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North Korea Digs Economic Hole Won Note at a Time

North Korea's decision to wage war on its burgeoning merchant class by reasserting state control over the economy could turn out to be a rare misstep for Kim Jong-il that poses risks to his iron grip over the hermit state.

North Korean leader Kim Jong Il
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North Korean leader Kim Jong Il

Kim may be looking to keep the masses in check through more repression, give quasi-state firms run by his supporters a boost by wiping out competition and secure capital to pay for an ambitious campaign to build "a prosperous nation" by 2012.

The moves include lopping two noughts off the value of the won, which cut the worth of savings to a hundredth unless, according to one report, they are deposited in state banks.

It also banned the use of foreign currency, a move likely aimed at merchants who operate outside the centrally planned economy, often by purchasing goods in China in dollars, euros and yuan.

The North also upgraded the status of a city it has designated as a foreign investment zone, in what may be another attempt to gain control of the faltering economy.

"The North Korean currency reform is an economically misguided initiative that will reduce the welfare of North Korean residents," economists Marcus Noland and Stephan Haggard wrote in a paper for the Peterson Institute for International Economics.

"Preliminary signs suggest the regime is leaving nothing to chance and that heightened repression is a central feature of the new economic controls," they said.

The North Korean economy has taken hits from fresh U.N. sanctions imposed after its nuclear test last May. It has also lost handouts from the South due to wrangling over Pyongyang's atomic ambitions that were once worth more than $1 billion a year for the country with an estimated annual GDP of $17 billion.

North Korea's market-based economy grew after a famine in the late 1990s killed an estimated 1 million of the country's then 22 million people as citizens saw state distribution systems as failures and turned to merchants for necessities.

Troubles for Kim

The currency moves have raised the real prices even higher for essentials impoverished North Koreans were already having trouble buying due to persistent inflation and reduced the few goods they can buy by restricting external trade with China.

Merchants risked imprisonment for operating outside of the state economy if they drew attention to themselves by converting large cash holdings in the small window North Korea allowed people to change over money, which likely led to considerable losses for those selling food, clothes and appliances.

Noland said in a separate interview that the North's leaders could face problems if they tried to enforce the foreign currency ban on military and security offices, which run quasi-state businesses that funnel funds to the leaders of those groups.

"If you look at North Korea, there are no civil society institutions capable of channelling mass discontent," he said.

"The one real chance for political instability is if they try to enforce the ban on foreign exchange for the military and security services."

The North has been able to stamp out dissent through regular purges of its leadership, a suffocating internal spy network and a massive political prison system where anyone thought to be working against the state is jailed, often with their families.

North Korea's authoritarian institutions are such that it has never seen mass protests or a noted dissident class.

"The first public rallies we see in North Korea will not be about freedom or democracy, but they will be about livelihood," said Kay Seok, a researcher in the Asian Division for Human Rights Watch in Seoul.

Economic Blunders

For the past five years, North Korea has been trying to exert more influence over the economy, which has only grown weaker since Kim Jong-il took over in 1994 due to mismanagement.

The recent measures appear to be linked to Kim's plans, highly touted at home, to turn North Korea into a "great and prosperous state" and to help him win support to name his youngest son as successor to Asia's only communist dynasty, analysts have said.

It will not be easy for Kim, 67, who was groomed for about 20 years before taking over when his father and state founder Kim Il-sung died in 1994, to anoint his son Kim Jong-un as successor.

Jong-un has never been mentioned in official media and he has yet to establish firm support with the powerful military and ruling Workers' Party.

"The (currency) measure has significantly strengthened the regime's control over the economy and the people for the time being," said Park Hyeong-jung at the Korea Institute for National Unification.

But Kim is fighting a losing battle, Park said.

In a sign the currency plan may have met with resistance, authorities in the North appeared to have had to hand out bigger cash benefits to certain groups of workers, Park said. This was done in response to what groups in South Korea said was anger at the currency move and a loss in purchasing power.

Park and others said the market economy will resurface because North Koreans need it to survive.

"The world is passing by like water in a large river and what the North Korean leaders have been doing amounts to trying to build a dam by throwing stones into the current," Park said.