A Stable Won Needs More Than Temporary Fixes

The Korean won has recently recovered from some of its earlier weakness. That is encouraging, but a stronger exchange rate today does not necessarily mean that the underlying problems have been solved.

The won has faced pressure from political uncertainty, global conflicts, high U.S. interest rates and strong demand for the dollar. The government has also pointed to increased overseas investment by Korean individuals and institutions. This is partly valid because buying foreign assets creates demand for foreign currency. But it explains what investors are doing without fully asking why.

The more important question is why foreign assets have become more attractive than domestic ones. Rather than criticizing Koreans for investing abroad, policymakers should make domestic markets more competitive and trustworthy.

The same caution applies to the recent rise of the KOSPI and the stabilization of the won. Stock gains concentrated in a few large companies do not necessarily represent broad confidence, while corporate dollar sales, capital inflows and government measures can support the won only temporarily.

Fiscal policy should be judged by a similar standard. Government recovery payments did stimulate consumption in the short term, so it would be inaccurate to say they had no effect. The real question is whether that benefit justified roughly 13.5 trillion won in fiscal spending.

Success should not be measured simply by whether consumption increased. Policymakers should ask how much additional economic activity was created for each won spent, how long the effect lasted and whether more targeted support could have achieved better results at lower fiscal cost.

Every large public expenditure also has an opportunity cost. Money spent on temporary payments cannot simultaneously be invested in research, employment, education or support for vulnerable groups.

Fiscal support can be necessary during economic hardship, but it should be targeted, temporary and supported by a credible debt-management plan.

The same principle applies to the won. Korea cannot rely indefinitely on foreign-exchange intervention, corporate dollar sales or criticism of overseas investors. It should instead improve corporate governance, protect minority shareholders, maintain predictable regulations and create better domestic investment opportunities.

Koreans should remain free to invest abroad. The better solution is to give capital stronger reasons to stay.

The won's recent recovery is welcome. Lasting stability, however, depends on confidence in Korea's institutions, fiscal discipline and economic future.

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