Assessing Cause and Effect: Food price stability and the Korean People’s Won

Despite turbulence in the upper echelons of political power in Pyongyang, rice prices in North Korea proved remarkably stable at the end of 2013.

This may be due to favorable farming conditions and the resulting increase in grain output that reduced the planned national food deficit by 167,000 tonnes from 2012 (read the summary of the 2013 FAO annual assessment of food security in the DPRK here).

But looking at long-term trends in the domestic rice market, recent developments appear consistent with the downward movement in volatility in the past few months. After a period of wild fluctuations that followed the disastrous revaluation of the Korean People’s Won (KPW) in the winter of 2009-10, rice prices became noticeably stable after January 2013.

Graph 1: semi-consistent bi-weekly changes in rice prices based on data from DailyNK

Graph 1: semi-consistent bi-weekly changes in rice prices based on data from DailyNK

This is a good sign. Decreased volatility in the price of the most basic consumer good, rice, means that North Koreans can have confidence in their own currency as a long-term store of value and circulate the KPW in market transactions. This then provides the central government, the issuer of the currency, with more tools to engage in economic policies and make meaningful changes.

Perhaps the important question here is how – how did North Korea manage to stabilize food prices?

Coinciding with stability in the DPRK food market, the KPW also recovered from an exchange rate crisis. The purchasing power of North Korea’s sovereign tender had been falling steadily since the failed revaluation, leading to increased circulation of foreign currencies in North Korea’s informal open markets. The exchange rate was particularly bad in 2012, before peaking around January 2013 and then stabilizing.

Although consistent data for renminbi to KPW exchange rate is not available, the dollar to KPW exchange rate can be used as a reliable proxy for the KPW exchange rate with the Chinese yuan.

Graph 2: semi-consistent bi-weekly changes in KPW/USD exchange rates based on data from DailyNK

Graph 2: semi-consistent bi-weekly changes in KPW/USD exchange rates based on data from DailyNK

It is difficult to ascertain whether these two factors maintain a causal relationship. However, given how the timing of the decreased volatility in food prices and exchange rate stability of the KPW coincide, they are most likely related.

Presuming a causal relationship, we are left with two possible scenarios:

  1. The stability in food prices restored public confidence in the KPW, thus restraining the domestic demand for foreign currencies which were used as a hedge for food security OR
  2. The restored purchasing power of the KPW facilitated imports and increased domestic trade of grain, stabilizing food prices

The former is the less likely scenario because the increase in grain output was not distributed equitably, so there is no reason why the increased yields would have improved the public’s confidence in the availability of grain. Furthermore, the North Korean people are probably cognizant of the precariousness of the spring harvest and the lean season due to deficient supply of seeds for winter wheat and barley.

What events would then support the likelihood of the latter scenario occurring? Two other interesting developments catch the eye when looking at North Korea’s economy:

The fact that Chinese rice has become relatively more expensive means that exports to North Korea have become more valuable, increasing the purchasing power of the North Korean market and its domestic currency. But how is this possible? North Korea’s most valuable export items since the collapse of its industries in the 1990s have been mostly luxury food items. Something else must have entered the trade between China and North Korea for the KPW exchange rate to have suddenly made a recovery in purchasing power. Is it possible that Pyongyang has been paying its trade deficit with gold?

Certainly. And it might have gone completely unnoticed by North Korea watchers had global gold markets not had one of its worst years in 2013, forcing Pyongyang to sell increasing amounts to service imports.

If this is indeed what is happening, it is not a bad policy to stem the loss of the KPW’s purchasing power, but it does leave us with several questions:

  • How long can/will this last?
  • Would the restoration of domestic confidence in the KPW lead to the tapering of gold exports?
  • Could this policy withstand a potential supply shock if there is a poor spring harvest of the winter crop as cautioned by the FAO?
  • How do these new developments affect the economic relationship between Pyongyang and the domestic political periphery (See articles on the Cantillon Effect and the urban-rural divide)

Again, the above scenario of Pyongyang’s gold exports being responsible for food price stability is far from being a surety, but it merits consideration.

In the mean time, we will dig for more evidence.

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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
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8 Responses to Assessing Cause and Effect: Food price stability and the Korean People’s Won

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