Pyongyang's Chang Gwang Street Reflects Gulf in North Korea's Dual Economy [-The economic pitfalls of communism]

Guests can buy a Heineken beer at the official exchange rate of 100 North Korean won to the U.S. dollar. Photographer: Dieter Depypere/Bloomberg

A woman poses for a photo at a store selling sausages across the street from the Koryo Hotel in Pyongyang, North Korea. Photographer: Michael Forsythe/Bloomberg

Dutch traders from Amsterdam stand outside the Koryo Hotel. Photographer: Dieter Depypere/Bloomberg

Oct 14, 2010
By Michael Forsythe
Bloomberg

The two sides of Chang Gwang Street in North Korea’s capital of Pyongyang show the gap between the Stalinist country’s elites and its capitalist-minded citizens.

On one side, English-speaking officials mingle with black- clad traders from Amsterdam at the Koryo Hotel. There, those with foreign currency can buy beer brewed by Amsterdam-based Heineken NV at the official exchange rate of 100 North Korean won to the U.S. dollar.

Across the street, a saleswoman at a private market giggles when a foreign guest says he doesn’t have the 200 won needed to buy a steamed vegetable bun. She flips the placard to reveal the cost in dollars, the currency of a country that doesn’t have diplomatic ties with North Korea. The price: 20 cents, implying an unofficial exchange rate of 1,000 won to the dollar.

Communist countries from the Soviet Union to China have had thriving black markets for so-called hard currencies such as the dollar and yen. What makes North Korea exceptional is the gap between the two rates, an indication of the economic weakness of Kim Jong Il’s regime. North Korea’s economy is about 3 percent the size of South Korea’s, according to Bank of Korea data released June 25.

The gap between the official and market rates in China “was not nearly as great in the early 1980s,” said Ken Dewoskin, a director of Deloitte LLP’s China Research and Insight Center in Beijing, who began his career watching China in the mid-1960s and first traveled there in 1977. “Even closed economies like Cambodia in the 1960s had only a two-to-one pricing discrepancy.”

Private Enterprise

Kim moved last November and December to revalue the won, taking two zeros off the currency and limiting the amount that could be exchanged for new bills. The policy was designed to rein in the richest of the private merchants, to whom North Koreans increasingly were turning for goods as the official economy stagnated, according to the University of Vienna’s Rudiger Frank.

“The revaluation not only wiped out people’s savings, but their trust in the government and their currency,” said Ha Tae Keung, founder of Open Radio for North Korea. “There’s a widespread belief among North Koreans that their money is going to get further devalued and they’ll get poorer just by holding onto it.”

Pak Nam Gi, North Korea’s head of finance and planning, was executed after the revaluation sparked unrest, South Korean media reported earlier this year. The currency turmoil came amid mounting speculation that Kim Jong Il’s health was failing.

Last month he promoted his son, Kim Jong Un, to four-star general, setting the stage for the second hereditary power transfer in the Stalinist state.

Anniversary Celebration

The government made an unprecedented invitation to international media to witness the Oct. 10 anniversary celebrations marking the 65th anniversary of the Workers’ Party of Korea.

The day after that event, Pyongyang residents, including old men, children and women with babies on their backs, queued up to use their won at the Chang Gwang Street market, with the biggest lines for the cheapest goods.

Twenty-four people lined up to buy a small cone of vanilla ice cream at 20 won each. A similar number were waiting for shaved ice with sweet bean paste at 5 won a bowl. Another 15 were there to buy sweet potatoes, at 60 won per kilo.

No one was seen lining up to purchase Polish-style sausages, which at 1,700 won each were priced at the equivalent of 16 cans of Heineken beer at the hotel across the street. While price tags at the Koryo are in won, the currency isn’t accepted there.

Scotch and Olive Oil

That wasn’t a concern for people at the hotel, who were buying foreign goods -- Scotch whiskey and Syrian olive oil were on offer -- with dollars, euro and Chinese yuan, and driving some of the new Ford Motor Co. Explorer and Audi AG sport- utility vehicles that ply the capital’s roads.

One such customer was Remco Van Daal, identified by the official Korean Central News Agency as the head of the Dutch organization for the study of the Juche Philosophy, the North Korean state ideology that stresses national self-reliance and total loyalty to the leaders.

Van Daal and a colleague, who said he was also named Remco and declined to give his last name, both had close-cropped blond hair and wore black shirts and black pants. The only color on their clothes was from the pins of Kim Jong Il’s father, state founder Kim Il Sung, which they wore over the left side of their chests.

Both said they were traders from Amsterdam, declining to elaborate.

One hotel worker, who said he made about 2,500 won a month, said the government provided people with most food staples and other necessities, such as clothing and housing. The free markets like the one across the street were there to supplement their diets, he said.

“We don’t operate like a capitalist country,” said the employee, who gave only his surname, Myung.

To contact the reporter on this story: Michael Forsythe in Pyongyang at mforsythe@bloomberg.net

To contact the editor responsible for this story: Bill Austin at billaustin@bloomberg.net