C. Peter McColough Series on International Economics With Governor Rhee Chang Yong of the Bank of Korea

Bank of Korea Governor Rhee Chang Yong discusses monetary policy in South Korea and the implications of reshaping global value chains.

The C. Peter McColough Series on International Economics brings the world’s foremost economic policymakers and scholars to address members on current topics in international economics. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

CLARIDA: Well, welcome to today’s CFR meeting with Rhee Chang Yong, the governor of the Bank of Korea. This meeting is part of the C. Peter McColough Series on International Economics. I am Richard Clarida, a professor of economics at Columbia University, and a global economic advisor with PIMCO, and CFR member, and I’ll be presiding over today’s discussion.

We are joined today by CFR members attending in person in New York right here and over one hundred attending virtually via Zoom.

I’ll begin with a very brief introduction of Governor Rhee. The bio’s available and very lengthy, so I’ll just—some highlights.

Dr. Rhee currently serves as the governor of the Bank of Korea and as a member of the board of directors of the BIS. His career spans more than thirty years with professional experience that includes senior positions at the IMF, the ADB, the Financial Services Council, as well as academic appointments at Seoul National University and the University of Rochester. He’s published extensively on macroeconomics as well as on the Korean economy, and holds a Ph.D. in economics from Harvard, and an undergraduate and honors degree in economics from Seoul National.

The plan for this session is the governor and I will be engaged in a conversation for about forty minutes, and then we will have opportunity for questions not only in the room but also from the audience on Zoom.

So, Governor, let’s begin. Korea inflation has returned to the 2 percent target and currently stands at 1.6 (percent). Congratulations.

RHEE: Thank you.

CLARIDA: This is an excellent achievement. And it seems that you won the fight against inflation earlier than major economies including the U.S. So what made this possible? And going forward, what’s your outlook for Korean inflation?

RHEE: Thank you, Mr. Clarida. And also, I’m very glad and I’m honored to be here.

As for your question, I think I can mention three factors.

First, I think the Bank of Korea and my predecessor start to raise the rate from mid-2021, well before the global inflation started. So in some sense his proactive policy helped me to tame the inflation better, even though at the time the main reason of the inflation hike was not due to the inflation but at the time we had a very rapid increase of housing prices. So my predecessor started as part of macroprudential.

Second factor is I was lucky to have two finance minister(s) who had a firm belief of fiscal soundness, so they less expansionary fiscal policy during the period of inflation. So, unlike many other advanced economies, this more contained fiscal policy helped me to tame the inflation in those period.

Third is definitely monetary policy has worked, too. We raised our interest rate about 300 BPs while the U.S. raise 500 BPs, but U.S. peak inflation is well above 10 percent and Korea’s peak inflation is about 6.3 (percent), in July 2022. And so inflation was lower, peak inflation lower, but at the same time we had our most mortgages are floating-rate loan, whereas the U.S. is more fixed-rate loans. So 300 BPs in Korea—300 BP increase in Korea is—had as significant impact of 500 BPs in the United States.

So three factors, all together it helped us to achieve the disinflation relatively earlier than others.

Looking forward, I believe we have some concern the geopolitical tension in the Middle East because oil price has a large impact on our economy. But if I exclude that uncertainty, I believe that price stability will prevail and our inflation will be around 2 percent in the coming future.

CLARIDA: Well, again, congratulations. Also, congratulations having fiscally responsible finance ministers, too. (Laughs.)

RHEE: Exactly. (Laughs.)

CLARIDA: So it sounds like at least given where things are today that if you have a last-mile problem, it was not insurmountable. Was the path down to target a straight line, or was it more of a bumpy road? In many countries, including the U.S., there’s been discussion of the last-mile disinflation.

RHEE: Yeah. I think our pathway to price stability was far from smooth, and I can mention one important factor is how to manage the exchange rate volatility during this past, especially U.S. start to have a giant, you know, hike—seventy-five BPs of increase for four consecutive time. That drove up the dollar strength. And emerging market exchange rate, including us, our exchange rate depreciate quite significantly.

You know, flexible exchange, it works. And unlike 1997, when we look at our balance sheet of our bank, Korea become a creditor. So actually, when—in 1997, when exchange rate depreciate, we had to pay back the loans and there is default risk. But now, currently, since we are the creditor, actually, we find that depreciation work for our balance sheet of the bank. So we didn’t have a reason to work very much.

But having said that, the people has a bad memory of 1997. So when inflation—I mean, exchange rate approached 1,400, I had a lot of criticism, you know, now we are heading for the risk, you know, crisis, all kind of argument. And many people asked me to solicit bad swaps from the—(laughs)—U.S. kind of things. So in some sense, it was important to manage the expectation given this—the deflation period.

