Wednesday, December 2, 2009

Concern Over New North Korean Currency

It's an old trick that is used periodically in communist countries. Now It is North Korea's turn to expropriate the accumulated wealth of the weary masses of North Korea. This week, the North Korean government is phasing in a new currency. They are making the population exchange their old bills at a rate of 10,000 old Won for one new Won. The Economist explains as follows the significance of the move.

"Rather, the moves represent confiscation on a massive scale. By this coming Sunday, the state says, all existing currency must be replaced by a brand new won, with old 10,000 won bills swapped for new 10 won bills. So far so fine. The state wants to fight inflation, and plenty of other countries have resorted to the expedient of a new currency.

But the state also wants to crack down further on North Korea's myriad private markets. The currency moves are all of a piece, for the maximum amount of old currency that may be converted into new is 100,000 won. For rich traders doing business with China, this matters little. Their wealth will already be in Chinese yuan or dollars. Ditto for the elite. For North Korea's poorest, the new currency is also neither here nor there, for they have no cash at all. But for the broad middle struggling to cope, this is a disaster. Responding to popular fury, North Korea appears to have raised the limit this week to 150,000 won."

The move will leave millions of people with worthless banknotes in their possession. It is a common way for the state to essentially confiscate the wealth of those engaging in private enterprise. Despite misgivings, North Korea has been forced to tolerate private industry. Many factories can no longer operate because the oil that once kept them moving is no longer given to North Korea at "friendship prices" by the former Soviet Union. An estimated 2 million people have died because of famine that is essentially caused by bad economics.

A logical way to alleviate North Korea's economic problems would be to vastly expand investment in the country from abroad. South Korea would be best able to aid in economic development by expanding on the existing model of the Kaesong Industrial Complex, which is a large industrial park on the border between North and South Korea. Jobs in the complex have been considered lucrative. Unfortunately, it does not seem that an expansion of the Kaesong Industrial Complex is likely. Amazingly enough, the North Korean government is reportedly considering closing the venture, which brings in about 33 million dollars a year. Chosun Ibo, a South Korean paper reports as follows on the plan to shutter a rare oasis in the North Korean economic desert.

"North Korea earns some US$33.52 million a year from the Kaesong Industrial Complex, making the inter-Korean joint venture a significant cash cow for the impoverished country.

If, as seems increasingly likely, the industrial park is closed, the simple economic loss from stopping operations is not the only blow the North will suffer. Experts speculate the closure could also cause social and political problems following an explosion of discontent by North Koreans who lose their jobs at a time when they are already suffering a food shortage.

About 38,000 North Korean workers and their families would be immediately affected. "Assuming each North Korean worker has about four family members, roughly 150,000 North Koreans are living off the industrial park. That figure isn't negligible," a south Korean official said Sunday."

The cumulative effect of shutting down foreign enterprises and voiding a large chunk of North Korea's currency could be explosive in terms of unrest and economic turmoil. The only logical explanation would be a desire to preserve North Korea's communist character and posssibly a dogged adherence to "Ju Che" which is the ruling Communist Party's philosophy of self reliance.

There are alternatives to trashing its existing currency. Cuba has two parallel currencies. One is a regular Peso that circulates across the island. The other is a special Peso that is backed by hard currency. There are special stores that will only take the hard currency Peso. While Cuba is tottering on the brink, it has done far better than North Korea. Unfortunately, it has developed an underbelly of prostitution to its tourism trade that has evokes memories of pre revolutionary Cuba.

If North Korea were to institute a second hard currency Won in North Korea, it could get a cut of the action, pulling in Chinese, American and North Korean money into a state run investment bank. Unfortunately,the actions of the North Korean government defy all logic. The people of North Korea could be facing another round of hunger. That would truly be a pity. Because it can be avoided Sphere: Related Content

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