Korea Times has admitted the obvious;
The government unveiled a series of ambitious measures to turn the country into an international financial center over the past few years but the hub dream has become a hollow slogan, many international analysts say.
But the Korean government isn’t giving up;
On Wednesday, the government announced the latest steps in its bid to achieve the financial hub plan, including providing tax breaks to promote mergers and acquisitions (M&As) between financial companies.
Among the measures are allowing the establishment of hedge funds and scrapping all regulations governing private equity funds (PEFs) by 2012. The government also said it will overhaul supervisory rules on the financial market to be on a par with those of advanced countries.
It plans to make things easier for financial firms to seek expansion through M&As and become internationally competitive investment banks with the Capital Market Consolidation Act, which is scheduled to take effect in 2009.
But despite its best efforts, there’s a long way to go;
Frederic Neumann, chief Korea economist at HSBC, said the capital market integration is only a first step towards the development of Seoul as a financial hub.
“The country faces a number of challenges, which make it unlikely for Seoul to rival other financial centers, such as Hong Kong or Singapore, any time soon,” he said
And there’s Lone Star;
He noted that the best negative example is regulators’ probe of the legitimacy of Lone Star’s takeover of the Korea Exchange Bank (KEB) in 2003.
“Through this incident, the international community thinks Koreans believe that non-Koreans making money in Korea is like committing a crime, which drives away potential foreign investors.”
Also, Henry M. Seggerman, president of International Investment Advisers, said foreign financial institutions are doing business to make profits, adding that Lone Star did a huge favor for the Korean people by bailing out the KEB.
“As long as the Lone Star investigation, attempted extradition and prosecution continue, Korea’s financial hub initiative is impossible,” he said.
In addition to the anti-foreign investor sentiment, there are some fundamental issues that Korean needs to address, if it wants to become a financial hub;
“Foremost is the supply of a larger pool of skilled professionals, fluent in English, that can help Korea win business from other financial centers. Also, comparatively high tax rates may be one of the barriers that could be addressed by authorities, as they represent one of the disincentives for the immigration of expatriates,” he said.
This begs the question, does Korea really need to be the hub of everything in Asia?
23 Comments
While the Capital Markets Consolidation Act will not make Korea a financial hub, it is very likely to have serious and unpredictable effects in the local financial services industry.
Some of the measures sound good, but not opening hedge funds in Korea, that’s bound to be abused.
Most foreigners with any experience in Korea were mocking the Hub bullshit from the first day it was announced.
Example #367,921 of an instance where a small dose of reality from someone outside the Korean Kluster of Kool-Aid Drinkers could’ve saved the government an assload of time, effort, and money.
Maybe it wants to be the hub of jailed foreign financial execs. It just can’t keep the Korean ones locked up.
Ah yes IHBB…. so would Korea’s delusions of grandeur of building POSCO out of nothing be example #5 (if your list of examples were in chronological order)?
Every beginning to an ambitious goal has to have a plan that dares to be great. Sometimes that plan is flawed… sometimes it doesn’t make the best sense, but at least there is a willingness to try.
Lots of countries end up doing nothing and planning nothing and end up with life expectancies 15 years shorter then Korea’s and lower national wealth.
They are about 4 years behind the Financial Times if hedge funds are a major policy goal. That bubble done been burst.
Korea, and specifically Seoul, will never be a financial hub for the simple reason that Korea is a deeply miserable place to live. FH’s depend on what the Singaporeans call “foreign talent”. Hogwon cowboys do not count. Finance professionals (not named Kim or Lee) will very simply not want to live in Korea. End of discussion.
Seoul can not compete with Tokyo, Singapore, Hong Kong or Dubai for quality foreigners.
Koreans, like the Japanese don’t have a lot of experience in building value. They have tons of experience in building scale, but not necessarily value. Plus, there is a lack of interest in running a business for the pure benefit of the bottom line.
Western financial services, particularly Hedge funds and private equity requires a willingness to view economics differently then modern East Asian countries currently view it. That’s why they have problems doing so. Private equity look at the all important IRR or Internal Rate of Return of any investment. Koreans and Japanese are not really trained to think like this. Their big conglomerates have been built with public money with no concern for shareholder rights or IRR.
