Korea Should Open Wider, Deregulate Further
By Kim Jae-kyoung
Staff Reporter
Following the Wall Street crisis, Korean policymakers are facing a dilemma in their drive to liberalize Asia's fourth largest economy, as many argue that U.S. investment banks, the icon of American capitalism, collapsed as result of excessive deregulation.
They stressed that since the demise of U.S. investment banks has exposed key flaws inherent in the system, the government should put a halt on, or at least slow down, its liberalization drive.
However, a noted economic and financial market expert said that Korea should open wider and deregulate further to weather the current financial turmoil and rev up its economy.
``I would say that in this globalizing era there is no going back to closing our doors to the outside world,'' Seoul Financial Forum Chairman Kim Ki-hwan said in an interview with The Korea Times. The SFF is a non-governmental organization composed of top finance experts from around the country. Its goal is to transform the nation into a financial hub in Northeast Asia.
``If anything, we should open our doors even wider. There is nothing as dangerous as protectionism in any guise these times,'' he added.
Regarding the model for financial development, Kim said, ``What we Koreans should pursue is a universal banking model.''
``Indeed, Wall Street itself has already chosen this direction as Goldman Sachs and Morgan Stanley decided to become commercial banks as well,'' he added. Global finance is now entering a new era in which universal banks ― those combining investment and commercial activities ― will rule the global financial economy.
U.S commercial banks such as JP Morgan Chase and Bank of America or Barclays of the United Kingdom purchased some of the distressed investment banks. As commercial banks, they have a deposit base. In other words, they do not need to leverage themselves so much.
But he did not agree with the view that the demise of U.S. investment banks signals the end of American finance capitalism. ``Investment banks represent an important part of the U.S. financial sector but by no means do they represent the entire sector. Hence pronouncing an end to U.S. financial capitalism is premature,'' he said.
Asked why the local currency market is more susceptible to external shocks than other markets, the global economic expert cited two factors ― a trade-dependent economy and a misguided foreign exchange policy.
``The Korean economy is a very open and highly trade-dependent. This means we need to do more trade financing than other countries. Also some of our major exports, particularly ship-building, require us to rely more on forward markets than otherwise,'' he said.
``In addition, some of the volatility in our markets in recent months has had a lot to do with a lack of transparency and consistency in our own policies,'' he added. ``A case in point here would be the misguided foreign exchange rate policy in favor of cheapening the Korean won in the first few months of the current administration, which was followed by attempts to smooth out fluctuations in the won-dollar exchange rates by clumsy market intervention.''
However, he countered the argument that local banks are exposed to a high risk of foreign liquidity problems due to heaving overseas borrowing, saying, ``Even in the case of short-term liabilities, Korea's claims over the rest of the world substantially exceed its liabilities.''
``In addition, some 35 percent of Korea's total external liabilities are of a self-liquidating nature because that portion was incurred either for hedging purposes or received in the form of advance payments in the case of ship building,'' he added. ``In short, Korea's short- and long-term borrowings have been by no means excessive and they are quite manageable.''
Kim said that while financial markets remain highly volatile, Korea's economic fundamentals are still sound, citing robust export growth.
``Although the Korean financial sector has already been affected very much by the developments abroad, the real sector economy is still quite healthy,'' he said.
He pointed out that export growth in September was roughly 29 percent up on the same month last year, which was higher than the average export growth rate of about 23 percent over the January-September period
Regarding the nation's stalled financial hub vision, he emphasized that Korea should continue to push ahead with its vision to become a new international financial center in Northeast Asia.
``The current difficulties on Wall Street and elsewhere do not mean that the world does not need a sophisticated, efficient and stable financial system. If anything, the world needs such a system even more especially now that it is facing difficulties,'' he said.
``It has also been my position for a long time that without a sophisticated and efficient international financial center in the region neither Korea nor the rest of Asia will be able to continue with their high growth,'' he added.
Kim said that South America well exemplifies the importance of an international financial center.
``The region to this day has no international financial center to speak of. As a result, it has recurrently run into financial crises due to the so-called three mismatches ― currency, liquidity and capital structure,'' he said.