Rice Is Nice, But Yuan Is Better

Until very recently, the price of rice in North Korea’s markets (“jangmadang”) had been trending upward, and this had been the case since the currency redenomination of November 30, 2009; i.e. for roughly two years. The trend reached its high point when said price tiptoed across the 5000 North Korean Won barrier in mid December 2011 in Hyesan, Yangkang Province. That was shortly before the death of Kim Jong Il.

The sense of impending doom this created in some quarters led to analysis and reanalysis, and while it was impossible for anyone to be absolutely sure what was going on for this eruditely summarized reason, the prevailing conclusion which emerged was, and remains, that the North Korean government’s determined effort to do a clutch of things that required both domestic and foreign currency, including but by no means limited to constructing 100,000 homes in Pyongyang to commemorate the 100^th anniversary of Kim Il Sung’s birth on April 15^th, was inspiring them to both print money to meet domestic obligations, such as payment of wages and provision of food to workers, and simultaneously suck up much of the available foreign exchange reserves to import the materials and equipment needed to improve the showpiece capital.

The rising market prices engendered by this double-pronged incitement to hyperinflation were enough to concern defector reporter Joo Seong Ha of the Donga Ilbo (and the excellent North Korea Real Talk), who spoke on December 3^rd, 2011 of a “flashing light on the dashboard of North Korea” and guesstimated rice price inflation at as much as 15,000%. 

However, despite the fact that rice denominated in North Korean Won was unquestionably now far out of the reach of people holding domestic currency alone, the only news of deaths that emerged was from southerly Hwanghae Province, reported last week here. It focused on suicides incited by hopelessness, and deaths from malnutrition caused primarily, the internal news source who reported it asserted, by excessive state appropriation of grain stocks for transfer to Pyongyang from the regions surrounding the metropolitan area.

This, while undoubtedly tragic, serves in large part to lend weight to the theory of ‘Yuanization’ that this author wrote about in a past post here. To summarize the argument in brief: rising rice prices in North Korea are caused by a number of factors, but probably the most important is exchange rates, since exchange rates have the power to affect the ability of agricultural producers to import fertilizer and other inputs and of the state to import food to make up shortfalls later on. However, in many areas transactions from Chinese rice paddy all the way to dinner table are conducted in Yuan (or U.S. Dollars), meaning that prices denominated in North Korean Won are predominantly headline grabbers rather than causes for concern, albeit that they do hit hard those with limited access to foreign currency, such as Chosun People’s Army soldiers.

Indirect evidence of the validity of this observation is that starvation very rarely occurs in the Sino-North Korean border region where it was at its most deadly in the 1990s, because economic circulation there functions on a diet of foreign currency. Ditto for Pyongyang, Pyongsung et al.

Given these facts, one would be right to presume that if the price of rice were actually falling, that would also be related to exchange rates. It is certainly one core issue, among a total of five causes that need to be taken note of.

First, there is strong evidence to suggest that as much as 500,000 tons of Chinese grain was delivered to North Korea quietly via Shinuiju at the beginning of January. A significant amount of this should be expected to enter military and Party grain stores, but a large slice will also have gone from there and elsewhere into the jangmadang. This is precisely what happens when international aid is given in the form of grains; it goes to state and Party actors, which is taken to be bad, but these already have well-dug channels by which to release it into the market, increasing supply and driving down prices. The profits from this activity go back to those state and Party actors, one of which is the Chosun People’s Army. This is one oft-unspoken fact that muddies the waters of the ‘aid transparency debate’; namely, that giving grain to the North Korean state ends up diluting prices in the jangmadang, something that is good for ordinary consumers (though bad for farmers).

The second reason is of a similar hew; namely, that there is valid evidence, available without undue difficulty to those trading across the border and in the jangmadang, that the U.S. is likely to provide substantial aid in grains to North Korea in the short- to medium term. While the aid North Korea has (almost) agreed with the U.S. so far is not in that form so as to limit this very risk of diversion into military and Party channels, the view of traders is likely to be that grains will follow where nutritional supplements lead so long as the government continues to respect its ‘Leap Day Agreement’ with Washington. Given the need to both celebrate Kim Il Sung’s birthday and overcome the spring lean period between late March, when potatoes and other staples run out, and the first summer harvest, traders and most outsiders rightly presume that this is going to be the case. 