WangKon936,
There is a pretty big difference between your example of POSCO and the hub blather…at least on the surface.
I don’t know a lot about it but it seems like the main difference between the ‘old’ big plans and the ‘new’ big plans is that the actions in the past supported the words - they did not contradict them.
“Through this incident, the international community thinks Koreans believe that non-Koreans making money in Korea is like committing a crime, which drives away potential foreign investors.”
NO! say it ain’t so! Do we believe this? REE OO WEE?
Why would we think that?
# 8, I have to disagree with you. POSCO as well as Korean ventures into ship building, cars and consumer appliances did have it’s ups and downs also. It wasn’t always known if these entries would be successful in the scale they are today until decades later. Even if they enjoyed a measure of success, eeryone was always convinced that the Koreans would stay at the lowest price and quality points.
No one would give Korea financing for POSCO. Build a huge steel factory in the middle of no where? No one believed in the Koreans. The World Bank even politely declined. So the Koreans used the money they got from normalizing relations with the Japanese to build POSCO. No one but Koreans themselves, believed they could do it.
However, building up industry requires a vastly different skill set then building up the financial service sector. Giving cheap money to industry in both Korea and Japan has created an extremely underdeveloped financial sector.
There is a Japanese private equity fund in the states called Red Diamond Capital. Given that operating and buying companies in Japan is so hard, Mitsubishi has decided to create a private equity fund that will do most of it’s M&A activity in the states. This is a Japanese experiment that may expand if Red Diamond is successful.
I have to side with WangKon in general here. Korean and Japanese companies initiated what Harvard Biz school wonks later spun into the theory of ambitious benchmarking. Of course we usually never hear when this fails to work, but we do hear about the Posco’s, Hyundai shipbuilding’s, Toyota’s, etc. that it DID work for.
The Posco story he told is true, the plan (and Hyundai Shipbuilding’s initial business plan too, incidentally) was scoffed at and mocked by every foreigner who heard of it, and well well well if it is not dancing on the graves of US Steel, Algoma Steel, et al today. Long and valid denunciations of the protectionism involved you may give, but it is still here and thriving.
Another story is the Park govt’s insistence on building an integrated machine tools complex - absolutely derided by every foreign expert as crazy and unnecessary, and why didn’t the Koreans just buy machine tools from more developed nations etc etc…. Park and Korea said screw that, and that complex turned out to be the unsung backbone of all sorts of Korean industries for 2 decades. Thailand and Indonesia followed the foreign experts advice. Who has a developed industrial base now? Uh huh.
The financial hub idea and assorted supporting actions will not happen, I am pretty sure, but I give it to the Koreans for at least having a (half-hearted?) go at it. What ambitious plans for the future does the Canadian govt come up with? Zip. They sit in Ottawa with their thumbs up their butts while the entire East coast has been poor for 4 generations. “Uh, see, our plan is to increase the pogie checks, eh?”
The Koreans have tried and failed with this financial hub thing, but they have improved their financial sector somewhat in the process, and who can say if another attempt 5 or 10 years from now might not build on this failure? At least they fail big, and at least they try, is what I’m saying.
And I forgot to add, this miss with the financial hub thing shows the clear difference between when Park ChungHee said something was going to happen, and when Noh MooHyung says something is going to happen. One is a man who got things done, the other a boob who snivels publicly how hard his job is.
I see what you guys are saying but I suppose I did not make myself clear.
Those stories were domestic industries strongly backed by the government and the people - a financial hub is a far cry from that. The governments (and the peoples) reactions to the Lone Star case give a pretty clear indication on where they stand.
Unlike the cases you mentioned, the governments actions just don’t seem to jive with Korea becoming a financial hub.
Once again correct me if I am wrong as I do not have a lot of information on this.
Hugh had some interesting points. I think the difference between Korea’s industrial development and it’s financial development is fundamental — you can have “Korea Inc.” and a limited version of juche to build up your industries. But to become a “financial hub” requires the free movement of capital. So, unless Korea opens many more doors to the financial markets, it simply cannot happen and that would be true of anywhere, not just Korea.
