North Korea: "shock therapy" on currency

N. Korea Revalues Currency to Curb Free Trade

Excerpts:

The currency reform, the North’s first in 17 years, was implemented on Monday without warning, South Korean news media reported on Tuesday, citing North Korean foreign trading officials based in China and anonymous sources inside the isolated country.

North Koreans were required to swap their old bills for new notes at an exchange rate of 100 to 1 by next Sunday, according to Good Neighbors, a Seoul-based civic group that monitors North Korea through informants inside the country. The authorities also put a cap on the swap, allowing individuals to turn in a maximum of 100,000 won in old notes.

“As people rushed to swap money, commercial activities have virtually come a standstill,” Good Neighbors said in a statement. “The purpose of the reform is to kill private market activities that stoked anti-socialism.”

...

“The primary aim is to control inflation,” said Choi Soo-young, an expert on the North Korean economy at the government-funded Korea Institute for National Unification in Seoul. “But the North also wants to stop the market from prospering too fast.”

Since a famine killed many North Koreans and shook the country’s ration system in the mid-1990s, its centrally planned economy, symbolized by state-run stores that sell goods at government-set prices, has coexisted with an unofficial economy where people sold home-grown food or goods smuggled from China.

“With the government stores unable to provide enough supplies, unofficial markets have fueled inflation,” said Dong Yong-sueng, an economist at the private Samsung Economic Research Institute, who monitors the North Korean economy.

Food prices has risen so sharply in recent years that ordinary workers can buy only two kilograms of rice with their monthly wages, according to Open Radio For North Korea, a Seoul-based radio station and Web site which specializes in collecting news from informants within the North.

The North Korean regime also saw the increasingly vibrant markets as a conduit of capitalist ideas and outside influence on its tightly controlled populace.

The ruling elite reportedly cracked down on the North’s biggest wholesale market, located in Pyongsong on the outskirts of Pyongyang, the capital, earlier this year, dispersing many traders into smaller markets in nearby districts.

The currency reform will wipe out much of the wealth that traders have accumulated, thus dampening the market activities, Mr. Dong said. For the regime, it has an added political benefit of fighting a gap between the rich and the poor among ordinary citizens, Mr. Choi said.

By knocking off two zeros from its banknotes, the measure will have an immediate but short-lived impact in fighting inflation, Mr. Choi and Mr. Dong said. It also could aggravate the North’s already acute shortages by discouraging the markets, which have emerged as an important source of food for North Koreans.

Comment: Mix totalitarianism and fiat currency and this is what you have!