On my first visit to North Korea in 1990, my hotel only accepted the official North Korean currency, the won. I had changed my money at the official rate of 2.2 won to a dollar. But my now-husband was an expert in the thriving black markets. With his assistance, my exchanges were conducted at a more realistic rate of 12 won to a dollar. Sadly, the improved rate made little difference: shopping was limited to three hotels.
Even then, entrepreneurial North Koreans were making money on the black market. But the local currency was little more than a coupon, allowing very limited kinds of exchange: food, housing, utilities, even basic clothing were free. The state maintained such a tight grip on the population that, other than the elite, anyone trying to spend large amounts of local currency would have likely felt the heavy hand of the state security apparatus. If savings ever seemed to get out of hand, the government responded simply, brutally and arbitrarily. Overnight it would revalue its currency so that the won savings of the population became worthless.
When I moved to North Korea in 1998, the socialist monetary system had been smashed by the famine, and the state's inability to provide basic goods. And when I lived in Korea again in 2000 a primitive market had exploded. The state has never recovered its ability to be a provider of first resort. Its battle to control and regulate the non-official market has been utterly unsuccessful.
That is why the unilateral announcement of a massive revaluation of the local currency is a disaster. When the government revalued the currency in the old days, the damage was limited to a few speculators; today, it will have a huge impact on people who are simply trying to survive. They will not be able to spend their savings in the private markets, and will not want to expose private savings to scrutiny at the state-controlled banks where they are supposed to exchange their money.
What worked in 1990 cannot work now the population largely knows that China and South Korea are prosperous; that a better way of life is possible elsewhere – and, by extension, with a change of government in Pyongyang. Whatever the economic impact of this action, the political consequences may be greater still.
The author is a Korea researcher and director at Cranfield University