Korea’s Reunification and Financial Policy Tasks – 3 Financial Policy Upon Economic Integration

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Main tasks for successful economic integration can be divided into 3 stages: Development, Implementation, and Integration.

In ‘Development’ stage, the main objective is to create a firm foundation for sustainable growth. We need to select and develop promising industries, re-establish railroad and harbor, open markets, and develop natural resources.

Implementing core system for market economy system will be the main challenge in ‘Implementation’ stage. It includes liberalizing price, privatizing properties, and adopting market system.

Lastly, in ‘Integration’ stage, the two different economic systems will be finally integrated. To do so, we need to integrate legislative system, infrastructure, and markets altogether.

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It is also very important to study and benchmark successful cases of economic integration outside of Korea.

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Korea’s Reunification and Financial Policy Tasks 2: Current Status of NK’s Economy

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North Korea’s GDP is around 34 trillion won, an equivalent to that of South Korea in 1971 and 1/5 of our size of GDP as of last year.

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Economic gap between the two Koreas is huge compared to the German case. Disparity in per capita GDP between South and North stands at staggering 20 folds which is more than 9 times wider compared to the gap between West and East Germany.

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North Korea’s financial system is underdeveloped, saying that it has mono-banking system, state-controlled monetary system, supply-oriented financial system, and no cash transaction. Central Bank of the DPRK, North’s central bank and the only functioning commercial bank at the same time is the sole source of money supply. Its only monetary policy means is controlling the size of bank loans. Moreover, the foreign exchange is directly controlled by the regime due to which the gap between official and commercial rate is widening. Although North Korea has been making laws and taking measures to improve its financial system and economy, the disparity between financial laws and economic realities is worsening.

 

 

Korea’s Reunification and Financial Policy Tasks 1

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2015 marks the 70th year since the Korean peninsula was divided. As President Park mentioned, Korean reunification is one of the biggest historical mission of our generation that can not be put off any longer.

Korea is faced with several structural problems. Korea’s growth rate has been stagnant for more than a decade at 3%, a 3 to 4% decrease since the 1990s. Youth employment fell sharply from 44.9% in 2005 to 39.7% last year. Yet worse, the population is aging rapidly while the number of men and women not contributing to the population growth is increasing.

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In such situation, reunification is expected to provide tremendous economic opportunities. Combined 80 million population and investment demand in North Korea’s development will create strong domestic demand. South’s abundant capital and cutting-edge technology integrated with the North’s diligent work force and precious natural resource will greatly strengthen our global competitiveness. Moreover, there won’t be any geopolitical risks posed by North Korea’s nuclear weapon and consequent arms race.

West and East Germany was united suddenly due to East Germany’s unexpected collapse. Even though their economic systems were integrated after going through 1 to 2 years of implementation period, and they have been preparing for the reunification in advance, the gap between the West and East hasn’t yet been fully resolved. Korea, therefore, must be thoroughly prepared for the possible integration of the two economies upon reunification.

In the following series of articles, we’ll look into the reasons why we must be ready in advance and what we can do to minimize negative effects while maximizing synergies upon Korean reunification.

 

Tax-exempt Financing

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What is your way of saving or gaining more money? Tax is always a heavy burden on the people. Annually, at the end of each year, people would make tax-adjustments and try to receive tax benefits or deduction. If you are not earning a stable income, think of situations where your parents, or any adults, collected all their receipts and checked all their credit card spending for the year. That will most probably have to do with the tax adjustment, where they calculate the total spending and see how much money they can get back in return. With such tax-adjustments, there are several ways of economizing income.  

Tax is not the only forms of economizing. Through interest rates from the bank people, rather than economizing, try to gain through the surplus. However, since the interest rates are decreasing in Korea, or stagnating in most cases, relying on them will not contribute to a large increase in one’s assets. Also, we should not forget about the fact that there are, for most cases, taxes imposed on the interest you get.  

This is where finances come in. There are different forms of finances, and one of the most popular ones today is the financing product that is related to tax deduction. As the title of this article suggests, financing product that gives tax benefits is called “tax-exempt financing”. For those on a steady income, such as the employees, can get tax deductions on the interest they receive through saving. Especially for those in the lower income class, there are certain financing products that are offered in which they can save up to a certain amount of their money and receive annual tax deductions.  

Such lucrative tax benefits attract many people on a tight budget or steady, but relatively small income to engage in tax-exempt financing. When considering joining such financing, it is important to first look at the period in which you are to invest your money. Either long term or short term, if you have even a vague idea in mind when you will want to get that money back as liquid money, you should choose the product that offers the appropriate period. Moreover, since there are so many types of exempted financing products offered by the financing market, it is important to compare and contrast all the products before choosing which one to join.

