Opinion Leaders' Digest 99-46
Date : December 3, 1999
Author : Hahn-Koo Lee, President, Daewoo Economic Research Institute

A Rootless Idealism:
An Appraisal of Industrial Policies

Within last one or two years, many changes in the South Korean government('government')'s policies that affected the growth, efficiency, stability, elasticity and self-reliance of Korea's industries have occurred.

The changes in the government's policies concerning the overall organization of the industry have called for disintegration of the conglomerates' (so-called chaebol) fleet-type management system and encouragement of foreign enterprises to take over the individually severed independent enterprises while fostering small and medium-sized enterprises, particularly venture businesses.

In consideration of the perspective of policies on the industrial structure, much emphasis is put on restructuring of the manufacturing industry while fostering the productive service industries, such as tourism, culture and information and technology services.

In consideration of the perspective on industrial infrastructure, much stress is put on the need for expansion of Korea's information and technology infrastructure and commodity distribution facilities while increase in responsibility and transparency of the ownership and management of companies are called for. Particularly, chaebols are asked to have management experts assume the actual role of managers instead of the owners in realistic terms. Under such circumstances, even capital transactions between subsidiaries of a single conglomerate will be regarded as unfair inside transactions with strict oversight. Additionally, the top 30 conglomerates of Korea will be uniformly ordered to reduce their debt-to-asset ratio to lower than 200% by the end of 1999, and by the end of March 2000, the practice of mutual payment guarantee between affiliated subsidiaries will no longer be accepted.

These policies are expected to yield many positive results in terms of policy-making strategies regarding Korea's industries. However, when the details of contents are reviewed, many items that may in fact hinder the efficiency and industrial growth improvement and pose burden to the growth of industrial stability and self-reliance capability can be found. Additionally, the priority in which the policies are implemented can dramatically change the results and there are many situations that much be dealt with caution including the harmonization and mutual support between demand-oriented economic policy and other policies.

Judgment on Excessive Equipment Facilitation

The problem from the perspective of policy-making basis is the recognition of the problematic status of excessive equipment facilitation of Korea's core manufacturing industries. In this era of globalization and technological innovation, worldwide overproduction phenomenon have subsequently caused price lowering effect in reality, on our nation's core manufacturing industries like Automobile, Ship-building, Petro-Chemical, Household Appliance, and Textile. It is not correct, however, to interpret the worldwide overproduction as that of Korea's applicable industries, which makes up less than 5% of overall world market.

Furthermore, it is undesirable to approach the matter by voluntarily giving up a part of Korea's production capacity, instead of looking for ways to link it with Korea's foreign debt for proper compensation. The more industrialized nations that have greater market share and Korea should agree to a fair share of the burden of re-adjustment of the worldwide excessive equipment facilitation. In fact, worldwide excessive equipment facilitation is a problem that Korea can resolve without too much burden if it can quickly facilitate 'good environment to do business' in the production factor market.

Korea's relevant industries are generally armed with new and sophisticated equipment, thus it is wrong to adopt policies of employment reduction and give up expansion of the relevant industries. Does it make sense to give up a nation's wealth so easily, while not making optimal efforts to find ways to make full use of the precious resources Korea's businesses hold which might have remained idle due to laziness or lack of cooperation? Why do Korea's policy-makers so readily try to accept the role of a prey?

A Conglomerate-related Policy with respect to Future Growth Potential

The policy of disintegrating the conglomerates may eventually shrink the potential of future growth of the industries to a great extent. Given Korea's present level of money market, financial industry, labor market, administrative service, and level of technology, it is in fact difficult for an individual independent enterprise to win a project of global magnitude or develop and foster giant businesses whose aim is the potential for future growth with a few exceptions. How can many an individual, independent enterprise be expected to engage in long-term, high value-added projects either for itself only, or in consideration of mutual and parallel growth of its sub- contractors under the following circumstances: the debt-to-asset ratio be uniformly maintained at less than 200%, capital transaction between affiliated companies be regarded as unfair inside trading, elongated gestation period of capital, large amount of funds needed for high-risk future business be not available in the domestic financial market? And all these things are happening with no consideration given to individual company's capabilities or characteristics with respect to cash flow or business cycle and under the stark reality in which the domestic businesses' participation in financial markets of more advanced countries should take into account international politics.

An enterprise should constantly try to be the leader of an industry to survive in an occasion of worldwide recession. Has the consideration been given to the need for a financial system that can support the enterprises' such posture in the near future? How much possibility is there of having high-end technologies supplied from outside? How well will individual enterprises play the role of forming a nation-wide network that can foster necessary industrial manpower and deal with the risks involved in the new businesses? Isn't Korea's technological basis and mutual trust between the government and the industries, and between businesses in an industry collapsing due to the recent unprincipled re-structuring? How can Korea flexibly make adjustments of the industries, ready to cushion the ever-increasing external shock arising from the open-door policy under the reality in which even the system of holding company is difficult to adopt?

