🚨 Government-Led Finance

Today Korean Social News for Beginners | 2025.09.28

0️⃣ Productive Finance Plans and Limits of State-Controlled Financial Policy

📌 Can Korea Create Successful Productive Finance Despite Government Control?

💬 Financial authorities announced a "productive finance" plan to reduce real estate investment focus and guide money toward innovative companies. However, questions arise about its effectiveness due to past government fund failures, bank safety concerns, and changing financial policies with each administration. While government-led finance practices from the development era have evolved into modern forms, experts say without private-led ecosystems and sustainable policies, these plans may remain just slogans. There are particular concerns that repeating government fund approaches like the National Growth Fund could distort private capital and reduce market trust.

💡 Summary

• Government-led finance is when the government directly controls bank loans and money distribution.
• New productive finance policies are proposed, but past government fund failures and bank safety concerns exist.
• Policy continuity regardless of political changes and private-led investment environments are needed.

1️⃣ Definition

Government-led finance means a system where the government directly controls or indirectly directs bank loans and money distribution. During early industrialization, it helped overcome capital shortages and develop specific industries, but over time it has been criticized for distorting market autonomy and creating inefficiencies.

Modern government-led finance works indirectly through regulation changes, policy fund creation, and financial institution evaluation criteria changes, rather than direct orders like in the past. While the government guides money to flow in "desirable" directions, this process can harm market autonomy and efficiency.

💡 Why is this important?

• It directly affects financial autonomy and market efficiency.
• It can create conflicts between bank safety and policy goals.
• It influences long-term financial system stability and competitiveness.
• It can cause negative effects throughout the economy by distorting private investment decisions.

2️⃣ History of Government-Led Finance and Current Issues

📕 Financial Control Since the Development Era

• The 1960s-80s government-led growth model started government-led finance. Key features include:

  • The government nationalized banks and concentrated money supply to specific industries.
  • Low-interest policy loans focused on developing heavy industry and export industries.
  • Financial institutions played passive roles, deciding loan targets and amounts based on government orders.
  • This enabled rapid growth but limited financial autonomy and competition.

• Government-led practices continued even after financial liberalization. Main changes include:

  • Direct control decreased with 1990s financial liberalization, but indirect intervention continued.
  • Government intervention strengthened again during financial restructuring after the foreign exchange crisis.
  • Special banks and policy financial institutions expanded for policy purposes.
  • Indirect control through financial supervisory authority administrative guidance and regulations became common.

📕 Productive Finance Policy and New Government-Led Finance Concerns

• Productive finance was proposed to solve real estate investment concentration. Main directions include:

  • Plans to reduce real estate mortgage loan ratios in household loans and increase innovation company investment.
  • Trying to increase bank corporate loan ratios and strengthen startup and venture company support.
  • Aiming to create venture capital ecosystems and activate direct financing markets.
  • Pursuing sustainable growth through ESG investment and green finance expansion.

• Past government fund failures may repeat. Main problems include:

  • The Lee Myung-bak administration's green fund and Park Geun-hye administration's unification fund didn't meet expectations.
  • They faced criticism as administration publicity projects along with poor profitability and market viability.
  • They distorted private capital's autonomous investment decisions and spread government failures.
  • Policies changed with each administration change, failing to create long-term investment ecosystems.

💡 Main Problems with Government-Led Finance

1. Market Autonomy Violation: Government distorts private autonomous investment decisions
2. Bank Safety Damage: Excessive loans for policy purposes increase default risks
3. Policy Inconsistency: Changing policies with each administration creates confusion
4. Resource Allocation Efficiency Loss: Political considerations prioritized over market signals
5. Private Investment Reduction: Government intervention reduces private sector investment motivation

3️⃣ Overseas Cases and Desirable Financial Policy Directions

✅ Major Countries' Financial Policy Experiences and Lessons

• The United States bases its system on market-centered finance. Key features include:

  • Monetary policy through the Federal Reserve System is strong, but it doesn't intervene in individual financial institution loans.
  • Government policy finance is limited to market failure areas like student loans.
  • Financial regulation focuses on safety supervision and minimizes policy-purpose enforcement.
  • Private investments like venture capital and private equity funds play key roles in innovation ecosystems.

• Germany and Japan pursue balance between policy finance and market finance. Main examples include:

  • Germany's KfW and Japan's Development Bank of Japan handle policy finance from long-term perspectives.
  • They clearly separate roles between policy financial institutions and commercial banks to minimize market distortion.
  • They set clear purposes and scopes like small business support and infrastructure investment.
  • They build governance that blocks political intervention and ensures expertise and independence.

✅ Success Conditions for Korean-Style Productive Finance

• Policy goals must be achieved through market-friendly methods. Main approaches include:

  • Guidance through incentives and deregulation is needed rather than direct orders or enforcement.
  • Roles between policy financial institutions and commercial banks must be clearly separated.
  • Government dependence must be reduced by activating private venture capital and private equity funds.
  • Innovation company support must be strengthened through regulatory sandboxes and negative regulation methods.

