Monetary Policy Case Study

Case Title:

Currency Appreciation and South Korean Economy: Shipbuilding Industry at the Centre of the Storm?

Abstract:

South Korean policymakers introduced Import Substitution Industrialisation (ISI) as a measure to encourage the domestic businesses and bring economy back on growth track, after the Korean war of early 1950s. During 1960s, the government introduced many export-promotion policies. However, by 1970s, the government's focus was on manufacturing and to support this production-led growth, Heavy and Chemical Industries (HCI) initiative was introduced. Shipbuilding was and is a focused industry that accounts for almost 4% of South Korea's GDP (as per 2007 estimates). Yet it was blamed for won's recent appreciation - from 1,145 per dollar in 2004 to 984 by January 2006 - adversely affecting other export sectors. Its government tried to arrest the rising won, whose outcomes are still ambiguous.

The case study helps analyse how developments in one sector affect the whole economy. Debates can ensue about how governments should act, when benefits from one sector subvert other sectors.

Pedagogical Objectives:

• To understand a currency's appreciation, depreciation, revaluation and devaluation
• To examine the economic impact of currency appreciation
• To debate on various alternatives while controlling appreciation.

Keywords : South Korean Economy, Currency Appreciation, Currency Depreciation, Currency Revaluation, Currency Devaluation, Exchange Rate, Real and Nominal Exchange Rates, Monetary Policy Case Study, Hedging, Comparative Cost Advantage, Economic Effects of Currency Appreciation, Measures to Control Currency Appreciation