On top of this, traders also have just cause to believe that next month will see the North Korean citizenry receiving more substantial special food rations from the state to commemorate April 15^th than normal. Recent moves to lockdown Pyongyang much earlier than in previous years, partly due to the fact that there is also to be a 4^th Chosun Workers’ Party Delegates’ Conference in mid April, coupled to the formation of ‘4.15 Gift Preparation Committees’, are exacerbating this feeling of exceptionality.

To summarize these first three points, the presence of aid, the likelihood of more aid and just cause to anticipate state distribution in the first two weeks of April is causing expectations of a glut of rice in the jangmadang. As an aside, there is much to recommend the view that this is an argument for not giving aid at all, but with prices up around 5,000 won just three months ago, now may not be the best time to make it.

There are a further two points to take into consideration. First, projects centered on constructing housing in and beautifying central Pyongyang are now either complete or nearing completion. This is substantially reducing the requirement for foreign exchange to pay for imports to feed the construction sector, in turn reducing demand for foreign exchange on the part of North Korean enterprises affiliated with state and Party organs.

Second, there is also the issue of the strengthening North Korean Won. The Chinese Yuan exchange rate is falling, going from 605 won to 600 won over the last weekend in February, for example.

The Chinese authorities and Chinese enterprises from Manchuria have now been investing in North Korea for more than two years, and some results are sure to emerge sooner or later; following tangible infrastructure improvements in limited areas (Exhibit A: the highway from Hunchun to Rasun), the North Korean government should start to accumulate some additional hard currency reserves to draw on.

Whether this is the cause of improving exchange conditions right now is impossible to say, but over the medium term it should help. It is possible to say with some conviction that Chinese firms will persist in investing in North Korea in this way for at least the next five years. On the part of commercial enterprises this is not, it is important to note, out of kindness, brotherly love or some other form of fraternal emotion, but simply because the price of natural resources has risen to the point where extracting them in North Korea has become highly economical. Furthermore, these prices are not seen as likely to fall.

For enterprises in the region of China abutting North Korea, the North is a very good place to obtain such natural resources. The resource-rich mountainous northern provinces of the North are close, and labor costs are lower than at home. However, until relatively recently, Chinese firms balked at investing there, because they faced the risk of equipment and profit expropriation, something which North Korea, to its credit, has been attempting to ameliorate by, at the urging of Beijing, improving trade and investment laws that guarantee the rights of Chinese enterprises.

However, there are two problems with this scenario as it stands; first, that it is a monopsony because North Korea is only selling to Chinese buyers, meaning that North Korea is not getting as much for its resources as it could on a more open playing field; and second, that these improving foreign exchange conditions for the government in Pyongyang are also the main reason why it is unlikely that the recent decline in rice prices is going to turn into a longer term trend.

In short, almost all the investment that North Korea is attracting from Chinese enterprises is related to contracts for natural resource extraction or, in the case of Rasun, access to the sea. As such, Chinese firms are not contributing anything of substance to the long-term development of the North Korean economy. Infrastructure developments could in theory perform this function, but that brings us to comments about the Hunchun-Rasun road Marcus Noland made here;

“The real question,” Noland asked, “is whether it will be a springboard to broader reforms. A simple leading indicator: are off-ramps built on the road between the port and China? If they are, the road could become the main artery of a growth corridor in that part of North Korea. If not, the highway would be a metaphorical tunnel from China to the sea. Sure, North Korea will make money off the port, but the project will effectively be an enclave, and not a catalyst for broader development.”

As the world well knows, what is actually needed is for North Korea to add metaphorical off-ramps to all its economic activities, reinvesting what profits it can derive from Rasun, port fees and trade in natural resources, particularly coal, into creating new secondary manufacturing and service industries that leverage its competitive advantages, namely low labor costs and an educated work force, to begin to add value to its exports and attract more foreign exchange.

However, this will remain a distant dream for as long as the country remains a highly authoritarian dictatorship that chooses to remain ignorant of macroeconomic and development theories of this nature. The day when rice completely ceases to cost “around half the price of rice in South Korea” will not come under such conditions.