And also, there is technical reason that we had to intervene in the market because our derivative market is less developed. Most maturities of derivatives are less than six months or three months, mostly. So when the exchange rate hit the—some bound that market participant expected before, it triggered kind of vicious circle. It triggered margin costs; and in order to meet the margin costs, financial institution has to finance through the internal market, so domestic interest rate increased a lot more than we expected. So in some sense, we definitely needed to slow down the speed of depreciation even if we do not change the direction. And so handling this rapid increase—interest rate increase period of the U.S. policy, because of the FX market, was not easy.

CLARIDA: Can appreciate that.

Of course, central banks, including in Korea, focus not just on price stability but also financial stability. In August, you delayed a policy shift considering the risk to financial stability, in particular rising house prices and household debt. But of course, earlier this month you decided to lower the policy rate and shifted the policy stance. So does this mean, in your view, that the financial stability risk has gone?

RHEE: No, not at all. But I mean, we—as you mentioned, we cut our reference rate by twenty-five BP in October 11. But actually, the pivot decision was not straightforward either.

In terms of price stability, as our inflation is approaching 2 percent for sure from July on, we were ready to have a pivot from July. But that is a time when U.S.—now it’s a little bit different, but at that time many people expecting that the U.S. would cut the rate aggressively. And that kind of expectation drove down interest rate not only in the United States, but many emerging market, including us. So these days I think is a big headache because our interest rate moved together with Jay Powell’s market in mind. So around July, our interest rate—market interest rate actually went down a lot more than I wanted to, and that caused housing price in metro Seoul area start to increase more than we wished for. And together with that, household mortgages start to increase. And our monetary policy committee members believed that it’s better to wait the rate cut until the macroprudential becomes strengthened. And as we wished for, government introduced more stronger—strengthened the macroprudential policies, and in October—in September/October period the housing prices and volume of the transaction has reduced quite significantly, and with that we decided to cut the rate. But from now on, you know, you don’t know what will be the impact of rate cut on housing market until you see it, right?

CLARIDA: Yeah.

RHEE: So we’re going to—we’re going to watch how the housing prices and the mortgages will behave after our cut, then we will decide how we’re going to manage this pivot down the road. But we have a lot of criticism because, you know, inflation is below 2 percent; why you think about financial stability too much and you just—because our growth rate is kind of in the neutral position. So we got a lot of internal criticism that we had to cut the rate before thinking about financial stability. But our monetary policy committee member believes that emerging market central bank has to put more weight than others on financial stability in addition to the price stability, so that was the main reason why we managed the speed of the cut.

CLARIDA: Well, especially given the context of global capital flows as being a driver consideration in emerging economies, you know, less so than in the U.S.

You had an interesting interview in the FT recently which could be read as giving some warnings about a housing boom. Is it unusual for a central bank governor to speak out so specifically about structural forms and, you know, housing boom, and more recently minimum wage, to education? Very refreshing to me, but not necessarily common. So—

RHEE: I knew that, I mean, there are—there are many critics who said I’d rather better just focus on monetary policy. But believe me, there are some who support me, OK?

CLARIDA: (Laughs.)

RHEE: I think two things.

I think that many central bank actually has a research on various topic such as, like, fiscal policy, labor market issues. And you know, recently Madam Lagarde actually gave a speech on the structural reform. So I think it’s not true that the central bank research has just focused on the monetary policy alone, right? But in our case, I really want to make Bank of Korea to be the leading think tank in Korea. And actually, there’s many structural issues such as education, housing, and labor, and how to we employ more foreign workers. All these issues are very important in Korea at this moment because of our low fertility rate and demographics. So maybe the education, all these things sounds strange, but you can think about that structural issue that I just mentioned is much more important in Korea than other countries. So as a think tank, we have to study it.

If I explain a little bit more, we find that our fertility rate at this moment is 0.7, world lowest. So—and then when I—we have a new study why the females refuse to have a baby, it’s mostly because of the—you know, the people are moving—young peoples are moving to Seoul metro area, and the competition has become fierce in getting house and getting the education, right? All this competition make many female workers not to (work ?); instead, they just focus on their careers.

So overall, I think the lower potential growth rate in Korea, you know, very expensive housing in Seoul area, and you know, all this education zeal and competition is related with these structural issues. And definitely, I believe our central bank as a think tank has to show some of our opinions and research on this topic.

Having said that, I also believe that—I do not believe that monetary policy is one thing and structural is the other. Structural issue really constraint or limit on the monetary policy. For example, our decision in August, why we didn’t cut the rate despite the low inflation rate, is because of structural issue, which is the housing price in metropolitan area. And we believe that housing price in metropolitan area is very hard to even control with macroprudential policies because there is a huge demand for the private tutoring in a certain area of Seoul, and people jump to that area, whatever. So we just wanted to mention that unless we correct this kind of structural issue, even monetary policy, the effectiveness will be limited.

