[Viewpoint]A new animalWhen we classify animals as tame or fierce, cattle are domestic and tigers are wild. But it is difficult to classify raccoons and badgers, because they fit neither category. The same situation applies to the classification of financial and industrial capital.
Cerberus Capital Management, LP, which took over 80 percent of equity interest in the Chrysler Group and its related financial services recently, is a private equity investment fund in the United States. Cerberus is a buyout fund that normalizes management after an acquisition of equity interest by implementing various restructuring plans, such as manpower reduction and relocation of production facilities to overseas bases. Judging from the fact that it participates in management directly, it seems to be a form of industrial capital. But it also acts like a financial company because it would give up its equity interest without hesitation when the management of the company is normalized and the price of its stock goes up.
U.S.-based General Electric Company is under a holding company that has various financial and manufacturing companies under its wing. When companies under GE Industrial or GE Infrastructure manufacture and install equipment, GE Commercial Finance provides loans and leases services to the customer. That is, the company provides a package of financial and manufacturing services.
The holding company, which enjoys the highest credit rating, helps its financial subsidiary by providing loan guarantees to it so that it could borrow money at low interest rates. As both manufacturing and financial businesses under GE, they create enormous added value by giving and taking help and cooperation from each other.
How are things in Korea now? While other countries are reluctant to adopt a system of dividing financial and industrial capital strictly, we are implementing the strictest policy, unprecedented in the world, of keeping them apart. We include securities, insurance and credit card companies in the financial category.
Government policies, such as limiting the voting right of shares held by financial subsidiaries of big businesses to under 4 percent and prohibiting holding companies from including financial arms under their wings show the situation clearly.
The logic behind the claim that financial and industrial capital should be separated is that banks will become “private safes” of big businesses if industrial capital is allowed to own shares of financial companies. According to that logic, finance is a tame animal, while industry is fierce. This ferocious animal is seen as a horrible creature that invests money borrowed from others at random, plunders other people’s money in banks and ultimately ruins itself. Compared to that, domesticated finance is a supporter that serves the interest of the manufacturing industry. Therefore, there should be a wall between the two, they say.
Is this logic still appropriate? After the foreign exchange crisis in 1998, Korea’s big businesses lost their ability to fight and thrive in the marketplace. A long time period has already passed since the debt ratio of leading Korean companies was made lower than that of international companies in the same line of business. Now that an economy with a capital deficiency has turned into an economy with a capital surplus, the wild beasts of the past have become obedient livestock.
Therefore, we no longer need to worry that financial and manufacturing businesses will drive themselves to mutual bankruptcy by making banks the private coffer of big businesses. Moreover, as the techniques of financial watchdogs have reached an advanced stage, they will never overlook the misuse of financial companies by big businesses. A business that decides to have a financial subsidiary will be big enough to find the funds its financial arm needs by issuing bonds in the company’s own name.
As China and India become active in the manufacturing sector, the profits of manufacturers in Korea are gradually decreasing. Now that manufacturing is waning, Korean businesses are struggling hard to make the financial industry a new source of profit and growth. The time has come for the government to support the effort with appropriate policy.
If it is burdensome for the government to allow big businesses to enter banking because banks create credit, it can adopt a policy of dividing only banking from industry, instead of all financial companies. Furthermore, it can also consider allowing a private equity investment fund in which more than one industrial company participates in the takeover and management of a bank. If Lone Star, an American private equity fund, can manage a bank, there is no reason why a Korean equivalent should not to be allowed to do the same. It may do an even better job than the American fund.
The financial sector is our future and a new growth engine. We can feel the “financialization” of the international economy take place when big businesses adopt a holding company system. We are seeing the implementation of capital market integration laws, active mergers and acquisitions of businesses on a global level and financial businesses’ exit from the brokerage business, to name a few.
We should also become more of a finance-centered economy, even if it is belated. The current policy of separating financial and industrial capital should be reconsidered. It is time to send the policy to the museum.
*The writer is a professor of business administration at University of Seoul. Translation by the JoongAng Daily staff.
by Yun Chang-hyun