Mr. Goat,
Yes, I agree that the government failed to carry out the hub plan. Their own actions undercut it. A botched job, but I was trying to say the whole thing should be understood in the Korean and Japanese tradition of benchmarking the best and striving for seemingly unattainable targets. Leading business administration professors argue that this trait is one reason for some of the startling successes they’ve had. Who would have imagined 20 or 30 years ago that Toyota would be annihilating Ford and GM, that world companies would be buying their chips from Samsung, etc?
I give them the nod for trying, comment that under a more competent Korean government it might have worked, and point out that that it while it is easy for us to laugh at ambitious plans, at least they have them and damned if one out of 5 or 10 (dunno) don’t actually happen. I wish my own government would do more of this kind of forward economic planning, frankly.
I think the examples are valid, to build a steel or shipbuilding industry where only farmland stood is equally (or arguably more) challenging and far-reaching than taking a financial industry from a domestic orientation to an international outlook.
Honestly, meanspirited as tambe’s comments are (Korea’s not that miserable, unless you’re a miserable person yourself), the real reason the “financial hub” idea can never fly is that Korea’s rulers have a profound need for deep control, especially over foreigners but also over all (lucrative) aspects of domestic society too.
The financial-services industry is a creature of the Anglosphere — its “talent” generally speaks English as a native language, and its legal framework is based on the English common law. There’s a signal reason that Hong Kong and Singapore are financial-services hubs: They were British colonies, and have common-law legal systems and domestic supply of English-speaking personnel. You might notice both places have a reputation for law-and-order, transparent and reliable enforcement of laws, and a low level of graft. Plus neither Hong Kong nor Singapore abhors the entry of foreign businesses or foreign individuals. Where are the other global financial hubs? Oh yeah: New York and London.
Give ‘em an English common-law based legal system, enforce laws reliably, produce a steady supply of English-speaking support staff, let the foreigners in and then leave them the hell alone. Be happy to collect tax on their operations but keep your nose to yourself. That’s the recipe for a financial-services hub.
Korea cannot do this. Thus it cannot now be, and never shall become, a financial-services hub.
Brendon brings up a good point, although he sort of spoils it by making an absolutist claim at the bottom. Personally, I’m never confident in making such statements and it risks making a smart person sound closed minded and inflexible.
Anyways, I’d also say that “Anglosphere” does not have a monopoly of the higher levels of the banking industry as the size and success of Deutsche Bank (German), Bank Paribas (French) and UBS (Swiss) would attest. However, English common law and its protection and recognition of real property, incorporeal property and intellectiual property, does give financial insitutions the edge when spreading their wings. Also, English is the universal language in the financial world and American GAAP accounting standards are the preferred method of evaluating financial performance.
“Give ‘em an English common-law based legal system, enforce laws reliably, produce a steady supply of English-speaking support staff, let the foreigners in and then leave them the hell alone.”
I’m not sure this is the place for this discussion, (maybe worthy of a separate post on your new blog?) but this is something that’s been nagging at me for a bit. I think we can all agree that reliable enforcement of laws, transparency, and minimal corruption are good things, but considering that it would be well nigh impossible to change an entrenched legal system overnight, why would you prescribe a change to a common law system or necessarily assume the superiority of English common law?
If we were talking about specific deficiencies in Korea’s legal system I would understand, but would you be making the same observation if you were in France, Germany, or Japan (the other mature world economies)? Or would they too have to go to the lengths of Dubai, which is groundbreaking and very impressive but difficult to imitate on a larger scale or at all? Sperwer posted a comment in a similar vein on the bar exam thread, and as someone who’s never been able to directly contrast and compare I was wondering why he felt that way. Perhaps it might be due to people posting here mostly being from common law jurisdictions and (subconsciously) displaying a hometown bias. Or maybe the dominance of American firms in international commerce and finance makes them favor a uniform set of Anglo-American “rules” as opposed to necessarily having a common law “system” in all countries but a clear distinction hasn’t been drawn between the two. If that’s the case, then there’s a continuing trend of “rules” convergence going on in the area of commercial law, which might pay off in the future as the kinks get worked out. If the common law system is clearly superior and desirable, however, then that suggests that no amount of enlightened legislation or judicial competence is going to make a civil law jurisdiction attractive to international financial institutions. I’m aware of the law and economics literature on common v. civil law, but let’s just say I’m not yet wholly convinced on that point and would appreciate from perspective “from the front lines” as it were.