• Long-term institutional foundations must be established. Main tasks include:

  • Legal and institutional devices that can continue regardless of administration changes are needed.
  • Financial authority independence and expertise must be strengthened to block political intervention.
  • Performance evaluation systems must be built to objectively verify policy effects.
  • Policy goals must be pursued while maintaining international standard safety regulations.
  • Policy credibility must be secured through sufficient communication and agreement with market participants.

4️⃣ Related Term Explanations

🔎 Basel III Regulations

• Basel III is an international bank safety regulation standard for financial stability.
  • Basel III is bank safety regulations established by the Bank for International Settlements (BIS) after the 2008 global financial crisis, aiming to secure financial stability through strengthening bank capital ratios and liquidity management.
  • Main contents include: First, basic capital ratios increased from 2% to 4.5%. Second, an additional 2.5% capital conservation buffer is required, maintaining a total 7% basic capital ratio. Third, countercyclical capital buffers require additional capital during economic overheating. Fourth, Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) regulations were introduced.
  • Basel III regulations function to check government-led finance. Even if forced to excessively increase corporate loans or risky investments for policy purposes, capital adequacy regulations serve as safety devices allowing banks to maintain soundness. Korea also adopts these standards to manage financial stability.

🔎 Policy Financial Institutions

• Policy financial institutions are special financial institutions established for government policy purposes.
  • Policy financial institutions are financial institutions established or supported by the government to supplement market failures and achieve specific policy goals. Unlike general commercial banks, they prioritize public interest and policy goal achievement over profitability.
  • Korea's main policy financial institutions include: First, Korea Development Bank (KDB) handles industrial finance and restructuring. Second, Export-Import Bank of Korea supports export finance and overseas investment. Third, Industrial Bank of Korea supports small businesses and venture companies. Fourth, Korea Housing Finance Corporation handles housing finance. Fifth, Korea Credit Guarantee Fund and Korea Technology Finance Corporation provide small business credit guarantees.
  • Policy financial institutions' advantages include enabling long-term perspective investment and supporting market failure areas. However, they also have problems like political intervention risks, moral hazard, and competition distortion with commercial banks, requiring appropriate governance and check mechanisms.

🔎 Venture Capital (VC)

• Venture capital is a professional investment institution that invests in high-risk, high-return startups.
  • Venture Capital invests in early-stage companies with high growth potential or startups with innovative technologies, pursuing long-term capital returns as professional investment institutions. They provide management consulting and networking beyond simple funding.
  • Venture capital investment processes include: First, deal sourcing to discover investment targets. Second, due diligence to evaluate company technology, market potential, and management capabilities. Third, investment contracts and equity acquisition. Fourth, portfolio management to support company growth. Fifth, investment recovery through IPO or M&A.
  • Venture capital features contrasting with government-led finance include private-led autonomous investment decisions, expertise-based investment screening, and market principle-based performance evaluation. Government should focus on creating institutional foundations for venture capital development and providing tax benefits, without intervening in direct investment decisions.

5️⃣ Frequently Asked Questions (FAQ)

Q: Why is government-led finance bad? Isn't the government guiding things in good directions?

A: While it may help achieve policy goals short-term, it causes greater costs and side effects long-term.

• Government-led finance problems appear in several aspects. First, governments have less information than markets and political considerations may intervene, making inefficient investment decisions more likely. Second, depending on government support weakens companies' self-reliance and competitiveness. Third, financial institutions moving according to government orders rather than market principles can reduce soundness and profitability. Fourth, policies changing with each administration make long-term investment and management difficult. Fifth, it reduces private sector autonomous innovation and investment, lowering overall economic dynamism.
• Of course, government intervention may be necessary in areas with market failures. But even then, market-friendly approaches like institutional improvement, incentive provision, and deregulation should be prioritized over direct control. The government's role is creating fair competitive environments and establishing foundations for proper market operation.

Q: Then how should productive finance policy be pursued?

A: The key is building institutional foundations from long-term perspectives while utilizing market mechanisms.

• Several conditions must be met for successful productive finance policy. First, private voluntary participation should be induced through tax benefits, deregulation, and guarantee support rather than direct loan orders or enforcement. Second, market distortion should be minimized by clearly separating roles between policy financial institutions and commercial banks. Third, government dependence should be reduced by strengthening private investment institution capabilities like venture capital and private equity funds. Fourth, environments should be created where new technologies and business models can be verified in markets through innovative systems like regulatory sandboxes.
• Most importantly, long-term perspectives and policy consistency are crucial. Legal and institutional foundations that can continue despite administration changes must be established, and financial authority independence and expertise must be strengthened. Regular performance evaluation and feedback systems should be built to objectively verify and improve policy effects. It's also essential to increase policy trust and predictability through sufficient communication and agreement with market participants.

Table of Contents

• Go to Guide