The North Korean won ‘brown won’ is a currency that has virtually no value outside of North Korea as it is not recognized and is considered to be worthless by many. Even within North Korea, the market value of the North Korean won has collapsed by a factor of 10 (90 percent depreciation) in the last 5 years alone. At present, North Korea settles any foreign trade transactions in hard currencies including the US-dollar (‘USD’). During the 1980’s, the North Korean economy started to decline. By year 1991, the collapse of the Soviet Union further impacted negatively the North Korean economy with the loss of oil and other economic subsidies from the Soviet bloc.
North Korea today is considered to be a ‘rogue state’ by many in the West for its hostile policies thus making the country isolated and impoverished. It is a backwards society when compared to much of the world with few cars, little electricity and an inadequate telecommunications system. The citizens are granted few personal freedoms. A national tragedy is the current on-going food shortage, the policy of relying on the West for food aid and diverting national funds to an unsustainable military establishment. Since 1990, famine alone has killed up to an estimated three million North Koreans with the present population in the area of 23 million.
POLITICS: North Korea is the only country in the world today where it is still under the leadership of a dead person, the Eternal President Kim Il-song who projects a father image of God and/or cult and is the founder of North Korea. Kim Jong-Il who took power in July 1994 after the passing of Kim Il-song, his father.
The government based out of Pyongyang is well known for its continual rhetoric, war of words and nuclear war threats with the United States. Kim Jong-Il’s regime is also threatening to pull out of the 1953 armistice agreement as they are technically at war with South Korea. The United States under the leadership of the Bush administration has tightened up its stance with North Korea and has not ruled out a military option although it prefers a diplomatic solution. North Korea is playing high stakes with a six country delegation on a proposal to provide security assurances & foreign aid from the West in return for disarming North Korea’s nuclear program. The end goal for the North Korean regimes is that of survival as its sole purpose.
In October 2006, North Korea stunned the world by announcing that it had detonated a nuclear device. The exact size of the test, a dirty bomb remains unclear to many.Why the tough talking statements of World War III from North Korea? The North Korean nuclear crisis is clearly an act of desperation for North Korea. They hope to use the nuclear issue as their trump card as a negotiation platform to secure favorable terms with the West in areas of food support, foreign aid and energy subsidies. The very survival of Kim Jong-Il’s regime is at stake.
ECONOMY: centrally planned, isolated from the global economy. The economy is currently imploding as the economic situation has deteriorated immensely over the last several years as North Korea remains isolated from the global community. North Korea’s regime is running out of time as the nation faces a renewed food crisis shortage. The economy during the 1990’s contracted for 9 consecutive years until 1999 where they say GDP growth turned positive at a modest 1 percent. Since the collapse of the Soviet Union in 1989-90, the North Korean economy has contracted by over 50 percent.
North Korea earns its foreign exchange by selling missiles, missile technology, bombs and other military hardware including the potential for sensitive nuclear technology knowledge. Military production is one of the few areas where North Korea excels. North Korea unbelievably has the world’s fifth largest army at 1.2 million or 1 in 20 citizens is a part of the armed forces. In addition, it reportedly has the largest submarine fleet in the world. It is estimated that North Korea spends in the area of 30 percent of GDP on defense. However, for the North Korean economy to ultimately survive, the government will have to downsize the military and re-direct monies towards the civilian economy. Other formal industries include minerals & mining, fish products, textiles, chemicals and electrical energy with nuclear power potential.
Economic Statistics
Total GDP as measured by purchasing power parity is estimated at $40 billion USD (2006) with corresponding GDP/Capita at $1,800 USD. Inflation is high. Trade deficit at $1.38 billion USD (2005). Net oil importer, foreign aid recipient.
KNOWLEDGE:
Contact BankINTRO.com for further detailed discussion on North Korea’s exploitment of nuclear technology as a vehicle to earn foreign exchange monies. Other issues of interest include international sanctions to mitigate the movement of monies abroad for North Korea - is the financial embargo with the use of foreign capital controls a success or failure?
CURRENCY: ISO Symbol ‘KPW’, North Korean won. At time of review on March 23, 2007, the won had an official exchange value of 142.45 KPW to the US-dollar (USD). It should be noted that the official rate is of little importance. Reports have the market value of the North Korean won presently trading in the 3,000 KPW to the USD. This is a dramatic collapse in market value of the KPW as our other research reports had the won trading at a rate of approximately 200 KPW to the USD in year 2002. The crash in the KPW reflects an economy in complete disarray with rampant inflation. The black market exchange rate is a proper indicator of fair market value which measures the true extent of depreciation for the KPW. Barter is a popular method to settle transactions in North Korea as is hard currency such as the Chinese yuan, Japanese yen or the US-dollar. The North Korea won is used only within North Korea, foreign visitors are issued foreign exchange certificates although they are allowing more hard currency transactions due to the shortage of hard currency within the country. The North Korean central bank if responsible for issuance of the North Korean won.
CURRENCY HISTORY: the new North Korean won has been in circulation since 1959. During the early 1990’s, the black market exchange rate was at 90 KPW to the USD. At the height of the food and flood crisis in 1996-97, the market exchange rate fell to 280 KPW. Official government exchange rates are out of step with reality of what is taking place in the economy and have very little to do with the economic fundamentals. Historical official valuations have included January 1990 at 2.1 KPW to 1 USD, May 1994 at 2.15 and year 2002-03 at 142.
CURRENCY FORECAST: North Korea with few natural resources, the only way to grow the economy is via foreign direct investment and foreign aid, both of which are non-existent. The collapse of the North Korean regime is inevitable and reunification with South Korea in BankINTRO.com’s view will all happen much sooner than many expect. The process of North Korean regime change is well underway.
Therefore, if our argument is correct, than the future of the KPW is that of a doomed currency with the much stronger South Korean won ‘KRW’ as the most probable replacement currency. Formal talks regarding reunification did take place at a Korean Peninsula summit in June 2000. Leaders of both Korea’s agreed to eventual reunification under the guidance of the ‘Sunshine Policy’. Although under this scenario, reunification would take decades to achieve at an estimated cost of $2 to 3 trillion USD equivalent to South Korea over the estimated 25 years to absorb North Korea. Of interest, a major plus for the North Korean won surprisingly is the nation’s gold reserves with some reports having total gold holdings at between 1,000 tons to 2,000 tons (GATA). For more information on the Korean story, please visit KOREA, SOUTH in this BankINTRO.com currency index.
UPDATED: March 23, 2007
