Attempts to regulate or limit market activities intensified after 2005. In December 2006 authorities prohibited able-bodied males from engaging in market trade. Men were allowed to trade at the markets only if the aspiring vendor was not the primary breadwinner of the household but a dependent.17 Indeed, in Kim Il Sung’s North Korea all men were expected to work a “proper” job—that is, be employed in the government sector.
There is a rational (indeed, very rational) reason behind the seemingly bizarre policy of keeping workers at nonfunctioning factories: the North Korean surveillance system operates on the assumption that every adult has a proper job with a state-run enterprise; thus, indoctrination and police surveillance are centered on the workplace, where the entire “organizational life” takes place.
The ban did not have much impact, however, on actual market activities, since men seldom trade in North Korea. Conversely, the government’s decision a year later, in December 2007, to extend the ban on market trade to women below 50 years of age was much more important.18 The decision reportedly led to riots in March 2008, particularly in the city of Chongjin.19
For a brief while the police and officials tried to enforce the ban, so the younger female vendors had to use a number of tricks. The most common way to evade regulations was to bring along an elderly mother-in-law or other aged female relative when going to the market. If police asked questions, the vendor explained that it was actually her highly esteemed mother-in-law who did trading, while she just dropped by to briefly help the old lady. This ruse could work, admittedly, only as long as the police were not too serious about enforcing the ban—and this was actually the case. Within a few months the ban was forgotten completely. Once again, the quiet resistance won.
Nonetheless, the North Korean government did not give up and in late 2008 prepared a decisive move against the markets. In November the local authorities were officially notified that beginning in 2009, the private markets would be allowed to operate only three days every month. No sales of industrial goods would be allowed on the markets, either. The leadership made explicitly clear that improvement in the North Korean economic and social situation would make markets obsolete.20 At the last moment, however, the plan was cancelled.
The backlash, however, was not limited to the markets. After 2005 the authorities increased control over the porous border with China. This led to a dramatic decline in the number of refugees hiding in China, falling from estimates of 200,000 in 1998 to a mere 20,000 to 40,000 in 2010.21 Although a number of factors, including improvement of the food situation, contributed to this dramatic drop in refugees, increased efficiency of the North Korean border control played a major role. It has become far more difficult to cross the border river without bribing the border guards.
The antimarket policies of the North Korean authorities culminated in the currency reform of 2009. It was designed to destroy the unruly markets once and forever. However, it shared the fate of the earlier antimarket measures: it failed, and this failure was quite a spectacle.
SALARIES
What was the average income of a North Korean in the 1980s and how much does he or she earn nowadays? These two questions sound natural and commonplace, but are rather difficult to answer—largely because wages in the North play a dramatically different role to that of wages in a capitalist (or even a Soviet-style Socialist) economy.
That said, in nominal terms the question is simple enough. In the 1980s the average monthly salary in North Korea was 70 to 80 North Korean won. In subsequent years it rose to a level of some 100 won in 2000. After the 2002 reform, salaries were increased dramatically, reaching the average level of 3,000 won, and have remained at that level ever since. Nowadays, North Korean workers draw salaries in the range from 1,500 to 6,000 won.
The official exchange rate of the North Korean won is now fixed at 135 won per US dollar, but the market rate seems to be far more indicative. Since currently the market rate fluctuates around the 3,400 won per US dollar mark, the official salary is equivalent to between $0.5 and $1.75 a month. For the Kim Il Sung era, the application of the then market exchange rate would mean that an average salary of 70 won would be roughly equivalent to some $20. But these figures are essentially meaningless and even misleading.
Under Kim Il Sung, North Korea was a rationing economy par excellence. Everything was rationed and the state, being the sole employer in the nation’s economy, decided how much grain a worker should eat every day (usually 700g), how much soy sauce he or she should be allowed to have, and how often pork or fresh apples should appear on the average Korean’s table. Markets existed, but the vast majority of North Koreans in Kim Il Sung’s era satisfied their consumption demands through the state-run distribution system.
The North Koreans of the era, however, did not necessarily see the public distribution system (PDS) as a system of control. For them, it was often seen as a social welfare system, because rations were subsidized heavily, almost to the point of being free.
For example, the price of grain within the public distribution system was fixed between 0.04 and 0.08 won. The entire standard food ration (cereals, soy sauce, some vegetables, and a few eggs and fish) would in the 1980s cost between 5 and 10 won a month or, in other words, some 10 percent of the then-average monthly salary.
In the North Korea of the Kim Il Sung era (that is, before the early 1990s), a wage was little different from pocket money. People could use it to buy stationery or movie tickets, or satisfy other supplementary needs, while essential goods and services were provided all but exclusively through the rationing system. The best equivalent might be military service: a soldier in a conscript army is supposed to fight and work, while the state is expected to take care of his reasonable consumption needs and also provide him with a certain amount of pocket money.
