ifc regulatory transformation republic of korea 2008

8/14/2019 Ifc Regulatory Transformation Republic of Korea 2008

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REGULATORY TRANSFORMATIONIN THE REPUBLIC OF KOREA

CASE STUDIES ON REFORMIMPLEMENTATION EXPERIENCE


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Copyright 2008The World Bank Group1818 H Street, NW

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The World Bank Groups Investment Climate Department (CIC) is the operational center for the International FinanceCorporations (IFCs) Business Enabling Environment Advisory Services and FIAS, the multi-donor investment climateadvisory service. CIC assists the governments of developing countries and transitional economies in reforming their businessenvironments, with emphasis on regulatory simplication and investment generation. CIC relies on close collaboration withits donors and World Bank Group partnersIFC, the Multilateral Investment Guarantee Agency (MIGA), and the WorldBank (IBRD)to leverage value and deliver tangible results for client governments.

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REGULATORYTRANSFORMATION INTHE REPUBLIC OF KOREA

CASE STUDIES ON REFORM

IMPLEMENTATION EXPERIENCE

December 2008


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AcknowledgementsThis case study was written by Jong Seok Kim,Tae Yun Kim, Junsok Yang, and Scott Jacobs(Jacobs and Associates Inc.) based on a templatedeveloped by FIAS, the multi-donor businessenvironment advisory service of the World Bank Group. The publication beneted from thevaluable comments and support of VincentPalmade, Gokhan Akinci, Peter Ladegaard, andDelia Rodrigo Enriquez. Florentina Mulaj,Doriana Basamakova, and Patricia Steeleprovided key comments and editorial assistancein nalizing the draft for publication.


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Contents

Executive Summary .............................................................................1

1. Introduction .................................................................................... 6

2. Context of the Reforms ................................................................... 7Historical Context: 1960s1997 7Context of the 1998 Reforms 10

3. Content of the Reforms ................................................................. 13Design of the 1998 Institutional Reforms 13Strategy of the 1998 Deregulation 16

4. Impact of the Reforms .................................................................. 18Impact of the 1998 Institutional Reforms 18Impact of the 1998 Deregulation 18

5. Implementation of the Reforms ..................................................... 23Differences Between the 1998 Reforms and Previous Efforts 23Gaining and Sustaining Momentum for Reforms 24Criticisms of the Design of the 1998 Regulatory Reforms 25Implementation and Monitoring of Reforms 28Summing Up and Looking Forward 28

6. Lessons of the Reforms ................................................................. 30Success Factors 30Shortcomings 32Lessons for Other Countries 33

Bibliography ...................................................................................... 35


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Tables1 Proposals for New or Strengthened Regulations Examined

by the Regulatory Reform Committee, 19982002 ............................................... 19

2 Regulations Eliminated or Modied by Selected Ministriesand all Government in Korea, 1998 and 2002 .................................................... 19

3 Industries with Entry Barriers in Korea, 1992 and 2001 ........................................ 20

4 Projected Direct Net Benets of 1998 Deregulationin Korea, 19992003 ...................................................................................... 21

5 Projected Macroeconomic Effects of 1998 Deregulationin Korea Over 10 Years ................................................................................... 21

Figures1 Structure of Regulatory Reform in the Korean Government, 2004 ........................... 15

2 Inows of Foreign Direct Investment into Korea, 19702002 ................................. 21

Boxes1 Sacred Regulations in Korea ............................................................................. 9

2 A Measure of Commitment to Regulatory Reform .................................................. 29


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EXECUTIVE SUMMARY

the political economy of reform, giving new strength to reformers and weakening the sup-porters of a regulatory state whose habits weretwo decades out of date. Having suffered one of the worst economic crises ever experienced by amember country of the Organization for Eco-

nomic Co-operation and Development(OECD), Korea launched an ambitious regula-tory reform program in 1998 as part of itsrecovery strategy.

The 1998 regulatory reform program, the focusof this case study, included two key initiatives.The rst was a massive deregulation initiativein which the president ordered each govern-ment ministry to eliminate 50 percent of itsregulations. The second was an enduring

institutional reform that established institu-tions and mechanisms at the center of govern-ment to promote reform and monitor andguarantee the quality of regulations and theregulatory process.

The nancial crisis had given regulatory reform inKorea added urgency and forced the governmentto commit to stronger reform measures. After the

The Republic of Koreas rst attempt at regula-tory reform began in the 1980s. The aim was todismantle the regulatory structure favoringgovernment intervention that had been built upduring the 1960s and 1970s. Korea thereforedesigned its regulatory reforms not as ad hoc

programs of deregulation but as broad institu-tional and procedural reforms. These reforms,extending over a decade, addressed entire elds of regulation and tried to permanently change how regulators functioned by building sustainablecapacities for good regulatory governance intothe machinery of the public sector.

Korean institutions are relatively developed. Butthe lessons from Koreas reform experience canhelp developing countries that are encumbered by

costly regulatory legacies and habits from earlierdevelopment strategies and are now building new capacities to regulate open, dynamic markets.

The 1998 Reforms

While regulatory reform in Korea began in thelate 1980s, initial efforts produced few results.But the Asian nancial crisis of 1997 changed


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was needed for regulatory reform to gain support and momentum. Governance problems were also useful: political support for the reform was built on a popular campaign to wipe out corruption.

Though Korea tried to deregulate and to reformregulation starting in the late 1980s, serious andeffective reform began only after the 1997nancial crisis, which coincided with a surge incivil society organizations focusing on govern-ment corruption. This conuence of economicand governance crises allowed the major politicalparties to support regulatory reform. Excessiveregulation was perceived and portrayed as thesource of economic inefciency and corruption

with the corruption argument proving to beespecially appealing to the public.

Embedding regulatory reform into government functions, particularly institutions and the administrative procedures law, was important to sustaining reform.

Public agencies normally resist change, but theirconservatism and inertia can work in favor of reform if it can be normalized in their operations.

In Korea regulatory reformin the form of quality control of new and revised regulationshas become a routine part of government opera-tions. Indeed, it has become a permanentfunction of government, protected by the publicadministration.

Regulatory reform was internalized in the publicadministration system through the reform of theBasic Act on Administrative Regulations, whichmandated the regulatory reform and review

processes. This legal change created a government- wide system, backed by internal institutions, law,rights, courts, and vigilant citizens, that ministriescould not evade.

Regulatory quality was controlled by an independent agency at the center of government that could counter the pro-regulation tendency of ministries.

nancial crisis reformers initially took forcefulactions. But their willingness to undertake majorreforms later weakened as a result of problemsfaced by reformers in many countries. As the needfor reform became less desperate and the political

strength of the president waned, the support forregulatory reform diminished. The new institu-tions were not enough to overcome implicitresistance to reform in the bureaucracy. Andbecause the reforms reduced the regulatory burdenless than had been hoped for, many Koreans lostinterest in further regulatory reform.

Lessons of the ReformsOne important lesson from the Korean experi-

ence is that to sustain an ambitious program of regulatory reform, the government and thecountry must accept that market discipline isnot a threat but a tool for achieving importantnational goals. That is, to ensure support forpro-market reforms, a national liberal consensusmust have reached a sufcient threshold.

This lesson supports strategies that seek toembed regulatory reform in existing macroeco-nomic and structural reforms. If the liberal

consensus is still in the early stages, institution-alizing reform is even more important forcreating active defenders of reform. In Koreastrong institutional reforms were neededbecause this consensus was weak. The culturalshift toward greater self-reliance and consumerchoice is still in the early stages.

The regulatory reform experience in Korea alsooffers other lessons, through the factors favoringsuccess as well as through the shortcomings.

Success Factors

Koreas strategy for building sustainable capaci-ties for good regulatory governance featuredseveral elements that supported success.

Reform was opportunistic. Economic crisis galvanized an emerging liberal consensus that


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Shortcomings

While the Korean efforts highlight the advan-tages of a strategy of rapid and massive reform,they also showcase its disadvantages.

The regulatory reforms in Korea focused unduly on top-down legal changes and not enough on actual implementation. In particular, the system lacks a detailed strategy for improving practices at the local level, undermining visible benets for citizens and businesses.

The Korean experience shows that the regula-tory quality strategy needs to go beyond acentralized review of legal texts to inspections of the administration of regulatory changes toensure that they are being carried out. At thelocal level the regulatory reform process was notmonitored and integrated as it was for thecentral government.

