[Opinion] Is Alleviation of Regulations the Only Proper Measure?

Centering the business circle, people voices the necessity for the government`s alleviation of regulations to overcome the difficult economic situation. The logic of the business circle is that various regulations prohibit necessary investment of the companies, and the economic recovery is delayed as a result of the lack of investment. The business circle is strongly demanding for the abolition of the chebol related regulations, such as restriction on equity investment.

It is natural that the role of the government, especially the role as regulator, should be adjusted according to the changes in the given circumstance. Everybody understands that the government`s unnecessary intervention should be excluded and the anti-market regulations should be reformed when the market economy centered reform is pursued. It is necessary to adjust policy on chebol according to the changing domestic and international circumstances.

However, a belief that `alleviation of regulations` is everything, which began to expand attributing the current difficult economic situation, should be carefully monitored. Those who argue for the abolition of regulations assert that the only proper and right measure is to rely on the autonomy of company and market, as if any regulation is bad. However, a perfect market, which is controlled by the ‘invisible hand’ written in the economic studies textbook, does not exist. It is necessary to have a subject that sets up regulations for the effective trades among economic subjects that have the different purposes, and restrains the regulations when they are violated in the incomplete market.

South American countries once tried the alleviation of regulations and privatization of market following the theory of the `Chicago School` that venerates the market function. South American companies, which are similar to chebol, bought banks which were objects of privatization, and used the deposits of the respective banks for the expansion of their own businesses. As a result, these countries experienced the large-scale foreign currency exchange crisis, and at last, the government had to resolve the crisis by investing huge public funds.

Our government temporarily abolished the restriction on equity investment under the name of stimulation of the investment of the large companies to overcome the economic crisis in 1998. However, the result was not the economic recovery through the activation of investment, but the bankruptcy of the Daewoo Group, which still presses down our economy. As the restriction on equity investment, which was introduced to prevent the recurring investment that was the major means to create fictitious capital, was abolished, many chebol companies including the Daewoo created fictitious capital by carrying out the large-scale recurring investment among affiliated companies to meet the 200 percent of debt rate. The fact that shares of the affiliated companies of the five chebol companies increased from 36 percent in 1997 to 48 percent in 1999 illustrates this. The attempt to meet the debt rate through the fictitious capital rather worsened the financial healthiness, hence, leading the ruin of the Daewoo Group.

Those who argue for the alleviation of regulations should be able to distinguish the anti-market regulations from the regulations that complement and develop market. Although regulations that restrain the market function should be abolished, complementary regulations, such as regulations on the rules of the game and destroyers of the rules, are necessary for the sound development.

For instance, the restriction on equity investment is a regulation that goes against the market function if the control structure of chebol is well established and the management supervision function of the capital market is properly operated. However, despite some reform on the control structure of chebol, the board of directors and the management supervision function of the capital market are still insufficient. Hence, the regulation on equity investment can be considered as a complementary system for the incomplete market.

Another important issue in relation to the alleviation of regulations is that major policy changes are being done without a direction or coherence. If regulation related people raise their voice, the government quickly changes the content of the regulation without hearing the public opinion and the reasonable decision making process. Such an incoherent policy is perceived as a self-denial of the reform that was advocated by the current government, and damages the trust in the government policy.

The government should bear in mind that the adjustment of the government role according to the changing environment is not to produce incoherent policies that do not have principles and direction, but to decisively abolish anti-market regulations and to plan for the new regulations that can complement the incomplete market.

Cho Myong-Hyun (Professor of Management at Korea University)