The Return of Macroeconomic Instability



As I observed in a December 2011, abstracting from the enormous step change in the price level that accompanied the November 2009 currency reform, it appeared that inflation in North Korea had been running at more than 130 percent annually, but that there had been some moderation in the latter part of 2011.  Now it appears that macroeconomic instability may be on the return.

Recent anecdotal reports of price changes conveyed in both press reports and in private communications from travelers returning from North Korea suggest a surge in inflation. Simple calculations suggest that the value of the won may have depreciated at an annualized rate of 200 percent or more over the past 6 months, with some evidence of an acceleration in the rate of depreciation over the past two months. Some commentators have attributed this development to the announcement of the 28 June measures. DailyNK reports the government pursuing odd strategems in an attempt to extract hard currency from the public at large.  A recent report from Rason indicated that workers were being paid in Chinese RMB, not North Korean won, for obvious reasons. Some sources report rumors of monetary or currency reforms. The one bright piece of news is the continued growth of trade, almost entirely with China.

The situation may well worsen however, if as now expected, the harvest comes in low. On the basis of this admittedly anecdotal and fragmentary data, rice prices appear to be increasing even faster than the exchange rate is depreciating, with most data from the past 3 months implying annualized price increases well over 1,000 percent annually. Such increases may reflect temporary price spikes, not sustained trends; time will tell.  But these data also suggest that at least for the last several months, the real price of rice has increased markedly.

These worrisome developments occur in front of a very strange backdrop. Kim Jong-un has said that there will be no more belt-tightening—happy days are here again—and the government is expressing renewed interest in policy changes— even if they do not call them reforms.  Their juxtaposition against an apparently deteriorating macroeconomic environment raises questions as to whether this is yet another example of North Korean reform under duress which will be reversed once conditions improve and with regard to the capacity of the country’s young and inexperienced leader. Both questions underscore the central difficulty the regime faces in establishing credibility: how does one convince the public that this time it will be different?

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