While the top-down approach produced impressive short-term results, a lack of incentives for regulatory reform within the government undermined cooperation and slowed progress.

Korea succeeded in many ways in putting intoplace the appropriate tools and mechanisms tocarry out true reform, but it has been largely unwilling to use them. While the regulatory reform mechanism initially produced impressivegains, lack of incentives in the ministries made itdifcult to sustain cooperation between theministries and the central agencies responsiblefor regulatory reform.

More attention to creating incentives for perfor-mance, such as by increasing the involvement of budget authorities, would have been helpful ininserting regulatory reform into the daily rou-tines of governing. In addition, governmentstructures should have been reorganized to reectchanges in regulatory powers and roles betweenministries and agencies, translating regulatory reform into organizational and budget reform.

Modern public administrations have a structuralbias toward introducing new regulations, muchas decentralized spending decisions tend to resultin budget decits. To correct this problem,international experience suggests giving an

independent, nonregulatory agency the authority to oversee the quality of regulations and therule-making process. Korea did so by setting upthe Regulatory Reform Committee, a presiden-tial commission chaired by the prime minister.Unlike the ad hoc advisory entities of past reformefforts, the Regulatory Reform Committee is abody backed by law with clear authority in theday-to-day policy process.

Along with efciency disciplines, transparency

and predictability were built into regulatory structures.

Among the costliest problems in Korean regula-tion are the lack of clarity and room for interpreta-tion in many regulatory rules and procedures.Regulators tend to have much discretionary poweras a result, creating uncertainty for regulatedentities. Regulatory risks are among the mostfrequently cited concerns of investors in Korea.

Making rules and procedures more transparentand predictable can substantially reduce suchrisks. To do so, Korea adopted informationdisclosure acts as part of its administrativereforms, and opened up its regulatory systemby introducing independent review of regula-tory quality and more consultation withstakeholders.

Korea made effective use of international good practices such as regulatory impact analysis in

both designing and promoting reforms.Korea substantially accepted the OECDrecommendations and guidelines on regulatory impact analysis (1997b) in shaping and intro-ducing its own process. In addition, Koreanreformers exploited the OECD peer review of regulatory reform as an outside pressure on thegovernment.


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embedded in a decades-old culture of control,are skeptical about the private sectors ability toself-regulate and maintain order. But theability to self-regulate is not inherent. Thiscapacity of a market needs to be cultivated by

allowing the private sector an opportunity topractice self-regulation and to become moreinvolved in market functions. The Koreanreforms have not yet sufciently challenged theessential regulatory role of the state to give theprivate sector this opportunity.

Lessons for Other Countries

Context, opportunities, external shocks, andchanging environments frame the design and

implementation of reform in every country.Many of the lessons from the reform experienceof Korea can be interpreted only through thepolitical, administrative, and cultural situation of that country. But several lessons may provehelpful to countries facing similar challenges:

Build a society-wide coalition around regulatory reform.Relying on narrow politicalbases to drive reform puts sustainability atrisk. The momentum for reform can be

maintained by educating the public aboutthe desirability of reform and keeping itinformed of the progress made.

Create a permanent system of reform.Internal-izing reform in the public administration canmake it permanent. One way to do so is tocreate an independent agency at the center of government to control regulatory quality.

Synchronize regulatory reform with govern-

ment reform and budget reform.This willmake regulatory reform more permanentand effective. Regulatory reform normally entails changes in the functions of govern-ment agencies. Changes in personnel andbudget should follow naturally.

Focus on compliance costs.Since the ultimategoal of regulatory reform is to reduce the

The regulatory reform program was not sufciently harmonized with larger policy goals such as protecting health and safety, giving opponents of reform an opportunity to question its legitimacy.

If seen as too narrowly focused on economicefciency, regulatory reform can appear toconict with other national policy goals. Therigid focus on rapid deregulation in the initialstages of the Korean reformsthough perhapsnecessary as shock therapytended to under-mine popular support for regulatory reformbecause people began to view it as conicting

with other politically popular national objectivesand agendas, such as health and safety. Reform-

ers failed to reassure opponents of regulatory reform that it would not weaken protections.

The Korean reforms tackled individual rules rather than groups of interlinked rules.

When economies become overregulated, piece-meal changes to individual regulations arealmost meaningless. Where regulations arepackaged with others, the most effectiveapproach to reform is to reconstruct the system

of regulations from scratchwith the aim of nding the most efcient means to achievepolicy goals. Korean reforms have not yetadopted this scrap and build approach.

The Korean reforms did not rely on market forces and self-regulation.

Regulatory reform can be an important steptoward a freer and more open society. But thisrequires that reform be based on an understanding

of the changing role of government and of theinteraction of government, businesses, and citizensin the market. And the success of reform would bemeasured by how much behavioral change itbrings about in market actors and in the publicsector and whether these changes are permanent.

In Korea regulations tend to become excessiveand restrictive in part because regulators,


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At the end of 1997, Korea suffered one of the worst economic crises ever experienced by amember country of the Organization for Eco-nomic Co-operation and Development. To restorestability and re-create the foundations for sustain-able growth, the government embarked on a

far-reaching program of regulatory, nancial, andstructural reforms. The regulatory reform programlaunched in 1998 as part of this recovery strategy affected thousands of regulations and administra-tive formalities across the whole of government.This case study examines the strategies of Korea incarrying out this ambitious program of regulatory reform.

The 1998 regulatory reform program includedtwo key initiatives. The rst was a deregulation

initiative in which the president ordered eachgovernment ministry to eliminate 50 percent of

its regulations. The second was an enduringinstitutional reform that established institutionsand mechanisms at the center of government topromote reform and monitor and guarantee thequality of regulations and the regulatory process.

The deregulation initiative was radical, aimed atreinvigorating the economy in the wake of theeconomic crisis. By contrast, the institutionalreforms can be considered evolutionary; they

were an outgrowth of past attempts at regulatory reform and adopted many of the earlier formsand structures. Korea hoped for a synergy effectbetween the two prongs of reform.

The reforms have led to many moderate suc-cesses. Whether they have effected a fundamen-

tal shift in the relationship between the state andthe market in Korea is not yet clear, however.

1. INTRODUCTION


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Koreas rst attempt at regulatory reform beganin the 1980s with the aim of dismantling theregulatory structure favoring governmentintervention that had been built up during the1960s and 1970s. Three presidential administra-tions made episodic efforts to reduce regulatory

burdens through institutional changes. Theseefforts were usually made at the beginning of anadministration, to gather political support, orduring recessions, to reinvigorate the economy.

The timing of Koreas 1998 regulatory reforms was therefore not unusual. But the severity of the Asian nancial crisis, and the peer pressureapplied by other member countries of the OECDto its newest member, gave the reforms an addedsense of urgency and greater seriousness.

Historical Context: 1960s1997In the early stages of its economic development,Korea depended heavily on direct interventionand allocation of national resources. This wasmost true in the 1960s and 1970s, when there

were doubts that market institutions were

functioning efciently. As a result, a tradition of government intervention in the economy became establisheda tradition that becameincreasingly costly as Korea entered its maturemarket development phase in the 1980s.

As the Korean economy grew and its structurebecame increasingly complex, limits in the govern-ments ability to control the economy began tobecome obvious. The costs of government failuresbegan to outweigh the benets of governmentintervention (RRC 1999, 2324). Korean busi-nesses had long complained of inefciencies arisingfrom Koreas complex and opaque regulatory regime, and as noted, there had been episodicattempts at regulatory reform since the early 1980s(Choi 2002, 5860). Thus even before the nan-

cial crisis, regulatory reform had been an ofcialgovernment policy in Korea for almost 20 years.

Early Regulatory Reform Efforts

In 1980, as Korea recorded its rst negativegrowth rate, widespread support for reformbegan to emerge. In 1981 newly inaugurated

2. CONTEXT OF THE REFORMS


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In 1992, the incoming Kim Young Sam adminis-tration established several committees to pursueregulatory reform as a way to combat the ongoingrecession. It created the Regulation RenovationCommittee as an advisory group to the president,

the Economic Administrative Regulation ReformCommittee in the Economic Planning Bureau,and the Committee to Examine Regulations onBusiness Activities in the Ministry of Commerceand Trade. The administration also formed thetemporary Deregulation Examination Team inthe Blue House.

These committees achieved some successes,including nancial deregulation, more exiblelabor and employment rules, and greater competi-

tion in trucking, telecommunications, gas stations, wholesale industries, and liquor manufacturing.

