Foreign Currency is Now the Key to North Korea’s Survival 

An American $100 dollar bill. Image provided by 401kcalculator.org

SEOUL – Despite being closed off from the world, politically and economically, North Korea cannot survive without foreign currency. 

This, of course, applies to some degree to all countries in the international trading system. But ever since the 1994-1998 famine – which North Koreans refer to as the ‘Arduous March’ – foreign currency earning in the country has become increasingly important.

At the same time, the economic system itself has become increasingly irrational. As that is quite a bold claim, let me explain it.

In contrast to other economies, the relationship between production, profit, and investment in North Korea is unbalanced. Goods are produced, for example, at very low cost. Factories are paid barely enough to cover basic material and labor costs. Any resulting profit is collected by the regime.

These profits may be used to meet unrelated costs or invest in unrelated businesses – such as those run by the military in what is known as the “Second Economy.”

Thus, the system features no expansive reproduction, to use a Marxist term. In other words, there is no natural generation of other businesses and activities connected to the profit-earning business.

Similarly, the distribution system does not function in the way it does in most countries. The supply of goods does not occur in response to demand but is determined by the arbitrary decisions of the state authorities. 

That said, there does appear to be a certain measure of supply that is determined by demand in the country today in the black markets. But these are temporary, permitted by the regime to avoid a societal crisis similar to the one experienced during the famine. 

It is noteworthy that, under this temporary situation, goods and services are traded at black market prices which are much higher than those set by the state. From this point of view, the market has provided the regime with a golden opportunity to generate high added value while the socialist supply system remains paralyzed. 

The recent focus on the development of many consumer goods factories under the guise of improving people’s quality of life is in fact a foreign currency earning strategy adopted by the regime that has come to see that cash is available in the markets. 

This is the essential character of the North Korean economy today. It is supposed to be a planned economy that is operated in a balanced manner, but in reality the system is completely unbalanced with most profits returned to the state coffers as “Party Funds” – ie, for use by the ruling (North) Korean Workers’ Party.

Foreign currency serves to determine actual value in the North Korean economy. Of course, there is a legal exchange rate. But it is so unreal that everyone ignores it. Just as there are prices set by the state and other prices set by the black market, so there is an official exchange rate and a market rate. 

The official rate is KPW 2.10 to one US dollar. But this is a form of political manipulation.

The market rate is naturally much more volatile. We note that it has been going up over the last month. On January 21, a market in Pyongyang reportedly traded KPW 8,400 for a dollar. Given such a disparity, the official rate means nothing. Traders have no choice but to go by the black market rate. 

This lack of reality is also apparent in the official national economic indicators. They are expressed in local currency based on official prices and exchange rates. But these are no help in evaluating actual economic activity.

What is clear is that foreign currency has become the driving force of the North Korean economy to the point that “foreign currency earning” has become the overarching term for all economic activities. 

This concept emerged as a result of the prosperity of state-planned areas which earn foreign currency. 

The regime relies on various legal and illicit ways to do this. These include the export of military weapons, hacking and the theft of cryptocurrencies, dispatch of workers overseas, development of IT and software industries, and normal trade with China and, to a lesser extent other countries, through front companies. 

Over the years, as the country’s isolation has intensified, foreign currency has become the key to its very survival. As a result, the concept has moved beyond the simple “Party Funds” and taken on greater significance. They are now known as “Revolutionary Funds.” 

If it is unable to secure them going forward, North Korea is likely to face a catastrophe.

Leave a Reply

Close

Start your week with NK Insider as reported by North Koreans!