Some security officials don’t crack down because they, too, need the money; some receive payoffs from traders that outweigh their own salaries, defectors say.
Foreign currency now powers much of the black-market trading, where even state-run companies have become buyers. And because the government sources its own materials from the markets, many of North Korea’s basic state functions would potentially sputter if officials tried to crack down on black-market trading, economists say.
The acceptance of this new model among North Korean authorities marks a tacit admission that the state’s centrally planned economy, which touts self-reliance but lacks the power to provide for its people, is broken.
The North Korean economy was originally designed to operate with strict controls and a heavy dose of central planning. Under that model, the government fed its people, delivering coupons for rations and leaving no need for private enterprise, let alone foreign cash. But when the public distribution system collapsed 20 years ago, leading to a famine that killed an estimated 1 million, the impoverished country encountered a choice between maintaining a broken model or giving space for a new one.
Marriage of markets and currency
For years, North Korea showed fitful tolerance for nascent private-market activity that slowly replaced the ration system. But it also used frequent punishment and policy crackdowns to limit the markets, worried that uncontrolled activity would build a merchant class, at arm’s length from government control, that would learn to take care of itself.
The loosening over the last two years is especially significant, analysts say, because it combines one thing North Korean authorities don’t like (markets) with another thing they wish they didn’t need (foreign cash).
One European diplomat with ties to Pyongyang said the North Korean government “detests” its reliance on foreign money and black markets.
“For a country as fiercely nationalistic as North Korea, this is a major struggle,” said the diplomat, speaking on the condition of anonymity to share frank opinions on conditions within the country.
North Korea faces extra pressure to show its people economic progress, the diplomat said, with new leader Kim Jong Eun taking power after the death of his father.
North Korea realized its dependence on black markets only after a high-profile attempt more than two years ago to eliminate them. That move came through a currency revaluation in late 2009 that effectively confiscated people’s savings. The state said the North Korean currency, the won, was about to become worthless and needed to be swapped for new bills. But when making those swaps, people were entitled to only a fixed amount of new bills, no matter how much they held before.