Won for the money: North Korea experiments with exchange rates

Reuters

By James Pearson

SEOUL, Nov 4 (Reuters) - In a dimly-lit Pyongyang toyshoppacked with Mickey Mouse picture frames and plastic handguns, abasketball sells for 46,000 Korean People's Won - close to $500at North Korea's centrally planned exchange rate.

Luckily, for young North Koreans looking to shoot hoops withDennis Rodman, the new friend of leader Kim Jong Un, theChinese-made ball actually costs a little less than $6 based onblack market rates.

Once reserved for official exchange only in zones aimed atattracting foreign investment, and in illegal underground marketdeals elsewhere, black market rates are being used morefrequently and openly in North Korean cities.

Publicly advertised prices at rates close to the market rate- around 8,000 won to the dollar versus the official rate of 96- could signal Pyongyang is trying to marketise its centrallyplanned economy and allow a burgeoning "grey market" to thrive.This could boost growth and capture more of the dollars andChinese yuan circulating widely so that North Korea can pay forimports of oil and food.

Unofficial market rates could become more widespreadfollowing an announcement last month of 14 new special economiczones (SEZs) aimed at kickstarting a moribund economy whereoutput is just one fortieth of wealthier South Korea's. Aspokesperson for the Korea Economic Development Association, alocal organisation tasked with communicating policy in the newSEZs, told Reuters that exchange rates in the new zones are tobe "fixed according to (local) market rates."

"The official rate for the won is like a placeholder," saidMatthew Reichel, director of the Pyongyang Project, a CanadianNGO that organises academic exchanges with North Korea. "We allknow that the value of the won is not this."

UNDER STRAIN

An estimated 90 percent of economic transactions along NorthKorea's border with China are in yuan, an embarrassment for acountry whose policy stresses economic independence, andsomething that reduces the grip that authorities attempt toexercise over its people and economy.

Pyongyang does not publish economic data, but is believed tohave run a sizeable current account deficit for years, strainingits ability to pay for imports in hard currency.

An attempt in 2009 to revalue the won and confiscate privateforeign currency savings prompted protests from market tradersand forced a rare policy reversal and public apology from stateofficials.

"Due to its lack of foreign currency, the North Koreangovernment will have to tolerate black market rates, even if ithas difficulty in officially recognising them," said ChoBong-hyun, a North Korea economics expert at the IBK EconomicResearch Institute in Seoul.

Others have gone down this route before.

"This is comparable to Cuba, which implements a dualcurrency system between convertible pesos and national pesos,and Myanmar, which for years refused to recognize the blackmarket value of the kyat until it became completelyuncontrollable," said Reichel at the Pyongyang Project.

GOING UNDERGROUND

Not only does North Korea not provide official data on itseconomy, but when things are actually paid for using theofficial rate, the maths don't add up.

Pyongyang's two-line metro system, which only accepts won,is one of the world's cheapest at just 5 won a ticket. However,the equivalent grey market value is so small that no single coinin any currency is small enough to cover it.

State salaries are also paid according to official rates,meaning the 6,000 won a month paid to a civil servant only justcovers the cost of a pack of cigarettes and a lighter.

The difference in official salaries and unofficial prices ismade up from an economy that, despite government restrictions,has become increasingly marketised.

Even workers with stable jobs in Pyongyang are tasked withextra money-making activities. Women in particular, less boundby obligations to work state-controlled jobs, dominate NorthKorea's countless urban and rural marketplaces.

While low-end goods and services are increasingly expressedaccording to grey market rates, transactions at more expensiveshops are usually priced using the official rate, but conductedin dollars or yuan.

The Chongjon Sunrise Supermarket in central Pyongyang sellsHershey's chocolate bars at 150 won and, for the ambassadors intown, boxes of Ferrero Rocher at 1,850 won - the low pricesindicate the vendor expects to be paid in foreign currency, notwon.

Reichel said that when he once teasingly tried to pay forhis midnight snacks with a couple of crumpled North Korean wonbanknotes, the shop assistant smiled patiently, and politelyasked for dollars. At grey market rates, the assistant wouldhave had to accept an armful of 5,000 won notes, the largestdenomination, for the 160,000 won the chocolates cost.

"Black market rates are set by larger scale currency tradersworking in major urban areas," said Christopher Green of theDaily NK, a website that tracks black market rates in NorthKorea.

TOUGH CHOICES

Kim Jong Un, the third of his line to rule impoverishedNorth Korea, has repeatedly pledged that austerity is over.

The North experienced a famine in the mid-1990s and itseconomy was hurt by the collapse of the Soviet Union thatpropped it up in a Cold War battle for supremacy in Asia.

Trading partners such as China and Russia now insist onbeing paid in hard currency, draining reserves.

Stacked up against South Korea, whose economy it onceoutmuscled, and China, which has gone from failedcollectivisation to the world's second-largest economy,Pyongyang faces some tough choices.

Economic reform and freer markets could accelerate thegrowth of a middle class that is not beholden to Kim and thedynastic rule of his father and grandfather.

One step would be to broaden out the number of institutionslike the Golden Triangle Bank in the Rason Special Economic Zonewhich regularly advertises rates for the euro, dollar, yuan, yenand rouble that no longer reflect the official policy rate.

"There are people who are trying to push for some sort ofpolicy implementation," said Reichel. "But we won't start to seesustainable economic development until the government acceptstheir currency system does not work in the long term, andcontinuing with this idea of a state-provided salary is futile."

"At this stage, it's still like cowboys and capitalism."

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