South Korea’s underground economy is estimated to be one quarter of the gross domestic product, much bigger than those of other advanced economies. One component of the shadow economy is the black market in gold, where unreported and illegal trade is rampant.
One government estimate shows that gold kept by individuals amounts to 720 tons, about seven times the 104 tons of gold reserves kept by the Bank of Korea.
During the 1997-98 financial meltdown, Koreans brought 250 tons of gold in the forms of rings and necklaces in a campaign to help the country overcome the foreign exchange crisis.
This is not surprising given Koreans’ preference for gold both as jewelry and as a means of keeping wealth in their private spaces.
The problem is that of about 100 tons of gold traded in the country annually, up to 70 percent is traded illegally, according to one government estimate. No doubt there is tax evasion at an enormous level, with one estimate putting its volume at 330 billion won.
So, this week’s launch of a spot gold market under the Korea Exchange should be welcomed. The provision of the physical trading platform will certainly enhance transparency in transactions of gold and curb the black market.
There are some skeptics who say that people accustomed to unreported deals and dodging taxes will not be easily attracted to the spot market.
They are right to suggest that it would be naive to ask, for instance, merchants to come to the exchange only to become “good citizens” who abide by the rules and pay all taxes.
Authorities should provide more incentives, on top of the exemption of trade commissions and various tax privileges being offered now, and devise diverse gold-related financial instruments. Not to be ignored is continuing efforts to crack down on the black market and smuggling of gold bars from overseas.
The gold trading platform was not launched at the best time, as the price of gold is falling, but it should overcome any such short-term difficulties and set an example for Korea’s fledgling spot markets.
A successful operation of the platform will also boost the Park administration’s drive to bring the underground economy out in the open, an urgent task facing the nation.