Adam Smith trumps Keynes in Korea
Top financial regulator aims to create a market ruled by the law
By Kim Jae-kyoung
The world has been undergoing a transformation in its economic and financial systems following the 2008 global crisis triggered by the collapse of giant American investment banks, the icon of neo-liberal financial capitalism.
The Wall Street crisis has brought many changes to regulatory policies and financial markets. Among them, what is most conspicuous is that John Maynard Keynes has suddenly trumped Adam Smith on the global scene, indicating that the look of markets is changing toward “bigger government” and “more regulation.”
Under the Smith-led “laissez faire” capitalism ― an economic system that espoused minimum government intervention, maximum competition and free flow of capital ― the U.S. economy thrived for 30 years. However, Keynes, the British economist regarded as the father of modern macroeconomics, is all the rage now.
Today’s global leaders, from U.S. President Barack Obama to French President Nicolas Sarkozy and German Chancellor Angel Merkel, have suddenly become Keynesians, who support more government, more taxes, and more regulations.
With the global economy showing signs of slipping back into another downturn due to the lingering debt crisis in the U.S. and Europe, it has become more evident that Smith, the Scottish philosopher and author of The Wealth of Nations, is out of favor, while Keynes is making a comeback with a vengeance.
However, in South Korea this may not be the case. The nation’s chief financial regulator is a strong advocate of Smithian economics. He did not openly describe himself as a disciple of the 18-centry free-market capitalist but his views suggest that Smith is behind his philosophy on economic policies and regulations.
Free market capitalist
“I have a strong belief in a (market) price system and self-regulation. In the market, players are the main actors, and the basic principle that drives them is prices,” Financial Services Commission Chairman Kim Seok-dong said in an exclusive interview with Business Focus held at his office in Yeouido, Seoul, on Oct. 4.
“I think that when there are prices and competition, markets function properly, creating positive market forces. My goal is to create a free market system that let prices fully rule the market and industrial players fulfill their roles,” he said.
He believes that the government should not try to get involved in determining interest rates and commissions. “If you want to control prices, you should resort to indirect measures. If you ignore the market mechanism, you have to reshape the whole (financial) system,” he said.
However, the 58-year-old minister recognizes the importance of the government’s role in the market in times of crisis.
“If markets malfunction and players do not address the problem (through self-regulation), the government should bail them out. Once the government steps in, price is not the principle that rules the market. The government should play the role of Big Brother,” he said.
“This is risk management. In a situation of market collapse, the government should turn into main actors,” he added. “What is important here is that state intervention should be ‘quick’ and ‘resolute.’ Markets tend to rely on the government.”
Kim’s belief in free market capitalism may come as a big surprise for investors both at home and abroad as he has been known as a top policymaker with the most bureaucratic and regulated mindset.
He claims that his image as an “obstinate bureaucrat” has been due to the roles he served in the past. “I think people see me that way because I was often in difficult positions,” he said.
Kim played the role of firefighter multiple times whenever the economy and financial markets fell into trouble. He played key roles in several crisis situations, including the 1997-1998 financial crisis, the Daewoo Group debacle in 1999 and credit card fiasco in 2003.
The Kim’s stance on free markets may come from his confidence in the Korean economy. In his view, Korea is now in a totally different situation from 2008.
He stressed the Asia’s fourth largest economy is capable of withstanding any shocks from the outside, citing several key indicators measuring external stability, including ample foreign exchange reserves ($303.3 billion), lower short-term debt ratio (37.6 percent), a fall in banks’ short-term borrowing abroad and an improvement in loan-to-deposit ratios (97.8 percent).
“The epicenter of the problem is outside of the country but its impact can ripple through the local economy and markets. In order to prevent it, it is important to remove potential risk factors in a preemptive manner,” he said. “To that end, we have restructured savings banks and sought measures to address household debt issues while accumulating foreign reserves.”
Furthermore, Korea is on a much better footing than Western countries suffering from fiscal crisis, according to the lifetime bureaucrat, who spent most of his career in macro finance.
“Unlike the U.S. and European countries, Korea has more ammunition to fight. There is more room for the country to opt for fiscal and monetary policy tools in a more flexible manner,” he said.
“Although G20 countries seek policy cooperation to address debt issues, they are running out of policy options. In this regard, the ongoing crisis is expected to give Korea a chance to create opportunities for further growth.”
Handling of Lone Star case
Korea’s image as investment destinations has been in trouble over the past few years as the government has delayed the sale of Korea Exchange Bank (KEB) owned by U.S. buyout fund Lone Star.
The top financial regulator emphasized that the government has no antagonistic view against foreign capital, although there is very negative public opinion toward it, which many believe makes it difficult for the government to take positive action.
“I don’t think there is a distinction between good and bad (foreign) capital. Since we are an open economy, it is essential to ensure the free flow of capital. The focus should lie on strengthening economic fundamentals, (not controlling capital). It is wrong to criticize them because they are from abroad,” he said.
“For example, if foreign private equity funds cause trouble here, the government should seek ways to foster strong domestic players to compete with them. It is not desirable to control and set barriers on the outflow of certain capital. We should be more open to foreign capital.”
A lot of private equity funds abroad and many foreign companies have been frightened by the Lone Star case, and that’s had an impact on foreign investment coming into Korea. On Thursday, the Seoul High Court sentenced Paul Yoo, a former executive of Lone Star to three years behind bars for manipulating the stock prices in the Lone Star’s 2004 acquisition of KEB’s credit card unit.
“Private equities have both positive and negative sides. If they play within legal boundaries, we have to respond to them by enhancing our force,” he said, adding that artificial capital control may limit the further growth of the economy, which has grown through international trade.
Asked on how to handle the Lone Star issue, the chief regulator said that he will place a top priority on the law and principle.
“For an open economy, the most important task is equal treatment of both domestic and foreign capital. You have to maintain consistency when giving favors and imposing punishment as well,” he said.
“The law and principle are the most important factors to ensure equal treatment. I think that Lone Star should get equal treatment. Public opinion should not be a factor. (Creating a market ruled by) the law is the only way to sustain long-term market growth. I will not budge an inch on this principle.”