A high exchange rate is the "new normal," and it keeps rising. With the won swinging wildly, the winners and losers are clearly divided. Foreign tourists are surging because Korea offers good value for money with cheap travel costs. But why does the won's value only fall? Is a strong won as hard to achieve as a strong dollar? The decline of the exchange rate is being justified for all sorts of reasons: that overseas investment by Korean retail investors has grown too much, that foreigners' "sell Korea" has intensified, that abnormal foreign-exchange speculators have intervened, and even that it is because of SpaceX's listing on the U.S. stock market. As a result, even the National Pension Service has stepped in to defend the exchange rate. How, then, should the exchange rate be maintained to benefit all of our citizens?
The exchange rate is often discussed only as an economic indicator. But from the citizens' standpoint, the exchange rate is a far more practical issue. When the exchange rate rises, the prices of gasoline, food, electricity, transportation, and even trash bags are shaken. In the end, those who suffer the most are ordinary citizens and the working class. Yet who actually benefits? A considerable number of export companies, holders of dollar assets, and, to a certain extent, the government.
When the exchange rate rises, won-based sales and profits increase. Even pension funds' foreign-currency investments create an optical illusion. The government also benefits from increased corporate tax and the effect of expanded exports. By contrast, citizens must bear rising prices and declining purchasing power. In other words, the exchange rate operates like a massive wealth-transfer device, moving money from individual citizens' pockets to the companies and the government that benefit from the exchange rate.
Large corporations can manage exchange-rate risk through forward contracts or currency options, but salaried workers, the self-employed, and the elderly simply have to endure when the exchange rate rises. Even as gasoline prices go up and grocery costs jump, individuals have almost no way to hedge against this. In the end, a high exchange rate operates like an "invisible tax" hidden throughout citizens' lives. If the benefits of a rising exchange rate are concentrated in specific companies and industries while the costs are dispersed across all citizens, a national-level balancing mechanism is needed. Leaving individuals to bear the exchange-rate shock on their own, as is the case now, is virtually a state of defenselessness.
If so, the state needs to play the role of a "person responsible for exchange-rate hedging" to a certain extent. The state is already involved in interest-rate policy, the management of foreign-exchange reserves, the export-centered economic structure, and energy import policy—all of which relate to the exchange rate. Yet if only citizens bear the burden of a rising exchange rate, it could be structurally unfair.
If tax revenue and foreign-exchange gains have increased due to a high exchange rate, a mechanism is needed to channel a portion of that back into stabilizing citizens' lives. Beyond an exchange-rate stabilization fund, it is also possible to connect this to automatic adjustment of the fuel tax and to financing the stabilization of food and energy prices. In particular, for a country like ours—export-dependent and highly reliant on imported energy—exchange-rate stability is, in effect, livelihood stability. Foreign-exchange policy, too, needs to be approached not merely as a financial domain but at the level of citizens' livelihood policy. When the exchange rate surges beyond a certain level, the fuel tax should automatically be lowered, or the pace of public utility rate increases should be automatically adjusted.
The government urgently needs a policy approach that prioritizes exchange-rate stability. This is because a surging exchange rate leads directly to burdens on citizens and on public finances. Ultimately, the state will need to focus more on fundamental measures such as energy self-sufficiency, strengthening domestic demand, expanding confidence in the won, and stabilizing the foreign-exchange market.
The state cannot fully control the exchange rate, but if all citizens are becoming victims of exchange-rate shocks, the state must bear the ultimate responsibility for cushioning those shocks. This is because the exchange rate is not a mere number but the lives of citizens and a matter of their survival. Of course, we must not forget that the most fundamental thing is the nation's economic strength and productivity.