The general consensus, however, is that thecommittees were ineffective in pursuing mean-ingful regulatory reform. Their successes weregenerally limited and narrow in scope. Theperception among the general public was thatthe regulatory burden was actually increasingand that the government would never be willingor able to reform Koreas many sacred regula-

tions (Box 1). These regulations, recognized asuntouchable because they protect nationalagendas important to Korea, impose some of theheaviest burdens on business and economicactivity in the country.

Korea also adopted some market liberalizationmeasures from the late 1980s to the mid-1990s.Most notable were those aimed at liberalizingland use (1990), liberalizing imports (1992),opening the stock market to foreigners (1992),

opening the domestic capital market (1994), andderegulating loan nancing in the foreignmarket. Driving these changes were domesticpressures for more market competition com-bined with pressure from foreign groups seekingto invest in Korea. These legal amendmentscontributed to open up the Korean economy, butmajor changes were still needed.

President Doo Hwan Chun ordered his Cabinetto reform the laws, policies, administrative acts,and precedents that were inefcient and slowingthe growth and development of Korea. To effectthese changes, the government formed the

Examination Committee to Reform Factors ThatHinder Growth and Development, headed by the prime minister and with relevant ministersand civilians as members. To provide support,the government established the Support Teamfor Policy Reforms as a temporary secretariat inthe Blue House (the executive ofce and ofcialresidence of the president).

Between 1981 and 1986, the committee focusedon reforming laws and policies that incon-

venienced the majority of the public, governmentsupports and regulatory policies that reducedthe publics autonomy, laws and policies thathad become inappropriate as a result of changesin the administrative environment, and laws andpolicies that were inefcient and undemocratic.In all, the committee reformed 120 majorpolicies and 1,434 individual measures.

In 1987, a new president, Ro Tae Woo, waselected. In the following year his administration

established the Administrative Reform Commit-tee, directly under the president. This committeefocused on reducing the size of the governmentbut made little progress.

In 1990, to combat the recession of the time, theRo administration announced a comprehensiveeconomic plan. As part of that plan the adminis-tration established the Committee to Reduce

Administrative Regulations, headed by the primeminister and with various ministers among its

21 members. The committee was responsible forreducing regulations on businesses, though twosubcommittees were to carry out the actual work.One, created in the Economic Planning Bureau,

was responsible for administrative regulationsdealing with economic issues; the other, formedin the Ofce of the Prime Minister, dealt withgeneral administrative regulations.


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As a result of these very different political econo-mies, soft reforms had business allies but bureau-cratic enemies, while hard reforms were orphans.

Another reason for the lack of success is thatKorea used a bottom-up approach to regulatory reform that limited its effectiveness. Regulators were responsible for determining which regula-tions to reform or abolishtantamount to thepublic asking the regulators to admit that theirrules were mistaken or misguided. Althoughsome efforts were made to collect suggestionsfrom the private sector, the regulating bureau-crats always had the nal authority, and pro-posed changes that met with strong oppositionfrom a ministry would not take place. Even when changes were forced on a ministry by political pressures, the ministry could dilutetheir effect when implementing the reform.

These problems were worsened by regulatory capture. Many Korean ministries have longmaintained a cooperative relationship withinterest groups and organizations under their jurisdiction. The regulators naturally tended to

sympathize with the regulated interest groupsthat supported them. Voluntarily proposingregulatory reforms that might adversely affecttheir interest groups has been particularly difcult for the ministries.

Another problem was that reforms focused onthe stock of regulations, with no controls over

Why the Reforms Before 1998 Were Unsuccessful

Why were these previous reforms not successful?

Examining this question is useful because thefactors working against the success of reformsbefore 1998 are the same ones that affected the1998 reforms reviewed in more detail in thiscase study.

One major reason that the previous reforms hada limited impact was a lack of demand forcomprehensive reform. Korean businesses haveusually called for soft reformsaimed atreducing bureaucratic intervention and red

tapeand it is on these reforms that the Koreangovernment has therefore focused. Soft reformshave the effect of reducing regulatory controlsover business activities, and their costs fallmostly on the bureaucrats. Thus bureaucrats putup direct and indirect resistance to the reforms,resulting in a cycle of deregulation and reregula-tion corresponding with episodes of politicalinterest in reform.

Korea has engaged much less enthusiastically in

hard reformsthose promoting competitionand market principles. Because hard reformshave a direct impact on the interests of compa-nies, the business sector has tended to resistthem. Moreover, bureaucrats have been less thaneager to introduce market principles that wouldreduce their discretionary powers over theeconomy.

BOX 1

Sacred Regulations in Korea

The sacred regulations in Korea include those designed to protect farmers, workers, and consumers; to protect

small and medium-size enterprises from competition; and to protect the environment. They include regulations tostabilize prices and employment, to prevent real estate speculation, and to ensure that nancial institutions followsound prudential standards. They also include regulations dealing with chaebol (conglomerates) and witheducation and culture.

Source: Kim 2000.


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Members of the committees were oftenchosen on the basis of politics rather thanexpertise, and the civilian members werepart time and unable to devote all theirattention to regulatory reform. Thus the

committees could not integrate into theadministrative bureaucracy, and the bureau-cracy had the upper hand in deciding thedirection and extent of regulatory reform.

While the administration adopted tools thatcould have been used to improve regulatory quality, it failed to establish a systematicprocess for doing so. As a result, it couldneither directly affect the regulatory processnor change the bureaucratic culture.

For all these reasons, the many measures Koreaintroduced for regulatory reformwith the aimof strengthening market competition andliberalizationled to few results and little reduc-tion of regulatory burdens. The measures were adhoc, leaving major regulatory barriers untouched.

And even when some of the more formal mea-sures were removed, informal measures such asadministrative guidelines remained.

Context of the 1998 ReformsReformers recognized this failure. Toward theend of the Kim Young Sam administration thatrecognition led to the drafting, after muchdebate, of the historic Basic Act on Administra-tive Regulations. The foundation for the 1998institutional reforms, this law created a power-ful, long-term regulatory reform body, the Regu-latory Reform Committee, and mandatedregulatory quality controls such as regulatory

impact analysis.

Like previous attempts to reduce regulatory burdens and reform the regulatory system, the1998 reforms took place in the context of a new presidential administration and a severe domes-tic recession. As a result of the 1997 Asiannancial crisis and the recession that followed,1998 was the rst year since 1980 in which

the ow. Thus while the reformers were improv-ing existing regulations, new ones were continu-ally introduced. That existing regulations haveto be modied, and new ones introduced inresponse to continual social and economic

changes, is inevitable. But the new regulations were just as low in quality as the old ones.Improvements were rapidly undermined by new problems.

Yet another element undermining effectivenessis that public ofcials are generally passive ordefensive about regulatory reforms. The reasonis not only that they want to hold onto powerand territory but also that they are generally risk averse. Government ofcials often give greater

weight to the potential adverse side effects of reform than to its potential benets.

The Kim Young Sam administration made amore systematic attempt at regulatory reformthan its predecessors, creating committees incharge of reform in different areas. But even thisreform attempt is generally judged to have failedbecause the committees were not very effective.

A crucial problem was lack of expertise and afailure to allocate skilled and dedicated personnel

(Lee and Han 1999, 22533). Other factors were also at play:

While the administration establishedadvisory committees on scores of differentissues, overall regulatory reform did notreceive focused attention. The roles of different committees sometimes overlapped,so that it was unclear who was responsiblefor regulatory reform.

The Regulation Renovation Committee incharge of regulatory reform was an advisory body with little actual power over policy.The committee had neither legal powers norclear political support.

Some of the committees were temporary,reducing their credibility in persuading minis-tries and interest groups to accept change.


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The most important goal of economic reformafter the nancial crisis was to reinstate effectivemarket governance structures in the public,nancial, and corporate sectors. The reforms wereintended to change the traditional relationship

between the government and the market, as wellas the role and behavior of individuals, by reden-ing the rules of the game in market interactions.

The crisis had shown that the regulatory struc-ture in Korea was woefully inadequate, especially for the nancial sector. The regulatory regimecould not adequately monitor the transactions of nancial institutions nor maintain their sound-ness. Another area highlighted by the crisis wasregulation of foreign investment. To overcome

the lack of foreign reserves, the direct cause of the nancial crisis, Korea needed greater foreigndirect investment. But direct investment by foreigners faced not only explicit barriers but alsoexcessive regulations and inefcient regulatory structures that made such investment difcultand unattractive. Regulatory barriers to entry were not entirely an accident, since signicanteconomic interests in Korea were concernedabout the market effects of inward investmentand increased competition.