Facts concerning Foreign Investment in Korea

There are many things to keep in mind when concerning the policy of promoting foreign investment in Korea. Needless to say, foreign investment has merits, such as possession of more available liquid foreign exchange, adoption of new technologies and management techniques, and being in touch with global standards in everyday lives. Its downside is that it will constantly entail the matter of appreciation of the local currency and shocks felt in the financial market, which are in force, apart from Korea's industrial competitiveness. Buy-out of existing businesses of Korea by foreign capital raises many realistic problems concerning whether such buy-out is fairly arranged or whether there is no reverse discrimination against domestic businesses, excessive employment adjustment, pursuit of short-term profits, focusing on securing cash, possibility of reduction of R&D on long-term basis, possibility of neglect in fostering sub-contractors, and possibility of forming international monopolistic powers, etc. With respect to the important manufacturing businesses and financial institutions in particular, their self-reliance, stability, and long-term growth potential can be secured only with considerably powerful counter force. Now that a considerable number of important, publicly traded companies in Korea have already reached such a state as well as allow foreign capitals to take over the management, Korea's policy makers should now be much more concerned with the quality of foreign investment than in the past.

Shift in Paradigm

From a directional point of view, it may be right to foster middle-sized, technology-intensive, businesses and productive service industry, in order to induce foreign owned businesses and their capital into Korea, so to make up for the risks of the conglomerate-centered manufacturing industry system. It may also be quite necessary to enhance the transparency and the sense of responsibility and also to focus on short-term achievements, protection of minority shareholders, and spread of direct financing methods in this era of globalization.

However, it must take a long time and tremendous social efforts before such a shift in paradigm can be settled in Korea, a traditionally agricultural society. And it remains to be seen whether such a shift can really be settled here, getting better of cultural conflicts. It should be remembered that no attempt has ever been successful that is not in consideration of human nature in the history's specific time and space.

Such a Matter Should be Left to Parties Immediately Concerned

Korea has a much shorter history of industrial development than more advanced countries. Korea's production factor market concerning technology, human resources and capital is much less developed. Such being the case, Korea requires a longer time to form a new industrial organization or structure than in the case of more advanced countries. It is not possible to predict whether the currently prevalent American Standards will be accepted as global standards without reservation for indefinite period of time to venture into this world of dynamic international relations.

It is highly likely that Korea may eventually pay unnecessary price in future efforts to secure food, as the government's current, industry-related policies are hurriedly disintegrating the existing industrial structure and organization and business practices without definite principles and proper counter force.

The government's current policies have resulted from its prejudice against the conglomerates and are based on the outdated principle of ordo-liberalism or the institutionalism. Will the government's much publicized and uniformly-applied emphasis on individual, independent businesses be successful in this era of diversity and creativity when it is not even up to the task of sublimating the existing industries which have developed within the world market of fierce competition and are going through all kinds of hardships?

First and foremost, the government's energy should be poured into innovation of the domestic production factor market. And the government's business-related policies should be established on the principle of paying respect to diversity and flexibility. The government's actions should be taken in such a way that will assist the manufacturing businesses' efforts for further sophistication, rather than imposing uniform and rigid methods on the businesses that really are the professional of their fields, having worked so hard over a long time to be world-leaders in their industries. Particularly, it takes a competent policy-maker with a proper business sense to start providing an environment where long-term funds can be prepared to support projects whose gestation period of capital is elongated, a system of funds supply that do not fear risks involved can be found, a plane where practical knowledge and technology can be obtained and dispersed freely, and bureaucrats try to find proper markets for the businesses' new products and software.

A Rootless Idealism is Something Korea Should be Wary of

Finally, I would like to emphasize that it is important to consider the need for more transparency and higher sense of responsibility and that they should really be thought of in terms of the possibly dangerous situation which might be caused by unbalanced information flow in free competition market. Such things should not ever be allowed to be taken advantage of by those who are only concerned with propaganda of interest groups, and not really interested in the way things should be going. We should learn a lesson from the collapse of Socialists countries. They favored grand projects, liked to form many committees, and concentrated in ambiguous principles and short-term populism. Korea should especially be wary of rootless and unprincipled idealism that puts stress on reforming ultimate target areas without being able to find a way to improve the existing realistic conditions.

(The view expressed here is the author's personal view. It is not the official view of the CFE.)