If more businesses use cash in their transactions, the government’s tax authorities find it hard to secure enough tax bases. (image: Flickr, by 401(K))
SEOUL, Korea, July 22 (Korea Bizwire) – Recently there are signs that the Korean economy has become more and more cash based. In a so-called cash economy, most transactions are made in cash instead of credit cards or bank balance transfers. As more people hold cash as a means of payment, the economy needs more cash. In many cases, a cash economy prospers in a place where the portion of the black market is substantial.
If more businesses use cash in their transactions, the government’s tax authorities find it hard to secure enough tax bases. Especially in an economy in which the needs for welfare payments and other social obligations rise rapidly, the emergence of the cash economy may lead the nation’s economy to a serious trouble.
According to LG Economic Research Institute, this is exactly what’s going on in Korea today. One such a sign is the fact that the outstanding currency balance has increased at a fast clip. For about four years between 2005 and 2008, the nation’s currency balance has maintained a stable growth rate of 5-6 percent. After the 50,000-won denomination was issued in 2009, however, the currency balance has accelerated to more than 20 percent at the end of 2009. The ratio somewhat slowed won to 11.7 percent as of the end of 2012. But it has regained the speed at 14.9 percent as of the end of May this year.
Comparing to other definitions of money supply, the speed with which cash balance rises is much more pronounced. For M2, a broader classification of money than M1, it has maintained a steady level of growth at 5 to 6 percent after rising to 9.9 percent in late 2009. As of the end of May this year, the M2 growth rate has been 5.2 percent, up only 0.4 percentage point from the end of 2012. That implies the speed of cash balance is rising too fast in relation to other measures of money supply.