So in that sense, I’m proud that we’ve continued to do so. But definitely some people are very unhappy and say that you had better cut the rate, you know, and do not, you know, be distracted by the—all these issues. But you know, difficult to persuade at this moment.

CLARIDA: But I took note of your comment about the thinking of your team in the context of having a think tank, which is certainly something that I noticed during my time at the Fed, the, you know, incredible human capital in—among economists in the Federal Reserve System oftentimes doing very relevant research that oftentimes is either not done in academic settings, or is maybe done in academic settings ten or fifteen years too late. And so I applaud that focus.

RHEE: Actually, I wanted to say that that is why I like your speech and your research when you were in the Fed. (Laughter.)

CLARIDA: Well, anyway, OK.

So certainly something that’s relevant not just to Korea but internationally is, you know, as we’re sitting here really the reshaping and rethinking of global value chains, supply side management, reflecting, of course, many drivers, one of which is technology but also, you know, an ongoing trade dispute between the U.S. and China. And then these trends were just accelerating in the midst of the COVID pandemic, and then, obviously, the war in Ukraine. Korea is, obviously, right—very much positioned both geographically and technologically, you know, in this system. So how have you thought about this in the context not only of monetary policy more broadly, the outlook for the Korean economy and in particular trade growth and the reshaping of supply chains?

RHEE: If I not limit myself as a central banker on price stability issue, I think the most important risk and challenge and opportunity is the changing global value chain. And Korea, as you know, has benefited a lot, and we are probably the most significant beneficiary of the global value chain in the last twenty years when China was center of the factory of the world and we were linked with China as a—we have benefited a lot from China’s rapid growth and spread of global value chain in the last twenty years.

Now, after the pandemic and also with increasing tension between United States and China, global—we all know the global value chain started to change and also will evolve in the future. So what will be the—new global value chain will look like is a very important issue for us. So that’s for sure thing.

And at this moment, we also understand and realize that importance of resilience of global value chain rather than just efficiency of global chain. So we are also definitely contribute focus on China plus one strategy, and we are moving out also diversifying our factories around the world, and that is a trend. And we probably—new technology we probably have more chance to talk about more details.

But having said that, I think what’s happening in Korea at this moment, you cannot just say that it’s due to the U.S.-China tension, what’s happening now, because we have this kind of trend—China plus one and the diversification trend—well before the trade tension started between United States and the U.S. (sic; China). Probably see from the data very clearly that our export to China start to decline around 2013-14.

CLARIDA: Really? Oh, I did not know that.

RHEE: Yeah. I think simply because it’s the competitiveness of Chinese industries.

CLARIDA: Yeah.

RHEE: So, you know, you can discuss why they become competitive, subsidy, all these controversial issues, but in some sense it’s a natural thing for us to understand now that as China becomes a little bit richer country from the low-income countries, their industry becomes very competitive. So exports, now we believe that the Korea businessman is a little bit complacent and enjoy the previous twenty years of high Chinese growth without expecting that they will catch up with us rapidly, as we caught up Japan previously. So I think this definitely be a new global value chain as a part of the result of China’s—increasing China’s competitiveness, and we probably have to take into consideration.

CLARIDA: Well, something that I know has been anticipated has now come to pass. So earlier this month, FTSE Russell decided to add Korea to its benchmark bond index, starting, I guess, from November of next year. Congratulations. What does it mean for your country? And in particular, impacts, presumably positive, on Korean financial markets?

RHEE: Yeah. Actually you run PIMCO. So we have a high expectation that PIMCO will raise Korean share in the future. Actually, it was really good news to Korea. Not because that we will have a lower financing cost for our government bond, but actually I think, in my opinion, that this is a demonstration that our structural reform effort acknowledged in the world. When I was a professor and when I was a former government official, ten to fifteen years ago, when we tried to liberalize our capital market and change the FX market structurally. There was a high resistance from the high—you know, top government offices, especially treasury, on this because it really saw its controlling—ability to control the exchange rate as the most important thing in macro management. So flexible exchange rate was not well understood. 

But I think the new generation—while I was away for ten years, when I get back to Korea I realized that our younger generation is more open minded for the capital account openings. And in the last couple of years, the effort to free up our market to the foreign investors, including we extended our operating hours of our onshore exchange market from 3:00 p.m. to 2:00 a.m., in the seven hours extension. We also allow the registered institution abroad can directly access our—the onboard in the exchange market. And also, we are start to allow the electronic trading platform. All those kind of effort is now being acknowledged. So I’m very happy.

