The Ledger for S. Korean Reform: Political Profits, Economic Losses : Finance: Public supports president’s ban on secret accounts, but GNP could suffer.

President Kim Young Sam’s order to pry open a financial system designed to conceal corruption and tax evasion--his most controversial reform yet--has proved a political success but may cost South Korea 1% of its gross national product this year.

In addition, the initial stage of the transformation indicates that still more reform will be needed to bring about complete openness.

That was the conclusion of a host of experts after bankers added up the results of two months the president gave Koreans to convert all financial accounts, including stock accounts, from bogus to authentic names before an order banning aliases in financial transactions took effect last Tuesday.

More than 70% of the public agreed with Kim that the measure would bring about “social justice” and supported the reform. Scholars, bankers and diplomats alike agreed that it is likely to do more than any other single measure to reduce corruption and tax evasion and streamline a rigidly controlled financial system.

“Korea is going to be quite different from now on. . . . It is going to be a cleaner society,” declared Oum Bong Sum, an adviser to the finance minister.

Chung Su Rak, deposit manager of the Hanil Bank, called the reform “not merely a financial revolution but a social revolution. The new transparency will transform abnormality to normalcy.”

“For the vast majority of account-holders, (the reform) won’t make any difference,” Chung said. “But for those very influential people with accumulated wealth who are afraid of disclosure of how they got it, there will be an impact.”

The initial stage of Kim’s reform left officials sighing with relief that chaos did not result. There was no run on the banks, no flight of capital. Stock prices did not collapse. And no rush of speculation in real estate occurred.

But small companies that lack collateral and whose debts are so large they had to borrow funds from private lenders face an uncertain future. Those lenders have traditionally operated through false-name accounts to avoid taxes and any revelation of how they obtained their funds. Now, fearing investigations, many have stopped new lending.

Ha Yung Ku, vice president of Citibank here, said bankruptcies among such companies already have started to rise.

“The government will pressure banks to increase their loans to small companies, but that won’t be successful,” Ha predicted.

The two-month process of conversion to authentic accounts revealed for the first time the extent of the Korean penchant for secrecy--and a major loophole in Kim’s reform.

About $41 billion, a sum equivalent to nearly 14% of South Korea’s gross national product last year, had been hidden in assets held by individuals and corporations whose identities were unknown when Kim issued the order, calculations and estimates indicated. The sum amounted to nearly a tenth of all deposits, including 30% of the total value of stocks.

But the owners-in-hiding of only $7.2 billion--less than a sixth of the total--came forward to identify themselves.

Holders of concealed accounts have found friends, relatives or employees willing not only to lend their identities but also to hand over the seal and passbook needed for transactions that can be done by proxies. Those who lend their identities face no penalties because taxes on interest, which are withheld at the source, are paid separately from individual or corporate income tax.

The “borrowed name” accounts, Ha said, will remain a source of potential corruption and illicit transactions until South Korea starts imposing a unified tax on all forms of income. Then the identity-lenders would have to pay taxes on interest from such accounts combined with their own income.

South Korea won’t have a computer network on line to enforce such a system before 1996.

It is estimated that fewer than one in 10 of the real owners of “borrowed name” accounts converted to true identities during the two-month moratorium.

The Finance Ministry’s Oum admitted that the government is uncertain what would happen to the “borrowed name” accounts.

Still, neither tax evasion nor bribery will be as easy as in the past, when banks, securities companies and other financial institutions did not require proof of identity, he said. Tax authorities, he noted, may investigate accounts that exceed 50 million won ($62,500) in value.

Oum said the new rules will severely affect South Korea’s distribution industry, where tax evasion was the rule, not the exception. The new necessity to pay taxes is likely to force up prices or even destroy the competitiveness of some wholesalers or retailers whose profits were based upon tax evasion.

“(Some dealers) reported even less than a tenth the value of the goods they sold,” he said.

Big businesses will no longer be able to indulge in land speculation or seek profit by lending funds through the usurious curb market, added Kim Yung Dae, the Bank of Korea’s monetary policy director. That should force large companies to concentrate on their main lines of business, ultimately improving the economy, he added.

In early October, however, the government-financed Korea Development Institute predicted that the reform will cut 1% from this year’s gross national product.

Coming on the heels of a host of anti-corruption and economic reforms Kim has implemented since taking office Feb. 25, the “real-name” measure created “a lot of uncertainty” and will depress growth, Oum said. He and others, however, rated the impact as less than 1% of the GNP.

Citibank’s Ha predicted that the impact will continue through next year.