Power Shifts Toward Financial Industry
By Yoon Ja-young
Financial and manufacturing industries are the two engines powering a country's economic growth. In South Korea, the financial sector has been viewed as a supplementary engine for the manufacturing industry. From textile to shipbuilding and tech industries, manufacturing firms have been the primary driver of the country's growth.
However, signs of changes are being felt. A shift of power is taking place, with the center of gravity gradually shifting toward the financial sector. On the Seoul bourse, the aggregate market value of the financial firms has outrun their IT rivals and the gap may widen.
The financial industry is about letting the money, not plants, work. If you put money at the right place and right time, it will work round the clock. No developed country has a weak financial industry.
With China, India and other countries lagging behind, Korean manufacturing firms will find it hard to maintain their edge and their contribution to the growth will dwindle. It's the job of the financial industry to take up the slack. Korea needs to develop the financial industry as a new locomotive to power the country into the ranks of the truly developed nations.
The main theme of our quarterly Financial Market Report is ``How to make Korea a financial powerhouse.'' Market experts and policymakers had diverse ideas and solutions, while they agreed on where Korea, standing at the crossroad, should head.
For the financial industry to be the main growth engine, financial firms should take steps to go global and policymakers should ease regulations hampering their globalization.
A Paradigm Shift
Financial Supervisory Service Governor Yoon Jeung-hyun said that the importance of financial globalization cannot be emphasized enough.
``In today's globalized economy, it only makes sense that domestic financial firms set their sight on competing globally, competing in global marketplaces with a global mindset,'' Yoon said. ``As they do so, they must be able to help domestic companies grow overseas and give top-notch investment opportunities to investors at home.''
Korea, which rose from the ruins of the Korean War, is expected to have $20,000 per capita income this year. It owes its miraculous economic growth to the manufacturing industry, starting from the export of light industrial products such as wigs to switch to heavy chemical industry and then IT. It is now among the world's top producers of semiconductor, automobile, ships and steel.
``Korea's competitive edge is, however, now at risk in the wake of emerging economies such as China, India and other Southeastern Asian countries,'' says Kwon Tae-shin, the ambassador to the Organization for Economic Cooperation and Development (OECD) and the former Vice Finance & Economy Minister.
As Kwon points out, Korea is losing price competitiveness in manufacturing sector. China, which went ahead of Korea in the world competitiveness book by IMD, is pouring more money into R&D than Japan, which is still too far ahead for Korea to catch up.
They don't mean Korea should give up manufacturing industry. It just needs a breakthrough, the financial industry, they point out.
Why Financial Industry
The financial industry is known as a high value adding industry, making ripple effects on other service sectors. Yoon Jeung-hyun, governor of the Financial Supervisory Service, explains that the financial industry not only allocates credit efficiently in support of the real economy but also generates high value-added services like no other.
Ambassador Kwon cites the example of Luxembourg, one of the top countries in terms of per capita income. About one third of its national income comes from the financial industry.
Vice Finance & Economy Minister Kim Seok-dong says it is impossible for the Korean economy to achieve a GNI per capita of $30,000 or $40,000 without reform and advancement in the financial sector.
The government also expects more decent jobs to be created in the financial industry, which would help the country advance into a knowledge-based economy.
Learn From U.K.
A number of experts and policymakers said Korea should learn from the United Kingdom, which turned into a global financial hub after a series of financial renovations.
The country, which had suffered a long depression, reformulated financial regulations in 1986 and 2000, and its capital market was hit with a ``Big Bang.'' It scrapped barriers between various financial sectors while promoting free competition and enhancing investor protection. The reform was harsh.
``Twenty-five domestic securities firms were closed or merged. Small and uncompetitive players were closed down or merged into a bigger one, and the surviving players also undertook a hard restructuring process to improve their competitiveness and profitability,'' says Park Dae-hyuk, CEO & president of Leading Investment & Securities.
The fruit was sweet after the harsh restructuring. The contribution of the financial industry in GDP grew to 30 percent in 2002 from 20.9 percent of 1986, and it became a major player in hedge funds, equity brokerage, foreign exchange trading and derivatives brokerages.
``Korea has a huge potential to become a London-style financial center in the region, encompassing China, Japan and ASEAN countries by developing an advanced financial services sectors such as the asset management industry,'' Vice Finance & Economy Minister Kim Seok-dong says, exhibiting that the U.K. style reform is a model for Korea.
Capital Market Consolidation
The financial industry was once regarded as a mere assistant to back up growth of the manufacturing sector, but it isn't so any more. The Capital market Consolidation Act, expected to go into effect next year, reflects the ambition of the Korean government on the financial sector.
Tearing down barriers between various sectors in the financial industry such as securities, asset management, futures and derivatives, the act is expected to introduce a variety of new investment products that satisfy customer needs. Supervision and regulation on the capital market will also go through reform. ``It will pervasively induce free competition within the capital market and promote development of innovative financial products,'' Vice Finance & Economy Minister Kim says.
Korea is not the only one dreaming of the financial hub. Other major cities around the world have launched financial hub initiatives, and the competition is getting fiercer.
``The recent London `Global Financial Centers Index' ranked Seoul as 43rd amongst global financial centers and 9th in the Asia/Pacific Basin region,'' points out Larry Berger of McKinsey & Company, explaining that the road ahead is tough. He says not only the traditional financial powerhouses such as New York, London, Hong Kong and Singapore, but also Dubai, Frankfurt, Johor Baru, and Panama have been working to improve competitiveness and implement changes.
``If the Korean market does not keep up with the global trend of capital market reorganization, it will trail behind and be degraded as a local market,'' warns Lee Young-tak, Chairman & CEO of the Korea Exchange.
The sandwiched location between China and Japan, two very strong countries, can strengthen Korea to become a financial hub, they say. While the rapid aging population is a burden for the manufacturing industry, it could be an opportunity for the financial industry since it means more people with assets to invest. Strong IT infrastructure can also be a plus. Some even say the financial crisis in 1997 was a painful bliss, which gave an opportunity to implement restructuring programs and reform the financial market.
To have competitiveness over the global players, Korea should provide diversified investment choices and cultivate integrated wealth management system, according to Henk de Bruijne, CEO of ING Investment Management Korea. He also emphasizes the importance of human resources.
Henry Seggerman, president of International Investment Advisers, stresses level playing field. Tax discrimination against offshore funds should be abolished. He shows concern over Korea's nationalism, and urges that it should not prosecute foreign bankers for making profits, or let foreign banks get shut down by strikers. He says Korea should make it attractive to have shares listed in the Korean bourse by ending corporate governance discount.