Inflation and Reform

Andrei Lankov recently wrote an article on Asia Times Online suggesting that while the situation in North Korea is bad, it is not as destitute and desperate as many have made it out to be:

For a long-time observer of North Korean politics, it appears obvious that these scare stories have two major sources. First, the international aid community and its representatives in North Korea are prone to disseminating such alarmist reports. Indeed, such reports help attract more aid to a country, which is, after all, in dire need of such assistance. Second, it seems that the North Korean authorities have also learnt how to complain loudly enough. Gone are the days when its officials presented their country as a paradise on earth. Nowadays they are far more likely to exaggerate the extent of their country’s economic difficulties in order to maximize outside aid.

Lankov’s analysis based on anecdotal evidence is inconsistent with UN reports that described instances of North Korean officials hiding how bad the malnutrition was for the children. Regardless, going beyond that, Lankov describes the relative opulence of Pyongyang and notes that the existence of a gap between the peripheral areas and the capital does not immediately suggest the deterioration of conditions in the rural areas. He gives a lot of credit to  privatization and concludes that “in the last five to seven years, the life of the average North Korean has changed for the better.”

Although ever important to be critical about information coming from North Korea, one should be more observant as to not miss the obvious signs.

The meteorological conditions on the Korean Peninsula this summer have been quite extraordinary. South Koreans noted record low levels of rainfall and intense heat. For a country like North Korea which suffers from a shortage of chemical fertilizers and deteriorating infrastructure, this may well have catastrophically affected food production.

Furthermore, inside report from DailyNK claimed that rice prices in provincial areas have reached a recent high. The price of a single kilo of rice had reached 5000 NK Wons (KPW) on July 10 in the city of Hyesan in Yangkang Province. What is more shocking is how the price of rice rose by 500 KPW in the past week alone.

Rice prices in other regions are rising too, other sources have informed Daily NK. Rice was selling for 4,500 won in Musan, North Hamkyung Province on the 5th, and had already exceeded 5,000 won in Muncheon, Kangwon Province on that same day.

On top of this, the RMB-KPWexchange rate has become radically unstable; on July 5, the exchange was at 1/800 (RMB/KPW), which rose to 1/810-20 by July 9 and finally hitting 1/860 on July 10.

Pyongyang is not blind to these real problems. Apparently minor agricultural reforms are being planned for October

According to an inside source, the authorities recently notified local organs of the so-called ‘6.28 Policy’, which is entitled, ‘On the establishing of a new economic management system in our own style’.

According to DailyNK sources these are some of the reform measures:

  • the so-called “bunjo danwei” (the basic farming unit on a cooperative farm) will come down from its current scale of 10-25 members down to 3-4 members;
  • the state will procure its quota of production at market prices and deduct the cost of inputs; then, as is nominally true now,
  • the unit which produced it will be free to deal with the remainder as it sees fit. Land and other inputs will be provided by the state.

While the new reform plans would theoretically incentivize greater efficiency and production, there are questions as to its effects on food prices (if sold at competitive market levels) and the state’s budget that may be subsidizing the losses.

This still leaves the basic questions about infrastructure, transportation, chemical fertilizers, state-mandated distribution and, possibly most importantly, Pyongyang’s monetary policy.

In the end, one might conclude that Andrei Lankov is being overly optimistic.


About Yong Kwon

I develop trade advocacy strategies for a DC-based consulting firm. Studied economic history at the London School of Economics, and can be found on twitter at @ykwon88
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