Among other things, this system created a remarkable degree of material equality. No doubt, even in the Kim Il Sung era, officials lived much better than the average person. But in most cases, living standards were remarkably uniform across the country and social groups. Even for officials, their privileges came not from higher salaries, but from access to special distribution points. There, they were issued items unavailable to normal people, like chocolate and cigarettes with filters.
Rations stopped being delivered between 1993 and 1995, with people discovering that in the new situation they had to rely on the market in order to obtain all food. This was not easy because from the mid-1990s, the average monthly salary would suffice to buy merely two kilos of rice.
In 2002 the state attempted to change the situation by increasing the official price of rice to the then market level, while also dramatically increasing salaries to partially compensate for the hike. Obviously, North Korea’s economic planners did not realize the consequences of a dramatic increase in the supply of money. After a few months of hyperinflation, the price of rice stabilized to compensate for the increase in cash supply and North Korean workers, now paid some 3,000 won instead of 100 won a month, discovered that they could afford to buy the same two or three kilos of rice.
No wonder that North Koreans turned to a great variety of activities to earn the necessary cash to buy the necessities of life. Now, in 2012, refugees agree that the survival income for a family of three or four is 50,000 won (some $15 according to the current exchange rate)—roughly 10 times the official salary. So, it is no surprise that salary is not seen as a major indicator of one’s income and prosperity.
A DISASTER THAT ALMOST HAPPENED: THE CURRENCY REFORM OF 2009
In late 2009 North Korean leaders decided to inflict a major blow to the market system, wiping out capitalistic activities and punishing independent entrepreneurs (also known as “shameless anti-Socialist profiteers”), while also rewarding those few who remained loyal to the Party and Leader in the midst of turmoil. Judging by some peculiarities that occurred during the subsequent events, it seems that it was not so much the faceless “leadership” but rather Kim Jong Il himself who was the
mastermind behind the botched counterreform of 2009.
In 2009 the North Korean leaders used a well-known policy device—currency reform. Such reforms have been part of life in all Communist countries, but similar measures have been used in market economies to curb hyperinflation. The Soviet currency reform of 1947 initiated by Joseph Stalin himself can be seen as an archetypical operation of this type. The Soviet reform was later emulated by other Communist regimes, including North Korea, which underwent reforms of this type in 1959, 1979, and 1992.
The reform scenario is well known. One day, usually in the morning, the population suddenly learns that old banknotes are to become useless in a few days, and should be swapped for new banknotes. For note exchange, strict limits are set. For cash the limits are usually equal to a couple of monthly salaries, while money in bank accounts usually is treated with greater leniency and can be exchanged in somewhat greater quantities—but still within limits. The exchange period is made deliberately short, usually a few days only, and the number of places where exchanges can be made is also limited.
The intended result of such a policy is a dramatic reduction in the money supply, which is very good for curbing inflation. In Communist countries, which tended to embrace this kind of currency reform, the policy had an important added benefit: it wiped out illegal savings of black market operators. People who lived on their official salaries and/or tended to keep money in government-controlled banks suffered as well, but to a far lesser extent when compared to the sorry fate of those involved in unsanctioned economic activities.
Accordingly, on the morning of November 30 (at 11:00 a.m., to be exact), the North Korean populace learned that old banknotes would go out of circulation. As was often the case with such reforms, it was accompanied with devaluation: two zeroes from the North Korean paper currency, the won, had to be lopped off, so 100 “new” won were supposed to buy as much merchandise as 10,000 “old” won. This would make the prices roughly similar to what they used to be in the early 1990s, just before the collapse of the state-run economy. The change of the banknotes had to be completed within less than a week and the exchange limit was initially set at 100,000 “old” won per person—equivalent to $30 on the then-ongoing exchange rate. Panic ensued, since many North Koreans, especially those involved in private economic activities, had significant amounts of cash holdings in North Korean currency. Many a private company faced collapse (as was intended by the reform planners).
The North Korean currency reform of 2009 had one striking peculiarity, however, which made it different from its prototypes and doomed it to failure. It was declared that all people who were employed by state-run factories and institutions—that is, virtually all those legally employed in the economy—would receive the same amount in the new currency in wages as they did in the old currency. This measure effectively constituted a hundredfold (that is, 10,000 percent) overnight increase in salaries and wages. Take, for example, the case of a skilled worker who dutifully attended his or her nonfunctioning factory and was before the currency reform paid 3,500 won per month. After the reform, the worker was still to be paid 3,500 won per month. At the same time, the price of all goods and services was supposed to go down a hundredfold—for example, the price of rice was officially fixed at the level of 22 new won per kilo, instead of the prereform level of 1,800–2,000. This—theoretically!—implied that his “new” 3,500 won would buy as much as “old” 350,000 won.
