Inflation Creates a North Korean “Dollar Economy”

Daily NK had one last fascinating report today, about North Korea’s worsening inflation and the burgeoning black market in dollars that has resulted. The dealers are increasingly sophisticated and brazen, plying their trade in front of major hotels and getting exchange rate updates by cell phone:

High inflation is continuing in North Korea. Price of dollar in the blackmarkets in Pyongyang was â–² 950 Won/1$ in Nov. 2003 â–² 1,245 Won in May 2004, â–² 2,200Won in Feb 2005 and â–² by the end of May this year it reached 2,630 Won, 430Won increased in the last three months, which made the price of dollar triple of it was only two years ago.

There were dollar dealers who exchanged dollar in the blackmarkets in the past too. However, where as before they negotiates price within reasonable range, now the dealers have exact currency rates. They exchange the information frequently for the exact rate just as the dollar dealers in capitalist societies.

As you might expect, most of the dealers and cross-border traders appear to be either government officials or are doing business with them. The report claims that part of this trend results from the regime’s difficulty in financing its operations, causing it to instruct government agencies to finance themselves by any means availab.e

Even as the value of the currency plummets and the central bank prints money furiously, factories find themselves short of cash or food to pay their remaining workers. The primary result has been to price food out of the range of ordinary people, even as the Public Distribution System barely functions.

[One private trader], who works at a local industry in Donglim-gun, North Pyongan province as a chief engineer says “Most of the local factories have stopped working after the New Economic System, and “˜8.28 mining instrument factory’, which is the biggest factory in our district(-gun) only few (production) lines the produces are in function.

. . . .

“You need products to trade for food but there is none. So they are unable to give rice, or wage for three a four months. Accountants of the factory usually bring cash from banks to give wage to workers but because the banks are short on cash, they have to bring it from the Central. Due to high inflation, monthly wage in North Korea won is slightly more than $1.

For the reason of high inflation Mr. Jung pointed out, “˜there is a rumor that to extract dollar from the individual pockets, the government is printing more and more money. Because the price of North Korean Won dropped so much, now people believe dollar is the only way to live, so more and more people are becoming dollar dealers.

The rise in inflation and the expansion of the semi-private side of the dual economy spells deep trouble for those who lack the official connections to participate in the dollar economy. The next warning signs to watch for are increases in internal migration, the mass slaughtering of livestock, and the pre-harvesting and forced seizure of crops.

Update: AFP has more on the subject:

In real terms, North Korea’s economy had contracted in the past three years, due to high inflation. “The situation runs counter to the regime’s argument that its economy has grown,” he said. North Korea took reform measures in 2002, freeing prices, wages and exchange rates from central control.

It has also eased government controls over businesses and individuals. However, the reforms failed to improve living standards, while a drop in food aid from the international community has resulted in a severe food shortage, the Samsung analyst said in a report.

Instead the reforms put food prices beyond the reach of millions of people. And while international food aid diminishes, North Korea’s own Public Distribution System on which 70 percent of the people depend for survival was winding down, and daily rations have been to starvation levels. “North Korea can no longer meet the rising demand of consumers with its limited resources, which means that the reform policy has failed to improve the quality of life for North Koreans,” he said.

He urged the Stalinist country to open its market wider, improve its infrastructure and ease relations with the United States.

The “reform,” it seems, has been highly selective. How it affects the North Korean people depends on what class–and thus, what economy–to which they belong.