Strangled by Red Tape

Korea is one of the most heavily regulated market economies in the world. This is a natural consequence of government-led industrialization over the last four decades. However, there is a cultural background for the current state of regulation in Korea. Korean society has long been influenced by Confucian values, which emphasize obedience to authority. It is implicitly accepted that what the government does is good for the society. Under these kind of social values, what the government does is assumed to be right and must be obeyed. Even today, many in Korea believe that it is in their interest for private citizens to have the government's blessing to undertake any kind of business, whether there are specific regulations affecting them or not.

As a result, Korean regulations have developed a very distinctive and unique nature. They are not just pervasive and large in number, but also highly judgmental and vague so that most of the decisions and interpretation of the regulations are left with the regulators themselves. Especially, many of the interventions are made based on "past practices" and sometimes without legal basis. The subsequent opaque procedures, ambiguous rules, and unpredictable results create big uncertainties in doing businesses in Korea. This is by far the most painful and costly aspect of Korean regulation.

Therefore, the excessive regulatory burden in Korea is caused not only by the large numbers and complexity of the regulations but also by the business uncertainties and excessive compliance costs created by these non-transparent regulations.

Another distinctive characteristic of Korean regulations is that the requirements and standards of many regulations are highly idealistic and sometimes unrealistic. Excessive compliance costs also arise when the requirements and standards imposed by regulations are excessively stringent and unrealistic. Under such circumstances, both regulators and regulatees know that the regulation cannot be enforced as written, and thus the regulatees have a strong incentive to lobby the regulators to circumvent the regulatory enforcement.


Conflicting Concepts of Regulatory Reform

In Korea the issue of regulatory reform or deregulation seems to be one of few issues on which virtually everyone in Korea agrees on including major political parties and NGOs. Regardless of their size, Korean businesses have been a strong champion of regulatory reform. This is quite interesting and ironic because economic theory predicts that existing businesses generally benefit more from maintaining regulations than from reducing them, and the consequence of regulatory reform is usually enhanced competition. In Korea, however, even small and medium sized companies are on the same side as the big companies as far as regulatory reform is concerned.

So one may wonder why Korean businesses and the general public almost unanimously demand reduction of government regulations. Probably it is because the state of Korean regulation has reached the point where it no longer protects existing businesses. Therefore, the "regulatory reform" demanded by Korean businesses probably is not exactly to promote competition and make the economy more open and efficient. Rather, it is to improve the business environment of existing businesses in Korea by eliminating bureaucratic intervention and red tape. Quite often, this mixed purpose of regulatory reform misled and distorted the direction and nature of Korean regulatory reform.

Therefore, there are two conflicting concepts of regulatory reform in Korea. One is "soft" reform as demanded by businesses, which reduces bureaucratic intervention and red tape. This will make the business environment of existing businesses better and freer. The other is "hard" reform, which promotes competition and market openness. This will make the business environment of existing businesses harder and more difficult. As a result of these conflicting concepts of regulatory reform in Korea, there has been an agreement on the principle of regulatory reform, but many disagreements on the details of regulatory reform.

As the results show, regulatory reform in Korea has mostly focused on soft reform. Since soft reform is intended to cut red tape and reduce regulatory control over business activities, the burden of soft reform has fallen mostly on government bureaucrats. They have become the main obstacles to soft reform. Ironically, however, regulatory reform in Korea so far has been the job of bureaucrats. This is why Korean regulatory reform had its own limitations from the very beginning.

Finally, despite the more fundamental problems of regulatory quality, such as opaque rules, informal interventions and discretionary enforcement, the Korean government's efforts to reform Korean regulations have concentrated mostly on reducing the number of regulations and simplifying procedures. Of course this will help, but, unless the quality of regulations and their enforcement are improved, abolition of thousands of individual regulations will not make much difference to the business environment in Korea.