“KDB Relocation”: Privatization Is the Right Answer

There is controversy over relocating the headquarters of the state-run Korea Development Bank (KDB) to Busan. The presidential transition committee is pushing ahead with the move to Busan as pledged. On the other hand, the labor union and some Democratic Party lawmakers are voicing opposition.

Because KDB is a public enterprise, the decision on where to locate its headquarters follows the government’s decision-making. Legally, however, the Korea Development Bank Act stipulates that “the head office shall be located in Seoul Special City,” so revising that provision is the National Assembly’s responsibility. Even if it was a presidential campaign pledge, amending the law must go through the National Assembly. It remains to be seen whether the National Assembly will ignore a presidential election pledge, but the political controversy is expected to continue.

Setting aside political logic, it is necessary to examine the relocation of KDB’s headquarters from an economic perspective. First, KDB’s role must be reviewed before judging where its headquarters should be located. KDB was established by law in 1954. It was not an ordinary financial company, but was given the special-purpose role of policy finance. As its name suggests, its primary mission was policy finance aimed at contributing to industrial development. Over time, however, serious questions have arisen as to whether policy finance—the role KDB has played—remains valid in our 21st-century economy. Companies have already achieved growth across sectors, and new investment can now be financed more easily through the stock market.

At present, KDB functions almost like a holding company for distressed firms. In group terms, it could be considered the largest group in Korea. There may be reasons why the companies in which it holds stakes are not quickly disposed of in the market, but this also raises the question of whether KDB is keeping and using these companies as subsidiaries.

Only when it is clear why KDB is needed can a legal status appropriate to that role be defined, and only then can the location of its headquarters be determined accordingly. If KDB’s policy-finance role has weakened, and its main role is instead to act as a parent company managing distressed firms or to sell financial products like an ordinary financial institution, then its legal status should also be changed to match that function.

It is said that the era of government-directed finance has ended. If government-directed finance has indeed disappeared, then KDB’s special character also no longer has a reason to exist. In other words, there is no reason for KDB to differ from ordinary banks. Accordingly, KDB should convert its legal status from that of a special corporation to that of a general financial company. One may call this privatization, or simply a conversion into a stock company.

KDB sells numerous products like an ordinary bank, including deposits, loans, cards, funds, insurance, and pensions. In substance, it is a financial company. That means it is operating as a general financial enterprise.

If KDB is to be transformed into a financial company like an ordinary bank, then relocating its headquarters should be a matter for it to decide on its own. It is reasonable for shareholders, under the bank’s own responsibility, to determine the location of the head office. Taking into account the financial company’s competitiveness, shareholders would place the headquarters in the optimal location. Both the new government’s decision to move the headquarters to Busan and the logic opposing it assume that KDB will remain a special corporation. This reflects a failure to consider that KDB’s historical role is changing.

The time has come for KDB to change. The same is true of the Export-Import Bank of Korea, which was created to support exports and imports, but this is no longer an era in which the government allocates finance through policy finance. These banks should no longer exist as state-run policy banks; the time has come for their status to change to that of private banks. Even if they are reborn as private banks, they can still fully carry out their current roles.

Rather than focusing discussion on the political logic of where to place KDB, the political sphere should recognize that its role is changing and revise the law accordingly. This is now an era in which the economy operates with the private sector at the center. For state-run policy banks as well, changing in a way that allows them to contribute in line with those economic principles is the path that meets the demands of the times.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: ‘본점 이전’ 산업은행, 민영화가 올바른 해답

Author: Sung-no Choi

Date: 2022-04-05

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=24668