[Viewpoint] A strong won can be a good thing

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[Viewpoint] A strong won can be a good thing

An economist forecasting the direction of the currency exchange rate is as evasive and shy as a baseball commentator predicting the season batting average for slugger Lee Seung-yeop.

Economists over the years tried various economic theories and statistical models to accurately estimate the direction and volatility of the foreign exchange rate, but to no avail. Economists tend to try to avoid making their own forecasts, but nevertheless keep a close watch on predictions of other analysts.

Domestic and foreign financial institutions agree on a weakening trend of the U.S. dollar this year, but differ about the possible extent of the fall. Domestic analysts expect more steady losses, hovering at around 1,100 won on average this year.

They are skeptical that the rate will dip below 1,000 even by year’s end, betting financial authorities won’t tolerate the won’s appreciation to three-digit level against the dollar for fear of eroding the competitiveness of Korean exporters.

Some foreign brokerage houses think otherwise, predicting the dollar-won exchange rate to average below 1,000 won this year, slipping to around 975 won in the final quarter. In their estimation, the dollar can even fall as low as a slightly above or midway to the 900 won level by the end of 2010.

Needless to say, authorities and traders should be prepared for the worst-case scenario. But we should not be overly worried about the downside of a strong won. Most advanced countries have seen their currencies’ value sharply strengthen as their per capita income doubled from $10,000 to $20,000. Most overcame the handicap of a strong currency in external trade to land safely in the advanced zone.

Japan, for example, saw its per capita income exceed $10,000 in 1981 and $20,000 six years later. During the period, the dollar went from 221 yen to 145 yen. The Japanese yen had gained as much as 34.4 percent against the greenback during those six years.

The case with South Korea is different.

When per capita income first topped $10,000 in 1995, the dollar averaged at 771 won. When estimating the exchange rate to average at 1,100 won this year, the value of Korean currency would have plummeted 43 percent for the 1995 level. If you think currency value represents the country’s economic strength, this drop would mean Korea’s economic competitiveness has weakened at a staggering pace over the last 15 years. But that’s not so.

According to latest 2008 economic data, income of a Korean national amounted to $19,231 based on an average currency value of 1,103 won against the dollar. If average exchange rate had been at the 1995 level, Korea’s per capita income would have surge to $27,523.

If Korea’s currency was allowed to strengthen as economic growth in Japan as done, the population’s per capita income could have reached close to $40,000 by now. Of course this estimation is based on the simple assumption that the country maintained steady growth despite a strong currency. The government and manufacturers need to change their views and expectations of currency rates. Authorities should employ a balanced perspective on the effect of the exchange rates on the Korean economy. A weak won can boost profitability of exporters by making their products price-attractive on overseas markets. But it does little to spur domestic consumption or employment - fundamental problems of current economy. The correlation between the won’s fall and job increases is subzero. The dollar’s strengthening could help exporters’ operational sales that can spur their employment.

But at the same time it raises manufacturing costs due to higher import prices, damping domestic consumption and leading to fewer jobs. It is high time that the government moderate its currency policy from aiding exports to one boosting domestic sales and the job market.

Exporters - especially high-profile ones - must depart from their traditional reliance on a weak won.

They should picture what they would turn into if the current exchange rate was at the 771 won level of 15 years ago when they assess how strongly they had benefited from the exchange rate. The won will continue to strengthen if the economy grows at a pace above the world’s average growth. The current value will be boosted as long as Korean companies keep up their global competitiveness. If the American economy remains in the doldrums, the dollar’s global leadership will further weaken.

Korea Inc. should best quit the sweet but addictive temptation of a weak currency as it does little to help overall economic health. It must prepare itself for a strengthening trend, making long-term plans as it prepares for short-term problems. We must stop depending on the foreign exchange rate leverage and build resilience to sustain growth regardless of currency factors.

*The writer is an economics professor at Sungshin Women’s University.
Translation by the JoongAng Daily staff.

by Kang Suk-hoon
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