Foreign exchange is no panacea
South Korea removed state control over the foreign exchange rate and let it float according to market conditions in 1990. Since then, Seoul has interfered to adjust the Korean won three times. In 1995, per capita income hit the $10,000 threshold. The country joined the Organization for Economic Cooperation and Development the following year. The Kim Young-sam government celebrated it as if Korea had finally joined an advanced rank. It wanted to keep up the triumphant mood until the next presidential election in 1997.
At the time, the government chose an easy way to defend the income threshold and rein in inflation under 5 percent. It pegged the dollar under 900 won. The current-account deficit of $9.7 billion in 1995 grew to $23.8 billion the following year. The dollar should have shot above 1,000 won under a normal mechanism. But the dollar was kept under 900 won until the Asian financial crisis in 1997. If the dollar was not pegged at the 800 won range, exports would have improved and current-account deficit narrowed. Then, the country would not have run out of dollars, and Korea could have avoided the liquidity crisis that demanded international bailouts.
Between 2003 and 2004, the early stage of President Roh Moo-hyun’s term, the government again interfered in the foreign exchange market to boost exports. Choi Joong-kyung, the director general for the international finance bureau of the finance ministry, who was dubbed Mr. Won, set 1,140 won as the Maginot Line for the dollar-won rate. Whenever the dollar fell below the threshold, the government aggressively poured out won. Exports were helped. But because import prices went up, domestic demand slumped. Seoul went on the Washington list of governments that manipulated foreign exchange rates. Seoul has never entirely shaken off the label.
The government under President Lee Myung-bak was outright pro-growth and export-driven. It interfered to keep the won weak. The economic team under Finance Minister Kang Man-soo in 2008 embarked on a campaign to weaken the won. The dollar jumped to 1,000 won from 900 won. When the Wall Street meltdown began, the dollar shot up to 1,400 won in September. Exports surged and current-account surplus widened. The country was able to weather the global financial crisis relatively well.
If there is gain, there is loss. When the dollar goes up against the won, consumer purchasing power stoops as consumer prices rise. Large companies get richer while people live more poorly.
Unions of large companies also were busy gathering fatter raises for themselves. As a result, the income gap between large and small companies and the permanent and irregular workforce widened. The government has been accused of favoring large companies. The Lee Myung-bak administration came up with a new slogan to emphasize balanced growth, but it received a cold response from the public.
All governments are tempted to use the exchange rate to help their countries. Japanese Prime Minister Shinzo Abe, under so-called Abenomics, has blatantly printed out money and unleashed an unlimited amount of liquidity to weaken the yen since late 2012. Exports were revived, and Japan Inc. made a strong comeback to the global market. Japan was touted as having finally come out of two-decade-long stagnation.
But the growth has quickly fizzled out. The Japanese economy contracted 1.2 percent in the second quarter. Due to a sharp rise in import prices, consumption remains sluggish. The lives of Japanese people have not improved, either.
Korean exports in the first nine months this year fell 6.5 percent from the same period last year. Local exports declined as much as 15.8 percent in October. The dollar has weakened due to the delay in the U.S. monetary tightening move. The external front has gotten more unfavorable for Korean exports. There are little signs of a breakthrough.
Korean exporters have long been accustomed to a foreign exchange rate helping their business. Some say Korea should also make a move while other countries are defending their won for their economy’s sake. But we should learn from our past government interferences that foreign exchange policy is hardly a panacea. National competitiveness should come from corporate capacity to innovate, not the government’s foreign exchange policy. People’s lives must not be further aggravated by a strong dollar. The government can never beat the market.
JoongAng Ilbo, Nov. 2, Page 28
*The author is the acting editor-in-chief of the JoongAng Ilbo.
by Koh Hyun-kohn