Specter of 'Mofia'
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By Park Yoon-bae
A recent controversy over the appointment of former finance ministry officials as financial group CEOs reveals how entrenched government control has been in the banking sector.
The controversy erupted when BS Financial Group Chairman Lee Jang-ho resigned this month, allegedly giving in to pressure from the Financial Supervisory Service (FSS).
The FSS denied the allegation that it pressurized Lee to quit his post so he can be replaced by a former bureaucrat or a politician who is close to the inner circle of the power elite.
However, the regulator has drawn criticism for allegedly meddling in the management of the Busan-based private financial holding firm.
The episode is not an isolated case. The criticism has since grown following the nomination of two former ranking officials to take the helm of the nation’s two major banking groups.
They are former vice finance and strategy ministers Lim Young-rok and Yim Jong-yong, who were appointed as CEO of KB Financial Group and Nonghyup Financial Group, respectively.
Members of the KB labor union are blocking Lim from entering the group’s building in downtown Seoul, in protest against the so-called Mofia who they claim is trying to control the banking sector.
Mofia has already become a household word in Korea, implying bureaucratic control of the financial sector. It is a combination of MOF (the Ministry of Finance, the old name for the Ministry of Strategy and Finance) and the mafia.
It is often used derogatorily to describe how appointees “parachuted” by the ministry behave like the mafia by exploiting their shadowy connections with bureaucrats, politicians and bankers not only to enforce government control on financial firms but also to maximize their self-interests and influence.
What’s more serious is that the bureaucratic control is so widespread that even regulators and policymakers do not recognize the serious danger that poses to the health of the nation’s banking and finance industry.
Cho Won-dong, senior presidential secretary for economic affairs, went so far as to say that there is “good government control” in the industry.
There is no doubt that any type of government control on the private sector can be detrimental to the market economy.
Cho had better realized that government control or bureaucratic control is not a matter of good or evil. It is only evil that should never be masked by the nonexistent “good” aspect of Mofia.
Of course, his remarks might be intended to insist that retired officials, if qualified and competent, be allowed to head banks and other financial firms.
But the problem is that too many Mofias are taking the top positions of the banking industry. Their numbers currently account for 50 percent of CEO positions at 26 banking institutions, including financial groups and banking associations.
It goes without saying that government control does more harm than good as it runs against free and fair competition in the private sector.
In particular, government control of the banking sector is all the more serious because it can result in the misallocation of capital.
History shows that many affiliates of family-run conglomerates have had easy access to bank loans, while small- and medium-sized enterprises have not.
South Korea has a long tradition of government control of banks which was seen as inevitable to achieve rapid economic growth in the 1970s and 1980s.
Despite the deregulation of the financial industry coupled with globalization in the 1990s and 2000s, the government has yet to give up its control.
It is hard to expect the development of the financial sector as long as the government keeps its hands-on policy.
President Park Geun-hye is pressing ahead with her ambitious campaign pledge to usher in a “creative economy.”
It is still unclear what the creative economy is like. But maintaining government control on the private sector is not likely to help Park make good on her promise. Rather, it would stifle creativity without bringing vitality back to the economy.
No one except bureaucrats and regulators wants to be haunted by the specter of Mofia.