North Korea’s failing currency

Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.

The North Korean government recently knocked two zeros off its currency, the won. And it ordered citizens to turn in their old cash savings. The move caused panic and riots among North Koreans. There were food shortages as well, as people scrambled to buy whatever they could before their money became worthless. Now the North Korean government has apparently fired the official who led the currency revaluation program. Katy Clark talks with Marcus Noland who is an expert on North Korea’s economy at the Peterson Institute for International Economics.

• BBC coverage
• Peterson Institute for International Economics

Read the Transcript
This text below is a phonetic transcript of a radio story broadcast by PRI’s THE WORLD. It has been created on deadline by a contractor for PRI. The transcript is included here to facilitate internet searches for audio content. Please report any transcribing errors to theworld@pri.org. This transcript may not be in its final form, and it may be updated. Please be aware that the authoritative record of material distributed by PRI’s THE WORLD is the program audio.

KATY CLARK: Next door to China in North Korea the economy is in chaos.  The problem is a government program to change the value of the North Korean currency the won.  Citizens were ordered to trade in a limited amount of old money in exchange for new bank notes.  If they had extra savings in the form of old cash, that money was declared worthless.  The move has reportedly caused panic, food shortages and even riots.  Marcus Noland is Deputy Director and Senior Fellow at the Peterson Institute for International Economics.  He says as usual, it’s hard to know exactly what’s going on in North Korea.

MARCUS NOLAND: The government has actually not made any official announcements at all about this currency reform.  What happened was the government through its party apparatus announced that these changes were being made on November 30th and gave the populace one week to implement this reform.  Foreign embassies were briefed verbally and then on New Year’s Day there is a very important editorial that is jointly issued by three publications.  Interestingly enough the New Year’s editorial didn’t mention the currency reform.  So it’s been a very strange episode all around.

CLARK: Can you talk a little bit about how North Korea’s currency revaluation and other recent moves caused the economic chaos there?

NOLAND: Well, North Korea is an extremely cash-oriented economy.  The financial system is extremely under-developed, and the critical thing about this currency reform is not that they just knocked two zeros off the currency.  Often times, good governments do this to signal that periods of high inflation in the past have come to an end, and there will be good economic policy in the future.  What sets the North Korean case apart is there were very severe limits placed on how much currency you can convert.  The effect of that was two-fold.  One was to wipe out large amounts of household savings.  Secondly, it had the effect of wiping out the working capital of private entrepreneurs which have developed over the last 15 years.  And that really was the motivation for this policy to strike a blow at this burgeoning private economy.  That makes the government very uncomfortable in that it offers an alternative pathway to wealth and prestige and possibly ultimately power that is beyond state control.

CLARK: Do you think that the government just didn’t think this through?  I mean, it sounded like a good idea but they didn’t think about what this would actually mean when put into practice?

NOLAND: You know, Katy, that is an absolutely fantastic question that I’ve been wondering about myself since the very beginning.  We know that someone at the Central Bank must have known the amount of currency in circulation, and when they put these confiscatory limits on it, how much of the money supply was effectively being destroyed.  What we don’t know is if the people who actually made these decisions knew that information or even knew enough to ask the question and if they did, cared about the answer.  What we’ve seen is this move has set off absolute chaos. The economy has really ground to a halt.

CLARK: There are reports of riots as a result of the currency revaluation.  If those are true, how unusual is that for North Korea.

NOLAND: Well, I would underline for your listeners that it is very, very difficult to confirm these stories.  There have been stories of people in effect engaging in civil obedience by burning their old currency.  The old currency bears the likeness of the founder of the country, Kim Il Sung, and defacing anything with his likeness is treasonable.  So there have been descriptions of acts like that as well as demonstrations and as you describe, riots.  It’s very hard to tell really how wide spread these are and how large they are.

CLARK: So if I am a U.S. official in Washington watching what’s going on Pyongyang, what do I make of it?

NOLAND: If I were a U.S. official in Washington, I would be very concerned about this.  There is an understandable tendency to focus on the nuclear issue when you think about Korea.  As a consequence, speaking frankly, there has been a tendency in Washington to ignore what’s actually go on, on the ground. There has been an excessive focus on these sort of diplomatic negotiations.  I would be concerned because North Korea is facing leadership transition.  Kim Jong Il is old.  He’s in poor health and what we could be looking at is the beginning of the end of this political regime in North Korea, and nobody has any idea how it’s going to end up.  It could ultimately involve intervention by China and South Korea and the U.S. could be drawn in as well.  The underlying political stability of that political regime I think is starting to be called into question.

CLARK: Marcus Noland, Deputy Director at the Peterson Institute for International Economics.  Good to speak with you.  Thank you.

NOLAND: My pleasure.

Copyright ©2009 PRI’s THE WORLD. All rights reserved. No quotes from the materials contained herein may be used in any media without attribution to PRI’s THE WORLD. This transcript may not be reproduced, in whole or in part, without prior written permission. For further information, please email The World’s Permissions Coordinator at theworld@pri.org.