Channeling the works of Amartya Sen, we at Rice & Iron have often argued that the price of food and the people’s command over income matter far more than the country’s aggregate grain output. Therefore, indices such as wages and inflation constitute markers of great importance in assessing food security.
Case in point:
If you are a regular follower of this blog, then you have seen the above graph posted many times before. The seismic waves of price volatility, unleashed by the currency revaluation in late 2009, caused such economic havoc that North Korea has yet to fully recover.
One of the things we have tracked since that turmoil has been the consequences of “yuanization,” the adoption of Chinese renminbi (RMB) and other foreign currencies in market exchanges over the Korean People’s Won (KPW). While the use of RMB (or the US dollar) will allow many North Korean businesses to thrive without having to accommodate for the risk of monetary instability, the decreased circulation of KPW will inevitably lead to the currency’s decline in value and ultimately hurt the most vulnerable members of society. This is because Public Distribution System-dependents and others with limited market access will have fewer means to acquire foreign exchange, leaving them with only the high-risk sovereign tender.
Once lost, restoring people’s confidence to a currency is a task that is difficult for even countries with robust financial services. Nonetheless, it is one that we consider vital for North Korea’s long-term food/economic security.
To be fair, the volatility has been steadily decreasing since 2010 and both rice prices and exchange rates appear to be stabilizing.
At the same time, administrators in Pyongyang are no doubt beginning to recognize the strange economic circumstances within which they are trapped. Consider the following graph:
Using rice prices and the exchange rate between the USD and the KPW for that same day, one can readily plot the changes in the dollar’s purchasing power in North Korea. As one might expect, the USD purchasing power shot up in the immediate aftermath of the 2009 currency revaluation and steadily fell over time until sometime in mid-2012. Then suddenly, the buying power of the dollar steadily increases until reaching levels unseen since early 2011. The rise in the USD purchasing power, no doubt fueling demand for foreign exchange for those who have the means to acquire it, is the direct result of diminishing price volatility – as rice becomes cheaper under more stable market conditions, more of it can be purchased with valuable foreign exchange.
On April 15, 2004, rice prices in Pyongyang, Sinuiju, and Hyesan (3800 KPW, 3900 KPW, and 4000 KPW respectively) reached their lowest since June 8, 2012. Naturally, the purchasing power of the USD was inversely at its zenith with 1 USD capable of purchasing 2.01316 kg, 1.974359 kg, and 2 kg. What this meant was that a person who acquired 1 dollar around October 2012 could buy twice as many things with that same dollar in April 2014. So why would anyone hold their assets in KPW?
So here is the dilemma:
- If the North Korean state does nothing, then increasing number people will abandon the KPW in favor of RMB and USD, leaving the state unable to institute policies (including reforms) and further impoverishing the most vulnerable members of society
- If the North Korean state attempts to defend its exchange rate with China, then nominal price may begin to fall as markets become more stable; however, the rising purchasing power of the USD under such conditions would encourage greater demand for foreign exchange, fueling the KPW abandonment
Granted, rice should not be the only commodity considered, but it does represent the country’s most important consumer good and illustrates a key problem that must be addressed soon.
For now, the purchasing power of the USD has dipped slightly since April. We will monitor where it goes.
More to come.