The government, in cooperation with theInternational Monetary Fund, began to reformregulations in these two areas from the earliestdays of the nancial crisis. The reforms focusedon building a regulatory structure to improveprudential supervision of the nancial industry and on deregulating foreign investment.

The results proved to be encouraging, andPresident Kim Dae Jung quickly decided to

expand regulatory reform and deregulation to allsectors of the government. In 1998 he instructedministers to eliminate 50 percent of the regula-tions held by each ministry by the end of theyear. In addition, the reform measures pre-scribed by the Basic Act on AdministrativeRegulations were adopted with strong supportfrom the president and the prime minister. Atleast in the short run these broad regulatory

Korea recorded a negative growth rate. Thecrisis and the recession were triggered by anexternal contagion effect from Southeast Asia,but Korea suffered a much harsher recessionthan most other Asian countries because of its

structural problems. These included a lack of exibility throughout the economy, a conse-quence of a rigid, anticompetitive regulatory environment for all rms, from the smallest tothe largest.

The crisis gave new strength to reformers and weakened the supporters of a regulatory state whose habits were two decades out of date. Toovercome the nancial crisis and promote fastermicroeconomic adjustment, Korea launched

reforms aimed at promoting efciency anddiscipline through market principles and marketforces. Most reform measures stemming fromthe nancial crisis were classied into one of four categories:

Public sector and regulatory reforms

Financial sector reforms

Corporate sector reforms

Labor market reforms

There were other major reform measures, suchas those to promote foreign investment and toreduce trade barriers. But these categories areoften referred to collectively as the four majorreform areas to emphasize their importance.These reforms were begun by the outgoingpresident, Kim Young Sam, but did not takehold until the incoming president, Kim Dae

Jung, took the initiative.Many of the reform measures required changes inregulatory methods and policy tools, and in abroad sense they were all regulatory reforms.Public sector reforms included passage of theBasic Act on Administrative Regulations, whichcontained basic provisions on the institutions andprocesses of regulatory reform.


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Administrative Procedures Act and the Adminis-trative Disclosure Act provided far greater oppor-tunities for input on government policy andlegislation from the nongovernment sector. Many of the NGOs were active across a wide range of

policy areas relevant to regulatory policy, reform,and anticorruption. These included broadcoalitions such as the Citizens Coalition forEconomic Justice and the Citizens Coalition forBetter Government.

reforms also gained the support of the National Assembly and the major political parties.

Another important political development was therise of nongovernmental organizations (NGOs)

in the 1990s. Rare in Korea until the late 1980s,these organizations have since multiplied rapidly;by 2000 they numbered roughly 8,000. Govern-ment policy may have been instrumental in thisrapid growth: major new legislation such as the


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The Basic Act on Administrative Regulationsforms the legislative core of todays regulatory reform policy in Korea and is still a key driver of the reform process. According to explanatory material published with the act:

The aim of the [Basic Act on AdministrativeRegulations] is to break away from the hithertofragmentary and dispersed attempts at regulatory reform and to move toward building a founda-tion for a more fundamental, enduring andsystematic regulatory reform . . . The purpose of this Act is to promote private initiative andcreativity in the social and economic sphere inorder to improve the quality of life for the peopleand to enhance national competitiveness.1

The Basic Act denes general principles forregulation, including minimum necessary regulation and greater transparency and ef-ciency. It sets out rules for making new regula-tion, including the use of regulatory impactanalysis, sunsetting, and review by the Regulatory Reform Committee and the Ofce of Legislation.The act also requires that all existing regulations

be reviewed by agencies in conjunction with theRegulatory Reform Committee and that allregulations be registered in a central registry.

Design of the 1998 InstitutionalReformsThe Kim Dae Jung administration established theRegulatory Reform Committee, as required by theBasic Act on Administrative Regulations, in April1998. Work on the Basic Act had begun in late1996, but not until after the nancial crisis wasthere enough political will and bureaucraticmomentum to actually establish the committee.This proved to be Koreas most important institu-tional reform: the committee reviews new andexisting regulations and bears the main responsi-bility for maintaining regulatory quality.

The Regulatory Reform Committee is meant tohave sufcient political and bureaucratic strength

3. CONTENT OF THE REFORMS

1 Basic Act on Administrative Regulations,Act 5368, August22, 1997. References to the act are to the English edition,dated June 1999, which includes explanatory andsupplementary material.


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Receive opinions and suggestions on how toreform or revise regulations.

Examine the current status of regulations ineach executive government agency.

All new regulations or amendments must beapproved by the Regulatory Reform Committee.Three subcommittees are responsible for examin-ing the technical details of regulations submittedfor approval. Two examine economic regulationsthe rst, regulations dealing with nance, publicnance, industry, and construction; and thesecond, regulations dealing with agriculture,maritime affairs, the environment, and informa-tion technology. The third subcommittee exam-ines administrative and social regulationsthosedealing with administration, welfare, education,culture, and labor (OECD 2000, 13940; RRC1999, 3446).

Most regulations to be adopted or strengthenedmust undergo the following process of quality control:

The ministry proposing the regulation must write a regulatory impact assessment, aformal document that explicitly considersthe costs and benets of the proposedregulation and considers alternative methodsof achieving the regulatory goal.

The proposal and the regulatory impactassessment undergo an internal examination within the ministry.

The ministry requests that the Regulatory Reform Committee examine the proposal.The proposal is rst examined by thecommittees technical subcommittee, thenby the committee itself.

The Regulatory Reform Committee also maintainsa comprehensive registry of regulations, accessiblethrough the Internet (http://www.rrc.go.kr).Technically, a regulation is valid and enforceableonly if it has been entered into the registry.

to lead government-wide reforms. It is an ofcialgovernment body directly accountable to thepresident and co-chaired by the prime minister.The other co-chair is a civilian, to ensure that thecommittee represents both the government and

the civilian sector.Role of the Regulatory ReformCommittee

In October 2004 the committee had 20 mem-bers, 13 of whom were civilian. The civilianmembers included academics (among them thechairman of the Korea Society for Regulatory Studies), industry leaders, a foreigner who hadbeen the head of the American Chamber of Commerce, the ombudsman for foreign directinvestment, and a representative from a con-sumer group. Besides the prime minister, theseven government members included relevantministers. While the committees structure issimilar to those of previous organizationsentrusted with regulatory reform, it is a perma-nent standing agency rather than a temporary one, and its legislative mandate gives it greaterpower.

The committees functions include quality controlof individual regulations, but go far beyond thatto reform of regulatory strategy and functions.The committees charter declares that it shall(RRC 2003, 32):

Establish the basic direction for regulatory reform and regulatory research anddevelopment.

Review proposals for new and strengthenedregulations.

Examine and update existing regulations.

Establish and implement a program forcomprehensive review and reform of existingregulations.

Register and publish regulations.


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have a ve-year sunset clause, so that unless aregulation is explicitly renewed, it will lapse within ve years.

The government of Korea has dened principles of regulatory reform in line with international goodpractice. The 2002 White Paper on Regulatory Reform sets out the following principles to guidethe practical application of regulatory reform:

Economic regulations are to be eliminated, while social regulations are to be made moreefcient.

The method of regulation should changefrom a negative system (where actions areprohibited unless exemptions are made) to apositive system (where actions are permitted

with a simple registration or notice, andprohibited actions are clearly spelled out).

The transparency of regulation is to beincreased, and excessive discretion by eld-level bureaucrats reduced.

Regulatory Reform Processand Structure

The Regulatory Reform Committee is in chargeof the entire regulatory reform process (Figure 1).

The Ofce of the Prime Minister, through theofce of a vice minister in charge of regulatory reform, carries out the reforms within the govern-ment. In turn, this ofce, through the CentralGovernment Regulatory Reform Team and theMinistry of Government Administration andHome Affairs, controls regulatory reform in eachministry as well as in provincial and local govern-ments. The Expert advisory group advises theRegulatory Reform Committee.

Each year core areas for reform of existingregulations are chosen, and each ministry formsa plan for eliminating or reforming regulationsunder its control and establishes an annual goalfor reducing the number of regulations. Thetotal number of regulations is limited by theBasic Act on Administrative Regulations. Inaddition, under the Basic Act all regulations

FIGURE 1

Structure of Regulatory Reform in the Korean Government, 2004

Note: RRC is Regulatory Reform Committee.

