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North Korea: Witness to Transformation

Inflation is Moderating

by | July 30th, 2014 | 05:00 pm

rice and usd prices pyongyang July 2014

Normally one thinks of inflation as a bad thing, but in the Post-Global Financial Crisis Era of Unconventional Monetary Policy a number of countries have faced debilitating deflation and have had trouble generating moderate increases in their price levels. Avoiding the liquidity trap has generally not been a problem in North Korea: due to its large fiscal needs and lack of an effective tax system or ability to float bonds, the government has resorted to the printing press and as a consequence generated sustained double to triple digit level inflation.

However, possibly due to the emergence of a current account surplus, the won is now appreciating against the dollar, and the won price of rice is falling as well. Simply put, more dollars are entering the economy than going out, and as a consequence of this excess supply of dollars, the won price of a dollar is declining. The upshot is that the price of rice—effectively determined by the marginal supply of dollar-priced imports— has stabilized (and is declining in won).

The good news for North Korea is that the macro economy is stabilizing. The bad news is that the country remains vulnerable to a sharp downturn in either the Chinese economy or world commodity prices.

Rice is consumed by the elite, so it would be interesting to investigate whether the same relationships held (or held as tightly) for other, less costly foodstuffs like corn, or in locations other than Pyongyang. It is possible that the situation is stabilizing or even improving for the upper echelon of North Korean society (people with access to dollars who eat rice) but not for less elite members of society who don’t have access to dollars and eat corn.

The bottom line is that the country remains on a trajectory to be Uzbekistan North: a corrupt extraction-driven economy that works well for the ruling family and connected elites but not the bulk of the citizenry.