[Viewpoint] For consumers’ sake, let won float
It is clear that far too much of the ‘Miracle on the Han’ has been accomplished by punishing Korea’s consumers.
The Economist magazine recently held a major conference in Seoul on international trade and banking in Korea. But it was most remarkable for what was left unsaid. Korea’s rising inflation (over 5 percent), stratospheric household debt (155 percent of income), low domestic savings (3 percent), chronically weak small and medium enterprises (SMEs), consumer-punishing undervalued currency and widening inequality should spark a major domestic debate, but even the finance minister ducked these issues.
A more liberal, consumer-friendly and less corporatist model of growth is desperately needed to slow the oligopolization of Korea’s economy by the chaebol. The average Korean consumer is laboring under high debt, low savings, artificially high prices and declining purchasing power. Leftish candidates are almost certain to run on populism next year against today’s oligarchic, chaebol-dominated economy.
Korean elites can be forgiven for taking a victory lap. Korea’s macroeconomics are enviable. It runs a regular trade surplus. Abject poverty, budget deficits and national debt are all low. Healthy currency reserves buffer it against international volatility.
But it is also clear that far too much of the “Miracle on the Han” has been accomplished by punishing Korea’s consumers. Koreans all know the (correct) urban legend that Korean cars are cheaper in the United States than here, and I was astonished when I moved here how small of a car one gets in Korea for the same price in the United States. The same quality car is probably 15 to 20 percent cheaper in the United States, and if you want an import here, you better be rich.
Such discrimination applies to whole classes of other goods. Even Korea’s box stores like Homeplus or E-mart are at least 10 to 15 percent more expensive than Target or Wal-Mart. I regularly encourage my political economy students to surf Amazon or eBay to price compare, and they’re astonished. The Korean branches of Costco are constantly packed, and the Korean side of my family gives my wife laundry lists of things to buy cheaply whenever we go to the United States. This summer we bought a copy of “Monopoly” at Wal-Mart for $10 because it cost $20 at Homeplus.
These sorts of price differentials are inexcusable in a democracy because they punish the poorest who have the tightest budget constraints. Here is one obvious reason why Korean household debt is one of the highest in the world: Korea’s managed trade system makes imports far too expensive, shields Korean domestic producers from consumer-benefiting price competition and so passes the buck to the long-suffering Korean consumer. There is a very obvious solution to this as well: Let the won float.
Korean elites, deeply intertwined with the largest business families of the chaebol, resist this because it means Korea’s exports will become more expensive. This is true, but so be it. The upside for Korea’s long-suffering consumer is needed. Brutalizing Korean consumers with exorbitant prices that push them into debt is simply no longer justifiable (and actually, it never was). Korea is not a developing economy anymore; it’s in the G-20.
The chaebol don’t need the help of the Korean state to gimmick the exchange rate for them. The Bank of Korea euphemistically calls this “fine-tuning” and “smoothing,” but in practice this is competitive devaluation, because BOK intervention never drives the won up (to help consumers), but always drives it down (to help mega-exporters). Not only does this violate WTO and OECD best practices, but it worsens inflation at home and widens inequality by transferring wealth upward to large corporations from weaker consumers. This is predatory corporatism, not liberalism.
Devaluing the won requires the BOK to remove dollars from global capital markets while expanding the supply of won. In other words, Korea buys dollars by printing won. While this gives Korea a nice buffer of dollars, its buffer (around $300 billion) is already big enough, and printing money obviously expands the money supply. More won floating around to keep the exchange rate down eventually feeds through the system and pushes up prices of goods and services in won.
Worse, inflation does not actually improve the average Korean’s household balance sheet because (according to Moody’s), 80 percent of Korea’s personal debts are indexed to inflation. So inflation does not erode the value of that 155 percent debt-load, while it does make prices at the store even higher. This is a recipe for yet higher debt as consumers borrow to maintain their accustomed standard of living. If you ever wondered why Korean TV is filled with overnight quick-loan commercials that weren’t there five to 10 years ago, this is it. The average Korean is drowning under debt and inflation.
Finally, all this worsens inequality. Price stability rewards the poorest by ensuring the purchasing power of their limited means. The wealthy and the chaebol have the sophistication to move their assets somewhere safer when inflation strikes. The advantages of the chaebol over the SME are already well known - easy, informal access to bank credit; close, cronyism-encouraging relationships with the government; little antitrust action to block cross-sector oligopolization; and a reputation as flag-carrying national champions who are “too big to fail.”
Any textbook in economics could tell you that this mix would encourage a predatory corporatism at the expense of consumers and small business, and the Korean government only worsens it by gaming the exchange rate at the behest of the chaebol.
Liberate the Korean consumer; empower the SME; make the chaebol work harder: raise interest rates and let the won go.
*The writer is an assistant professor of international relations in the department of political science and diplomacy at Pusan National University. More of his work may be found at his Web site, AsianSecurityBlog.wordpress.com.
By Robert E. Kelly