In terms of effect, I think since the real inclusion will be from November, it will be very hard to see when the real impact of the capital inflow, exchange rate will happen. That also depends on how much the bond investment in PIMCO can be hedged or just—(inaudible). But I’m very happy in the sense that by including in FTSE index, there will be more money from the long-term investors, hard money. And also by promoting our government bond market in domestic currency, not dollar currency, that will give us more ability to use the exchange rate flexibility more aggressively. So in every sense, I think it’s a good achievement. And we have to continue.

CLARIDA: Well, we could not have a session with the governor of Korea without asking about China. In particular, China obviously is an important driver of the global cycle, but obviously very relevant into the Korean outlook. And it’s widely expected this year China will grow below the official 5 percent target, and perhaps continue that disappointing trajectory next year. So how does the outlook for the Chinese economy and the weakening outlook have implications for Korea specifically, and Asia more broadly?

RHEE: I was in Beijing last week. So I updated my understanding. You know, when I was in Beijing the third quarter number, 4.6 percent growth rate, was announced. So that was slightly lower than what people have expected. So you’re talking about 4.5 to 5 percent growth rate this year. And they recently announced the new stimulus packages. And this 4.6 percent hasn’t reflected the impact of this new stimulus plan. So people are discussing how big the new stimulus plan will be in terms of growth rate. So but whatever the outcome, I think the—I find that the mood in the—in China was a little bit less bright than this 5 percent suggests. 

I think it’s easily understood if you just look at the nominal growth rate. In the last six quarters, China’s nominal GDP growth rate has been lower than the real GDP growth rate. Which means that they had—not as severely as in Japan—but they have this deflationary pressure. So overall, when I talk to businessmen, if I just summarize the current situation in one sentence, they produce a lot but not make much money. So there are a lot of production, and now there’s internal competition is very high because domestic growth rate is not as high as they wanted. And now they went outside to sell those product. 

And in that sense, I think China’s slow growth is definitely not a positive thing for us. But at the same time, the overseas production of Chinese companies is now—can be a—there will be winners and losers in Asia, depending on your situation. Because many ASEAN countries become a destination of China Plus One strategy. But at the same time, many Chinese companies actually went outside. And they are actually investing a lot in Asia and other countries. So, you know, this will be the changing pattern of the global value chain.

CLARIDA: And certainly, one thing that we—I’ve noticed as well, and done some work on this, is you actually see in the in some of the data a diminished correlation between the Chinese cycle and the global, say, commodity cycle. It’s striking that before the pandemic you would see, you know, eyeball correlations, pretty striking relationship between the China cycle and then the global cycle, commodities and trade. And it began to weaken during COVID, and it really is still rather weak. So part of that structural evolution that you—that you talked about.

RHEE: And also the nature of their growth around global financial crisis. Their growth was led by the infrastructure investment, housing investment. And so that means more demand for the commodity—

CLARIDA: Very commodity intensive.

RHEE: But the nature of growth has also changed. 

CLARIDA: Yeah. Well, I guess we couldn’t have any conversation about without discussing AI. It’s everywhere, including in the in the stock market. It even dominated the Nobel prizes this year in physics and chemistry. According to the optimist, AI is widely expected to transform the global economy, but maybe I can narrow the question down a bit. How are you thinking about AI in the context of Korean economy? And more specifically, are you trying to leverage AI inside the Bank of Korea?

RHEE: I think Korea is, in some sense, unique situation in terms of the impact of AI. And because, OK, on production side Korea is one of the rare country who can actually produce AI-related chip competitively. So at this moment, people are just focused on the, you know, AI chip and servers, like NVIDIA chips. But as AI technologies develops further, we believe in the near future—this is really a big assumption, and it’s not yet, you know, confirmed by many others—that if the AI become a kind of technology used for many areas, and especially if AI technology start to be used on device—you know, equipment like mobile phone and others—then maybe more cheaper AI chips, the demand will be higher. Not just for the server chips. And Korea will be the biggest beneficiary if that happens, because in producing chips we have a competitive edge. And our companies, Samsung and the Hynix, really have a competitive edge in producing AI server chip, as well as other high-quality chips. So that’s what we’re expecting. 

And on the application side, I find that our youngsters very much IT friendly, we have a very IT—well-developed IT infrastructure. So I see rising, you know, business—small businesses are created on the many AI-related services, like medicine, medical services, biotics, and robotics in many area. So even in application side, and we see this as an opportunity. So we’ll see. And you ask me what we are doing on AI side on the Bank of Korea. We are the same for in other central banks. We are exploring the how we can improve our operational efficiency using AI. And, you know, we actually, you know, are now forecasting—all this, you know, forecasting and the analytical work, but at the same time we are try to develop our own chatbots to help our operation in all these things. 

