Ⅰ. Introduction Since 1997 when Korea received bail out money from International Monetary Fund(IMF) Korea has expedited foreign exchange liberalization policy according to Memorandum of Understanding contracted between Korean government and IMF. Deregulation on foreign exchange control have some positive effects; it removes obstacles on transactions with nonresidents, reduces transaction cost, increases worldwide trades so that eventually contributes to global economic interest. However, liberalization makes a country give up her own policy measures to cope with deficit of balance of payments. Moreover, opening foreign exchange market or stock exchange market makes it difficult to protect her country from attacks by foreign capital. Korea experienced this kind of problems in September, 2008, when I am writing this thesis, as well as in 1997. Therefore, I think we need to examine the speed and priority of foreign exchange liberalization policy at this time. Ⅱ. Foreign Exchange Control in Korea The usual type of foreign exchange control which had been set up through the two World War looks like this; All foreign currencies resident acquired should be deposited or sold to government or his agent to a central pool in return for local currency at specified rates. Foreign exchange is then distributed from the pool, through licensing or similar devices, to those persons who meet the criteria of the particular governmental plan. Korea also adopted this structure in the Foreign Exchange Control Act of 1961. The act is based on three basic rules; 1. All foreign exchange should be pooled, 2. Foreign exchange can be used by only one who has actual demand, 3. All foreign transactions should be monitored by banks. There are various ways to pool foreign currencies; sales, deposit, custody and registration. Sales pooling can be said to be the strongest measure. Korea established sales pooling system in 1961. Afterward, the duty of pooling have been alleviated. One example is that government permits individuals to retain foreign exchange below 3,000 dollars in 1978. In February 1995, government abolished the duty of pooling foreign exchange, so that residents become to freely retain foreign exchange. The second rule, actual demand rule, is required to forbid insufficient foreign currencies to be wasted or to be used for speculative purpose. Foreign exchange can be bought from banks only when residents prove actual demand until in 1994 government allows corporation or individuals to buy foreign exchange without proving actual demand within a limited amount. This ceiling was eliminated in January, 2001, so that actual demand rule was abolished. Now a resident can buy foreign exchange without limitation even for the purpose of speculation. Actual demand rule in future, swap transactions was also abolished in April, 1994. The third basic rule is that all foreign transactions should be settled through banking system. This makes government be possible to monitor all foreign transactions, get statistics concerning outflow/inflow of foreign exchange. Thus, a bank that wants to do foreign exchange business have to equip certain physical or personal requirements and get a license from government. Moreover, the Foreign Exchange Control Act of 1961 of Korea was designed under the triple checking system copying the Foreign Exchange and Trade Act of 1949 of Japan. There are three barriers to pass in order to complete foreign transactions; barrier at the step of underlying transactions, barrier at the step of remittance or receipt, and barrier at airport or seaport. For example, one who want to export or import have to report to authorities with required documents. This is a regulation at the step of underlying transactions. When the person pays or receives money to/from counterpart, banks examine whether the underlying transactions were permitted or not. This is a regulation at the step of remittance or receipt. Besides these, one who carry foreign or domestic currencies through customs line should report to customs officers. This is a regulation at airport or seaport. Ⅲ. The progress of Liberalization of foreign exchange control Due to several liberalization measures since 1994, Korea has experienced drastic deregulation on foreign exchange control. All limitation on payments or receipt was abolished except some limitations on settlement methods such as write-off, paying to non-contracting party, or paying not through banks. In particular, the payment ceiling of individual was abolished, so that individual can remit or carry out foreign exchange for purpose of endowment, travel, foreign study, emigration, transferring property by emigrants, etc. without ceiling. Most capital transactions by corporations or banks were also liberalized. Foreign exchange outflow transactions such as overseas investment, purchase of foreign real estate, purchase of foreign stocks, deposit to foreign banks were allowed without meaningful restriction. Foreign exchange inflow transactions such as borrowing money from nonresidents, deposit or trust to domestic banks by nonresidents, foreign direct investment were allowed without real restriction. Specifically, domestic stock and bond market was totally opened to foreign investors in 1997. However, some discrepancies between press report and reality are found. Although Korean government announced that it completed transfer to Negative system from Positive system in capital transaction in 2001, there still be positive type regulation in capital transactions. Also, though the Foreign Exchange Control Act distinguishes "simple report" from "report should be accepted" and regards "simple report" as deregulated rather than "report should be accepted," in reality there are no difference, so both are treated to need to be accepted by authorities. Ⅳ. The speed and priority of foreign exchange liberalization Foreign exchange is the most important thing for Korea to develop its economy from the ruins of Korean War. Korea needs foreign currencies to import raw materials to make products and export them. Therefore, strict foreign exchange control is necessary and justified. However, as Korean economy has grown up the chronic deficit problem of foreign exchange is dissolved. Moreover, the strict regulations is sometimes criticized as an obstacles for corporations to expand their business to world. International institutions such as OECD, IMF have watched the progress of Korea`s liberalization measures with suspicious eyes. Here are the reasons we cannot help pursuing liberalization. However, the liberalization means that Korea will give up political powers on the problem of foreign exchange deficit and let the problem to market. Once it happens, fluctuating exchange rates replaces governmental powers and government will lose its sovereignty in maintaining economic stability. This is the state of Korea we see in 2008. Accordingly, the liberalization should not be done hastily surrendering to international pressure or being swept with current fashion. Liberalization measures should be pursued in consideration of Korea`s best interest and government have to tune up the speed and priority of liberalization within the scope that our economy can endure the deficit of balance of payments. Pertaining to the speed and priority of liberalization, I proposed some principles; first, the restrictions that are not relevant to outflow/inflow of foreign exchange but restrain corporation`s activity excessively, such as payment/receipt period regulations, should be deregulated first. Second, the transactions that can be used as speculative devices by foreign exchange speculators, such as domestic currency funding, should be restricted as last as possible. Third, capital transactions that have relatively low risk may get a priority in deregulation, however, capital transactions that have great risk such as derivative transaction should be restricted until last. Fourth, the transactions that can be used to avoid other restrictions, such as payment to non-contracting party, should not be deregulated hastily. Fifth, the monopolizing foreign exchange banking system that is the basis of current foreign exchange control should not be given up without thoughtful consideration.