Financial Industry, Service Industries and Compressed

Growth

Financial Industry

Obstacles of Financing Economic Development

• Tight financial resources : Poor savings cannot meet the demand for investment.

• Deviation in incentives : Commercial banking pursues after short-term profitability of low risks, while government takes high risk with long-term benefit for economic development.

Basic Solutions

• Government increased money supply (i.e., forced saving) in order to acquire investment fund.

• Commercial banks had to be coerced to take high risk with long term benefit.

• Korean government took over the management of all private banks by a special legislation in early ’60s.

Government-Directed Credit Rationing 1

• Big portion of bank loans were directed to strategic projects without considering their short term commercial profitability.

• Favored loans were provided for restructuring troubled ventures.

• Bank loans had been extended not by commercial sense but by government plans.

GD Credit Rationing 2

• Failure of bank-financed projects created non-performing loans of non-negligible size.

• Commercial banks made use of timely stock market boom by issuing new stocks to recapitalize their financial accounts.

• All banks’ losses were also covered by increased money supply.

GD Credit Rationing 3

• Losses of banks had not been written off and remained as liability to the Central Bank in book keeping, even though the Central Bank would never demand its repayment.

Effect of GD Credit Rationing

• Succeeded in directing domestic savings into strategic projects.

• Supply side : Neither commercial mind nor advanced financial skill had been developed in commercial banking sector. Accumulated bad debts undermined the credibility of commercial banks.

• Demand side : Business sector became heavily reliant on governmental favor.

Financial Liberalization

• OECD membership required financial liberalization.

• Government formally repealed directed- credit-rationing, and disclosed banks financial accounts.

• Depleting foreign exchange reserves in 1997 undermined state credit and thereby credit rating of commercial banks.

Financial Liberalization 2

• Banking sector was unable to handle properly the financial crisis 1997.

• Critiques argue that Korean financial sector was not ready for full liberalization. Weak financial sector used to be a good target of Hot Money.

Financial Restructuring

• Immediate task : Closed down hopeless banks, and extended massive public lending to viable ones to take care of huge volume of non-performing loans.

• Long Term task : Extensive revision of financial regulatory scheme, and foster healthy units.

• Korea survived financial crisis of 2008 owing to Restructuring in late 1990s.

Service Industries

Service Industries

• What are services?• Classical economists’ view on

productive and unproductive labors.• Tourisms, Medical services, Educations. -Tourism : Luxuries. -Medical services and Educations : Basic

needs & Luxuries.

Tourisms

• Domestic tourism was O.K., but tourism to foreign countries was viewed as luxury and wasting of foreign exchanges.

• Golf was deemed as a sport for riches, and it was heavily regulated by high special taxes and strict control of golf course construction.

Medical Services

• Medical services are for basic needs, and therefore the fees were strictly regulated so that average layman may afford without difficulties.

• Hospitals aiming at commercial profit are not allowed so that domestic supply of high quality medical services is effectively banned.

• Plastic Surgery is an exception.

Education

• Equal opportunity for education is the fundamental principle for social justice.

• Does equal opportunity necessarily mean identical content of education to everybody?

• Korean government imposed equal education up to high school level by banning inter-school competition.

Economic Development and Demand for Services

• Successful economic development has raised people’s income.

• Higher income enabled people to demand high quality services.

• State regulation restricts domestic supply of high quality services. What then?

Let’s Go Abroad!

• Golfers went abroad on golf tourism, while foreign golfers avoided expensive Korea.

• Medical tour to foreign countries increased.

• Early study-abroad program is welcomed. 100 Korean students go abroad while 5 foreign students visit Korea. ※Wild Goose fathers.

Increasing BOP Deficit in Service Account

• Balance of Payment statistics (billion US$) 2003 2004 2005 2006

Current Account 120 282 150 61Commodities 220 376 327 292 Services -74 -80 -137 -188 • Major portion of trade surplus is offset by

service deficit.

Old Mind Faltering in New Age

• Many Koreans became quite rich, and their demand for quality services constitutes as big a market as an export market of some manufactured goods.

• But thrift-and-equality oriented mind of the past does not tolerate domestic activities to produce luxurious services, and leave the market to foreign suppliers.

Old Mind Faltering 2

• Thrift-oriented mind was essential in early stage of development, when domestic market was thin.

• Now income growth generated a strong demand for high quality services.

• Service industries are ready to serve as next stage strategic industries for further growth.

