Cut out the zeros

Equity-related funds on the Korean stock markets reached 11.134 quadrillion won ($9.5 trillion) in the first half. The amount exceeded “kyung,” Korea’s unit after a trillion, which in English is tantamount to 10 quadrillion. Over-the-counter derivatives turnover last year topped 40 quadrillion won. Won transfers through the Bank of Korea financial network also exceeded 60 quadrillion won last year. One quadrillion won has 16 zeroes. You would need 10,000 won notes that carpeted all of South Korea to make a quadrillion won. Even Americans are not familiar with the unit quadrillion.

Having a currency that requires this amount of zeroes is unfitting for the world’s 11th largest economy in terms of GDP. A single bhat, the currency of Thailand, a much smaller economy, will get you 33 Korean won. Nowhere except maybe Mongolia can you change a dollar into a local currency of more than four digits. We must seriously consider redenomination, or changing our 1,000 won banknotes into 10 won coins or even 1 won.

Redenomination is a de facto practice in some marketplaces. Coffee shops and restaurants in Itaewon, a popular shopping and dining district for foreigners, list 10,000 won prices as 10.0 or 5,000 as 5.0 on their menus. Park Seung, Bank of Korea Governor under President Roh Moo-hyun, argued for the need to change the value of the Korean won. The central bank conducted a study but decided the timing wasn’t right. Real estate speculation was at a peak and redenomination would have done more harm than good. If three zeroes were knocked out of 1,000 won, a home value of 390 million won would become 390,000 won. Home prices would jump because the price tag would look cheap. Other consumer prices would have spiked too as a 600 won biscuit - reduced to 0.6 won - could have a new price tag of 1 won.

But today’s situation is much more different. Inflation has been mired in the zero percent range for eight months in a row. Consumer prices are lower than a year ago if you factor out the increase in tobacco prices. Authorities now worry about a deflationary cycle of the sort that has plagued Japan for two decades. Home prices have recovered a bit but are hardly close to the speculative fervor of mid-2000. Redenomination, in fact, can be effective fending off deflationary pressure. The change would also help spur local demand as it would require replacements of ATMs and other electronic systems. It would dig out hidden money, which would have to be exchanged into new banknotes. The government could expect extra tax revenues.

But the motive behind redenomination must not be to expose the underground economy for increased tax revenues. The Park Chung Hee administration in 1962 attempted currency reform to bolster tax revenue to fund its five-year industrialization plan. The government offered to exchange 10 hwan (Korea’s currency unit at the time) into 1 won and money exceeding a certain amount would be paid in shares of state-run development corporations. It hoped to dig out underground money and use it to fund infrastructure projects. But the effect was the opposite. Legitimate money dried out and consumer spending froze. Companies found themselves on the brink of bankruptcy. The government abandoned the plan in just a month. Its aim to increase tax revenue backfired and the government also ended up losing face.

Financial transactions today have become far more transparent. Credit cards are used to pay bus fares. The social repercussions and confusion won’t be great as long as the government is not obsessed about collecting extra taxes. The 19 members of the eurozone changed their currencies to the common euro from 1999, but did not suffer any upsets or disarray. If redenomination is too risky with the parliamentary and presidential elections coming up the next and following years, we could start discussions now and embark on the work under the next government. We cannot go on counting digits in zillion figures in financial transactions.

JoongAng Ilbo, Aug. 31, Page 30

*The author is the business news editor of the JoongAng Ilbo.

by Jung Kyung-min