On December 17th, GWIKS hosted a special North Korea Economic Forum, discussing North Korea’s financial reform measures in the face of economic crisis and international sanctions. Moderated by Assistant Director Yonho Kim, Guest Speaker Dr. Moon-Soo Yang join GWIKS to break down North Korea’s financial evolutions and adaptations through a series of challenges.
The traditional financial system of North consists of a Monobank universal banking system. This is composed mainly of the Chosun Central Bank and the Chosun Trade Bank, in addition to the Foreign Exchange Bank and Joint Venture Bank.
After the financial crisis of the 1990’s, a number of changes came about in response to a dwindling economy. First, was the paralysis of the financial system and the destruction of money circulation. In the traditional system, the Central Bank provided funds to State-run Firms who would provide funds to the Residents of the country where the money would circulate between residents, the general market, and the State-run stores where the funds would cycle back to the Central Bank. Due to the degree of the economic hardships to follow, the circulation of monetary funds was changed, as the State-Run stores could not provide the daily necessities needed for Residents, forcing them to spend funds in the general market, thus cutting off the Banks monetary system. Citizens started to avoid depositing funds into banks because they did not have the money to retain them or give them back.
Second, there was the development of private finance. Private finance, an informal financial market to the socialist system, was popularized to offset the paralysis of the public finance and marketization during the crisis. Instead of obtaining their monetary funds from the government, residents, state-owned firms, and cooperations who participated in the private market received funds from wealthy individuals, called “donju”, and private banks. These exchanges were separated into three markets, (1) Personal-to-personal finance, (2) Individual-to-Company finance, and (3) Bank-to-Business finance.
A combination of both circumstances lead to the instability of Market Prices and Exchange rates, as inflation began to increase as a result of the money produced from the private sector, despite the fact that economic hardship of the public sector left the state with no funds at all, minimizing the value of the North Korea won year after year in its global market value.
The Kim Jung-Un era would bring about a number of key ‘financial reform’ measures to deal with these issues. The first revision would focus on changes in the banking sector. This took shape in the form of revising banking legislation through the Central Bank Act and Commercial Bank Act; reorganizing the banking structure with the introduction of a two-tier banking system with commercial banks; the reorganization of the roles that banks play in the public market as the middle man between the state and residents in accordance to new legislation; and the introduction of news systems and profit systems to help monitor the way banks operate of time as well as making banks independent.
Second, there was a revision to the enterprise sector, permitting State-run firms the liberty to obtain loans from individuals as well as the ability to open cash accounts and foreign currency accounts for residents. The local sector saw adjustments that help to regulate the expenditures of funds as well as self-sustainment. This came through the establishment of a regional budget payment system and the introduction of local budget systems in accordance with the 2012 Local Budget Act that was passed. The commercial sector saw reforms in accordance with new legislation as well, which helped restore the monetary cycle back to state-run stores by matching the state-run prices to the prices found on the market to stimulate the state economy. Perhaps the biggest change to come was measures introduced to the residents of North Korea. Resident were incentivized to participate in the domestic market by depositing money into North Korean banks and spending money in the commercial market with the introduction of two new bank cards: the pre-paid card in 2010 and the debit card in 2015.
These financial ‘reforms’ to come out of the Kim Jong-Un era strengthened the link between national finance and banking systems. The expectation of these reforms was that it would not only restore monetary circulation in North Korea but also stimulate the recovery of the public financial system and reduce the burden of financial expenditures by the central government by providing middle-men and infrastructure for self-sustainability. In reality, the final outcome of these reforms will be dependent on whether the individual economic variables (banks, firms, residents, Donju, etc.) will work as the state intends as a part of their efforts of indirect control of the economy or if they will find other ways to maneuver the government to sustain themselves. Additionally, there are still issues within the North Korean economy that are still unsolved due to institutional limitations that restrict the degree by which the government can implement new changes to correct them. A general distrust of the state bank system is still prevalent in North Korea, and the government is still working to re-establish that trust as time progresses.
