ed Redenomination warrants public discussion
By Lee Chang-sup
Last week, the Bank of Korea held an unpublicized workshop to study the possibility of currency redenomination — changing the face value of banknotes or coins in circulation — in the country.
The Korean public, however, also needs to talk about redenomination now. While most Koreans use credit cards, many still carry too many banknotes and coins for their daily transactions. The U.S. economy is 15 times larger than the Korean economy, yet the Korean currency’s face value is about 1,080 times larger than that of the U.S. dollar. Indeed, Korean currency numbers have become so large that they impede daily transactions because of the risk and inconvenience of carrying stacks of banknotes. Large numbers are difficult and costly for the central bank to process and for consumers to understand.
In addition, Korea has not redenominated for the past 52 years even though inflation has risen significantly. Since 2000, Korea has considered redenominating twice but did not adopt it. The central bank proposed converting 1,000 “won” into 1 “hwan” in 2002, but scrapped the proposal in the face of public opposition. The Roh Moo-hyun administration (2003–2008) also hinted at the need for redenomination but did not pursue it.
Redenomination is technically simple but psychologically, economically and politically complex. Redenomination simply requires removing zeros from the face value of banknotes. For example, it converts a 50,000-won banknote into a 50-won hwan, and thus, the monthly wage of 3,000,000 won becomes just 3,000 hwan.
Redenomination has many benefits: it simplifies daily transactions and accounting and reduces inflation psychology and the number of fake banknotes in circulation.
In addition, redenomination will more accurately reflect Korea’s status as an advanced economy. Despite being the world’s 14th largest economy and the eighth largest trading country, Korea is still the only OECD country with a four-digit currency to one U.S. dollar.
Redenomination cuts the untaxed economy because it forces people to take out their hidden banknotes to exchange them for new ones.
Redenomination also often minimizes corruption because large-denomination banknotes will disappear. These days, 50,000-won banknotes have allegedly been used for bribery.
This is an important benefit because although Korea is already an OECD country, it is still plagued by widespread corruption. According to Transparency International, Korea ranks 46th out of the 177 countries surveyed for the perceived corruption index.
However, redenomination also carries many risks and costs. It may fan speculation in property and incur significant costs in producing new banknotes and coins as well as installing new software on automated teller machines and other financial transaction equipment.
Although the public backs cutting the underground economy and removing corruption, people, especially the rich, are concerned about the possible wealth erosion. People are also concerned that the government will abuse redenomination for income redistribution.
The public’s concerns are not without basis. Many countries have failed in their redenomination attempts. Turkey, Zimbabwe, Mozambique and North Korea have failed because they adopted redenomination abruptly and without considering the public consensus and potential economic impacts. Thus, after redenominating, they experienced a sudden hike in inflation and real estate speculation, which shook their economies.
If Korea redenominates now, the side effects will outweigh the benefits. Like many emerging financial markets, Korea’s is unstable following the United States’ recent reduction of its money supply, often called a reversal of quantitative easing in monetary policy.
This does not mean, however, that Korea should not reduce the face value of its currency. In contrast to the countries who have failed in their redenomination attempts, Korea has the right conditions for a successful redenomination. As I have mentioned earlier, it has been 52 years since the last redenomination, and the numbers have become so large that financial transactions have become difficult to process.
To ensure successful redenomination, policymakers should not confuse redenomination with currency reform. Although the two concepts have some similarities, redenomination simply means decreasing the number of zeroes from the face value of banknotes and coins, while currency reform involves something more complex.
Redenomination becomes currency reform when policymakers use it to try to penalize the rich. For example, the government can tax hidden cash and limit the amount of old banknotes that can be converted into new ones. While using redenomination for currency reform can reduce the untaxed economy, it can also trigger capital outflow and speculation in property, including gold bars and artwork, because the rich are forced to cash their deposits to protect their wealth. Consequently, Korea’s inflation will jump.
To illustrate, the Park Chung-hee administration implemented currency reform in 1962 to channel hidden cash toward industrial development. However, the reform was unsuccessful because less than the expected amount of hidden cash came out but inflation nonetheless jumped to double digits.
To minimize the possibility of an inflationary spiral, the government must conduct redenomination and fiscal reform — reducing government debt and spending — at the same time.
As with the Constitutional revision, Korea can pursue redenomination with sufficient preparation and public consensus, and only when the benefits outweigh the risks and costs.
Lee Chang-sup is the executive managing director of The Korea Times. Contact him at editorial@koreatimes.co.kr