Office of theVice Minister in chargeof regulatory reform

Secretary to RRC inthe Office of thePrime Minister

Regulatory reformgroups in each

provincial and localgovernment agency

Ministry of GovernmentAdministration and

Home Affairs

Regulatory reformgroups in each centralgovernment agency

Expert committeemembers and

research personnelExpert advisory group

Regulatory Reform Committee


22/4316

made each minister personally responsible formeeting that goal.

This deregulation strategy was designed by thepresidential advisers at the time, notably the

adviser to the president for economic policy,Tae-dong Kim. Chosen from outside thetraditional bureaucracy, these advisers held anegative view of bureaucratic intervention in theeconomy. They pursued various reforms toreduce the governments inuence on theeconomy, with deregulation a centerpiece.

The administration justied the presidentsorder on the grounds that recovering from thenancial crisis demanded quick and drastic

deregulation. It also hoped that deregulation would build popular political support for theadministration, forced to make unpopulareconomic and political decisions in the wakeof the nancial crisis. The administrationneeded to create an identity for itself, and it

wanted to use the popular sentiments againstbureaucracy, corruption, and regulation to itsadvantage.

Following the presidential order, the ministries

reviewed all their regulations to determine which were to be eliminated on the basis of thefollowing principles:

All regulations were to be examined on azero basisthat is, from the point of view of stakeholders, with no prejudices, predis-positions, or preconceptions. Regulationshindering competition and the market wereto be eliminated, but those required toprotect health, public safety, or the environ-

ment were to be modied to achieve theirgoals as efciently as possible.

All regulations without a legal basis wouldlose their status by the beginning of 1999.Regulations without a legal basis thereforehad to be either eliminated or given a legalbasis through appropriate legislation.

Regulations with low compliance rates, andthose whose costs outweigh their benets,are to be eliminated.

Overlapping regulations are to be merged

into a single, unied regulation. Regulations that are contrary to interna-

tional agreements and global standards areto be eliminated.

These principles have focused reforms and giventhem a certain consistency across the govern-ment and over time, though they have some-times failed to prevail against vested interestsand sacred regulations.

Regulatory reform by provincial and local govern-ments was also encouraged. This was donethrough education and training for local publicofcials, dissemination of successes at each level of government, and monitoring and evaluation by central government agencies such as the Ministry of Government Administration and Home

Affairs, the Bureau of Auditing and Inspection,and the Ofce of the Prime Minister.

The performance at the local level is not wellreported. But many believe that reforms by localgovernments were less extensive than those by the central government, with the unfortunateresult that many Korean people remain largely unaffected by the reforms in their everyday lives.

Strategy of the 1998 DeregulationPresident Kim Dae Jung, from the beginning of his administration, had expressed a desire tocarry out comprehensive regulatory reform. Heordered each ministry to submit plans forreform, but was reportedly unimpressed withthe results. That led to the presidential order tothe ministries to review their regulations andeliminate 50 percent of them across the board(RRC 1999, appendix chapter 1). The president


23/4317

This process was not nearly as smooth as thisshort description indicates, however. Because of the intense political pressure and an impendingdeadline set by the president, the process wasperhaps more hurried than warranted. But given

the reluctance of the bureaucracy, the massivederegulation might not have occurred withoutsuch pressure.

Because the ministries already had data on theregulations under their jurisdiction, they wereable to identify which to eliminate through inter-nal reviews. Each ministry submitted its plan toeliminate or reform regulations to the Regulatory

Reform Committee, as required by the Basic Acton Administrative Regulations. The committeereviewed each plan and regulation before makingnal decisions on which regulations to eliminateor revise.


24/4318

The volume of research assessing the impact of regulatory reform in Korea is fairly small, as isthe case for most countries. Nevertheless, theresearch results that are available suggest that the1998 institutional reforms and deregulation pro-duced benets for both businesses and the

economy as a whole.

Impact of the 1998 InstitutionalReforms

While little research has dealt directly with theimpact of the institutional reforms in Korea, theRegulatory Reform Committee has publisheddata on the regulatory proposals that it hasexamined. These data show that between 1998and 2002 the committee examined 4,518regulations associated with 1,339 lawsand rec-ommended that 1,544 of these regulations berevised or withdrawn (Table 1).

According to ofcial data, Korea had 7,435regulations at the end of 2002. That totalsuggests the signicance of both the number of regulations that the committee examined and

the number of regulatory proposals that itrecommended for revision or withdrawal. Takentogether, the numbers also suggest that theRegulatory Reform Committee did much tohelp reduce the growth in new regulations.

Impact of the 1998 DeregulationFor the deregulation initiative, direct measuresof the outputs are clear. By the end of 1998, as aresult of the presidential order calling for a 50percent reduction in regulations, the govern-ment had eliminated 5,430 (48.8 percent) of the11,125 regulations previously in place and hadrevised another 2,411 (21.7 percent). By 2002,however, new regulations had begun to increasein number, bringing the reduction since 1998 toonly 33 percent (Table 2).

The deregulation touched virtually all areas of theeconomy and of Korean life in general. It coveredsuch areas as paperwork, social regulations,corporate regulations, nancial sector regulations,regulations on venture rms and on small andmedium-size enterprises, and regulations relating

4. IMPACT OF THE REFORMS


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TABLE 1

Proposals for New or Strengthened Regulations Examined by theRegulatory Reform Committee, 19982002

Regulations by Results of Examination

Associated Regulations Revision WithdrawalLaws Examined Recommended Recommended Passed

Economic Subcommittee I 581 1,724 512 122 1,090(29.7%) (7.1%) (63.2%)

Administrative and 379 1,347 300 200 847Social Subcommittee (22.3%) (14.8%) (62.9%)

Economic Subcommittee II 379 1,447 345 65 1,037(23.8%) (4.5%) (71.7%)

Total 1,339 4,518 1,157 387 2,974(25.6%) (8.6%) (65.8%)

Source: RRC 2003, p. 58.

TABLE 2

Regulations Eliminated or Modi ed by Selected Ministries and AllGovernment in Korea, 1998 and 2002

Regulations in 1998 Regulations in 19992002 Percentage

Initial Year-End Year-End Year-End Reduction,Ministry Count Eliminated Modied Count a Eliminated Modied Count a Count a 19982002

Welfare 1,703 857 256 883 90 36 793 765 55.08

Constructionand Transport 917 467 232 606 23 33 583 754 17.78

Maritime Affairs 778 422 169 535 53 38 482 567 27.12

Agriculture 701 362 165 423 23 15 400 491 29.96

Commerce,Industry, andEnergy 667 345 174 355 16 25 339 410 38.53

Financial

SupervisoryCommittee 630 315 131 407 35 64 372 541 14.13

Environment 643 224 170 536 25 67 511 576 10.42

Finance andEconomy 509 255 137 336 12 28 324 434 14.73

All Government 11,125 5,430 2,411 6,820 503 570 6,308 7,435 33.17

Source: Regulatory Reform Committee Web site (http://www.rrc.go.kr)a. Includes previously omitted, newly established, or newly found regulations.


26/4320

to foreign direct investment and to trade andmarket openness. Among other things, deregula-tion made dismissals of workers easier, made work and employment rules more exible,increased access to foreign exchange markets,reduced regulations on foreign ownership of land,2 and led to both privatization of andreduced privileges for state-owned enterprises.In foreign direct investment, deregulation wasgenerally deemed to have made inward invest-ment easier. Koreas growth policies had resultedin numerous barriers to entry, such as govern-ment monopoly and licensing, permit, andreporting requirements. Indeed, according to a1997 government study, 63 percent of all indus-tries (205 out of 325) had regulations controllingmarket entry (KDI 1997).

A private sector study in 2002, using a moredetailed categorization of industries, found avisible decline in the number affected by entry barriers. Between 1992 and 2001 the share of industries subject to entry barriers dropped from

around 45 percent to 36 percent (Table 3). Evenmore important, the share with strong barriersdropped by almost half.

The easing of entry barriers, along with othermeasures to promote foreign direct investment,probably contributed to an increase in suchinvestment. In 19972000 the inows of foreign direct investment into Korea rose tounprecedented levels (Figure 2). Inows fellsubstantially in 2001, however, and sank to thelevel of before the Asian crisis in 2002.

