Great Confiscation Updates: Marcus Noland and Stephan Haggard on the Risk of Hyperinflation (Updated)
[Update: Blaine Harden has a must-read story in the Washington Post: “[T]he government’s action appears to have backfired, with potentially disastrous consequences in a country that is chronically short of food. The black-market value of “new” won has reportedly plummeted against Chinese currency, spooking private traders who have pulled their goods out of markets. Outside economists say suspicion about the value of the won has made residents wary, increasing economic stagnation and worsening food shortages.”]
In my in-box today is this paper by Noland and Haggard on the effects of the Great Confiscation on the North Korean economy, which cites a number of the same sources I’ve cited here recently. I thought I’d share it with you even before I had time to read the whole paper myself. It’s both relieving and gratifying to see two eminent economists reaching some of the same conclusions that I had early on: that this move will shrink the nascent North Korean “peoples’ economy” and result in more, not less, inflation:
The effects of these confiscatory measures are twofold. First, they will increase the risk premium on engaging in market-based economic activity, both increasing the prices of goods and services as well as decreasing their availability. It has been reported that even some high priority housing construction in the capital has ground to a halt amid the chaos.
Second, the reform provides a disincentive to hold the domestic currency and, in the long run, will encourage further dollarization of the economy. The government preemptively banned the use of foreign currencies on December 28. Successful implementation of this prohibition will require an extraordinary degree of repression. These disincentives to economic activity and to holding the domestic currency (assuming the ban on foreign currencies does not stick) will make it increasingly difficult for the state to finance its activities and thus reinforce, not diminish, inflationary tendencies.
There is also a particularly valuable chronology of the North’s anti-reform measures on page 5.
Three other new articles I was going to discuss anyway dovetail well with what Noland and Haggard write. The first of these, from Open Radio, notes that not everyone is unhappy with the currency redistribution, at least until hyperinflation eats up what amounts to a substantial pay increase:
According to a source on December 27, North Korean citizens have positive feedback on currency reform. Especially at the end of December, elderlies, farmers, and those who receive salary are fond of the reform. With same amount of retirement support for elderlies and salary, the value of payment increased hundred-fold. On the other hand, price of goods did not rise very much. For this reason, purchase power increased fifty-fold. Men who were criticized for not being able to make enough for 1kg of rice are now being accepted, which is enhancing the positive feedback on currency reform.
According to the source, trade is not frequent, but 1kg of rice is selling at 38-45 Won (2000 Won before the currency reform), and home-made soju is selling at 20-25 Won (500-600 Won before the currency reform). Therefore, with salary of 2000-3000 Won could only buy 1-2kg of rice before, whereas now, the same amount of salary can buy 50kg of rice. Pension for the elderly is also kept at 1,500-2,000 Won.
However, the citizens are still anxious that the price level may rise. If the price level is kept at status quo, the currency reform would have done the job of raising citizens’ support for the North Korean government. [Open Radio]
Noland and Haggard also note that “wage policies were introduced that favored certain groups,” particularly those employed in factories and party organizations. For those groups, the new wage structure gave them an effective hundred-fold pay increase, plus substantial bonuses. The apparent idea here is to draw people back from the capitalist economy to state-owned industries, thus increasing the state’s export revenues. But how are those industries supposed to operate if North Korea’s old socialist economy isn’t capable of operating? The bigger question also remains: what good is a wage increase if the wages are paid in currency that’s worth nothing?
But confiscation changes how traders and even households think about their holdings of North Korean won and foreign currency. Residents are now more suspicious of holding won and thus put downward pressure on the exchange rate, adding additional inflationary pressures to the economy. One news report indicated that by the end of December, in the wake of the ban on foreign currencies, the postconversion black market won-yuan rate had reached 1,000 implying a won-dollar rate of more than 600,000 in preconversion terms!
The first time I believe I’ve seen Noland and Haggard use that kind of punctuation.
Reinforcing the evidence of hyperinflation, here’s the latest from the Chosun Ilbo:
One Korean Chinese, who visited Pyongyang recently, said, “Department store shelves are stacked with goods that the state confiscated from market traders in return for nothing on Jan. 1, and they are selling those goods at prices readjusted at the exchange rate of 100 old won for one new won. Huge crowds rushed to buy them, so they ran out of stock immediately.”
But commodity prices skyrocketed. Inflation is soaring as market traders are hoarding goods, anticipating that the real value of the new currency will plummet. According to a North Korean source, 1 kg of rice cost about 30 won right after the currency reform but is now closing in on 1,000 won. The U.S. dollar was exchanged at the rate of 75 won to the greenback right after the currency reform but soared to 400 won in late December. There is speculation that it is now only a matter of time before the rate will reach 3,000 won, the same as the unofficial exchange rate of the old won.
Market traders are angry as they have realized that they were robbed of nearly everything they earned. A former senior North Korean official said, “The latest currency reform is more cruel than the previous reform in 1992. It’s tantamount to the state confiscating 99 percent of people’s money.”
Authorities have been handing out food rations in Pyongyang and other regions since December, but North Koreans already know that the food cannot last them more than a month or two. Urban residents are experiencing particular hardship.
Similarly, Open Radio reports that wealthier buyers have just depleted merchants’ inventories by dumping their foreign currency in anticipating of the ban on its possession and use, which will at least temporarily drive up the price that buyers would have to pay for the same goods in North Korean won.
In the end, Noland and Haggard conclude that the regime will fail to stamp out private markets, that there will be many isolated and uncoordinated expressions of dissent, and that those expressions will not present a serious challenge to the regime because the people have no means to organize to oppose the regime. Sadly, I agree.