MADELEINE BRAND, host:

This is MORNING EDITION from NPR News. I'm Madeleine Brand.

STEVE INSKEEP, host:

And I'm Steve Inskeep. Good morning. Imagine that the government decreed that you could keep $40, and the rest of your money is worthless. This actually happened in North Korea last month. Since then, the North Korean currency restrictions have led to rampant inflation and food shortages and a very unhappy public, as NPR's Louisa Lim reports.

LOUISA LIM: Tens of thousands of North Koreans began the new year with a massive staged rally in central Pyongyang.

Unidentified Group: (Foreign language spoken)

LIM: Let's implement it, they shouted, referring to government policy. But words aside, many fear what the new year might bring. A month ago, North Korea pushed through reforms, effectively slashing two zeroes off the currency. People had to exchange their old currency for new at a rate of 100-1, but they could only change around $40.

Even in this tightly controlled state, that caused widespread dissatisfaction. People burnt money bearing founder Kim Il Sung's picture, or threw it into the river, both acts constituting political crimes. Marcus Noland, a North Korean expert at the Peterson Institute of International Economics, explains what happened next.

Mr. MARCUS NOLAND (North Korean Expert, Peterson Institute of International Economics): It appears that the regime did not anticipate the degree of pushback that it would get from the population on this. And so it was forced to raise limits on conversion in a series of what appear to be ad-hoc steps, not only raising overall limits, but providing compensatory pay raises to certain favored groups.

LIM: South Korean groups with sources in the north say subsidies of 500 won, about 15 U.S. dollars each, were given to the whole population. Then at the end of December, salaries were distributed at the same rate as if the two zeroes hadn't been knocked off. Marcus Noland again.

Mr. NOLAND: In effect, there has been 100-fold increase in purchasing power. If there are no more goods on the market, that simply is going to manifest itself in inflation.

LIM: And that's already happening.

(Soundbite of music)

Unidentified Woman #1: (Foreign language spoken)

LIM: Open Radio for North Korea broadcasts from Seoul, compiling reports from sources inside North Korea. It says rice prices have quintupled compared to before the reform. Other food prices have doubled. Other sources say after salaries were dispersed, the price of goods like pork was rising by the hour. Now, rice is hard to find. Supplies are being stockpiled, since traders believe prices will continue to climb.

Open Radio's president, Tae Kyung Ha, says public opinion swung behind the reforms after the salary hikes. But now worries are returning, especially given the chronic food shortages.

Mr. TAE KYUNG HA (President, Open Radio for North Korea): People, again, are getting frustrated, just after two weeks. People's emotion and people's reaction is very fluctuating. It's changing every week.

LIM: At the beginning of this month, the use of foreign currency was banned. The price of the new one on the black market has plummeted, with the dollar exchange rates 10 times higher than usual, according to some reports. Foreign trade has been affected, especially with China. A Chinese seafood trader, who would only give his name as Mr. Han, says the currency reforms have made importing North Korean goods uneconomical.

Mr. HAN (Seafood Trader): (Through translator) About 20 to 30 percent of Chinese companies have suspended business. We stopped last month, so we're doing OK. Those still doing business are losing a lot of money, in the tens of thousands of dollars.

LIM: These reforms constitute an attack on North Korea's emerging market economy and those newly minted businessmen who got rich from it. They signal a return to North Korea's former socialism. But Open Radio's Tae Kyung Ha says the real aim is lay the groundwork for the power succession to Kim Jong-un, son and presumptive heir to North Korean leader Kim Jong-il. What's unprecedented is Pyongyang's new sensitivity to public opinion.

Mr. HA: This currency reform is the first policy initiative to stabilize Kim Jong-il's power succession. So if the public opinion to this policy is going bad, it might jeopardize the power succession plan.

(Soundbite of song, "The Country Will Be Aware of You")

Unidentified Woman #2: (Singing in foreign language)

LIM: "The Country Will Be Aware of You." This is the name of a North Korean song recorded last year, and its sentiments are finally true. What's not clear, however, is how Pyongyang will continue to disperse such huge salaries and feed its hungry population. South Korea's defense minister has been warning his troops that it's difficult to estimate the threats that will arise in the aftermath of the currency reform.

Louisa Lim, NPR News, Shanghai.

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