For a while, foreign observers were taken aback by such a seemingly irrational move and speculated about secret designs behind the plan—or even refused to believe the first reports about the promised 10,000 percent rise of wages. However, it soon became clear that no secret design existed, and that reports were true indeed. Obviously, the people who approved the plan did not quite understand that by increasing salaries a hundredfold overnight they would produce a tidal wave of inflation, and not a dramatic increase in living standards.
North Korea has undergone currency reforms a number of times, and its financial experts are aware of similar reforms elsewhere—so one cannot help but wonder how such a bizarre feature made its way into the reform plan. One can speculate that planners initially intended to follow the well-established pattern and launch a standard confiscatory currency reform—that is, a reform in which most of the cash deposits would be appropriated by the state, and both salaries and retail prices would be decreased in equal proportions. However, it seems likely that at the last moment somebody intervened and ordered a dramatic revision of the plan, suggesting to dramatically increase official salaries.
The person who suggested this was unbelievably naïve, not to say ignorant, about the fundamental workings of an economy, where human beings have to divide limited resources and are not able to simply create resources with paper alone. One should not be so surprised by such naiveté. Taking into consideration the mechanics of the North Korean state, such a decision had to be initiated (or at least personally approved) by Kim Jong Il himself. The North Korean ruler has never in his life had to worry about paying for groceries or saving for a new car (let alone for a rainy day). Kim Jong Il was indeed a brilliant power broker and a world-class diplomatic manipulator, but he had a reputation for being almost comically incompetent in matters of economic management—and the 2009 reform confirmed this widespread opinion.
One can easily imagine how the Dear Leader would look through a currency reform plan and say: “And what about poor wage-earners? Should we not reward the people who remained loyal to the socialist industry and did not go for black markets? Why not increase their salaries, so they will become affluent, more affluent than those anti-socialist profiteers of the black market?” One would imagine that few, if any, officials would dare to explain the dire economic consequences of such generosity to the Dear Leader.
From the first hours, the currency reforms took a very messy turn indeed. People rushed to save their earnings and savings, and panic buying ensued. In a sense, this was expected to happen, but the scale of panic was unusual. To placate the situation, the authorities adjusted the rules, increasing the maximum exchange limits, but this did not help. Unfortunately, further actions merely exacerbated the crisis.
The authorities obviously supposed that the PDS would start functioning immediately, delivering the rations to the masses, but this did not (and could not) happen. As one would expect, inflation began to speed up. For a while the government kept issuing restrictions on the maximum market price for essential goods—for example, rice should not be sold for more than 24 won per kilo. The market ignored these regulations. In rare cases when the regulations were enforced by police, nobody was going to sell at the price that was well below the market equilibrium, so goods disappeared. In an attempt to rein in the chaos (and, perhaps, to “punish” the stubborn merchants and vendors), the regime closed all markets in December. In early January 2010, hard currency shops, where the elite and new rich could buy quality goods, were closed as well. This latter decision delivered a blow to the highly privileged groups of the population. In January it did not necessarily help to be an army general, a spy master, or a successful antiques dealer—even these people would have trouble getting daily food for their families.
For a brief while in January and February 2010, a major outbreak of public discontent seemed to be within the limits of the possible. The dissatisfaction was expressed with unprecedented frankness. It was the first time in decades even highly privileged members of the Pyongyang elite openly criticized their government’s actions when talking to foreigners. Russian students in Pyongyang were approached by their classmates who did not bother to hide their anger about the currency reform, and North Korean diplomats sometimes made pointed comments to their foreign opposite numbers. A military attaché of one Western country (not exactly friendly from the North Korean point of view) told me that his opposite numbers related that the North Korean government “doesn’t quite understand what it’s doing.” One can imagine how angry a military intelligence officer
in one of the world’s most controlled societies has to be in order to share his frustration with an imperialist outsider.
It is not coincidental that around this time rumors about the impending collapse of North Korea began to spread. To an extent these rumors were probably circulated by South Korean conservatives then in control in Seoul, but the sense of insecurity was briefly shared by many people who had firsthand access to Pyongyang (not least by the Chinese whose unease was palpable in those days).
But nothing serious happened. By April, it was business as usual (almost). Foreign currency shops and private markets were reopened in February, the rich and powerful stopped complaining, and the humbler folks resumed their usual economic activities, which lay well outside the shrinking government-controlled sphere.
In the aftermath of the reform fiasco, the government withdrew all restrictions that had been introduced in the 2005–2009 antimarket campaigns. The local authorities were explicitly ordered in May 2010 not to intervene with the daily working of markets—as long as politically dangerous items, like South Korean DVDs, were not on sale. It was again unofficially permitted to sell grain at the market price, and traders regardless of age or gender were allowed to conduct business much as they liked. Obviously, the government again implicitly admitted that North Korea in its present shape could not exist without active markets—its hyper-Stalinist rhetoric notwithstanding.
B00BY4HXME EBOK Page 16