1. Regulations work to protect consumers and the environment, deter fraud and waste, ensure market stability and vitality.
2. But can also stifle competition increase costs to business and consumers, inflate government budgets, decrease government efficiency, create opportunities for corruption.

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2. Korea's Development

1. 1970s

1. Very restricted market; government maintained control over economic activity; capitalized on cheap labor to push exports.
2. Government direct expansion, such as creation of new industries; for example, under President Park Shipbuilding industry stated: Hyundai shipbuilding evolution from 10,000 tons displacement to 250,000 ton supertankers overnight; soon after law enacted that all imported oil must arrive in Korea-built ship.
3. Close ties between government, banks and chaebol; preferential treatment from government allowed chaebol expansion.
4. Foreign investment opportunities extremely limited; JVs one of the few avenues of investment.

2. 1980s

1. Still a tightly controlled market.
2. Chaebol expanding into many different business sectors; beginning to gain international prestige.
3. Chaebol controlled most aspects of economy; for example, sales of top 10 chaebol in 1974 represented over 15% of GDP, in 1984, it was over 67% of GDP; the sales at the top 3 in 1984 represented over 35% of GDP.

3. Late 1980s

1. Government began to loosen grip on the economy; GDP growth increased to over 11% 1986-1988.
2. Labor unrest started; wealth of chaebol and strength of economy spurred union activity & workers' demands.
3. Still averse to foreign investment;

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��Procedural processes for Foreign Investors (1985)

Nation	No. Of Documents	No. Of Procedures	No. Of workdays
Korea	312	64	1005
Japan	325	46	492
Taiwan	238	20	175
US	23	9	175

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3. Liberalization and Globalization

1. Kim YS took office 1992; government began "globalization" effort; speed and scope of liberalization matters of great debate.
2. Restricted and prohibited business lines sealed back:

1988 - 162 restricted (i.e. partially opened) industries

56 prohibited industries

1996 - 74 restricted industries

32 prohibited industries

3. "Globalization" focused on Korean companies investing abroad, less so on open market for foreign investors; chaebol expand business lines and increase investments.

1. Hyundai cars into the U.S. market.
2. Daewoo in eastern Europe and other regions.

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4. Economic Crisis and the Regulatory Environment

1. Chaebol grabbed any opportunity when possible; otherwise, might not be available in the future �� consequence of tight government control
2. Restricted market access led to oligopolistic business environment; intense competition between power-holders in which market share was prime goal, not profitability.
3. Legal mechanisms to deal with bankruptcy not efficient; government unwilling to let companies die; for example, Kia and Hanbo still exporting today.
4. Lack of small and medium sized businesses, except for chaebol suppliers.
5. Bank-government-chaebol collusion caused irrational credit allocation; too much emphasis to debt-it's easier to control �� than equity; chaebol highly leveraged; over-capacity evident in many industries.
6. Protected financial markets; banks and other financial institutions lacking risk analysis techniques and access to necessary financial information.

2. Problems Abroad: investor confidence weakened throughout Southeast Asia; Indonesia and Thailand faced financial disaster; currency devaluations pressured Korean won.
   
   
3. Korea the Next to Fall: attention turned to Korea and inherent, market problems; run on currency in November and near financial collapse; lack of international confidence in Korean financial system.

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5. The Government Reaction

1. Asked for international support for rollover of short term debt in exchange for reforming financial regulatory system.

1. Support from IMP, World Bank and trading partners; adopted IMF program.
2. Stopped spending to defend currency; began to disclose the scope of financial problems.
3. Established the Financial Supervisory commission and defined its relationship with MOFE and newly independent BOK.
4. International government bond offering a huge success; more demand, than supply.

2. Began self criticism: what are the fundamental problems? How can Korea improve?

1. Realization that regulatory environment had to be improved; more business friendly.
2. Realization that foreign capital and foreign participation vital parts of successful economies.
3. Over last six years, Korea had lowest level of FDI compared to total fixed capital of any developing nation at 0.9%, Singapore 25.4%, China 13%, Mexico 11.9%, Taiwan 3.5%.

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6. Liberalization Part II: The Government Steps Up

1. Kim Dae Jung wins election; basically running government after election/before inauguration; liberalization sped up as reaction to weakened economy; attracting foreign investment now a policy priority.
2. Major areas of reform

1. Trade and Capital Accounts bond market liberalized; open market for commercial papers, commercial bills and trade bills.
2. Corporate Governance: restrictions on hostile M&A relaxed; consolidated financial statements required by 1999; cross financing between chaebol affiliates restricted.
3. Labor: formation of tripartite commission for labor market reform; layoffs permitted for restructuring of companies in financial difficulty; government announced provision of US$5.6 billion to provide social safety not for unemployed.
4. Real Estate: restrictions on purchase of land by non-Koreans eliminated; taxed on sales of real estate reduced.

3. Progress of Liberalization: two examples

1. Example �� Telecommunications

1998 �� Prohibited to foreign participation

1996 - Foreign investment limited to 33% foreign ownership in

wireless services and no ownership in wire based services

1998 - Foreign investment in wireless and wire based services limited to

33%; 20% ceiling on foreign ownership of Korea Telecom

1999 - Foreign investment limit in wireless and wire based services

increases to 49%

2001 - Foreign ownership limit in Korea Telecom raises to 33%

2. Example �� Stock Market

Pre 1992 �� Stock Market closed to foreign investors

1992 �� 10% total foreign investment ceiling per issue and 3% individual

holding ceiling per issue

1996 �� 18% total foreign investment ceiling per issue and 4% individual

holding ceiling per issue

1998 �� Ceiling raised incrementally over first four months: removed

completely in May, except for government controlled companies

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7. The Results of Reform

1. Currency stabilized; confidence returning, albeit slowly.
2. Financial system working; restructuring underway: problems (weak banks, accounting standards, etc) being addressed, but will take time.
3. Significant foreign investments by Coca-Cola, Volco, P&G, BASF and AES; more on the way: in 1997, inward investment (US$6.9 billion) greater than outward (US$5.8 billion).
4. Push towards liberalization and market reform; barring major setbacks, will have more equitable and business friendly environment in the future.