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By Kim Jae-kyoung
Staff Reporter
Korea has been backpedaling on its financial liberalization as the government has been increasingly stepping in to financial markets and transactions to control the free flow of money.
The government's backward move has been clearly witnessed in a couple of key cases associated with its attempts to keep the local currency lower to boost exports, to control the banks' short-term offshore borrowings and to stop Lone Star from selling the Korean Exchange Bank (KEB) and leaving the country.
With recent moves by the government reminiscent of administrative mismanagement during the 1997-1998 financial crisis, concerns are brewing over whether its series of steps may put the economy in a dire situation, bringing the nation's financial hub vision to naught.
One of the more vocal experts hostile to the government's backward move from financial liberalization is Kim Ki-hwan, chairman of the Seoul Financial Forum (SFF), who says that the government is going back to the 1970s and 1980s.
The SFF is a non-governmental organization composed of top finance experts from around the nation. Its goal is to transform the nation into a financial hub in Northeast Asia.
``I think the current economic team has mixed up short-term economic management with the long-term one. They seem to believe that boosting exports through intervention in foreign exchange market is everything in economic growth,'' Kim said in an interview with The Korea Times.
``The current economic team's stance on exchange rate is carrying me back to 1970s or 1980s,'' he added.
Strategy and Finance Minister Kang Man-soo and Vice Minister Choi Joong-kyung are the main control tower of the nation's economic and financial policies, and they are the two key hawkish policymakers in the forefront of the backtracking.
The two top-ranking officials are known interventionists, who believe the government should play an active role in interest and foreign exchange rate mechanisms.
Since they took office in March, Kang and Choi have kept saying that the government will tolerate the depreciation of the won against the dollar and may intervene in the foreign currency market, if necessary, to keep the won's value low.
They said the weaker local currency is necessary to boost exports and improve the country's current account balance, which has posted deficits for the past five months on surging oil and other raw material prices.
Kim, who is also an international advisor to Goldman Sachs, severely criticized them for mishandling foreign exchange policies, saying, ``Their foreign exchange policy is nonsense.''
``They said the weak won will boost exports, improve the trade balance, increase growth rate and generate more jobs. But that mechanism does not work under current technology-intensive economy,'' Kim said. ``Exchange rates should be determined by market principles.''
He explained that using the exchange rate as a policy tool to boost exports was effective when Korea produced shoes and textiles. However, now the products are technology-intensive, which means that cheaper prices do not give as much a competitive edge as before, he added.
The exchange rate for the won against the dollar fell to 900.7 won on Nov. 2, 2007. Since then, the rate has been rising ― to 1,029.2 on March 17, peaking at 1,049.6 won on May 8 ― losing 113.8 won in value from the yearly low of 935.8 won on Jan. 15.
Despite the government's determined efforts to improve the current account through a weak won policy, the nation's balance of payments has shown little signs of a turnaround, an indication that the government has wasted taxpayers' money for nothing.
The current account is expected to be in the red in May for the sixth consecutive months. Imports amounted to $25.06 billion for the first 20 days of this month, surpassing exports estimated at $20.66 billion during the same period.
Kim pointed out that the Bank of Korea should be a partner for the government in foreign exchange policy but nowadays the government is trying to put the central bank under its authority.
Korea Needs to Quicken Financial Liberalization
``The government should pay attention to relations between governments and central banks in other countries. The two parities are supposed to share concerns over the economy and markets and to put their heads together for the best solution,'' he said.He continued to say that only the Korean won is losing ground against the U.S. dollar while most other foreign currencies are strengthening against it, which suggests that the recent weakness is not a natural phenomenon.
Another attempt to control the financial market was seen in its move to curb rising short-term debt in the banking sector. As this external debt continued to rise, the government took a number of direct measures to curb offshore borrowing in 2007
``The government's measures undermined the credibility of the earlier policy of liberalizing foreign exchange controls on capital account transactions,'' he said. ``The measure for all practical purposes failed to achieve what the government wanted.''
As a result of the direct measures to restrict offshore borrowings by foreign bank branches, the onshore-offshore basis swap rate differential has widened and created new offshore arbitrage opportunities for offshore investors.
To the extent that offshore investors have purchased short-term Korean won bonds, this has translated into an increase in the short-term external debt position of Korea, the very outcome that the government has been trying to avoid.
Drawing a deep sigh, Kim cited the Lone Star case as another good example of the government's attempt to control the free flow of money, saying, ``The case is the incident that has given the biggest damage to the nation's credibility on the global market.''
``The policy preventing Lone Star from selling its shares of KEB stems more from an emotional reaction of trying to prevent Lone Star from earning any profits on the sale of its shares than enforcing any provisions of Korean law and protecting the interests of financial markets or other shareholders of KEB,'' he said.
`` Lone Star has the legal right to sell off KEB and leave the country with profits under the bilateral treaty obligation,'' he said. ``In this regard, I think that the government's move associated with the case is another attempt to control the free flow of money.''
He pointed out that Lone Star didn't pay taxes because of bilateral double taxation avoidance treaty, noting that unless the government revises the treaty, the government should respect the treaty obligation.
Kim expressed special concerns over the Lone Star case, saying, ``Rightly or wrongly, this issue has grown to become a key focus of attention for existing and potential foreign investors in Korea.''
``In the minds of foreign investors, the case has created the strong impression that Korea is inconsistent in its policies encouraging foreign investment and enforcing its laws on foreign investors,'' he added. ``The perception among most foreign investors is that foreigners are welcome in Korea as long as they do not make too much money.''
He cited the Lone Star impact as the most important reason for the steady decline in the inflow of direct foreign investment since 2004.
Kim emphasized that in order to become an Asia's financial hub, the government, first of all, should give up its current outdated economic management and adopt a market-oriented policy.
``The nation should shift the government management philosophy to facilitate the needs of the industry instead of dictating its evolution, while changing financial regulations and supervision from a rule-based to a principle-based approach,'' he said.
``Also, the nation should remove all foreign exchange restrictions on capital account transactions as soon as possible,'' he added. ``Most importantly, the government should permit Lone Star to sell KEB at the earliest possible date to regain its reputation as a country ruled by the law.''
kjk@koreatimes.co.kr
