By Dr. Jeffrey I. Kim
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His statement was immediately transmitted to news agencies. A week later, the issue of won redenomination appeared in major newspapers in Korea.
The rumor of the sudden implementation of currency reform has rapidly spread and it has made a tremendous impact on the stock market for a couple of days. The stock prices of ATM manufacturing companies quickly shot up.
Redenomination is the process of changing the face value of banknotes or coins. Historically currency redenomination occurs when people are suffering from hyperinflation.
Due to ever increasing inflation, daily transactions are impeded as people have to carry stacks of bills. To alleviate such inconveniences, the nation's government carries out redenomination by dropping zeros off the currency.
Also currency redenomination occurs when the nation's underground economy has grown too big to tolerate. The government implements it blitzkrieg with no preannouncement.
However, due to the leakage of the secret information, this scheme has often failed. Some countries such as Israel, Afghanistan, and Zimbabwe failed in their redenomination. But other countries like the EU member states were successful.
Turkey is another success country for currency redenomination. Turkey's redenomination experience sheds much light on those who are contemplating to implement redenomination. Turkey suffered from persistently high inflation during the last three decades of the 20th century.
In Turkey, redenomination was first considered in 1998. The Parliament passed a law that enabled removing six zeros from the currency and the creating of a new currency, new Turkish lira in December 2003. Redenomination took place Jan. 1, 2005.
The exchange rate was set as 1 new Turkish lira (YTL) for 1 million of old Turkish lira. On Jan. 1, 2009, the word "new" was removed from the official name of the currency and the name returned to Turkish lira.
Its consequences were:
(1) Credibility of the currency increased.
(2) Accounting statements were simplified.
(3) The nominal value of the new currency became comparable with other currencies, for example 1 euro standing at 1.6361 YTL and $1 at 1.3448 YTL.
(4) Following the redenomination, inflation in Turkey stayed in single digits.
(5) The redenomination process was followed by implementing of the explicit inflation targeting in 2006.
Based on these results, many people say Turkey's redenomination was quite successful.
As Governor Lee suggested, we can now talk about the adoption of currency redenomination in Korea. Unlike other newly emerging countries, Korea has maintained price stability for over a decade.
Korea's inflation rate in terms of consumer prices has been at a low level below two percent for many years until now. The won-dollar exchange rate has been relatively stable within a range of 1,100 won to 1,200 won against the greenback
Regarding the won-dollar rate, many people suggested that the rate be changed to 1.1 won to 1.2 won against the U.S. unit by removing three zeros.
Any new policy or reform has its own benefit and cost. However, estimating net benefit is extremely difficult because it involves the forecasting of future variables. The assessment of the effects of redenomination by specialists varies with their knowledge scope and attitude toward uncertainty and future risk.
Historical records for currency redenomination indicate that timing is the most import factor for success. At present the Korean economy is facing too many challenges such as a lack of policy credibility, persistently high unemployment, declining household consumption, and an unfavorable investment environment.
Under these circumstances, a hasty push for currency reform is not likely to succeed. "Shock therapy" would not work. Sudden and blind implementation of currency redenomination would freeze all economic activities and bring about a social unrest.
Despite all these problems and difficulties in assessing the results of redenomination, I may present a list of conditions for Korea's successful currency reform or redenomination as follows:
(1) Redenomination should be well planned.
(2) The timing of execution should be determined by the National Assembly.
(3) Authorities should continuously conduct the elimination of outdated laws and regulation.
(4) Redenomination should be undertaken step by step according to the preannounced timetable.
Dr. Jeffrey I. Kim (ickim@skku.ac.kr), former foreign investment ombudsman, is a professor emeritus at Sungkyunkwan University. He earned a Ph.D. in economics at the University of Chicago and taught at the University of Colorado, Boulder, and the American University, Washington, D.C.
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