North Korea takes on traders and, just maybe, reform

BEIJING/SEOUL (Reuters) - North Korea’s surprise attack on its traders’ wallets probably means deeper economic gloom but does divert more cash to a government used to near total control over how its impoverished population does business.

It may even, some analysts said, be the start of economic reforms just as the reclusive state readies to resume negotiations over its nuclear weapons program with the outside world, heralded by the first visit to Pyongyang next week of an envoy of U.S. President Barack Obama.

The secretive state has kept mum over widespread reports it this week lopped two zeroes of the value of its currency, a move that instantly cuts the worth of savings by a hundredth unless, according to one report, they are deposited in state banks.

“Their lifestyle is even more miserable than we think. People make a little money in the unofficial market and then with a bang, this has devastated their (finances),” said one South Korean official who has worked with refugees from the North.

The move has left most analysts puzzling over what exactly North Korea’s hard-line leaders hope to achieve by such a dramatic change which, on the face of it, looks hard to implement and runs the risk of stoking inflation, even triggering unrest.

“This has the potential to be a destabilizing move for North Korea because it will adversely impact a wide cross section of the population, well beyond merchants who have accumulated wealth,” said Kay Seok, a researcher for Human Rights Watch in Seoul.


Many suspect it has two targets -- rising inflation and mushrooming private markets that increasingly make up for the government’s own shortcomings getting goods, food in particular, to its 23 million people.

“These are some short-term effects (from the revaluation) ... but for them to last, the official economy has to have a steady inflow of goods,” said Soongsil University’s Lee Jung-chul.

“(If not), the value of the won will plummet further. What little trust the people have in the government will evaporate and reliance on the dollar and the yuan will only grow stronger. With this, the inflation that started the problem will only increase.”

South Korea’s Chosun Ilbo daily said the ruling, the first time in 50 years Pyongyang has revalued its currency, allows people to keep the equivalent of about $40 in cash -- enough to keep a family of four going for two months -- and deposit the rest in the bank. They may not withdraw the money on demand.

“Anyone who’s holding a lot of money there will become poor overnight,” said a Chinese border resident who travels to North Korea several times a year, adding that most North Koreans who do large volumes of trade with China are well-connected.

The limited trade the isolated North does with the outside world is mostly across its border with China. In the first 10 months of this year, their bilateral trade was worth US$2.04 billion, down 4 percent from the same period last year, Chinese customs data show.


Shan Jie, a Chinese businessman who runs a trade consultancy company in the Chinese border city of Dandong, said the change had had little impact on trading because most deals are settled in U.S. dollars or euros, not the North Korean won.

But domestic business within North Korea had frozen and would take several more days to sort out.

“My analysis is that North Korea has taken this step to prepare the way to further open up the economy. Once the currency redenomination is completed, if North Korea can stabilize the currency, then it could become more acceptable as a currency for settling trade.

“For now, nobody wants to touch it. But if they can make this work, then at least at the Chinese border, it could become more widely used to settle trade, and that could help open up more business.”

Paik Hak-soon of South Korea’s Sejong Institute and a North Korea specialist, saw echoes in a similar move some years ago by Vietnam when it implemented economic reforms.

“We can put this as a way by the North Korean government to engage in strategic financing for national projects through controlling the flow of national wealth. I believe they are doing it as part of economic reform,” Paik said.

Another North Korea analyst in Seoul and former MP Chang Sung-min, speculated that leader Kim Jong-il’s brother-in-law may have been the mastermind.

Jang Song-thaek, was once seen as a proponent of market reforms but eventually shunted aside, is widely thought to have returned to the center of power this year.

“It is part of a move to gain more control over non-government controlled trades with China as a way to step up economic reforms, especially ahead of (U.S. envoy Stephen) Bosworth’s visit.”

The North certainly wanted to get its hands on the cash held by private North Korean traders working the border with China.

“The money these people are holding is serious,” Chang said.

Additional reporting by Christine Kim, and Jack Kim and Jon Herskovitz in Seoul, Chris Buckley and Huang Yan in Beijing, writing by Jonathan Thatcher; Editing by Jeremy Laurence