Is foreign exchange liberalization so urgent?

Government must weigh long-term costs of such a move

Foreign exchange liberalization will occur earlier than originally scheduled, with a new government measure planned to internationalize the won and expand the domestic foreign exchange market. Related to what the measure covers, investors express an intense interest in allowing for the purchase of overseas real estate and to ease export regulations.

Due to the won’s rapid ascent against the dollar, the government decided to enforce the new measure two years ahead of schedule. We can’t dispel doubts that the decision was made hastily.

But it would have been difficult for the government to infinitely maintain a system aimed at controlling outflow of dollars, put in place at a time when the national foreign exchange market was on the decline. Considering the size of the national economy, which is ranked within the world’s top ten, it is desirable to move toward the won’s internationalization. There is no effective way to stop the rapid strengthening of the won against the dollar, and exporters are voicing complaints. Therefore, it is understandable that the government adopt measure to allow easier outflow of dollars.

Nonetheless, people are concerned that the government has made a hasty decision over matters with mid- and long-term effects on our national economy. Finance and Economy Minister Han Duk-soo, who advocates an open-door policy, seems to have exercised his influence on the government’s decision. It is hard to backtrack on the road to liberalization; that goes for the foreign exchange system, as well. Therefore, before making a decision, the government must cautiously weigh whether the nation has the capacity or infrastructure to cope with the potentially harmful side effects which can emerge through foreign exchange liberalization. It must also look at the effects on the nation’s future. Currently, South Korea holds large foreign exchange reserves, but no one can guarantee that such a situation will continue.

It is clear that illegal capital outflow will be accelerated. For example, under the new measure, when South Korean investors purchase international real estate for investment purposes, they must hand in related documents every two years to prove they really possess the property, and when they sell it, the money earned must come back into the country under the scrutiny of the government. However, it is doubtful if administrative capacity will be extended to such a degree. It is highly possible that a plan to ease exporter-related regulation will also be abused. Even though capital outflow is currently banned, a large number of people take their money out of the country illegally. Under the new measures, this road would become even more open. Once capital flows out of the country, it doesn’t return, even as the local foreign exchange condition worsens.

Above all, the government should reexamine whether the control of international monetary flow will be done properly, and supplement the system so that rapid foreign exchange liberalization will not affect the domestic market in unpredicted ways. The government said there will be no massive outflow of local funds, but it is a common occurrence for a new policy to have an unexpected effect. In the case that unfavorable side effects appear, a safeguard measure to control capital outflow must be prepared.