Larry Berger McKinsey & Company

By Larry Berger, McKinsey & Company

In 2003, Korea announced its intention of developing Seoul into the regional financial hub of Northeast Asia. Achieving this vision would enhance the country's rate of economic growth, provide much needed diversification into the services sector of the economy and create new employment opportunities. Creating a financial hub would also increase the global competitiveness and efficiency of Korean financial institutions . . . allowing them to join the ranks of Asian leaders. The hub would attract global-scale financial institutions and allow them to prosper in a conducive growth environment. A deeper, more liquid money and capital market would be more resilient in future financial or economic crises, mitigating the severe disruptions such as were experienced in the 1997-98 downturn. Becoming a financial hub would furthermore enhance Seoul's diplomatic positioning, regionally and internationally.

Concurrent with Seoul's effort to become a financial hub, other major world-class cities have been focusing on their growth and competitiveness as financial centers. ``U.S. capital markets are the lifeblood of our economy,'' claims Secretary of the Treasury Hank Paulson, and according to President Bush, ``To keep America's economic leadership, America must be the best place in the world to invest capital and do business.'' Dubai has launched several new financial hub initiatives, most recently a petroleum futures exchange. And even Tokyo is setting-up a committee to improve the competitiveness of its financial center.

Significant steps have been taken by Korea in the past several years to create this financial hub, commencing with the MOFE study in 2003 followed by the establishment of the MOFE Financial Hub working committee. An international financial center is being built in Yeouido and plans are being discussed to designate a part of the city center as the hub area, perhaps along Cheongye Stream. The initial plan envisions asset management as an important component of the hub and major international firms have begun to grow their asset management businesses in Seoul, including Fidelity Investments, Prudential, J. P. Morgan, ING, Goldman Sachs, Morgan Stanley, Credit Suisse and UBS. Former mayor Lee Myung-bak formed the Financial Hub Advisory Committee to inform and advise him on the key initiatives required to make Seoul a successful financial hub.

Unfortunately, while important, these initiatives have been insufficient given the escalating competition in Asia and globally. The recent London ``Global Financial Centers Index'' ranked Seoul as 43rd amongst global financial centers and 9th in the Asia/Pacific Basin region. Whilst Seoul has been launching its financial hub, many of the world's other major financial centers have been at work improving their competitiveness and implementing changes, most prominently New York and London, the dominant players; Singapore, Hong Kong, Dubai and Frankfurt, established regional players; and, Johor Baru, Liechtenstein and Panama, as regional attackers. Much more needs to be accomplished before Seoul can achieve its vision of truly becoming a regional financial hub.

First, a cohesive leadership team is lacking. This is a team that should include the senior executives from MOFE, FSC, SMG and the leading financial institutions in Seoul, Korea and international. Its first task is to develop a common vision for the sector.

Second, regulatory reform is moving too slowly. The FSS was formed nine years ago as the single financial market regulator yet it continues to work in silos, e.g. banking, insurance, securities and asset management. And regulatory reforms are often inconsistent with the vision of creating a financial hub. Foreign exchange controls, for example, still inhibit the free flow of capital in and out of the market and need to be up-dated.

Third, private equity is rapidly becoming a critical component of global money and capital markets, most recently thought to be a major factor in the rise of global equity markets. And yet Korea is giving strong signals that PE is not welcome. It behooves Korea to significantly improve the climate for all types of serious foreign investors.

Fourth, the recent capital gains tax exemption for domestic overseas funds seems miss-aligned with the financial hub vision, as it creates differential tax rates for Korean and international asset managers serving Korean consumers with international investment management products. If Korea is serious about becoming a financial hub, equal treatment for all is a pre-condition for success.

Finally, the financial hub is about creating new jobs, yet the Korean labor market remains one of the most difficult amongst major international financial centers. The ability to hire and fire, the militancy of the labor unions and outdated labor practices significantly hinder the competitiveness of the market.

Korea needs to step back, evaluate its vision for the financial hub and develop a robust plan for implementing the key action steps. The initial plan envisioned asset management as the leading product for the center, but much greater granularity is required. Asset management, for example, has at least three major components _ operations and servicing, product manufacturing, distribution. Where will Seoul compete? What is Seoul's competitive position with respect to its Asian and international competitors, and how will Seoul succeed against this competition?

A coherent, cohesive leadership team has been missing from the start, particularly benchmarked against the major effort currently being launched in the United States and over the last ten years, the leadership team that has insured Singapore's role as the major regional financial hub in Asia. This team needs to be built from the top, perhaps co-chaired by the Minister of Finance and Economy, the FSC Chairman, Mayor of Seoul and chairman (or chairmen) of the leading financial services companies in Korea. The leadership team then needs to be supported by sub-committees focusing on specific aspects of the hub, for example, products, regulatory environment and infrastructure, and include leaders from the Korean financial community, Korean and foreign, and financial market specialists/experts from Korea and offshore.

Korea must implement the financial market rules and regulations that foster the development of a hub, for example, ``Wimbledon rules'' that are clear, transparent, predictable, market friendly and consistently applied. Further, the financial market regulators, including tax authorities, need to understand and be committed to the internationalization of the Korean financial market, which would represent a significant change from the current model. Additionally, tax incentives will be required to make Seoul competitive with Hong Kong and Singapore, and which have played a continuing role in keeping New York and London competitive.

Labor must share the financial hub vision, a vision that includes a significant increase in the number of jobs in the financial services sector. Labor flexibility must be enhanced and outdated labor policies and practices that hinder competitiveness must be abandoned. And immigration laws need to be revised, facilitating the recruitment and retention of international financial markets skills and talents.

The financial hub initiative will fundamentally transform the City of Seoul, not only in becoming an international financial center, but a world-class city. Living conditions in Seoul have improved significantly over the past five years, particularly with respect to primary education facilities, the ``greening'' of Seoul, housing and the arts, but much more remains to be done.

Seoul is well positioned to become a key regional financial center. Korea will shortly become one of the world's ten largest economies and a key member of the OECD. Korea has a highly educated, dedicated workforce that with proper leadership, has demonstrated the ability to achieve outstanding economic success. Geographically, Seoul is the center of Northeast Asia. But Korea must act and act promptly to achieve its vision as a financial hub.