KOREA FOCUS

North Korea's economy was in dire straits when Kim Jong-il became the general secretary of the Workers' Party in 1997, after finishing the three-year official mourning for Kim Il-sung, his late father and founder of the communist country. During that time, labeled "March of Hardship," factories stopped operations and rationing ceased.

 

People abandoned workplaces to search for food. Even tree bark was hard to come by. It is said that up to a few million people starved to death. More and more tombs appeared in the North Korean town of Hyesan, which can be seen with naked eyes from the Chinese city of Tumen. People could not even afford to buy grass to cover the tombs. North Korean leaders told their people that they were living in a paradise. It was nothing but a hell. Alluding to the country`s juche (self-reliance) theory, North Koreans began saying that “we should take care of our own life.”      

 

Indeed, North Koreans had no one else but themselves to rely on. Markets emerged as state-run stores shut down. Prices rose ruthlessly and people had to sell something to stay alive. The planned economy began to crumble. But North Korea could not adopt an open-door policy and reform. It could not abandon its socialist planned economy since it constituted the basis for the North`s system and Kim`s political power. It thus is no surprise that North Korea decided to try to normalize the economy while preserving its planned economic system.   

 

The question was how. How could it get production back to normal and resume rationing? Only then would people return to factories. In Pyongyang, two groups probably engaged in a hot debate in the late 1990s. The “currency reform group” must have raised the need to reform the currency in order to bring down the prices and close private markets. They must have argued that people would have no choice but to embrace the planned economy.

 

The “improvement group” could have refuted the currency reform group`s argument, saying that the country should accept higher prices. They could have insisted that higher wages could help offset price hikes. In addition, the group might have tried to persuade Kim Jong-il that the economy could return to normal if factories were given autonomy and incentives for production. The argument was a fresh and bold one. 

 

The North Korean leader supported the “improvement group.” It might have been around the year 2000. Kim himself started to mention the need for changes. It was around that time that he called for new thinking. He said: “Now (we are) in a new century, (we should) solve all the problems from a fresh perspective.” It is against this background that North Korea launched the “economic management improvement measures” on July 1, 2002. 

 

North Korea got ready to issue coins because it would need low-value money in anticipation of price stability returning. This might have been the reason the recently released new low-value bills are dated 2002. The real economy, however, moved in the opposite direction. Markets prospered and even factories were interested more in selling to the private markets than in supplying under the state planned economy. The U.S. hundred dollar bill was lauded as the “dollar the father” and the middle class began to emerge as some people started accumulating wealth through business activities.   

 

It meant that the seeds of capitalism were sprouting, something that the North Korean regime had long feared. As the North`s socialist system faced its gravest crisis, Kim could not be idle. In order to ensure the legitimacy of dynastic succession of power to his son, Kim needed to preserve the socialist system.

 

Kim therefore again called in the “currency reform group.” It might have been three to four years ago. Judging from the fact that it took the Bank of (South) Korea about two years to prepare for the issuance of the 50,000-won bill, North Korea might have needed a longer time, considering its shortage of paper, ink and electricity.

 

Currency reform alone, however, does not guarantee the smooth operation of a planned economy. Only when supply is normalized will the people and money return from the market. In other words, securing resources is essential for normalizing the planned economy. Under these circumstances, Kim might have weighed the timing even though he had made all the preparations to implement the currency reform in 2008.

 

Internally, the North Korean leader must have been waiting for the economy to strengthen enough to absorb repercussions of a currency reform. Externally, he must have been awaiting a chance to get outside aid. The “150-Day Battle” and the “100-Day Battle” could have been part of the internal efforts. The Chinese leader`s invitation for Kim to visit Beijing and Pyongyang`s reconciliatory gestures extended to South Korea and the United States could have been part of the external efforts.      

 

This time North Korea may succeed in the currency reform. Unless the planned economy gets sufficient supplies, however, market forces will flex their muscles again. North Koreans, having already experienced the market system in a life-or-death situation, may be more tempted to go back to markets. Kim`s last resort in case the currency reform fails would be military force.

 

[ JoongAng Ilbo, December 18, 2009 ]