[Letters] Korea’s currency conundrum

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[Letters] Korea’s currency conundrum

Recently, foreign business workers have begun to ask the following question: Korea seems to have very stable and strong economic fundamentals, but why then does the country’s currency lack power?

As an AICPA-certified person, I am able to view the Korean economy with some objectivity, and I cannot agree more on the importance of the question.

Based on 2009 statistics, Korea is No. 15 in GDP worldwide, 11th in trade volume and No. 6 in foreign exchange holdings. Nevertheless, in the recent global financial crisis, and compared to other Asian nations, Korea’s currency has fluctuated greatly.

If we take a look at the Korean foreign currency market, we find that daily fluctuations are severe and it is almost impossible to predict the currency rate.

The recent rapid appreciation of the Korean currency highlights the notion.

The reason behind the appreciation lies in the fact that Korea was able to exit the global tunnel of the financial crisis rather quickly.

But if we look at the fluctuation rate, we can see it was due to flaws in a price-determining mechanism in the current exchange rate market.

For reference, Korea has utilized the Automatic Floating Exchange Rate System - after the IMF - in 1997, and this system allows the international financial market to determine the value of currency.

Currently, the currency trade amount for the international financial market is $1 quadrillion and object trading is approximately 2 percent of the total amount. That is, most of the trade is speculative and the investment is in the currency of different nations.

Unlike the currency rate - where trade is mostly for sole investment purposes - a time difference exists on the balance of current accounts, and this could be one of the reasons for currency rate instability.

Therefore, because Korea heavily relies on foreign trade and is a small-scale open economy, it is important for the government to control the problems of foreign short-term investment funds.

Professor Edward Prescott from Arizona State University, a Nobel prize winner in 2004, argues that nations that do not have economic power like the U.S. or European Union should use a non-autonomic Floating Exchange Rate System, such as the Basket Exchange rate system. After the wave of neoliberalism has passed, we need to focus on how the regulations with foreign capital for various nations are increasing.

What does the adoption by Singapore and Hong Kong, global meccas for financial interaction, of the Controlled Floating Exchange Rate System and fixed currency system insist?

I believe this is time to reform the currency rate system when the fundamentals of Korean economy are strong. Intervention to foreign markets only through smoothing operations cannot be the solution to removing potential risks.

Therefore, the government should consider changing to a Managed Floating Exchange System.

For example, one of the possible solutions is a Basket System where certain weight is applied to major foreign currency of interaction and determines the currency rate. That is, the government must intervene in flotation of their currency rate, suggesting certain range and directions.

Finally, I would like to emphasize that we need to develop a flexible mind for economic policies in changing the currency rate system. The currency rate system in Korea was determined based on the economic situation.

The Multiple Currency Basket system was adopted in the 1980s and Market Average Currency System in 1990, and Korea later adopted the Autonomic Floating Exchange Rate System.

We must remember that the change in currency rate policy should be not a returning to an obsolete economic system but a step forward to a future with a flexible economic system.


Pae Ki-pyo,

CEO of Copetition Consulting Company Limited
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