 

 

 

verdue Loans of under KRW 50,000 Excluded From Credibility Assessment

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Loans and household debt has been, for a while, a big issue in the Korean economy. From small to large amounts, and through legal or “illegal” means, people have been loaning money for different purposes. Speaking of loan, the issue of credibility becomes inevitable.

The government has announced that from this year, December 3rd, overdue of loans under KRW 50,000 will not be taken into account when measuring a person’s credibility. Up till now, any loans that are more than three months overdue have been directly reported to the Korea Federation of Banks. For credit cards and other forms of installment plans, any loans over KRW 50,000 that were overdue have been reported. The records of overdue loans would directly affect the credibility rates, which at times make it hard for people who are on frequent loans to borrow more money from the legitimate financial institutions.

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Starting from December, the overdue records of under KRW 50,000, regardless of the overdue period, will not be reported. It will not be counted towards the individual’s credibility assessment. This is seen as a rather positive change for the lower and the middle-income class that rely on frequent loans. If the small amounts of overdue keep piling up, it might be very difficult to get more loans in the future especially when trying to take out larger amounts for purposes such as buying or renting a house.

On the other hand, there are those who express anxiety over such change. As it is one’s responsibility to pay back the loans on time, the morality of responsibility might come into question. If all the records are cleared, some people argue that it would not be fair to give the same treatment as those who have never had any overdue loans.

After the implementation of the new fiscal policy, it is expected that about 10,000 data would be deleted. The Credit Bureau would raise the credibility status for those who only have overdue loans of less than KRW 50,000 as the same level as those who do not have any loans. Overall the anticipated effect is rather positive as it would give more chances for those borrowing smaller amounts to sustain their living a broader chance to expand their economic welfare.

Fund Supermarket attracts more than 300 million dollars

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Did you know that we can also purchase funds at supermarket? On April 24, Fund Online Korea launched an ‘Online Fund Supermarket’ upon approval by the FSC. Fund supermarket is where you can shop different investment products at once just like when you buy groceries. In the past, customers needed to visit banks or asset management firms in order to purchase funds. There were some online investment products but they were only few in number and hard to make comparisons between diverse investment products offered by different banks and assets management firms.

In the past, there was high possibility that investors did not receive sufficient information. This is because banks and asset management firms are likely to recommend investment products which they made or can make profit with. In addition, small and mid-sized management firms found it difficult to sell their funds. Therefore, some said that traditional fund markets can discourage competition. Therefore the FSC approved establishment of Fund Supermarket to boost fund markets and diversify selling channel where banks were the main channel for fund distribution.

Due to its convenience and low commission fee, Fund Supermarket attracted 30 million dollars (31.9 billion won) within 50 days and the amount is continuously increasing for six months.

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As of October 17, over 24 thousand people newly opened accounts. The amount of fund investments reached 300 million dollars (345.4 billion won) or 10 thousand dollars (14.2 million won) per person. Funds which were designed by small and mid-sized management firms are showing great performance.

In order to vitalize the fund market in the long-term, it is essential to introduce Independent Financial Advisor (IFA). This is because investors who do not have expert knowledge in finance may have trouble in choosing appropriate investment instruments. IFA is an advisor who is independent from any financial institutions and recommends appropriate financial products for each investor considering their assets and profitability.

They also have IFA in the U.S and U.K. They are called IC(Independent Contractor), IBD(Independent Broker-Dealer), RIA(Registered Investment Advisor) or TPM(Third Party Maketer). They all have different names but their roles are similar in a sense that they receive commission fee after giving advices to investors. They are popular as people want to design investment plan according to personal financial status. Even some IFAs not only recommend financial products but provide different services such as providing on-line lectures and designing investment portfolio. IFA is already common in some developed countries. For example, the amount of financial products which are sold by IFA in U.K accounts for around 55.6%. However, around 65.6% of fund is sold by domestic security companies in Korea.

 

More various types of funds will be available as asset management companies are planning to introduce new ones. The FSC plans to introduce IFA in fund investment first then expand it throughout the financial products. This will improve customers’ profitability as well as protect customers from selecting inappropriate products.

‘Council for IT-Finance Convergence’ established

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Council for IT-Finance Convergence kicked off on November 10 to speed up the process of providing advanced financial services by converging internet technology and finance.

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The council is chaired by Director General of FSC’s Banking & Insurance Bureau and FSS’s Chief Officer for IT and Financial Data Protection. The council is comprised of 20 experts from 16 institutions of bank, asset management and credit card companies, electronic financial service, IT, and data protection industries.

In the first meeting on Monday, the members agreed to improve the current rules and regulations, select and concentrate on specific financial services that have potential to create huge synergy, and strengthen consumer data protection measures.

The council will meet regularly once in every two weeks to discuss ways to achieve shared growth between IT and financial sector and create new service industry by effectively converging the two.