Reuters — Breakingviews
9 January 2018
South Korea has a way of confounding sceptics – rebounding quickly from the Asian financial crisis and proving surprisingly resilient after Lehman Brothers collapsed a decade later. The country is doing it again as its currency, the won, surges to three-year highs despite Washington and Pyongyang exchanging threats.
The won was Asia’s top performer in 2017, jumping almost 13 percent against the dollar. Seoul worries the currency is rising too far, too fast, threatening exports of goods and services, which equated to about 42 percent of GDP in 2016, according to the World Bank. On Monday, currency dealers told Reuters authorities had intervened, buying the greenback at about 1,050 won per dollar. Rather than revert to a tired pattern, though, Korea should embrace the trend.
There is in fact logic behind the won’s advance. The government expects 3.2 percent GDP growth in 2017, the best performance since 2014, and 3 percent this year. And North Korea’s Kim Jong Un has extended an olive branch. The two Koreas started dialogue on Tuesday.
A firm currency would help with U.S. trade talks and encourage export-dependent conglomerates to up their game. While President Donald Trump brawls with Pyongyang, his negotiators demand better terms on the five-year-old United States – Korea Free Trade Agreement, also known as KORUS. Letting the won rise could win South Korean President Moon Jae-in goodwill in Washington and ease trade tensions. It would pressure coddled exporters towering over Asia’s fourth-biggest economy to restructure and seek a bigger share of profits from services and new home-grown inventions.
It is high time Korea dropped the Japanese model of currency weakness and adapted to market realities. While Samsung, LG and other conglomerates are masterful at reverse engineering and improving upon inventions from Silicon Valley and Tokyo, South Korea Inc concocts few game-changing technologies. Without the cushion of an under-priced won, companies would be forced to restructure, innovate and increase productivity to the benefit of national competitiveness.
Obsessively capping exchange rates amounts to corporate welfare. It reduces the urgency to adapt to an increasingly dynamic global marketplace – and makes it harder for South Korea to keep confounding the naysayers.