Sino-NK

Hillside farming in Hyesan during the “150-day Battle” of 2009 | photo by Adam Cathcart

As keen followers of North Korea and idiosyncratic economists have already noted, the first decade of the new millennium was marked by various attempts by the North Korean government to tame market forces and revive the command economy of the old order. In 2005, attempts were made to “roll back” the “liberalization” measures of 2002 and in 2009 occurred the well-documented currency reform. Some of the effects of these reforms were apparent immediately and others shortly thereafter. However, some of the effects are just now coming to the surface, especially in the border regions. Christopher Green, using sources at the Daily NK, introduces the phenomenon of “Yuanization” and other changes in the North Korean economy, with a focus on Hyesan. – Steven Denney, Managing Editor

Yuanization Writ Large: Daily NK Confirms the Rush to RMB

by Christopher Green

On April 17, 2013, the Seoul-based Daily NK released a new video (or here, on Facebook). Produced in February this year, the film shows both official markets (장마당/jangmadang) and unofficial alley markets (골목장/golmokjang) in and around Hyesan, a major border city in Yangkang Province. The film clearly shows not only the public sale of South Korean products, a source of fascination for domestic South Korean readers of Daily NK and other websites like it, but more importantly that the overwhelming majority of products on sale in the markets are priced not in North Korean Won but in Chinese Yuan, and that most customers pay in Renminbi, too.

As such, the video lends great currency to a burgeoning trend that I first reported on for SinoNK in January 2012 and again in March the same year, but which has been underway for years: namely, the slow but steady movement toward the “yuanization” of North Korea.

As I wrote that frigid January day in 2012, responding to concerns over the danger of an impending famine being voiced at the time:

I actually wonder whether [persons concerned about famine] are looking at the wrong signals. In other words, I wonder whether the Yuan has become so overwhelmingly ubiquitous that we can legitimately claim that North Korea has become the first ever ‘yuanized’ state. Such a development would account for the fact that the price of rice denominated in North Korean Won is becoming entirely irrelevant on-the-ground because the buyers buy and the sellers sell in Chinese Yuan and, therefore, almost nobody is prepared to keep their savings in domestic currency.

The true ubiquity of the Yuan (and the US Dollar) in North Korea remains a focus for research, and there is more to do in this regard, but the new video offers strong preliminary evidence that people across North Korea are strongly cognizant of the need to hold liquid assets in Chinese and/or American currency where possible.

A transaction in Chinese Yuan happening in Hyesan, North Korea in February 2013 | Daily NK video capture

Looking back,  it is a trend that can be dated at least as far as 2002. The cause being that, contrary to prevailing wisdom, the economic reforms enacted in July of that year were neither universally welcome nor universally beneficial. In the analytical frame employed by pro-engagement analysts, the reforms, or “improvements” (개선, gaeseon) in the parlance of the North Korean side, raised incomes and prices in tandem, rebalancing the economy to better reflect the cost of production. However, the very act of increasing prices in this way was also inherently confiscatory, in that it heavily eroded the value of whatever savings in local currency may have existed at the time. While concomitant measures conferring modest autonomy on individual enterprises were indeed popular, the real lesson for any well-connected trader or other businessperson whose famine era market earnings were then held in North Korean Won was that they must henceforth shift to holdings in foreign currency.

The attraction to a North Korean trader of holding cash assets in Yuan or another foreign currency are self-evident, because the country suffers from increasingly intractable inflationary pressures. These are exacerbated by government choices such as those explained in this SinoNK piece, but the ongoing tale of the Kaesong Industrial Complex offers another contemporary case in point. First and foremost, it is clear that the North Korean government sees Kaesong as a bargaining chip in political relations with the outside world, specifically South Korea, rather than as a source of hard currency income that they would be wise to ring-fence from political interference. This represents a cost of doing business in North Korea, one that companies are forced to factor into their calculations and most will eschew. It counteracts the low cost and relatively high level of education of the North Korean labor force, and makes North Korea an unattractive business destination.

Now, more than a decade after the 2002 changes, the latest Daily NK video shows the road down which North Korean society is inexorably heading. One source recently commented to me that in 2002 the number of people with access to foreign currency in Wonsan, a city in Gangwon Province, was “certainly not more than 10%.” Upon defection he lost touch with the region, which lies far from the Sino-North Korean border and its raft of Chinese cell phones. But more recent defectors from the city now say that what was 10% is nearer 50%. Of course this is “anecdata” of a kind that should be countenanced with care and may indeed be uncomfortably imprecise, but the flow of history is nevertheless clear. The days when the North Korean state brought the free market to heel via the “7.1 economic management system improvement measure” (7.1경제관리개선조치/7.1 gyeongjae gwanli gaeseon jochi) and “11.30 currency redenomination” (11.30 화폐개혁/11.30 hwapye gaehyeok) are numbered.

* SinoNK would like to note that the author of the above article is the Manager of International Affairs for Daily NK, the company that obtained the video. He will be discussing the Yuanization of North Korea in more detail at a conference at Oxford University on May 4.