Another state fund for a Korean New Deal?The government has set out to create a civilian participatory fund to raise financing for the nearly $100 billion “New Deal” projects over the next five years. Policymakers at the Finance Ministry and Financial Services Commission (FSC) have embarked on the scheme proposed by the ruling party. The outline proposes inviting the private sector to invest in state-led 5G, autonomous vehicle and green projects. Although details are yet to come out, the fund has been proposed to ensure a roughly 3 percent annual yield while guaranteeing the principle.
The fund is designed to funnel lush liquidity away from the real estate market into more productive investments and to encourage wealth building in a healthier way. The fund could draw interest, as bank deposits yield no more than 1 percent. But a state fund to promote a certain industrial field can create side effects.
Public finances must be used to guarantee the principle and returns higher than the market rates. All funds previously led by the government have done poorly. The Green Fund created under President Lee Myung-bak’s government, that encourages corporate green investments, is barely active, with a dwindling balance. The Unification Fund created under the Park Geun-hye government has been hovering in the negative due to a stalemate in inter-Korean relations. A state fund devoted to promoting IT materials and the equipment industry was launched to enhance self-sufficiency in the chip supply chain following Japan’s export curbs. It has been doing well, but its performance hinges on the volatile chip market. Policymakers must consider whether they will be using public money to back stable returns. Some suspect a political consideration to make up for the negative public sentiment due to failures in real estate policies.
A state fund can discourage private sector investment. The government has allowed corporate venture capital, but regulations could limit its effectiveness. Caps were imposed on loans and outside capital financing to mitigate criticism for allowing large industrial capital into the financial market. Creating a colossal public fund could dampen the corporate venture market. The fund also could divert investment from private companies.
Why a state fund is necessary to promote the New Deal projects raises questions. A state-funded industrial habitat cannot last long. It is better to lift regulations to stimulate private investments in new industries and venture enterprises.