Financial Industry, Service Industries and Compressed Growth

1
Financial Industry, Service Industries and
Compressed Growth
2

• Financial Industry

3
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.

4
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.

5
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.

6
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.

7
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.

8
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.

9
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• Government formally repealed directed-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.

10
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.

11
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.

12

• Service Industries

13
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.

14
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.

15
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.

16
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.

17
Economic Development and Demand for Services

• Successful economic development has raised
  peoples income.
• Higher income enabled people to demand high
  quality services.
• State regulation restricts domestic supply of
  high quality services. What then?

18
Lets 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.

19
Increasing BOP Deficit in Service Account

• Balance of Payment statistics (billion US)
  2003 2004 2005 2006
• Current Account 120 282 150 61
• Commodities 220 376 327 292
• Services -74 -80 -137 -188
• Major portion of trade surplus is offset by
  service deficit.

20
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.

21
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.

22
Examples of Medical Tourism Promotion

• Singapores Healthcare Service Working Group
  2000 2002 2004
• F. patients (1,000) 165 212 260
• Spending (mil ) 430 550 750
• Thai aims at Healthcare hub and deregulated
  medical industries.
• Shanghai World Link Medical and Dental Center
  invites first class MDs.

23

• Compressed Growth

24
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.

25
Aiming at An Advanced Country

• The successful industrialization has raised
  Koreas GNI to about US20,000-.
• 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?

26
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.

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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.

28
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.

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

30
continued

• Sometimes, the shorter and the poorer the
  services are, the stronger the providers
  authority becomes.
• Incumbent providers even tend to exclude the
  emergence of promising new candidates for
  providers.

31
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.

32
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 providers position is quite safe regardless of
  her/his performance.

33
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?

34
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.

35
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.

36
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.

37
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.

38
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.

39
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.

40
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.