Another study projected that the 1998 deregula-tion would have positive macroeconomic effects.The study, by Ha and others (1999), focusedprimarily on regulatory reforms in such areas asemployment, entry barriers, price cap regulation,inward investment, the environment, and landuse. The study rst estimated the direct effectsand the direct net benets of the 1998 deregula-tion (Table 4). Using input-output table analysis,the study then projected the effects of deregulation on major sectors of the Koreaneconomy. Finally, it used these results in amacroeconomic model to project the overalleconomic effect of the deregulation (Table 5).

2 Foreign investors had often cited restrictions on foreignownership of land as the most serious barrier to foreigndirect investment. See, for example, Kiska (2003).

TABLE 3

Industries with Entry Barriers in Korea, 1992 and 2001

Industries with Barriers

Year and Type of Industry Total Industries Strong Barriers Weak Barriers Total

1992Manufacturing 585 103 85 188 32.1

Nonmanufacturing 610 249 104 353 57.9

Total 1,195 352 189 541 45.3

2001

Manufacturing 585 42 73 115 19.7

Nonmanufacturing 610 147 165 312 51.1

Total 1,195 189 238 427 35.7

Source:Kim 2002.

Industries with

Barriers asPercentageof Total


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FIGURE 2

In ows of Foreign Direct Investment into Korea, 19702002Millions of U.S. dollars

Source:UNCTAD Web site.

0

2000

4000

60008000

10000

1 9 7 0

1 9 7 2

1 9 7 4

1 9 7 6

1 9 7 8

1 9 8 0

1 9 8 2

1 9 8 4

1 9 8 6

1 9 8 8

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

2 0 0 0

2 0 0 2

TABLE 4

Projected Direct Net Bene ts of 1998 Deregulation in Korea,19992003

Area Net Benets

Job creation 1,066,200 jobs

Cost savings due to lower regulatory costs 18.69 trillion won (4.4 percent of GDP in 1997)

Reduction of government costs 590 billion won

Foreign direct investment $36.5 billion increase expected over ve yearsSource:Ha and others 1999, p. 22.

TABLE 5

Projected Macroeconomic Effects of 1998 Deregulation in KoreaOver 10 YearsPercent (except where otherwise specied)

Unemployment RateReal GDP Consumer Prices Employment Real Wages (Percentage Points)

8.57 7.18 0.94 0.95 0.91

Source:Ha and others 1999, p. 22.


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1998 deregulation, with the index falling from60.6 to 31.9. As can be expected, however, hefound that regulations were more likely to beeliminated or revised if they were relatively unimportant and if there was no substantial

opposition to the change. The Regulatory Reform Committee also recognized this limita-tion of the drastic push in 1998, and it re-sponded by introducing the concept of essentialtasksmajor targets of regulatory reform thatincluded not only a ministrys priorities or petitems but also burdensome regulations theministry did not eliminate.

Another measure of the effects of the 1998deregulation comes from the World Economic

Forum. In its Global Competitiveness Report 1997, Korea ranked 48th among 53 countrieson the burden from administrative regulations.In Global Competitiveness Report 20012002, however, Korea ranked 26th among 75 coun-tries on the general burden from regulation.

While the categories used by the World Eco-nomic Forum changed between 1997 and 2002,the improvement in Koreas ranking can beattributed at least in part to the reduction inregulatory burden over the period.

The study projected that deregulation wouldresult in real GDP growth in Korea of 8.57 percentin 10 years compared with the base case of noderegulation. This increase is equivalent to adding0.64 percentage point to the annual growth rate.

The deregulation also would lower consumerprices by 7.18 percent and reduce the unemploy-ment rate by 0.91 percentage point in 10 years,again compared with the base case.

Yet another study assessed the effect of the 1998deregulation from the point of view of stake-holders, using a relatively simple index of regulatory burden, and concluded that the effect was positive. Han (1999) rated regulationsaccording to their perceived burden, then

calculated an index of these ratings before andafter the 1998 deregulation. In evaluating theburden of rm entry regulations, for example,Han gave points ranging from zero (whereregulations specied no requirements) to ve(where regulations effectively acted as an entry barrier). Points were assigned in a similar way for other types of regulations.

Hans assessment suggests that the regulatory burden declined by almost half as a result of the


29/4323

In implementing the 1998 reforms, the Kim Dae Jung administration went beyond the reformefforts of previous administrations in two crucial

ways, taking signicant rst steps to reduce theregulatory burden on the Korean economy:

Institutionalizing reforms.The Kim Dae Jungadministration established permanentinstitutions and mechanisms of regulatory reform, such as the Regulatory ReformCommittee, regulatory impact analysis, andthe sunset clause. Each ministry establishedan internal regulatory review committee,and the activities of these committees aremonitored by the Ofce of the PrimeMinister and the Regulatory ReformCommittee.

Improving accountability.President Kim set anumerical target for deregulation that servedas a concrete goal that ministries had to meet.Setting a numerical target had mixed effects,but it did signal that the government wasserious about regulatory reform and estab-lished unequivocal goals for monitoring.

The institutional changes were intended to allow the reforms to continue even if the politicalleaders and the public lose interest. But thesupport for regulatory reform weakened near theend of the administration, when the need forreform was less desperate and the political

strength of the president waned. The new institutions were not enough to overcomeimplicit resistance to reform in the bureaucracy.Moreover, because the deregulation measuresreduced the regulatory burden less than had beenhoped for, many observers lost interest in furtherregulatory reform.

Differences Between the 1998Reforms and Previous EffortsThe Korean governments bold, sweeping reformmeasures in 1998 were in part a response tocriticism of previous reform methods. Indeed,one of the major goals was to avoid the short-comings of previous attempts at reform. Thebold reform strategy was intended to signal thegovernments seriousness about reforming

5. IMPLEMENTATION OF THE REFORMS


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In another innovation, the 1998 reforms intro-duced the idea of bureaucrat-led regulatory reform. Previous reform attempts had shown thateven if a public-private committee was establishedto pursue and oversee the entire regulatory reform

effort, it would have extreme difculty in over-coming bureaucratic resistance. The reason wasthat the civilian members could not devote alltheir time to the reforms and lacked the expertiseof the bureaucrats who lived with regulationsevery day. The 1998 reforms recognized the needto create a force within the bureaucracyapro-reform interest groupthat would act as aag carrier for reform.

In addition, the 1998 institutional reforms

engineered the relationship between the Regula-tory Reform Committee and the bureaucracy toincrease the bureaucrats incentives for reforms.

While the Regulatory Reform Committeeconsists of civilian and government members,the reforms established a bureaucratic apparatusto support the committee within the Ofce of the Prime Minister (Kim 2003, 514). Thecommittee would provide directions for reform,

while bureaucrats in the Ofce of the PrimeMinisterand the bureaucrats under their

supervision in individual ministrieswouldcarry out the actual reforms.

This structure created a more even match be-tween the reformers and those opposed to reform,internalizing reform in a permanent challengefunction in the bureaucracy. But it also increasedthe need for political support, since it put bureau-crats in charge of regulating the regulators, raisingthe risk of capture by a resistant bureaucracy if outside checks were not in place.

Gaining and SustainingMomentum for ReformsSeveral factors came together in 1998 to createmomentum for regulatory reform. The rst of these factors was the Asian nancial crisis, whichmade it obvious early on that the efciency and

regulations and to create political and socialmomentum. Since the new government hadtaken ofce in the middle of the economic crisis,the need for regulatory reform was all the moreurgent and widely accepted.

The 1998 reforms did differ in several impor-tant ways from previous efforts. To begin with,they resulted in a much more structuredsystem. Managing regulatory quality becamepart of the administrative process by law,through the Basic Act on AdministrativeRegulations. Ministries could not evade thelaws requirement that new regulations andamendments of existing ones must go througha review by the Regulatory Reform Committee.

The law also specically requires regulatory impact analysis for each new and amendedregulation. OECD recommendations and guide-lines (1997b) were instrumental in introducingand shaping the process in Korea. Regulatory impact analysis is still at a primitive stage inKorea, however, with the government not yethaving accumulated sufcient experience andknow-how.

Another major difference in the 1998 reformscan be seen in the method of reducing thenumber of regulations. Under the bottom-upapproach used by past administrations, regula-tions remained in place unless the responsibleregulator decided to eliminate them. Regulatory impact analysis places the burden of proof forthe need and efcacy of a regulation on theregulators themselves. If the regulators cannotconvince the Regulatory Reform Committeethe majority of whose members are civilians

that a particular regulation is necessary, thatregulation is abolished or changed.

