[Commentary] Policy lets nonviable companies survive

It has been reported that the creditors evaluating the possible shutdown of non-viable businesses are now considering a resuscitation measure for many of the businesses showing signs of instability.

If such resuscitation measures are called for as the businesses have satisfied the guidelines demonstrating their potential to become healthy, it is a great relief. However, if that is not the case, but a decision made for yet another patch-up measure, it could become yet another cause of an even bleaker economic future, according to the economic observers and experts.

Recently, the Korean economy has shown severe signs of laxity and reform fatigue with the slowdown of the real economic indexes conspicuously visible. The slowdown in the real economy due to anxiety over financial instability and persistently high international oil prices could be much worse than as indicated by the macroscopic indexes. It would not be an exaggeration to point to the government's four-pronged restructuring reforms marked by constant underachievement and mistakes as one of the major causes.

During the first phase of business reform efforts, the government pursued resuscitation and workout measures in fear of an increase in unemployment. Setting aside the accusation of the lack of transparency in the designation of businesses for workouts, as the underlying problems of the moral laxity and irresponsible management were addressed in very few of the companies under government workout, the first phase of business reform was a failure.

Various creditor banks, in the hope of resuscitating the failed companies, made fresh loans to them for equipment purchases or operating expenses on top of the investment switch-overs and increasing bad loans, thereby overburdening themselves. As such, the government might need to put the second phase of financial institution restructuring on hold. The government might not be able to set the financial sector straight without first closing down all non-viable companies.

Worsening the situation is the write-off of bad loans and conversion of debt to equity investment, not to mention the workout companies receiving government assistance and undercutting healthy businesses in bidding wars. Such actions by the workout companies also threaten the banks. The numbers speak for themselves, as the net loss for the first half of the year recorded by the companies under the workout program is 150% higher than during the same period last year.

The way out of this predicament lies in how quickly the detrimental practices and conditions can be dealt with, laying the foundation in which the financial sector can return to health.

If the guidelines for the first phase of business restructuring, transparency in implementation and the no-exception principles were adhered to during the early economic crisis period, the current debate concerning the second phase of business reform might not have been necessary. Learning a lesson from the first phase, the government and the creditor banks must be resolute and carry through with the most effective business sector reform. The government's handling of the second phase will act as a litmus test.

The second phase will not only affect the success or failure of the upcoming financial reform, it also will play an important role in reclaiming international confidence. Should the business and financial restructuring be inadequate, it will be too much to expect a transformation of Korean economy to a stabile quality economy like that of the United States, which is able to ride out long economic fluctuations.

In the short-term outlook, there is a great possibility of Korea facing "stagflation," which is characterized by a slowdown in economic growth accompanied by inflation.

None can deny that it is the responsibility of the market and the lenders to adhere to the guidelines, which seek a fair assessment of nonviable companies, and pressure them to close down. However, in the present situation where the market still lacks such ability, the task should not be left to the creditor banks. The government also must be a part of the effort.

As an example, if a company that the creditor banks have determined to be viable and left out of the list of companies marked for shutdown later turns out to be nonviable, the creditor banks must take responsibility for their shortsightedness.

The business and financial sector reforms should not be a short-term patchwork. For a change in the quality of our economy, it must be a continued effort on a long term basis. The government should implement and diligently watch over the Korean economy on a long-term basis for the automatic transformation brought on by the market economy system.

Professor Lee Man-Woo, College of Political Science and Economics, Korea University