The reported execution of a ranking North Korean economic official is a reminder of the high personal price that can be paid for policy failures in that country. The official may be a scapegoat, but the sentence is a sign of the Pyongyang leadership’s concern about the toll that a botched currency reform effort has taken on the economy. Economic mismanagement is not only a growing burden for the long-suffering North Korean people, but also an obstacle to supreme leader Kim Jong Il’s plans to pave the way for his successor.
In a surprise move last November, North Korea announced it was introducing new bank notes and would require citizens to exchange old bills for new ones at a rate of 100 to 1. More worrying to most citizens was that the amount of money that could be exchanged was limited to 100,000 to 150,000 old won. That essentially amounted to a confiscation of private savings.
The decision served two purposes. First, it was intended to slow rising inflation that was said to be skyrocketing. The blame for that belongs on the top-down system of economic management, which has been exacerbated by a poor rice harvest that has driven up prices and encouraged producers to divert their products to private markets rather than sell to the government at its artificially low price.
Second, and perhaps most important, it was designed to rein in the rapidly growing private markets outside government control. The government had loosened its grip on the economy to assuage financial hardships that its system had inflicted. Small private markets sprung up as the economic situation worsened, creating relatively large holdings of private wealth. Pyongyang was concerned that these markets and holdings were getting too large, and that “anti-socialist forces” threatened to erode the legitimacy of the state itself.
The reform announcement was a disaster. It reportedly triggered “confusion and unrest” throughout the country, including limited street protests in Pyongyang. Private groups said there were “uncontrollable crowds” in railway stations as people rushed home to exchange their money. The reaction was so strong that the government raised the limits on the amount of money that could be exchanged. That wasn’t enough, though, as food prices skyrocketed. By one estimate, the price of rice has increased 70 times since the reform, and workers have been restricted to purchasing 2 kg of rice.
By February, North Korean Premier Kim Yong Il (not Kim Jong Il) was apologizing for the decision, saying that state prices had been wrongly set after the currency revaluation. Again, that was not enough. Last week Mr. Pak Nam Gi, head of the finance and planning department of the Korean Worker’s Party, was reported to have been executed for the botched reform.
Mr. Pak had been the subject of considerable speculation when he disappeared from public view two months ago. He was once a companion of Mr. Kim Jong Il, joining the supreme leader on foreign trips. He was regularly identified among the coterie of officials who joined the leader on inspection tours. South Korean sources report that he was arrested in mid-January after being criticized at a party meeting.
The November reforms were a mistake. Yet, they were part of a wider effort to reassert central government control over the economy since 2005, after the leadership became nervous about the scope of the private sector of the economy. Last June, for example, it was reported that the largest private market in Pyongyang was shut down because it was diverting goods from official supply channels and fueling inflation.
Perhaps a still greater concern was that the reforms — how they were implemented, the reaction and the subsequent apology — undermined the image of Mr. Kim. There are reports that the supreme leader has been trying to put a succession process in place since he allegedly suffered a stroke about 1 1/2 years ago. The key date looks to be 2012: the 100th anniversary of the birth of Mr. Kim’s father, Kim Il Sung; the year Mr. Kim will be 70; and the target for North Korea becoming “a strong and powerful nation.” Then, it is alleged that Mr. Kim’s third son Kim Jong Eun will be unveiled as the official heir.
Despite nearly two decades in the headlines, North Korea remains a mystery to outside observers. Any explanation of the thinking in Pyongyang is inevitably more speculative than factual. What is certain, however, is that the economic situation in that country is dire and the leadership has never demonstrated that it has the instincts to properly adjust to those realities. Instead, its inclination is to clamp down and subordinate economic reality to political needs.
North Korea is likely to become more belligerent, not less, as the situation becomes more desperate. The search for scapegoats is not likely to stop at the borders. Japan, like other countries in the region, needs to prepare for a variety of contingencies as it assesses developments in North Korea.
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