The biggest issue for me is how much investment I have to do in advance, or whether we have to wait and then try to buy the ready-made, off-the-shelf product later, or whether we have to invest money a lot in advance. That’s a quite difficult question. And the amount of money that we are talking about is not small. And I personally do not have any good technical, you know, knowledges. So when our staff asking me to sign the—you know, the bill, I was a bit uncomfortable. But this is an issue that, you know, how much we have to invest. But definitely we will be more positive on AI investment, because we have a domestic companies who can actually help us with us. 

CLARIDA: Yeah. Well, that’s certainly a good position to be in, for sure. I thought—we have a little bit of time before we go to the audience Q&A. I thought maybe, since it’s certainly something that I benefited from during my time as Fed vice chair, and also you have a very senior leadership position in the BIS, maybe if you could just share with us the BIS infrastructure for convening central bankers, and your impressions of it, and what specifically you’re doing in that contact.

RHEE: Actually, it’s—I’m a newcomer as a governor. I didn’t know that—I heard a lot about BIS, but I have more experience in IMF and other global institutions, especially, probably, I’m more familiar with the finance minister trade rather than the central bank governor trade before I joined the BIS. I find that the intimacy of the central bankers are much more tight than the finance minister, naturally, because finance minister stay one or two years in the central bank stay ten years, very easily. So they know each other. And so it’s quite—they’re very close friendship in the BIS meetings. And especially, I really like at BIS there is a closed-door session among governors. And they can very speak privately, and, you know, without having a concern on their remarks can be exposed to media. So it was a great setup that I learned a lot. 

Especially I was lucky because I joined at the time that global inflation was starting to increase quite rapidly.

CLARIDA: So when was your—what was your first meeting as governor?

RHEE: I was appointed in April 2022.

CLARIDA: OK, wow. 

RHEE: So—yeah. So it’s time that inflation—if I knew it is going up like that, I probably wouldn’t have chosen it. (Laughter.) So but I think by joining the BIS meeting, I could guess what others were doing. And that really helped me to plan for our monetary policy. I was lucky. Great institution.

CLARIDA: Yeah. It is, indeed. OK, I think we will now move on to the remaining time we have to Q&A. And we’re going to invite questions, both in person in the room and on Zoom. If you’re in the room, please raise your tent card to indicate your interest in asking a question of the governor. And do speak into the microphone, because—and also, just a reminder, this meeting is on the record. And so we will start with a question or two here in New York. So if you have a question for Governor Rhee, just please raise your card, like this. OK, right there. Please, yes.

Q: Go ahead.

Q: I have to turn this this thing on.

CLARIDA: Oh, Ameer (ph), sorry. My glasses—a little dark in here. Please, yeah.

Q: So free advice on AI: Wait. (Laughter.)

But my question pertains to China. And both Richard and Ben have—no doubt, know of Bob Aliber, whose standard theory is that all developing countries have fifteen minutes of fame in the sun. When they enter the world trading—when they enter the world economy they grow like gangbusters, attracts a ton of hot money. At some point, this creates an internal crisis, and the whole thing collapses. And he cites, of course, his example’s Korea and the Southeast Asian countries. And for some years, he’s been banging on about China. And I guess now his predictions about China have come true, more or less. But Korea seems to have not only had its fifteen minutes of fame, had its crisis, but then has moved on. If you were to advise the Chinese on what they could do to move on, putting on your sort of structural hat not just your monetary policy hat, what would you advise the Chinese?

RHEE: I think your question can be divided in two parts. One is whether China will have a kind of crisis that Korea has experienced, first, OK? And then second question is that what China has to do to move on from now on, if their growth rate is moderating or slowing down. First part, I do not think China will have a same kind of crisis that Korea has experienced, simply because they have not much foreign currency denominate that. So to me, if China has a crisis or difficulties, it’s more like a dislocation of the capital into a very unproductive area, such as state-owned enterprises and all these things. So they may suffer from slower growth more than necessary because of these kind of policies. But that doesn’t necessarily mean they will have a very abrupt, you know, the FX kind of crisis that Korea had. 

So if somebody is—when I was in IMF and ADB, I got a lot of questions, similar question, from the Wall Street, when China will collapse and all this, you know, because of high debt. I say no, don’t expect too much, because their debt is more domestic currency-denominated debt. They have a lot of real estate under the government book. So if they sell some of them, they can easily recapitalized the bank. So it’s a matter of the slow growth rather than, you know, immediate crisis—abrupt crisis that many emerging market experienced. So that’s my answer to the first part.

Second part, if they have some issue of the, you know, resource allocation for higher productivity area, that is very difficult question. And that is also well beyond the economics, because at this moment it looks like the Chinese high authorities have very little incentive to move on to the private market by reducing the size and—size of the state-owned enterprises. They believe state-owned enterprises has many functions, not just for economic functions. It’s a kind of building block of their political system, as well as social safety system. So the million dollar question is that whether you can be successful in increasing the opportunities or the productivity using the industrial policy and the state-owned enterprises.

