North Korea’s economic moves bring new misery

Reporting from Seoul and Beijing — 

A recent move by North Korean officials to rejigger the nation’s economic system has introduced a new level of misery to everyday life.

In the last month, the price of rice rose tenfold at private markets, and residents often had to wait in line for hours in subzero temperatures to buy food.

Humanitarian aid workers have been unable to travel to large portions of the country because many hotels no longer accept foreign currency and the exchange rate bounces around wildly.

At the heart of the turmoil is a series of dictates imposed late last year by Kim Jong Il’s regime: revaluing the currency, closing down privately run markets in favor of state-owned shops and banning the use of foreign currency and the sale of many imports from China.

Recent visitors to North Korea, aid agencies and defectors say the changes have sent the already-troubled economy into a tailspin.

“It’s all really chaos. Everybody is confused,” said a businessman, who asked not to be identified.

After the 1990s, when food distribution collapsed and as many as 2 million people died as a result, North Koreans began buying food privately from vendors who sold homegrown produce on the streets and at covered bazaars. By last year, the regime had rolled back many of the liberal reforms, tightening the hours of the markets and the types of Chinese goods available.

The new dictates appear designed not only to put the entrepreneurs out of business but to confiscate any accumulated wealth.

“We need to strengthen the principle and order of socialist economic management,” Cho Song Hyun, an official with North Korea’s central bank, said in December to a pro-regime newspaper in Japan.

On Nov. 30, North Korea announced it would knock two zeros off its currency, the won, which was then trading on the black market at about 3,500 to the U.S. dollar.

People had just one week to trade in their money for new notes, and they were given a limit: Each family could exchange 100,000 old won for 1,000 new won, the equivalent of less than $30.

Any cash in excess of the limit would become invalid -- meaning life savings were being wiped out with the stroke of a pen.

“People panicked. They had all their savings in cash because nobody trusts the banks. Many committed suicide,” said Song Jung-su, a former railroad security official who defected from North Korea in 2006 but is still in touch with relatives.

Won Sei-hoon, head of South Korea’s National Intelligence Service, is reported to have told South Korean lawmakers in a closed session last week that the move led to outbreaks of violence.

“The move late last year led to riots in some places,” the Seoul-based newspaper JoongAng Daily quoted Won as saying. “But the North Korean government appears to have them now under control.”

Given North Korea’s absolute grip, organized protest was impossible. But many expressed their anger by discarding the worthless currency.

Some threw it into the wind from motorbikes, others made bonfires or tossed the money into the ocean, according to North Korea Today, a newsletter produced by a Seoul-based Buddhist charity with sources in the country. Arrests followed, the newsletter reported, and at least one man was executed -- not only because the law requires the old notes to be turned in, but because desecration of the image of the nation’s late founder, Kim Il Sung, whose portrait was on the currency, is considered treason.

In the days before the old won lost its value and foreign currency was banned, people shopped frantically, snapping up whatever they could find: electronics, rice cookers, shoes, cosmetics, clothing and, most of all, food, said a foreign resident of the capital, Pyongyang, who asked not to be identified.

Authorities twice raised the limit on how much currency could be traded in, but they couldn’t stop the hysteria. By the time the new won was distributed, almost all market shelves were bare.

When a little food went back on sale, there was such pent-up demand that prices soared out of control. Police tried to impose limits on staples such as corn and rice, but minutes after authorities left the premises, prices would climb again.

In some cases, angry vendors and residents were reported to have attacked security agents who tried to close markets, Daily NK, a Seoul-based newsletter put out by defectors, said Tuesday.

“I think they [North Korean authorities] miscalculated in their judgment,” said Kim Hyuck, 27, a defector who is getting a degree in North Korean studies in Seoul. “They wanted to stop inflation, but they made things worse.”

The currency reform has had peculiar side effects. North Korea’s treasury didn’t print enough small-denomination notes, so shops have had to give out candy and gum as change.

Uncertainty about the currency has all but stopped cross-border trade with China. A shortage of construction materials has caused delays in Pyongyang’s showcase building projects.

Even the elite, who once enjoyed a privileged lifestyle in the capital, have been affected. Most restaurants and stores in hotels, which serve foreigners and high-ranking officials, are closed, and the few still open have no fresh produce.

Prices veer from the erratic to the absurd. One recent visitor told of friends who paid $41 for two cups of coffee and an ice cream.

“You don’t want to throw terms like hyperinflation around too lightly, but it is getting pretty ugly out there,” said Marcus Noland, a North Korea specialist and deputy director of the Washington-based Peterson Institute for International Economics.

The shortages have been compounded by the regime’s relentless crusade against private vendors. Until recently, people with enough money could procure a decent selection of food at the markets offering products from China, along with shoes, clothing, cosmetics and kitchenware.

But authorities crippled the markets by limiting them to four hours a day and permitting only women older than 40 to operate the stalls. (Men and younger women are supposed to work for state-owned enterprises.)

Now many of the markets have been closed, including the Tongil market, considered the best place to shop in Pyongyang. There are even plans to phase out the country’s largest market, Sunam, in the city of Chongjin, a major trading hub for Chinese goods.

“They feel like they need to get rid of the markets in order to rebuild socialism and create a great and glorious nation,” said Cho Myong-chol, a former economics professor from Pyongyang’s Kim Il Sung University who defected to South Korea in the 1990s.

From the perspective of the regime, Cho says, there is a method to the madness:

By destroying the old money supply and printing a new one, the government essentially confiscated the wealth of the merchant class and redistributed it for its own political purposes. According to Cho, newly printed money will be directed toward a rebuilding campaign in Pyongyang to celebrate the 2012 centennial of Kim Il Sung’s birth.

The central bank is also distributing new money to the politically loyal -- members of the ruling Workers’ Party, the military, officers and employees of state-owned enterprises. Farmers are also supposed to get special stipends of 1,500 won.

“In the short term, it will help them finance projects they think will sustain the regime,” said Cho. “Of course, the policy will fail in the long term. North Korea can’t produce enough food and consumer goods to distribute, so the people won’t have any choice but to go back to the markets.”

Defectors say that as soon as markets are closed, people find other places to trade, such as dark alleys not frequented by police.

“It’s always been that way. If you went to the main market and nobody was there, you knew the police had come through, so you went and found another market,” said defector Kim. “They can close the markets, but they can’t stop market activity.”

North Korean officials have been quoted as saying they expected a brief period of uncertainty but that the economy would be stable by mid-January. They’re not there yet.

Economist Noland said there was little doubt that the measures had been a disaster for the North Korean people. The only question is whether it was deliberate.

“Was it incompetence or callousness that led them to do this? You take your pick,” he said. “There is so little accountability in the system, the regime has considerable capacity to inflict misery on the population without any significant political risk.”

barbara.demick @latimes.com

Ju-min Park of The Times’ Seoul Bureau contributed to this report.