For a country that trumpets the success of its economic system and the power of its local currency, it is very difficult as a foreigner in North Korea to buy anything with it.

At the Yanggakdo hotel, one of a handful of places foreigners stay in Pyongyang, a tin of peaches is listed at 130 North Korean won -- $1.30 at the official rate of about 100 to the dollar. Yet staff won’t accept payment in won, only taking dollars, yuan or euros. If they don’t have proper change, they may give back a mix of currencies adding up to the amount owed.

That tin of peaches highlights a contradiction at the heart of North Korea’s command economy. With its banking system hobbled by sanctions, the regime takes every chance it can to get hard currency. And while the official exchange rate is propagated as a symbol of state control, the country had to let go of its grip on the won for its own people to avoid hyperinflation and make modest improvements to livelihoods.

In fact, there is a second exchange rate, of about 8,000 won to the dollar. Once considered a taboo topic and denied to foreigners, the market rate is universally acknowledged.

“Once a market sprouts, you can’t tamp it down forever,” said Lee Ji Sue, a professor of North Korean studies at Seoul’s Myongji University. “The grassroots markets have thrived and taken North Korea’s economy higher along with them. But how long would Kim tolerate them with the unofficial economy threatening to turn his official one useless?” Lee said, referring to leader Kim Jong Un.

Market Rate

Foreign journalists -- allowed into North Korea for the first congress of the ruling Workers’ Party in 36 years -- were permitted to exchange yuan or dollars for the currency at the unofficial rate at a booth inside a store on a recent day. Workers interviewed in Pyongyang acknowledged being paid at the market rate, and the minders accompanying journalists relayed that fact.

A street stall in Pyongyang sells fried buns with red bean paste for 1,000 won -- a bit more than 10 U.S. cents at the market rate. A department store in Pyongyang features a stall where North Koreans can change foreign currency for won at the unofficial rate, and prices throughout the store are listed at the same rate.

The real economy has found greater traction under Kim, the 30-something leader whose policies to improve life for North Korea’s 25 million people will take center stage at the party congress.

North Korea’s modest market economy has defied government attempts to stamp it out. In 2009, it revalued the won by removing two zeros from the end, a move that was aimed at controlling inflation and curbing the private market, but ended up withering people’s savings.

“The official exchange rate is used to give the patina of North Korean strength,” said Steve Hanke, an economics professor at Johns Hopkins University who has written about North Korea’s currency. “In conjunction with exchange controls, it also acts to conserve the government’s foreign exchange reserves.”

There are also limits to what North Koreans will admit to, and the idea of a national economy that relies solely on North Koreans, and makes quality products, remains central to their belief system.

North Koreans allowed to be interviewed by the foreign media rarely stray from official lines dictated by the government. Journalists visiting Pyongyang this week have not been permitted to visit unofficial street markets.

Interviewed outside the hall where the party congress is being held, Kim Sun Hwa, 29, said she doesn’t keep savings in foreign currency. Asked how life is different now than it was in the past, she mentioned how proud she was of North Korea’s home-grown products.

‘Real Quality’

“Korean products are now competing with foreign ones in every shop,” Kim said, her words translated by a minder accompanying foreign journalists. “You can now see the real quality of Korean products everywhere you go.”

Factory worker Ri Song Il, 50, said he didn’t need foreign currency. “We use our own money,” he said during an interview at the factory as journalists were taken on a tour.

But like several other people interviewed, he quoted his salary at the market rate, which in his case came to less than $40 a month. He said he gets everything he needs from the government and uses this salary to buy school supplies for his children. "In my opinion I have to buy Korean products to help our country develop."

Source:
courtesy of BLOOMBERG

by Nicholas Wadhams & Sam Kim

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