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Obstacles in South Korea's Privatization - 2002-04-02

An ongoing strike by thousands of South Korean state power workers is threatening to derail the government's privatization program, which includes the sale of the countries electricity monopoly. Seoul also faces obstacles to dismantling the country's powerful, family-run conglomerates.

South Korea recovered from the Asian financial crisis of 1997 faster than any other nation in the region and has successfully avoided the recession that now grips some of its neighbors. But two critical aspects of its economic reform program remain incomplete: the restructuring of the nation's debt-laden conglomerates, called chaebols, and the sell-off of state-run companies, including banks, the telecom monopoly and utilities.

A strike by thousands of state power employees has put the government's privatization plans in the headlines. Workers fear that the sell-off of the power industry, slated to begin later this year, will lead to massive job cuts. But the government has refused to back down from the plan, which has already won parliament's consent.

Seoul began selling state enterprises four years ago, and some sales, such as the partial sale of Pohang Iron and Steel and Korea First Bank, have been quite lucrative. Paul Presler, Managing Director of Nomura Securities approves of Seoul's handling of the complex sell-off process so far.

"It has been very successful. Naysayers would ask that it be done at a quicker price, but I think that what differentiates Korea from other developing countries is that the government is not privatizing based on any sort of a need," he said. "In fact in Korea, most of these companies that are being privatized right now are very profitable."

Mr. Presler says that privatization is Seoul's way of demonstrating a commitment to the free market economy a surefire method of attracting international investment. In addition, Seoul is compelled to complete the process because of an agreement with the International Monetary Fund, which provided it with a $58 billion bailout during the Asian economic crisis.

Besides the privatization of the power, steel and banking industries, Seoul is also in the process of auctioning off Korea Telecom and the country's tobacco monopoly.

While state employees of the power industry and other entities may have misgivings, the public generally supports the sales. When a company is privatized, greater efficiency often leads to lower retail prices for items ranging from utility costs to banking fees to cigarettes. The proceeds from the sales may also help the government to recoup some of the $118 billion in taxpayer money that it spent to rescue troubled companies during the crisis.

South Koreans are also watching carefully to see how the government handles the powerful family-run conglomerates known as chaebols. Many South Koreans blame the cozy ties between these vast companies, the government and banks for the economic woes of the late 1990s. Many chaebols borrowed huge sums and never repaid them, causing financial problems for the country's banking sector.

Since the late 1990s, the government has allowed some of the largest chaebols, such as Daewoo, to collapse. Hyundai, another indebted giant, has been broken up into smaller entities.

Seoul has also placed financial restrictions on the chaebols to increase accountability. Professor Lee Phil Sang of Korea University says that, if the government wants to tame the giants, it has more challenges ahead.

"I would assess half a success and half a failure," he said. "On the surface, the government was successful in changing the chaebols in terms of capital structure and business structure. But inside, the government was not successful in changing the ownership structure and governance structure."

One key problem is that the government continues to allow state-owned banks to provide a financial lifeline to chaebols that are technically bankrupt, but continue to operate as usual.

Most economists, including Professor Lee, do not expect further corporate reform this year, saying politicians of all stripes do not want to take steps that would alienate voters ahead of the presidential election in December.

"I think the chaebol reform has ended. To reform the chaebols, the government must have power and a certain support from the public," Professor Lee said. "As the election nears, the government is gradually losing power and losing support from the people, so I do not think there will be any progress on chaebol reform."

Once the election is over, if the twin goals of privatization and chaebol reform are to be achieved, economists say, the government will have to allow market forces to take over. But on privatization, the government has dug its heels in so far and has refused to give ground. Whether it will continue to resist the growing pressure from labor remains to be seen.