Examples of Medical Tourism Promotion

• Singapore’s Healthcare Service Working Group 2000 2002 2004

F. patients (1,000) 165 212 260Spending (mil $) 430 550 750• Thai aims at Healthcare hub and

deregulated medical industries.• Shanghai World Link Medical and

Dental Center invites first class MDs.

Compressed Growth

Korea in 1950s

• “It is much easier for you to see a beautiful rose making flowers in garbage field than to see democracy working in South Korea.”

• “The economic aid to Korea will have no target, since the natural environment is very much unfit to agriculture, and the work force is too unskilled for Korea to try any manufacturing industry.”

Aiming at An Advanced Country

• The successful industrialization has raised Korea’s GNI to about US$20,000-.

• Democratization has brought forth a government of the people, by the people and for the people at least in outlook.

• Is South Korea an advanced country?• What on earth is an advanced

country?

Social Services and Providers

• Each human society provides a variety of services to its members.

• Advanced societies provide services of high quality, tangible and/or intangible, while developing ones cannot.

• There are agents for each service provided, we call them service providers, who make decisions and actions on provisions of that service.

Less Developed Economies Are Provider-Centric

• LD economies lack qualified providers.• Poor provision mechanism –

institutions, custom, and culture.• Only a limited number of providers are

capable of providing services of poor qualities in insufficient amounts.

• Shortage of services strengthens providers’ power. Provider-Centric society.

Authoritarianism

• Providers’ power helps to build up their own authority in their own sectors, entrenching provider-centrism.

• Authoritarian ruling, not democracy, prevails in political regimes of most LD economies.

• Political authoritarianism is a representation of provider-centrism in political sector.

Provider-Centrism: Problems

• Providers dictate, and people (customers) follow.

• Services tend to be provided mainly at the providers’ convenience rather than for the improvement of people’s satisfaction,

• Providers’ tyranny may not be properly controlled as there are usually no practical alternatives.

continued

• Sometimes, the shorter and the poorer the services are, the stronger the provider’s authority becomes.

• Incumbent providers even tend to exclude the emergence of promising new candidates for providers.

Provider-Centrism : Examples

• Less efforts are spent to improve commodity qualities and AS is poor for the goods sold.

• Education is provided at the convenience of teachers rather than for the needs of students.

• School programs are needed not for study bur for degree. Degree matters in eligibility for positions of providers, capability not .

• Politicians buy votes cheap from voters, who have lost every hope, vision and enthusiasm in the future of their country.

continued

• Create and maintain a maximum number of regulations to entrench the positions of providers.

• Extra perquisites come in the form of briberies to buy favor from providers generate a variety of corruptions.

• A provider’s position is quite safe regardless of her/his performance.

How To Break Down the Provider-Centric System?

• General Principle : “If a provider is not acting properly, then replace her/him by an alternative.”

• There are two problems with the General Principle. The one is “How To Replace?”, and the other is “Is There Any Better Alternative?”

How To Replace Bad Providers?

• Providers belong either to the private sector or to the public sector.

• Marketization : Introduce competition among providers in private sectors.

• Governance : Establish a solid monitoring and rewarding system over providers in public sectors.

Market and Competition

• A provider-centered market is the monopoly-oligopoly market.

• Make sure that there be no unfair barrier to entry.

• Active competition will dismiss inferior providers and invite superior ones.

• Make up legal arrangements so that the market may remain ever competitive.

Governance

• Make the process of public providers’ decision and action as transparent as possible.

• Award appropriate prize for good performances and due penalty, including replacement, for bad performances.

Is There Any Better Alternative?

• The shortage of the qualified manpower constitutes the basis of provider-centered system.

• So when a provider is to be replaced, the replacement is not guaranteed to be any better.

• But only the belief that “Only Good Providers Will Retain Their Posts” will drive providers to improve their capabilities.

Present Status of South Korea

• Rapid growth of income empowered consumers to discipline providers in private sector.

• Globalization has opened markets for foreign providers.

• Providers in service industry still retain provider-centerism owing to heavy regulation.

continued

• Democratization has demolished authoritarianism in public sector to a substantial degree.

• But governance system is not ready yet.

Traditional provider-centerism coexists in mixture with amateurs, who are temporary replacements, wielding power.

• Transitory chaos.

From Hungry Society to Angry Society

• Rapid change challenges vested interest every moment.

• Everybody in keen to defend his own interest in confrontation with everybody else.

• Everybody is angry now despite that they are not hungry any more.