TCS Daily

Seoul Searching for More Intervention

By Christopher Lingle - June 27, 2005 12:00 AM

Finance-Economy Minister Han Duck-soo has declared that Seoul will bear the costs to curb further appreciation of the won against the U.S. dollar. The reason for accepting the burden of intervention efforts in foreign currency markets is to maintain the momentum of economic growth provided by exports.

Not mentioned is the political expediency of responding to pressures from Korean exporters that complain that the appreciating won is causing an erosion of their profits. Unfortunately, the costs to the entire country are likely to exceed the benefits to this special interest group of producers.

Considering only the interest of exporters ignores the fact that a strengthening won benefits importers and consumers who buy more goods with fewer won and less energy and other inputs. An appreciating won also shields domestic producers from rising prices of oil and other commodities as well as imported inputs. Those companies with offshore production facilities will find that an appreciating won will allow them to hold market share.

A stronger currency may adversely affect some exporters, but this may inspire them to increase the diversification of domestic production. Currency market interventions can discourage producers from making decisions that serve their long-term interests.

From the microeconomic perspective, a rising won can force out inefficient firms that operate on small margins so that some of the remaining excess capacity in the domestic manufacturing sector can be eliminated. Accepting the painful effects of reduced overcapacity and fewer nonviable companies in the present will improve long-run economic growth.

In all events, currency values do not affect long-run competitiveness as much as does rising growth in productivity. Therefore, it is more important to improve the investment and regulatory environment for both domestic and foreign investors.

As such, there are better ways of improving the growth potential of the economy. These include reducing the overall tax burden and lower public-sector debt through government spending cuts with less waste and corruption.

It is wise to inspire an economic recovery by implementing policies that increase savings while also boosting domestic consumption and corporate investments. However, expansionary fiscal and monetary policies that lead to increased fiscal deficits or cheap credit are both inappropriate and ineffective.

And it is time to stop currency interventions to "protect" the won. Such moves reflect a commitment to export-led economic growth that is based upon vain hope. The sell-by-date on this neo-mercantilist model has long expired. Adam Smith drove a stake through its heart in 1776, but its spirit struggled on until a final death blow was struck by the massive wave of globalization as the Cold War ended.

So much capacity and hope for growth has been based upon a never-ending increase in global consumption. Alas, the inevitable decline in U.S. spending will bring a very hard fall for export-oriented economies like South Korea and China.

But remember. Do not blame the market system. The coming correction was preordained by bad policy choices backed by erroneous economic theories.

Christopher Lingle is a member of the Korea Times' Economic Board of Editors.



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