Jangmadang: Duel Exchange Rates and De-dollarizing the Economy
So, let’s do a simple trade.
You gave me a dollar and I gave you two choices. If I presented you with either 10 cents or 7 dollars, what would you take?
It is quite clear that anybody would choose to take 7 dollars over 10 cents, right?
In our previous story, we learned that Jangmadang is an unofficial black market. Because it is an unofficial black market, it also has a free market rate.
While the official exchange rate of the North Korean won and the U.S. dollar is about 100 won per dollar, the exchange rate ranges from 7,000 to 8,000 won per dollar in the market. Called a ‘Won’, North Korea’s currency is coded as KPW (₩).
When a government sets an official rate, often for political purposes, but the rate does not align with economic realities, the official rate is often ignored by the public and in markets and thus, creates what is known as - duelling exchange rates.
With citizens learning how to survive on their own during the Arduous March and the formation of Jangmadang, North Koreans have adopted their lifestyle around the unofficial capitalist-style market and the unofficial exchange rate, in which the supply and demand make up the competitive price. Rather than following the official premium price set by the government, Jangmadang sets the exchange rate day by day. This reflects the lack of public trust in the state and of credibility of the currency system.
It is believed that half or more of all economic activities are organized within the black market, Jangmadang.
New Monetary Reform (2009)
The new unofficial market has raised the standards of living for North Koreans and also blossomed nouveaux riches, but the government decided to reassert control over nouveaux riches as they had profited too much from the gray market and were seen as a political threat.
So, what did they do? In 2009, Kim Jong Il, the father of Kim Jong Un, ordered a revaluation of the won, effectively changing 100 won in old currency to 1 won in new bills. As if cutting two zeros wasn’t enough, the exchange limit was set to 100,000 won in old currency per person as well.
However, this monetary reform carried out by the state has put the country through severe hyperinflation. In November 2009, the price of rice in North Korea was about KRW 2,200 per kilogram. Through monetary reform, the price of rice was expected to fall to 22 won, but one kilogram of rice soared to 50 won by mid-December 2009, 150 won by early January 2010, 300 won in mid-January, and 800 won at the end of January.
The price of rice in North Korea stands at around 5,000 won, demonstrating the terrible failure of the monetary reform. Rice is considered as the barometer of all commodity prices in the North Korean market and thus, the price of rice reflects the state of the market.
“North Korea seemed to have adopted a de facto yuan-pegging currency exchange system to stabilize its economy by allowing its people to use the Chinese currency.” (Nikkei Asia, 2018)
The adoption of a yuan-pegging currency exchange system was beneficial in stabilizing and expanding the economy and raising living standards through increased consumption. By pegging its currency to yuan, the government was able to stabilize the macroeconomy with a nominal anchor through the fixed exchange rate system in the market economy.
While the “dollarization” - or yuanization - seemed to bring many benefits, the use of the yuan has led to the fall in the credibility of North Korea’s currency and the increase in trust towards the foreign currency.
This was seen as risky because an outside factor can threaten the whole North Korean economy.
However, the use of foreign currency continued in North Korea since the failure of 2009 monetary reform and the heightened reliance on foreign currency.
According to a survey conducted at Korea Development Institute, the proportion of North Koreans who used the yuan reached 52.5% from 2013 onwards, up from 23.4% between 2010 and 2012.
The same survey also reported that those who paid with the North Korean won had dropped to 43.4% by 2013, down from 74.9% between 2010 and 2012, largely due to high inflation.
As this figure demonstrated waning confidence in North Korea’s won currency, the isolated country’s economic reliance on China deepened.
Expecting the Unexpected
Yuanization was seen as risky and turned out to be risky because the coronavirus has led North Korea to be one of the first nations to close its borders, even with China, its main trading partner. This has led to a more than 90% decrease in imports from China to North Korea. With the border closure, the need for using yuan or other foreign currencies disappeared as well.
“As imports into the North crashed, demand for overseas currencies kept falling, too.” (Blooomberg, 2021).
Kim possibly saw this as an opportunity. According to a post uploaded by the Russian Embassy in Pyongyang last October, the North Korean government has ordered foreigners to convert their dollars into North Korean won as they implied the official exchange rate as 8,000 won per dollar. Would this possibly eliminate the difference between the market exchange rate and the official exchange rate?
By de-dollarizing the economy, the regime would be able to ensure complete dependence on the state from the public for their survival.
Its impact has given analysts a situation that is difficult to understand - why has the market exchange rate fallen significantly since the North Korean economy has been hit hard by COVID-19? A typical economy would rather experience a rise in the exchange rate, but not in North Korea.
The market exchange rate, which sat at about 8,000 per dollar, dropped low to 6,000 won near the end of last year. It has risen at a minimal level to the 7,000 won range at this moment.
One of the analyses made towards this happening is that the North Korean government is preventing residents from using foreign currency and that the demand for foreign currency has decreased due to blockage in trade.
However, the reason is as unclear as North Korea’s exchange rate trends. With the market exchange rate not set by the state but rather determined in the market day by day, it is certainly not easy to grasp the whole situation with information gathered from outside.