Nobody has done it. I’m very—I say that in case of Korea, I think the 1997 crisis had—was really costly and the painful, but at this at the same time it had a positive impact for restructuring our economy, and we could move to a more higher productivity society partly due to the crisis. But in case of China, the million dollar—billion dollar question is whether they can achieve the new standard of—so at the bottom, they are very successful to become a middle-income country through the industrial policy using the state-owned—you know, state-owned enterprises. But whether they can move onto the higher level, still based on the state-owned enterprises, I don’t know the answer. 

Q: Aliber, incidentally, would include Japan, which did not have much external debt, as part of his model.

RHEE: Well, Japan, sure. I think their currency is internationalized. And lot of Japan’s debt is in terms of Japan’s own currency. So I don’t expect they will have, like, a crisis. But, you know, small—(inaudible).

CLARIDA: Right there.

Q: Hello. Thanks for your remarks. I’m Ron Tiersky from Amherst College in Massachusetts. 

I’m not a Korea specialist and I’m not a finance guy. I’m a Europeanist and a geopolitics guy. The one thing we all know about South Korea, which you touched on, is the birth rate. And I would like to ask you to talk more about that. You were congratulated for the low inflation rate. I don’t know if you could be congratulated for the low birth rate. We know about K-pop, and you’re having great success, and all—and it’s really remarkable that South Korea is so vigorous, from that point of view. As a Europeanist, I can recall a joke. When the German population in the ’80s and ’90s began to go south, there was a joke which was: Will the last German please remember to turn out the light? 

So my question is, first, something specific. Do you think that the South Korean birth rate is likely to remain about the same, go up, or go down? What might—what, you know, effect might that have? What is the relation of the—of the birth rate to the financial system, the economic system? And are you really worried, or is it OK?

RHEE: Yeah. I’m really worried. (Laughter.) You know, the 0.7 is a really low number. And I was interested in this issue, demographic issues, for a long time as a professor. At that time, by looking at the European data, I saw our fertility rate, around that time around 2 percent, and I saw that our—you know, not 1.5 percent. And I saw that our fertility rate will go down to, like, 1.2, or even close to 1 percent, by looking at the European cases, in the worst scenario. But now we have 0.7 percent, which is—I think is unimaginable, like, fifteen years ago, even by looking at Japan’s data.

What I’m doing is, personally, I’m trying my best. So I my eldest daughter just got married. And I asked her to have a baby as soon as possible. (Laughter.) Whether she listened to me or not, I don’t know. But I think Korea government has two things. One is that even if we will be successful in raising the birth way to above 1 percent, by looking at the world other advanced economies, probably the maximum we can expect, 1.5 rather than go back 2 percent. So and also that—even if that helps, that will happen, new labor supply will only be realized after twenty-two years. It’s ten years. So I think in between it’s inevitable to have even more foreign workers, even if I’m not talking about immigration, but immigration included. It will be very hard for us to avoid not having, you know, foreign workers. 

And Japan—(inaudible)—knows very well, and twenty years ago they were very reluctant to invite in foreign workers. But after suffering low growth rate and the necessity of helping the elderly, finally, after Abenomics, you know, they start to incorporate foreign workers. So if you go to Japan now, you can see many foreign workers. So somehow I really think the Korean people has to be—I don’t want to use the word “educated”—but Korean people perhaps understand the inevitability of having more foreign workers, despite some social problem they are worried about. So that is one important policy change that we would like to talk. That is why it’s controversial for me to talk about this immigration, foreign workers. 

And second, definitely we need to improve the fertility rate. And I don’t think there is one panacea to help that, because it’s more like a voluntary decision of the youngsters because of the heavy competition and many different issues, especially housing prices. Housing price goes up, you know, people are very uncertain about their life, all these things. So that cannot be solved by one policy. And definitely we have to give more incentive for people to have a baby. We have to use the fiscal resources to do it. But that’s not a panacea. So I think we need a lot of effort in reducing the cost of living. We have to reduce competition of the—unnecessary competition in education. We have to probably change the culture of the businesses, where—toward the female workers. All these things are necessary.

CLARIDA: Let’s move around to this part of the room. Sir, I can’t see your name, but please, right there. Yeah.

Q: Thank you. Kilaparti Ramakrishna from the Woods Hole Oceanographic Institution.