The president also increased the accountability of regulators by setting the quantitative targetfor deregulation. Given the authoritative natureof the Korean government, this presidentialorder carried great weight.


31/43


32/4326

Moreover, Shin (2002, 4648) points out thatinterest groups could bypass the regulatory review process by going directly to the National Assembly.This alternative channel allowed interest groups toincrease regulations de facto through new laws

increasing the regulatory burdensince theRegulatory Reform Committee and the regulatory review mechanism were not empowered to rejectlaws passed by the National Assembly.

Though powerful on paper, the Regulatory Reform Committee also lacked the legal force orexpertise to deal with intentional sabotage by rule-making ministries:

The civilian members of the committee did

not represent a cross-section of stakeholders,nor did they have the expertise needed. Theremay have been a tendency to choose mem-bers because they were widely known to thepublic rather than on the basis of expertise.

The committees bureaucratic support mecha-nism in the Ofce of the Prime Minister may not have had the support needed to overcomeantireform sentiments in ministries, and thesupport agency itself lacked expertise, in part

because of the tendency for rapid managerialturnover in Korea.

Some of the committees rst decisions as agovernment institution were culturally controversial and may have weakened publicsupport for regulatory reform.

In addition, the range of regulatory reformsenvisioned in the Basic Act on AdministrativeRegulations proved to be too narrow. The law wasdesigned to take into account the criticism by businesses and experts that previous regulatory reform efforts had been unfocused and needed tobe unied under a common framework. But theremay have been some miscommunication betweenthe government and the National Assembly. TheNational Assembly wanted to reduce the regula-tory burden on businesses. The government, by contrast, focused on more formal, legalistic

Insufcient focus on producing tangiblegains for businesses

A continuing lack of cooperation on regula-tory reform within the government

A lack of coordination between the regula-tory reform agencies and the provincial andlocal governments

Political support proved to be too narrow as thecrisis passed. The Basic Act on AdministrativeRegulations was passed by the National Assem-bly in 1997 thanks in large part to personalefforts by President Kim Dae Jung and PrimeMinister Go Geon, and there was little attemptafterward to widen the political support forregulatory reform. As the urgency of the crisisdeclined, so did active support for regulatory reform and further deregulation (see Kim 2003).

Politicians also sensed that the continuing strugglefor good regulation might require more politicalcapital than it produced. After the drastic purge of half the existing regulations, the political andsocioeconomic context of the remaining agendabecame much more complicated, with lesspolitical capital to be gained from dramaticmeasures. As the regulatory system began to deal

with longer-term and more institutional prob-lems, the attention of the president waned.

Without the presidents support, the governmentsrepresentatives on the Regulatory Reform Com-mittee lost their enthusiasm for reform proposals.The committee continued to examine new regulations, but gradually lost its aggressiveness.

The mechanism for regulatory review also beganto show aws. The Regulatory Reform Commit-tee regularly examined new regulations andreleased regulatory impact assessments to thepublic. But battles with the bureaucracy contin-ued because its traditional practice of controllingrather than enabling private sector activity hadchanged little. That is, the regulatory quality agenda remained top down rather than being builtinto the machinery of government at all levels.


33/4327

attend only formal meetings chaired by theprime minister, which take place only a few times a year. As a result, the budget and reforms were not closely tied at the working level.Though these limitations were widely recog-

nized, the regulatory regime did not make mucheffort to overcome them (see Kim 2003).

Similarly, there was a lack of coordinationbetween the regulatory reform agencies and theprovincial and local governments. This lack notonly explains why regulatory reform at the locallevel was weak. It also helps explain why publicsupport for regulatory reform was weak, sincethe public most often deals with regional govern-ments. The failure of this network reected a

shortage of resources (especially human resources)devoted to regulatory reform, particularly in theMinistry of Government Administration andHome Affairs.

Other factors also contributed to the lack of success with regulatory reform at the local level:

The anticorruption campaign, ironically,discouraged changes in behavior towardclients. Client service became confused withcorruption. Since bureaucrats feared beingcharged with attempted corruptionwhenhelping a petitioner, for examplethey tended to be rigid and formalistic in interpret-ing decrees. This suggests that coordinationbetween regulatory reform and auditing andinspection authorities is vital for local reforms.

The guidance and manuals for regulatory reform that the Ministry of Government

Administration and Home Affairs producedand distributed were not very relevant oruser friendly. For example, the developmentof regulatory alternatives is not presented ina way that can be put into practice.

Reforming laws and decrees takes time, butpeople are sometimes impatient, even if reforms are beginning to lter down.

reforms to general administrative regulations, withless attention to the actual impact on businesses.The governments approach won out.

The failure to fully consider the effects of the

reform on the regulatory burden was one of the weaknesses of the 50 percent reduction plan.Blindly establishing an arbitrary number forelimination and assigning the same goal to allministries was criticized as placing too littleemphasis on the most important regulations.Indeed, priority was given to eliminating lessimportant and trivial regulations, while many duplications and overlaps were overlooked (Kim1999, 45758; Han 1999, 1319). A long list of critics have pointed out that, despite the 50 percent

reduction in the number of regulations, thetypical citizen or business feels no reduction inthe regulatory burden.

Most observers had recommended a more focused,sector-by-sector effort (for example, OECD 2000and Kim 1999). While there has been some efforttoward that goal, progress has been slow.

Within the government, cooperation on regula-tory reform was lacking despite the efforts of the

Kim Dae Jung administration to foster it. Whilethe regulatory reform mechanism that theadministration established was more extensivethan any previous network, it still was notenough to achieve a cooperative relationshipbetween ministries and the central agenciesresponsible for regulatory reform. Thepro-reform interest group created within thebureaucracy was not strong enough to overcomethe antireform interest group there.

One way to strengthen reform incentives withina bureaucracy is to tie reforms to budget alloca-tions. To do so in Korea required achievingmore cooperation between the regulatory reformagencies and the Ofce of Planning and Budget.Toward this end the minister of the Ofce of Planning and Budget was appointed to theRegulatory Reform Committee. Unfortunately,ministers who are members of the committee


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Summing Up and Looking ForwardIt will take some time before Koreans feel thefull impact of the regulatory reform of 1998.The level of regulatory intervention in Korea isstill considered to be quite high. Moreover,

while half the previous regulations were elimi-nated, the quality of the remaining onesthesource of most regulatory burdenshas yet tobe addressed. In addition, at the regulatory

window where people come into contact withthe bureaucracy, changes in behaviors andattitudes have been slow to emerge.

While the machinery of reform continues, therehas been no sustained, focused effort for furtherregulatory reform since the initial deregulation in1998. Instead, most reforms have been piecemeal,concerned with specic regulations in specicareas, such as deregulation of zoning or liberaliza-tion of operating hours for bars. All this has led tothe perception that the recent regulatory reformefforts have not reduced regulatory burdens.

Still, the 1998 reforms should not be written off as a failure. The method was authoritative andperhaps even crude. But the reform efforts didmove the stagnant bureaucracy and managed tosubstantially reduce the number of regulations.Many measures of the regulatory environmentshow improvements in Korea.

Indeed, Korea succeeded in many ways inputting into place the appropriate tools andmechanisms to carry out true reform. Accordingto an OECD review of Korean regulatory reform, for example, Koreas formal mechanismsfor maintaining transparency and public partici-pation had exceeded the average for OECD

member countries by 2000 (OECD 2000). Inaddition, Koreas regulatory reform policies andregulatory review mechanisms surpassed theOECD average in rigor and design (Box 2).

The issue lies in Koreas willingness to actually use the tools and mechanisms of reform. Busi-nesses in Korea still cite the regulatory burdenand the lack of transparency as major problems

Implementation and Monitoringof ReformsThe implementation and monitoring of the1998 reforms reected signicant improvements

compared with the previous reform efforts. Thescrutiny of international organizations andinvestors during and after the Asian nancialcrisis served as a monitoring mechanism. More-over, for the deregulation initiative the numericalgoal of 50 percent was relatively simple toimplement and monitor: each ministry wasrequired to report the initial number of regula-tions, and the presidents ofce then monitoredthe numbers throughout the year.3 The criticalreview required for new or strengthened reforms

was also relatively simple to implement andmonitor, since it is basically a yes or no propo-sition. Quality in deregulation and in the reviews

was harder to implement and monitor, however,and here less progress was seen.

