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(2nd LD) N. Korea to shrink free market via currency exchange

All Headlines 19:02 December 04, 2009

(ATTN: RECASTS headline, UPDATES with reform intended for shrinking free market, COMBINES with earlier story slugged "NK-economic confidence," background, analysis)
By Kim Hyun

SEOUL, Dec. 4 (Yonhap) -- North Korea confirmed its surprise currency reform, saying it aims to tackle inflation and normalize its economy that has been struggling since the 1990s, a pro-Pyongyang newspaper reported Friday, citing an official at the North's Central Bank.

"This currency exchange is first of all aimed at raising the value of our currency to smooth its circulation," the bank official, Jo Song-hyon, was quoted as saying in an interview with the Choson Sinbo. The Japan-based paper said its branch in Pyongyang talked with Jo on Thursday.

Jo's remarks were the first confirmation by North Korea of Monday's redenomination, which knocked two zeros off its currency. North Korean media still remains silent.

Outside reports say the sudden revaluation has thrown the entire nation into a panic, with shops closed and rumors of suicides and murders circulating. Large amounts of money stashed at home turned useless paper overnight, as the government reportedly set a cap on new bills available for exchange.

The North Korean bank official, however, painted a different picture. "An absolute majority of workers from laborers, farmers and office workers are giving their support to this government measure," Jo said.

In a rare admission to the North's dilapidated economy, the official said North Korea has suffered the combined effects of international sanctions, natural disasters and the fall of the communist bloc since the 1990s.

"The imperialists' vicious isolation and suffocation maneuvers against us, subsequent natural disasters and the fall of the socialist market have posed great impediments to the normal economic development of our country," Jo said.

He even mentioned the so-called "arduous march" of the late 1990s, during which about 3 million North Koreans died from hunger, according to foreign estimates. The official said productivity fell and the government was forced to spend lavishly to maintain the nation.

"As a result, the currency became inflated, and an abnormal imbalance in the people's economic development has ensued," he asserted.

The reform is aimed at curbing burgeoning free market trade, a necessary step to build a strong socialist nation in three years, he said. North Korea, which depends on international food aid to help feed its 24 million people, has set the target year for economic revival at 2012, the birth centennial of Kim Il-sung, the country's founder and father of the current leader Kim Jong-il.

"We are not headed toward a free market economy, but will further consolidate the principles and order of the socialist economy" with the revaluation, the official said.

He also said the reform took effect so suddenly so as to give no time for money laundering.

"If this measure is made public beforehand, there would arise time for illegal money to become legal by subterfuge," he said. "In the future, a large share of economic activities will be subject not to the market, but the planned supply and distribution system" of the government, he said.

The measure is expected to reduce cash circulating in the market. Jo said people can make exchanges for new banknotes for seven days ending Sunday, and "bills that were not exchanged during the period -- and our currency that has been illegally taken outside the country -- will become entirely invalid."

The exchange rate to new denominations was 100 to one, but bank deposits will receive benefits of a 10 to one rate in a policy to encourage savings, he said. The government will reset commodity prices to the level of 2002, he said. North Korea introduced market freedom in 2002, but rolled back the reform and tightened market control five years later amid soaring prices.

Cho Myung-chul, a former economics professor at Kim Il Sung University in Pyongyang, said North Korea is being honest with its problems. The currency reform will crack down on budding free market trade and strengthen government control on the economy, he said.

"The North Korean government is demonstrating its hostility toward the market," said Cho, who defected to the South in 1994 and is now an analyst at the non-governmental Korea Institute for International Economic Policy.

"For North Korea, everything -- from politics to the economy and social units -- should come in the grip of its monolithic regime so that it can function. If the market system grows independently, it means there is a growing force that does not listen to the monolithic, totalitarian system," he said.

In a similar measure, North Korea closed its biggest free market in Phyongsong, north of Pyongyang, in July.

The Choson Sinbo ran images of the new banknotes that feature the portrait of Kim Il-sung and birth places of Kim Jong-il and his mother, Kim Jong-suk. The Central bank issues notes in 5,000 won, 2,000 won, 1,000 won, 100 won, 50 won and 10 won, and lower denominations are in coins, the report said.

Through its official media on Friday, North Korea expressed confidence that efforts to build a strong socialist economy are gaining momentum thanks to its people's mental strength.

"The Korean people today, demonstrating their mental power of self-regeneration and fight against hardships, are making strenuous efforts to build a strong, prosperous and powerful socialist nation," the North's Korean Central News Agency said.

"There are quite a few things that are still in shortage for the Korean people," it said. "But nothing is impossible" as they remain united around the Workers' Party and have a self-reliant economy," the KCNA said.

hkim@yna.co.kr
(END)

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