But the question has nothing to do with the oceanography institution. (Laughter.) I was in Korea as head of the Northeast Asia office of the United Nations, and had the opportunity to work with you, in your capacity at the time, with the Blue House. One of the things that we had to deal while running that office was North Korea. And the question was more about finding information that is reliable for various purposes. And I found—this is going back to the comment about the Bank of Korea as a think tank—I found lots of very useful studies about North Korea coming from Bank of Korea. 

And then the analyses, I thought, when we talked about this with various other economists, was spot on. And then it talked about a time when it became simply not viable in continuing on the path that it is on. But here we are, you know, a decade or so later, it’s still continuing in the same way. And I was wondering if you could share any reflections on what you think is happening in North Korea, and what you see as the future of the two Koreas. (Laughter.)

RHEE: If you invite me again after I resigned from the government position—(laughter)—I’ll be more free to talk. But you know that not many people know that Bank of Korea is producing the official—you know, from outside—official GDP statistics for North Korea. So we actually—and don’t ask me how we get it. (Laughter.) Don’t ask me whether—how correct it is. But we work from many various agencies to get the information. And especially from the border of China and North Korea. And so we get a lot of—we are trying to get a lot of statistics for North Korea.

And but I think—at this moment, I think, especially given, you know, this week’s kind of sensitive situation in North Korea, please allow me. I should refrain from commenting on the North Korea, because it’s more diplomacy and security issue. As a central bank, I probably have to refrain from it. Thank you.

CLARIDA: We do understand. Next question. 

Q: Thank you very much. Marsha Vande Berg from San Francisco.

Governor, you mentioned the chip industry in Korea—in South Korea, and particularly AI—as it applies to AI. I wonder if you could talk a little bit more about that. What percent of the economy you see that now being, and what percent of the economy do you see it becoming? What are the drivers? Is it more a policy or a competition? And then how you will manage—how Korea will manage the tensions that currently exist between U.S. and China, particularly over chips. If you’d just sort of talk a little bit about the stake in the ground for South Korea in the chip industry. Thank you. 

RHEE: I think—I forgot the exact number of how IT sector account for in our export. So if I—it’s a significant, but I think I forgot the number. And it has a lot of spillovers for other industries too. So IT sector is very important. And we have been—for example, but China was a big market for our chips. More than 50 percent of our chip export went to China before the U.S.-China tension. So definitely that won’t go on, because there’s a technical sanctions of the United States on the very high-end, you know, technology to China. And our very high-end chip is stop exporting to China at this moment. 

Low-end chip, we have more competition with China. So this definitely will change. But on the other hand, the demand for chips actually increase quite over the world. So in the short term, because of competition and the sanctions, we may have some difficulties. But I think, even that—if you look at how many countries can actually produce chips, and also this sanction of the United States in some sense has an impact. China was a quite an important competitor. But now, because of sanction, I think it will be probably some time for them to catch up later. So there is a pros and cons. So chip industry, still, we believe, is one of our, you know, strengths of the Korean economy. And so, you know. Sorry, I don’t know whether this answers or not. 

Q: Yeah. Thank you very much.

CLARIDA: Next.

Q: Chuck Weiss, retired from Georgetown School of Foreign Service.

I wonder how your admirably broad gage think tank is dealing with climate change. What you see the impact on—directly on Korea, and the effect of the global change on Korea.

RHEE: I have to admit that I’m very proud that Bank of Korea is doing many things. Sometimes we have been criticized. But climate change, I wish we could have done more. At this moment, we are doing—like many other central bank—we are doing something—or, focusing more on, like, analyzing the climate impact on the financial market stability. We are trying—we are developing the several stress test kind of scenarios. We do some kind of education role for the public and overall. And then also we are trying to, you know, invest our foreign exchange reserves into the more green bond and other things. So we are doing many.

But whether this is big enough, we have certain limitation because Korea is a little slow in adopting many climate change, you know, policies, because we are very much manufacturing based. And there is a lot of resistance from the industry to adopt the carbon tax and others, understandably. So we—I’d rather say Korea is very—in many front, we are in the front line. But climate change, we are not behind. But I think there are lot of room for us to do it. It’s not—I’m not just talking about the central bank, but government as a whole. I believe there are more things we need to do. 

And definitely we see the climate change is having an impact on us widely. Our agricultural production pattern has changed. And, you know, many fruits that we have raised before in southern part is now moving to the northern part. So that has a lot of, you know, price impact, inflation impact too. And the windfall—I mean, rainfalls is, these days, are more like in Bangkok rather than in Seoul. So that actually has a lot of implication of how we have to update our infrastructure, such as water control kind of thing. So I think—before too late, I think we had better focus. We have to invest more money on this climate change issue. But it’s starting very slowly.

CLARIDA: Do we have any questions on—from the—OK, please, please. 

Q: Yeah. I’m an institutional investor. 