Another factor that helped improve implementa-tion and monitoring was the composition of theRegulatory Reform Committee. As one of thecochairs, the prime minister himself was respon-sible for the working of the committee. A coupleof times a year the committee and relevantministries organized a task force to monitor thepractical results of regulatory reform in the streetand at the local level. In addition, the committeemembers included the ministers of several of themost important regulatory ministries (includingthe Ofce of Planning and Budget, the Ministry of Finance and Economy, the Korea Fair TradeCommission, and the Ministry of Government

Administration and Home Affairs). Their

membership made them personally responsiblefor implementing and monitoring in their ownministries the reforms discussed in the commit-tee. It also allowed ministries to more quickly negotiate and reach compromises on reforms.

3 Some critics have argued that some ministries inated theinitial number of regulations under their domain by splitting regulations.


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foreign, still considers regulations to be amongthe biggest problems in Korea, and businesseshave asked the Roh Moo Hyun administrationto focus on further reducing the regulatory burden. According to the FKI Press, a poll of thepresidents of 13 Korean economic researchinstitutes ranked regulatory reform secondamong the 10 most urgent economic policy reforms for Korea. A poll by the Korean Cham-ber of Commerce showed that more than60 percent of respondents were dissatised with

current government efforts on regulatory reform, and the organizations chairman citedexcessive regulation as a major reason for Koreaslow domestic investment. True to historicalpatterns, the Roh government pledged to carry out regulatory reform in 2005 to combat theongoing recession.

in the business environment. This suggests thatthe Korean government and the Regulatory Reform Committee have not been able to use theformal tools and policies at their disposal toeffectively reduce the regulatory burden andtackle problems in Koreas regulatory structure.The system of regulatory impact analysis has beenparticularly misused and neglected. Though every ministry fullls its legal obligation to submitregulatory impact assessments to the Regulatory Reform Committee, the quality of the assess-

ments is too poor to show the true costs andbenets of proposed regulations.

Even so, there may be cause for optimism aboutthe future of regulatory reform because of continued pressure from the business commu-nity. The business sector, both Korean and

BOX 2

A Measure of Commitment to Regulatory Reform

The OECD produces a synthetic indicator that measures the existence and content of explicit government

policies on regulatory reform and the organizational arrangements put into place to support themtheindicator of policy and organizational commitment to regulatory reform. This indicator gives a high score topolicies on regulatory reform that are adopted or revised by the current government, those that include explicitobjectives and principles of good regulation, and those that are supported by the establishment of a speci cbody with responsibility for promoting, supporting, and reporting on the progress of regulatory reform.In 2001 Koreas score on this indicator was one of the highest among OECD member countries. It was alsosignicantly higher than the average for the G7 countries and that for the other member countries of bothOECD and the Asia-Pacic Economic Cooperation (APEC). Because the indicator measures formal aspects andnot the intensity of implementation of reform policies, however, it may not be a good proxy for policy results.

Indicator of policy and organizational commitment to regulatory reform, 2001.

Source: OECD 2000.

0

20

40

60

80

100

Korea, Rep. of APEC and OECD G7 OECD members(excluding Korea, Rep. of)


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Regulatory reform in Korea did not originate with the Asian nancial crisis, but the crisis gavereforms an added urgency and forced thegovernment to commit to stronger measures.

After the crisis the Regulatory Reform Commit-tee initially took forceful actions. But in the

second half of the Kim Dae Jung administrationits willingness to undertake major reformsdiminished sharply. This weakening seems tohave stemmed from a waning of the politicalstrength of the Kim administration combined

with reform fatigue.

In addition, many Koreans mistook the estab-lishment of a reform organization for actualreform. That is, Koreans created the mechanismfor reform without realizing that true reformalso requires a continual effort.

While perhaps weak, a permanent mechanismfor regulatory reform has nevertheless been putinto place, and a pro-reform interest groupcreated within the bureaucracy. The culturalchange in Koreas public administration, thoughstill in its early stages, has begun.

Success FactorsKoreas institutional reforms tried to perma-nently change how regulators functioned by building sustainable capacities for good regula-tory governance into the machinery of the

public sector. Several factors supported thesuccess of this initiative.

Reform was opportunistic. Economic crisis galvanized an emerging liberal consensus that was needed for regulatory reform to gain support and momentum. Governance problems were also useful: political support for the reform was built on a popular campaign to wipe out corruption.

Though Korea tried to deregulate and to reformregulation starting in the late 1980s, seriousand effective reform began only after the 1997nancial crisis. The most powerful support camefrom politicians. Major political parties sup-ported regulatory reform to combat the nancialcrisis. Their assumption was that excessiveregulation was the source of economic inef-ciency and corruption.

6. LESSONS OF THE REFORMS


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became a permanent function of government.Now it is a tug of war between regulators and theRegulatory Reform Committee, internalized in thepublic administration.

This institutional reform was backed by amend-ments to the Basic Act on Administrative Regula-tions to mandate the reform and review process.This created a government-wide system, such as forregulatory impact analysis, that ministries couldnot evade. Managing regulatory quality became apart of the administrative process, and as a result,introducing and revising regulations was no longerthe exclusive right of regulating agencies.

Regulatory quality was controlled by an

independent agency at the center of government that could counter the pro-regulation tendency of ministries.

Modern public administrations have a structuralbias toward introducing new regulations, even when the social cost does not justify the expectedbenets. In addition, regulating agencies tend tooverestimate the potential benets of a new regulation while underestimating its potentialsocial costs and negative side effects.

To counter these tendencies, the Basic Act on Administrative Regulations set a framework forreform that gave an independent agency, theRegulatory Reform Committee, authority tocontrol the quality of regulations. The commit-tee maintained a consistent set of principles tocontrol regulatory quality. Reinforcing itsfunction were tools to control regulatory quality,such as regulatory impact analysis.

Along with efciency disciplines, transparency and predictability were built into the regulatory structures.

Among the costliest problems in Korean regula-tion are the lack of clarity and room for interpre-tation in many regulatory rules and procedures.Regulators tend to have much discretionary power as a result, creating uncertainty for

This corruption argument proved to be appeal-ing to the public, and regulatory reform becamean important campaign promise for mostpolitical parties. Business groups, citizensgroups, academics, and opinion leaders voiced

support for regulatory reform in the media andat conferences. Most newspapers and broadcast-ers reected these public opinions, and thepoliticians followed suit. As a result of the broadconsensus that had emerged among experts,opinion leaders, and the media, supportingregulatory reform became a political advantage.

Embedding regulatory reform into government functions, particularly in institutions and in the administrative procedures law, was important to sustaining reform.

Political leaders tend to lose interest in regulatory reform once it ceases to provide political gains.They look elsewhere to increase their politicalcapital. In Korea regulatory reformin the formof quality control of new and revised regulationshas been made a routine part of governmentoperations. The intent was to provide a structurefor continuing reforms independent of politicalsupport. (Whether this laudable goal wasachieved, however, is questionable.)

Earlier regulatory reform attempts in Koreafeatured a tug of war waged between civilianrepresentatives and bureaucrats on advisory committees for deregulation or regulatory reform.Bureaucrats had the advantagein part becausecivilian representatives had only honorary posi-tions and inadequate informationand mostly

won the war.

While public agencies tend to resist change, their

conservatism and inertia can work in favor of reform if it can be normalized in their operations.Establishing the Regulatory Reform Committee asa dedicated full-time reform ofcealong with asupport structure within the bureaucracy, to createa pro-reform factionbegan to change incen-tives in internal policy processes. A group of government ofcials formed their careers aroundregulatory reform. As a result, regulatory reform


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the benets of the reforms did not reach peoplein their everyday lives. That led to populardissatisfaction with the results and a loss of momentum for further reform.

Giving higher priority to regulatory reform atthe provincial and local government levels couldhave helped ensure that gains were translatedinto action that people could see and feel.

While the top-down approach produced impressive short-term results, a lack of incentives for regulatory reform within the government undermined cooperation and slowed progress.

The regulatory reform mechanism establishedby the Kim Dae Jung administration, whilebroader than any previous effort, did not createsufcient cooperation between ministries andthe central agencies responsible for regulatory reform. Nor could the pro-reform forcescreated in the bureaucracy overcome the existingantireform forces. More attention to creatingincentives for performance, such as by involvingthe budget authorities, would

ifc regulatory transformation republic of korea 2008

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