Brief Footnote: Cantillon Effect in 1955

In August 2012, I argued in an article on Asia Times Online that the concentration of capital in Pyongyang was distorting prices in the country

With the country’s wealth largely concentrated in the capital and most of the resources from abroad going through Pyongyang, the already-unstable food prices are invariably affected by this privileged population’s ability to afford higher food prices.

Pyongyang’s market rice prices are by far more expensive than the rest of the country, yet it appears more than capable of feeding its affluent population. Meanwhile, the rest of the country is forced to compete for resources using less capital. Thus, even if rice is not as expensive in the provinces, the relative increase in food price is harder to overcome.

This conjecture was largely based on my understanding of the Cantillon Effect (a very concise and informative summary written here by my friend and economist Pablo Paniagua), which Wenli Cheng and Simon D. Angus summarized as

Since new money does not reach everyone at the same time, the injection of money increases the purchasing power of those who receive the new money first, enabling them to bid resources away from those who receive that money at a later time. As a result, relative prices will change, resources will be reallocated and income will be redistributed during the time interval between money injection and its final permeation in the economy. These changes are referred to as the Cantillon Effect.

Indeed, evidence for the Cantillon Effect occurring in North Korea, manifesting most evidently in the urban-rural/Pyongyang-other divide, can be found buried in primary source documents. In particular, I came across this fascinating snapshot of North Korean economic history in a Romanian document acquired by North Korea International Documentation Project (NKIDP) and archived in the Woodrow Wilson digital archives:

The Government’s and the Workers’ Party’s permanent concerns for [creating] better life conditions are also shown in the last decision of the Cabinet of Ministers of the DPRK from December 25th, 1954, which stipulates a wage bonus for January of 100% [of the value of the current wage] for workers in Pyongyang and by 50% from those outside the capital, on the occasion of the New Year. This had a great echo among workers. [1]

Coinciding with bad harvest in the winter of 1954-55, abolition of private trade in grains, and the sudden rush for “cooperatization” of the agricultural sector, North Korea spirals into a massive food crisis in 1955. By February, a kilogram of rice cost between 400 and 460 won on the black market, above the income of everyday people.

Although it may be hasty to draw any definitive conclusions on causal relations, there is a correlation between distortions in the distribution of inflation and the destructive fluctuations in North Korea’s food economy that deserves greater attention.

It certainly carries huge implications for current reform efforts.

Footnote:

[1] “The Political, Economic and Social-Cultural Situation of the Democratic Popular Republic Of Korea, 1954” 1954, History and Public Policy Program Digital Archive, Archive of the Romanian Ministry of Foreign Affairs. Obtained and translated for NKIDP by Eliza Gheorghe.

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About Yong Kwon

Analyst of international relations, writer of history, observer of North Korea's food and monetary policies, and Korea blogger for the Diplomat
This entry was posted in Rice and tagged , , , , , , , , . Bookmark the permalink.

3 Responses to Brief Footnote: Cantillon Effect in 1955

  1. Pingback: The Jacobin Experiment: summary of Food Control and Price-Fixing in Revolutionary France by Henry Bourne and reflections on food insecurity in North Korea | DPRK Food Policy Blog

  2. Pingback: Assessing Cause and Effect: Food price stability and the Korean People’s Won | DPRK Food Policy Blog

  3. Pingback: Is there or Is there not reform in the DPRK? And some recommendations | DPRK Food Policy Blog

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