By the way, a commercial law prof at SNU finished off his last semester’s classes by remarking that it had been convincingly proven that common law is superior to civil law and that the persons responsible for the research would likely one day receive Nobel prizes. (He continued on to emphasize the importance of the judiciary and hence the education they receive and the awareness they have of the international impact of their decisions.) Like I said, I don’t necessarily agree, but it was pretty shocking for a classroom full of Korean law students to hear. Another reason this issue piqued my interest.
Oh, and I’m also looking forward to your inevitable (I hope?) post on the introduction of the law school system in Korea
My hometown of St. Louis has no deep-sea fishing industry. There is no ocean near St. Louis, so we don’t go to sea in boats. Not because the people in St. Louis are incapable bumblers, but because the environmental conditions aren’t correct. It would therefore really be dumb for St. Louis to pursue a strategy of becoming a hub of deep-sea fishing.
My thesis is that it’s no accident the English-speaking world produced the financial-services industry, and dominates it today. Yes, there are French, German, and Swiss financial-services giants, but as they globalized, those businesses have been inexorably drawn into — and become staffed by — the Anglosphere. Especially Deutsche Bank. That place is full of Americans and Englishmen now, but hardly any Germans.
By the way, St. Louis is also an example of an economy that has endured long-term, seemingly unstoppable, decline after a period of high growth and greatness. It was once America’s “second city” and had a very large number of Fortune 500 companies headquartered there. Why did St. Louis fail? Because nearly every decision the city fathers have made since 1850 has been wrong, wrong, wrong. Yet every one of those decisions “felt right” to them at the time, but around the time of the Great Depression all those mistakes starting coming home to roost. By the 1980s those Fortune 500s were all either clearing out of town or became acquired by more dynamic companies elsewhere. Manufacturing left too. From my perspective, Korea faces the same danger.
I mostly agree with Mr. Carr.
There is a vast difference between the homegrown “economic miracles” during President Park’s rule and the desire for Korea to be a major financial hub. In the former, a strong spirit of nationalism helped fuel the determination and energy necessary to accomplish such miracles as a home-grown steel industry and heavy machine industry , and tool industry.
More importantly, Park’s strong and centralized rule swept aside dissent and made sure things happened, for better or worse.
However, in the case of striving to be a financial hub, quite different national traits are necessary to accomplish such a feat. Specifically, openness, transparency, and as such, a lack of xenophobic nationalism will be necessary for Korea to have a foundation and trust and fair treatment of foreigners and foreign capital in order to have a strong financial sector.
I applaud Korea for striving to move in this direction, but major societal, law, and governmental changes - far exceeding those during the Park era - will be necessary to accomplish such an audacious goal. Korea has yet to even begin in earnest to move in this direction and rather seems to be happy to move in the direction of driving foreign capital away from Korea:
“Through this (Lone Star) incident, the international community thinks Koreans believe that non-Koreans making money in Korea is like committing a crime, which drives away potential foreign investors.”
Cheers,
David
It’s a shame that the repercussions of the Lone Star incident and its ilk is not better appreciated in Korea.
i.e. - You can’t throw a party, accept all the gifts, tell your guests to go home without feeding them, and then expect guests to willingly come back for the next party.
The ROK has to look no further than just across the border at the DPRK to understand what it’s asking for - financial isolation. Does South Korea really want to be isolated from international finance ? It’s sure acting like it does.
The key change Korea needs to make is also the one that’s impossible: Move away from the government reserving to itself control over everything. Deregulate. Are we seeing many signs of that happening?
In principle, under Korea’s civil-law system all that is not expressly authorized by law is forbidden — the so-called “positive list” principle. It puts everyone in the position of a supplicant seeking license or permission to do anything. By contrast, English common-law systems — especially the American — limit the power of the ruler by reserving to the people all powers not granted to the state. That which is not expressly forbidden is therefore implicitly authorized.
That principle is the keystone of modern, prosperous, free society. It’s also why the good English common-law systems (I’m not talking about Nigeria here) have much lower levels of official graft and corruption — there is less power reserved to officials who might be tempted to turn their licensing power into a money-maker.
One Trackback
[...] new poster here Minso beat me to a delightfully skeptical Korea Times piece about Korea’s renewed mission to become a [...]