‘Dollarization’ of North Korean Economy, Once Vital, Now Potential Threat to Kim’s Rule – WOODTV.com
SEOUL, South Korea (`) – Before fleeing North Korea in 2014, Jeon Jae-hyun kept US dollars as a store of value and used Chinese yuan for everyday purchases at markets, restaurants and other places. He used the local currency, the won, only occasionally.
“There weren’t many places to use the won, and we actually had little confidence in our currency,” Jeon said in a recent interview in Seoul. “Even the quality of the North Korean bills was terrible, as they often ripped when we put them in our pockets.”
North Korea has tolerated the widespread use of more stable foreign currencies like the US dollar and Chinese yuan since a botched appreciation of the won in 2009 sparked runaway inflation and public unrest.
So-called “dollarization” helped bring down inflation and stabilize exchange rates, allowing leader Kim Jong Un to keep his power steady after he assumed that role in late 2011. But this trend poses a potential threat to Kim, as it undermines his own government’s control over the money supply and monetary policy.
Isolation from the pandemic has severely damaged the North’s economy, but still gave Kim a chance to tighten social controls by restricting market activity and limiting the influence of capitalist, democratic South Korea. Now, observers say Kim is trying to limit the use of the dollar and yuan to consolidate his position of power as the North grapples with pandemic-related difficulties, long-standing UN sanctions and tensions with the US
“He has no choice but to strengthen the command economy as he is involved in confrontations with the US while maintaining the border closure,” said Lim Eul-chul, a professor at the Institute of Far Eastern Studies at Kyungnam University in Seoul. “The current direction of the North’s economy controls markets more tightly, so demand for dollars is still limited.”
It’s unclear what Kim would do, as banning the use of the dollar and yuan could backfire and only confuse and anger the public, experts say. Given the low public confidence in the government’s economic policies, North Koreans are likely to resist attempts by the authorities to usurp their foreign currency, said Choi Ji-young, an analyst at the state-funded Korea Institute for National Unification in Seoul.
The switch to the dollar and yuan came amid economic turmoil and famine in the 1990s that collapsed the government rationing system and prompted the emergence of capitalist markets.
The revaluation of the won in 2009 led to even greater use of foreign currencies. To restore control over emerging markets, authorities limited the amount of old bills citizens could exchange for new North Korean won, wiping out much of their household savings. Realizing that the local currency was unreliable, many began storing their savings in dollars and yuan.
Jeon, a former civil servant from the city of Hyesan in northern North Korea, had two boxes of North Korean won notes worth a total of 2 million won at his home in 2009, about what it would have cost at the time, 60-80 smuggled, used Buy Japanese TVs. Most of that money became worthless, as authorities only allowed residents to exchange up to 200,000 won (about US$60–70 at the time) per household in old bills for new money.
“My money was completely gone. I was extremely frustrated and embarrassed but couldn’t do anything about it,” Jeon said. “I saw many people cry and heard others flee to South Korea.”
Since then, the yuan has been the most widely used and preferred savings currency in areas near the north’s border with China. According to surveys of apostates, the dollar has become the most saved currency and the second most used currency after the won in the southern regions.
Jeon said he used the yuan to buy clothes, rice and other necessities, eat out or pay bribes to bosses. Most of his savings were stored in yuan and dollar bills. He kept a small amount of North Korean won for causes such as donating money to village campaigns in support of military units.
Paek HO, who fled the city of Musan in northeast North Korea in 2018, said she used the yuan to buy expensive goods and the won for cheap items like sodas, vegetables and bread sold in markets. There are about 50 professional money changers working in Musan, she said.
“Using foreign currency is officially illegal, but few have gotten into trouble or been arrested for using it,” said 47-year-old Paek. She requested that her first name be identified with initials, citing concerns about the safety of her relatives in North Korea.
There are two exchange rates for the won – one artificially high set by the government and another set by the market, which experts say better reflects actual economic conditions in the country.
The won had stabilized at around 8,000 per dollar since 2012-2013 but suddenly surged sharply in 2020 as North Korea sealed off its borders to protect against COVID-19. According to North Korean monitoring groups, the won was trading on the street at around 6,700-7,000 per dollar in late 2020; 4,600-7,200 in 2021; and 5,200-7,500 in the first half of 2022. Later in 2022, it fell again to around 8,000 won per dollar.
The value of the won likely rose during the pandemic because demand for the dollar and yuan fell due to border closures and tighter controls on the use of foreign currencies. Such controls appear to have been unevenly enforced, although the lack of information from the mysterious north makes it all but impossible to obtain clear details.
Jeon said his relatives in Hyesan told him in phone calls that they would not be allowed to use foreign currency in 2021, but they did last year. Paek said her sisters in Musan told her last year that they used the yuan.
Kang Mi-Jin, a defector who runs a company that analyzes North Korea’s economy, said people in nearly 20 regions of North Korea voluntarily stopped using foreign ones in 2021 during a campaign against “anti-socialist elements” for fear of possible punishment Currencies would have renounced. Citing her contacts inside North Korea, Kang said North Koreans also cling to foreign currency as a safe haven.
The return in exchange rates to pre-pandemic levels likely reflects revived demand for foreign currencies amid speculation North Korea may soon lift its COVID-19 restrictions. However, many experts say there is less foreign exchange in circulation and the government is likely to step in to control exchange rates in the markets.
“Dollarization cannot be a long-term government policy as it amounts to a relinquishment of sovereignty over monetary policy, although it is still true that it helped the North’s economy to thrive in the (earlier) years of Kim Jong Un’s rule stabilize and grow,” said Lim Soo-ho, an analyst at the Institute for National Security Strategy, a think tank of the South Korean espionage agency.
He said Kim’s government is likely to “review very carefully” whether to fully reopen borders, as an abrupt, wholesale resumption of imports would sharply boost the dollar’s value against the won and make imported goods more expensive.
Son Kwang Soo, an analyst at Seoul-based firm KB Research, said the north may be trying to keep the exchange rate in a narrow range of around 8,000 won per dollar.
Defectors say an attempt to stop using the dollar and yuan would likely only cause chaos.
“Kim Jong Un will eventually leave ‘dollarization’ as it was. “If he bans ordinary people from using foreign currency, the country’s money circulation would be disrupted,” Kang said. “My contacts in North Korea told me that even some North Korean bills are now difficult to find.”