Power game sprouts in Seoul over G20 summit

Finance ministry officials piqued by Sakong Il’s command

By Cho Jin-seo

Power games between economy-related agencies are becoming more apparent, casting doubts on whether Korea can handle the heavy financial reform agenda at the G20 Seoul Summit.

Academics blame an escalating turf war between the central bank and financial regulators for making it more difficult to implement efficient macro-prudential policies. And a rift is developing between the finance ministry and the G20 preparation committee on which of them would deserve more of the credit once the summit successfully ends in November.

Sakong Il, the chairman of the G20 committee, and Yoon Jeung-hyun, the finance minister, have not been so amiable in recent weeks, people who know them well have commented. Sakong is leading Seoul’s efforts to host a milestone summit this November, yet the people at the finance ministry are not very pleased by the way he handles the publicity.

“Though Sakong is the person in charge of preparations for the summit, all the hard work is being done by the people at the finance ministry because 90 percent of the G20 agenda concerns financial system reform,” a high-level official said. “But somehow the G20 committee thinks they deserve most of the credit, and they may even lead the president to think so.”

The official points out how the committee chairman insisted on being in a group photo of ministers and chief negotiators of the G20 countries at the Busan ministerial meeting in June, in the place of Korean minister Yoon.

Sakong is 70 years old and known to be a close friend to President Lee Myung-bak. He himself was the finance minister during the 1980s when the current minister Yoon was only a junior manager of the finance bureau, so now the two avoid meeting each other because of the ambiguous hierarchy between them, people from both sides say.

Such personal matters can complicate public affairs. At a recent conference hosted by a major newspaper here, Sakong and Yoon baffled the protocol managers with fussy requests. “The most important mission for me was to avoid the two meeting or seeing each other, while making them feel that each was getting more respect than the other,” a conference host said.

People at the G20 committee in turn blame the finance ministry for their lack of international networking, where Sakong excels. Without him, Korea could not get the support from internationally influential figures such as Larry Summers, the head of the White House’ economy team, and Dominique Strauss-Kahn, the head of the International Monetary Fund, for the summit, they argue.

BOK vs. FSS

While the finance ministry is engaged in a sorry game with the G20 committee in international matters, it is the central bank and financial regulators who are failing to cooperate in national affairs.

Academics began to raise their voices that they are failing to achieve the common goal of financial stability and their “territorial behavior” will be a risk to the economy when the next crisis hits.

“Managing system risks requires harmonized efforts between the various regulatory authorities including the treasury, the central bank, and the financial supervisory authority. However, they reacted extremely sensitively to any attempts they think will encroach on their territory,” Park Chang-gyun of Chung Ang University said during an international economics conference last week.

“Of course, this behavior is a common phenomenon in the realm of bureaucrats. But the Korean financial regulatory system is a very typical example of this,” he adds.

Ham Choon-ho of Yonsei University agrees. “In this system, no one wants to take responsibility for policies,” he says.

The scholars are upset because of the bureaucratic scuffle between the Bank of Korea (BOK), and the Financial Supervisory Service negatively impacts Korea during the financial crisis.

In dealing with the crisis, the BOK demanded the FSS to give them access to the supervisory information of banks and other financial institutions, claiming that they are necessary for the smooth operation of its monetary policy. The BOK has the right to ask for the information, but the access is hampered by the conditions attached and the non-cooperative attitude of the FSS, they complain.

The FSS, on the other hand, accuses the BOK of demanding too much information, with an ambition to share the power to supervise and regulate banks along with the FSS. The central bank used to perform the role until a major restructuring of government financial arms in the late 1990s (see the table).

The access to micro-level regulatory information on banks is critical territory for both the BOK and the FSS, since it gives them enormous power over the banking industry. With a modest salary, government workers often feel financially deprived in comparison to their friends in the financial industries, and they tend to seek compensation by pursuing power. Both organizations know this very well, and are not willing to share it with each other.

“In the case of this power struggle, it is the lawmakers’ job to settle the dispute. But even the National Assembly was divided into two opposing groups. The groups were formed not according to party lines but congressional committees,” Park says, explaining that all members of the assembly’s Strategy and Finance Committee supported the BOK, while all members of the State Affairs Committee supported the FSS.

“Most agree that the amendment is now dead, and the BOK should wait for another financial crisis to revitalize the issue,” he says.

This kind of non-cooperation could have brought about disaster, as it has in the past. After the Asian financial crisis of late 1990s, the government allowed credit card firms to offer plastic to people with no or little credit to boost economic growth. In the process, there was little discussion among the central bank, the finance ministry and regulators, leading to a debt bubble that burst spectacularly in 2003.

Systemic collaboration is needed among government agencies in order to prevent such disasters, but the two scholars, Park and Ham, differ in their solutions to moderate the territorial behavior syndrome. Park suggests the establishment of an independent panel of outside experts and scholars, just like the United Kingdom and the United States did during the recent crisis.

Ham, on the other hand, prefers to solve the issue from inside the government. His idea is to establish a pan-government panel of all related parties, and under the name of Macro-prudential Economic Policy, or such, and let it make decisions on who should help who and how.