[Insight & Opinion] Korean Capital Market Trapped in the "Tragedy of the Commons"

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Recently, the sharp rise in the won-dollar exchange rate has triggered warnings that "the won is weaker than the dollar, even though the dollar itself is relatively weak." In fact, while the dollar index has remained around the 100 mark, the exchange rate has surged to the 1,460 won per dollar range, fueling market anxiety.

This surge in the exchange rate is not simply an issue of rising import prices or increased volatility in the foreign exchange market. If the high exchange rate becomes entrenched, it poses structural risks such as weakening the competitiveness of Korean industries, triggering an outflow of foreign capital, and reducing the capacity for domestic investment. Rather than focusing solely on defending the exchange rate in the short term, we need to fundamentally reconsider the flow of capital and the structure of investment.

In this context, the overseas investment activities of the National Pension Service (NPS) warrant close attention. As of the end of August 2025, the NPS has invested about 36.8% of its total fund, or approximately 486 trillion won, in overseas equities, with about 70.5% of these assets concentrated in North America. Furthermore, in just the third quarter of this year, the value of NPS investments in US-listed stocks increased by more than 18 trillion won in three months, rising from about $115.83 billion (167 trillion won) to $128.77 billion (186 trillion won).

Of course, such overseas investments can yield high returns in the short term. However, given the size and role of the NPS, this is a short-sighted approach. We must ask, "Is there no consideration for balance with domestic industries?" and "How does the outflow of capital overseas affect the exchange rate, domestic investment environment, and economic structure?"

The classic economic concept of the "tragedy of the commons" aptly explains this phenomenon. When everyone uses a common resource a little more, there may be short-term gains, but ultimately, everyone suffers. In Korea today, we see individuals flocking to apartments for real estate and to US stocks for equities. While this may benefit individuals in the short term, it ultimately undermines the overall balance of the nation in the long run.

As a result, we face social costs such as soaring housing prices, asset imbalances, and increased housing burdens for young people. Similarly, if capital continues to flow into the US stock market, short-term returns may rise, but the virtuous cycle of technology accumulation, job creation, and corporate growth in domestic industries will weaken. If capital does not flow into domestic industries but instead continues to move overseas, imbalances in the supply and demand of the foreign exchange market will accumulate, causing the exchange rate to rise further. This leads to higher import prices and increased corporate costs, ultimately undermining the competitiveness of the entire industrial sector. In fact, recent analyses pointing out that "the exchange rate does not fall despite a current account surplus" are due to the structure in which dollars earned through overseas investments are not repatriated to Korea but are instead reinvested abroad.

Large-scale overseas investments by the NPS may have advantages in terms of returns. However, this conflicts with the public purpose of protecting domestic industries and ensuring the long-term health of the national economy. The NPS is not simply an asset management institution seeking high returns; it is a responsible public fund that must safeguard the retirement assets of the people and promote the stable accumulation of national wealth. Yet, the current structure is such that the expansion of overseas assets is progressing much faster than the capacity for domestic industry investment. In effect, the pension fund is reproducing the trend of domestic capital flowing out to overseas markets rather than into the industrial sector.

This is not a rejection of overseas equity investment itself, but rather a call for a balanced adjustment in the direction of capital. The government and pension funds must restore an investment incentive structure that channels capital into domestic industries, technology development, and job creation. This is necessary to prevent the "tragedy of the commons," where the accumulation of individual short-term gains leads to collective national losses.

The current surge in the exchange rate is not a simple market fluctuation. It is a warning that the Korean economy is tilting toward a structure where individual interests outweigh the common good. I hope that a policy shift from a long-term perspective will not come too late.

Kim Kyuil, Professor at Michigan State University

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