You mentioned U.S. dollar appreciation, the impact that it’s had on emerging markets. Could you talk a little bit about prospects for a reversal of the appreciation that we’ve seen over the last many years in the U.S. dollar against other currencies? As an economist, not as the governor of a central bank.

RHEE: I think you are asking what—I mean in the last months after now people start to realize that U.S. economic growth is much more strong. And now people, just their expectation about the interest rate cut of the U.S. Fed, emerging market currency depreciates together with the dollar strength. And now that is also affected by some uncertainties of the U.S. election result and the future economic policy of the U.S. So I think at this moment it will be a little bit hard. There are too many uncertainties. I’d rather answer and then rather guess what will be the future pass of U.S. dollar after the election, because there are a lot of uncertainties. And then how the monetary policy will change. 

But one good news for us, at least, is that the emerging market currency depreciation is quite common across the countries, rather than one or two countries are singled out. So in some sense—previously, depreciation was a kind of regarded as evidence of weakness of a certain country. But this time the market all understand that this is depreciation because of strong dollar. So in that sense, the impact is smaller. So, but we’ll see how it goes. 

CLARIDA: Right there. Hi.

Q: Hi. Thank you. My name is Jean. I’m with Google. 

You had mentioned earlier immigration, which was what my question was about. So I had lowered my placard, but actually you also had mentioned the post-Abenomics introduction of more foreign labor in Japan as well. But what is kind of—from a socio and economic perspective in Korea—the research that you’re seeing around immigration in Korea.

RHEE: I used the word “foreign workers” intentionally, because somehow immigration—there is not much consensus yet to having more immigration. And actually, what’s happening in Europe, and the United States, and other advanced economies about this immigration issue does not help us to promote immigration immediately. So that’s why I’m using the word “foreign workers” as a kind of transition. And still, but I think I’m sure people will understand that we need more foreign workers. And then if you start to accept the more foreign workers, probably we can open our mind for the immigration down the road. But at this moment, on Korea and Japan and Asian countries compared with Western countries, it’s true that we are a little bit more conservative in having an immigration. 

So but I think at this moment, as I mentioned, our study shows that it will be very hard for us to manage our life without having our foreign workers, even rapid aging. So our Baby Boom generation will become—in next ten years will be older than seventy-five or ninety. So down the road, ten to fifteen years later, the elderly care is a big issue. Not only just, you know, the low birth rate. And I can see a lot of pressure too. So, you know, whether we like it or not, my first point is that having more foreign workers is inevitable. And then once we got familiar with having more foreign workers, maybe we may open to the immigration down the road.

CLARIDA: We have time for one more question. Anybody want to—maybe I’ll ask one last question, with the remaining time. Any lessons, since South Korea is a success story in terms of the disinflation. You went early. You didn’t mention inflation expectations. I’m assuming that they remained well anchored at your target throughout the surge in inflation.

RHEE: Yeah. In the beginning, it seems to start to increase, together with actually increases. And our consumer expectation on inflation is very much tracked the actual inflation. On the other hand, expert opinion on the inflation was kind of well anchored for our policy. To do that, we introduced some experiment, and still controversial. So I don’t want to claim that it was my legacy. But we introduced so-called dot plot of the U.S. Fed. And before 

CLARIDA: Be careful what you wish for. (Laughter.)

RHEE: That’s why I say it’s controversial. And when I become a governor, I think the general understanding of monetary policy under my predecessor was mostly believer of the strategic ambiguity. So Bank of Korea was very careful not to mention the future path of inflation. I am a little bit different. I’m a little more academic. And I’m trying to test few things. But I like, in some sense, dot plots. There are pros and cons. But I thought that instead of having, like, a two to three years horizon for a dot plot, which is too much uncertainty in case of Korea, which is a smaller economy. But on the other hand, not talking about future path at all seems to be too much, because Bank of Korea has more information than private sector. 

So if you do not show any signal and say that no signal is better, that’s—I feel like that’s too much. So what we introduce is we introduce so-called K-dot plot, which is we just talk about what is opinion of the monetary policy committee members for the next three months, three months later. And then we—I thought that somehow by announcing what is a kind of conditional expectation, about three months later interest rate by the each member of the monetary policy committee, seven members excluding me. I know that my opinion will weight more than that. So we announced the six members expectation about the next three months interest rate. And the expectation actually followed very closely with that announcement. So far, I think our experiment was not a failure—(inaudible)—conditions.

CLARIDA: I had not known about that.

OK. Well, thank you all for joining today’s meeting. And thank you very much to Governor Rhee for speaking with us. Please note that the video and transcript of this session will be posted on CFR’s website. Our meeting is adjourned. And have a good visit to the United States. (Applause.)

RHEE: Thank you. Thanks so much. Thank you.

(END)

This is an uncorrected transcript.