[OUTLOOK]Transparency: It’s Korea’s ace

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[OUTLOOK]Transparency: It’s Korea’s ace

Recent Korean visitors to Washington have brimmed with enthusiasm over the possibility of a new international financial service center in Korea, perhaps amid the growing cluster of foreign investment in Incheon.
As it happens, however, the Incheon/Seoul area is not the only location in northeast Asia with hopes of becoming an international financial center.
Both Shanghai/Pudong and Beijing have such hopes, and, of course, Tokyo already is the world’s third largest financial center, after London and New York. In addition, Hong Kong and Singapore already are important Asian financial centers, and would like to expand. So there is a lot of competition.
Given this, does Incheon/Seoul have much chance? To be honest, many analysts see the Korean candidate as the long shot in this particular horse race.
One factor against it is that it does not have a long history as a financial center, unlike some of the alternatives. Furthermore, Korea is relatively small compared to its neighbors, and major financial centers tend to be in large, economically dominant nations.
Thus, for example, London rose to financial prominence more or less in tandem with the UK becoming the world’s dominant economy at the time of the Industrial Revolution, and New York’s rise paralleled the growing world role of the U.S. economy.
However, a long history is not always a requirement for preeminence in an economic activity. Until about 30 years ago, for example, Korea had no history as a steel-making country, as a builder of ships, or as a center of electronics and information technology, and yet it is at the leading edge of all of these sectors today.
Korea does have some factors in its favor. For example, the latest and best information technology is necessary for the infrastructure on which financial services are conducted, and Korea is a world leader in this technology. And the highly successful opening of the international airport at Incheon has made the whole metropolitan area highly accessible as a location for business operations.
However, it must be noted that these advantages are not unique to Korea. Both China and Japan have sophisticated information technology capabilities, and Shanghai/Pudong opened a large airport a few years ago.
Korea’s leaders wisely recognize that, to become a financial center, Korea must be open to the establishment of major operations by foreign investors in the financial services sector. Indeed, foreign investment figures importantly in all of the world financial centers.
In New York and London in particular, non-U.S. and non-British financial institutions compete robustly with locally based ones. Analysts often note that Japan’s failure to open itself as widely to foreign investment might be one reason Tokyo’s status as a financial center has somewhat diminished in recent years. Korea has largely abandoned policies discouraging foreign involvement in key industries, and this is a factor in Korea’s favor.
As important as foreign investment might be, Korea must have a vibrant domestic financial services sector as well. In this regard, Korea might be seen as having actually benefited from the financial crisis of 1997-98.
Before the crisis, domestic financial institutions were mostly weak and underdeveloped. Korean banks were saddled with mountains of non-performing loans, while many of Korea’s non-bank financial institutions were captive to the industrial jaebol and incapable of the independence that such institutions must have in an advanced financial sector.
But since the crisis, enormous progress has been made in restructuring domestic financial institutions, and they have become far more effective and sophisticated. In fact, in some areas of finance, Korean institutions have become recognized internationally as innovators, such as in the securitization of non-performing loans.
Even so, most Korean experts recognize that financial sector reform is incomplete in Korea, that problems do remain and that some new problems have even arisen (from too-rapid increase in household debt, for instance). What is important is that to become an international center for finance, Korea must have both strong domestic institutions and strong foreign participation.
Something that would advance both these goals would be further reform of corporate governance, including greater transparency. In these areas, too, Korea has made enormous strides: in the adoption of international accounting standards; in implementation of minority shareholder rights; in the willingness to investigate and prosecute possible corporate violations of the law, as the still-unfolding SK case.
Indeed, progress in these areas might ultimately prove to be the strongest card in Korea’s bid to become an international financial center. This is partly because, for quite different reasons, both China and Japan have been laggard in implementing such reform.
In this area, Korea is ahead of its neighbors. This is important: Financial institutional strength is, to a large extent, based on confidence and trust, and both are enhanced when corporate governance is effective and transparent, and when the rights of minority investors are upheld.
If Korea is to achieve its ambitious goal, it must go beyond simply doing better than China or Japan. It must be looked upon as a place where standards of corporate governance and transparency are at the highest levels in the world. In this regard, much progress has been made, but still more needs to be done.

* The writer is a senior fellow at the Institute for International Economics in Washington.


by Edward M. Graham

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