The decline in the won, by making imports more expensive and exports more competitive, would help bring about the decline in the current-account deficit, or the generation of a surplus. So, one could visualize a postcrisis situation in which total output was unaffected; investment was smaller; the capital inflow was smaller or negative; and the won would reach an equilibrium level, lower than it had been before the crisis.
But the transition to that situation would be painful. The decline in the won would not immediately raise exports or limit imports. The cut in output and employment in the investment sector would not be immediately offset by a rise in output and employment in industries that produce for export or that compete with imports. The decline of the Korean economy would cause more bankruptcies, increase investors' efforts to get out of won assets into other currencies, and force the won down further. So there could be a cumulative, speculative process in which the won fell far below what might be its long-term equilibrium value and the Korean economy was depressed far beyond what its postcrisis situation would be.
T he purpose of assistance by the IMF and foreign governments is to cushion that transition and help Korea get to its postcrisis condition. The objective is to keep the won from falling much more than is necessary for the long-run adjustment of the Korean economy, and thereby to prevent unnecessary bankruptcies and unnecessary depression of Korean income and employment. The goal is not to bail out failing Korean enterprises but to keep enterprises from failing only because of a panicky flight from the won and the fall in its value. The assumption is that private investors who buy and sell won are depressing its value below its equilibrium rate. That assumption may or may not be correct.
This may not be the only possible story of the Korean economy. But it is a story that fits into standard economic analysis, is coherent and understandable, and reveals the interaction among the forces at work--the kind of story I miss when I read the daily reports.
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