[FORUM]Let's not fiddle with the won yet

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[FORUM]Let's not fiddle with the won yet

Travelers to Turkey often feel unduly rich as if they have become millionaires. Having to pay 100 million Turkish liras ($62) for a night in a moderate hotel, 10 million liras for a 20-minute taxi ride and tipping 1 million lira at a restaurant can cause such an illusion. Because of inflation in Turkey, its currency value has plunged and the exchange rate per dollar is around 1.59 million liras.

Come to think of it, all semifinalists of this year's World Cup finals are countries that once suffered severe currency inflation.

Immediately after the World War I, Germany suffered hyperinflation, pulling up prices 400 percent every month. National bankruptcy drew near, and Adolf Hitler emerged from this background.

Brazil suffered from murderous price rises and a weakening currency for 10 years, starting in the mid-1980s.

South Korea saw soaring prices after the 1950 Korean War; the economy suffered from inflation in the 1960s.

One thing a government can do when prices skyrocket too rapidly and its currency no longer functions is issue new currency, replacing the old money with the new money based on a fixed rate. Brazil had five different currencies from 1986 to 1994, each time the old money was exchanged for the new money at a lower rate.

South Korea had similar currency reform in 1953 and 1962. Such measures are called "denomi" in Japan -- a shortening of the word denomination. The idea is to knock zeroes of the currency denominations.

The president of the Bank of Korea recently said he would review a denomination plan for South Korea's currency. Some say the denomination is necessary because the current money makes it difficult to gauge our economy's size.

South Korea's gross domestic product, however, is about 550 trillion won at this point and with an 8-percent nominal growth, it will take nearly 40 years for our economy to grow to 10,000 trillion won, or 1 gyeong. It is too early to worry about the difficulty of measuring our economy.

Second, some others argued that denomination is a face-saving formula because a strong foreign exchange rate -- around 1.2 won per dollar -- will enhance our nation's reputation.

Japan's denomination supporters share this argument. Among the advanced countries, Japan and Italy are the only two countries where more than three digits of their currencies are equivalent to a dollar; both had been part of the Axis powers of World War II, which were defeated. That may be why those two countries are obsessed with denomination.

It is, however, important to remember that North Korea has an exchange rate of 2.2 North Korean won per dollar. Denomination should never be done for appearance's sake; it must be done practically and realistically, taking account of the costs to do so, including the economic and social confusion.

Denomination will contribute to internationalization of the South Korean won, supporters argue, but Japan is a good example that we must pay attention to. The Japanese yen is an example how a closed economy has hindered internalization of its currency. Those supporting denomination insist that it would cut down spending and encourage savings, but it is, in fact, the opposite. A denominated currency would encourage spending and might trigger a price rise. That is exactly why the supporters of denomination have gained power in Japan, because the economy is struggling to escape from the longstanding stagnation.

It is important to remember that sooner or later South Korea will have to review denomination, not necessarily right now. When the peninsula is reunited, or when a common currency, like the euro, is introduced in Asia, having a new currency will be unavoidable.

The central bank must carefully review such a plan with a long-term perspective, not hurriedly.


The writer is director of the JoongAng Ilbo Economic Research Institute.

by Ro Sung-tae

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