TCHA, MoonJoongDecember 31, 2005600p
Regulatory Reforms to Improve Business Environment
While the Korean economy is best known for its unprecedented rapid economic growth for the last forty years, it has been frequently criticized that the business environment in Korea is not particularly
favorable. Regulatory reform has been always pointed out as an imminent agenda to improve the business environment and enhance the efficiency of the economy.
Therefore, the nation exerted strenuous efforts to reform the regulation system since the mid-1990s and achieved some visible outcomes. Nevertheless, there has been strong resistance against the reform because of a temporary inconvenience or loss produced during the reform process. In addition, it has been pointed out that the outcome of the regulatory reform was not fully appreciated and utilized by economic agents.
This research monograph consists of 12 independent chapters, which are devoted to the issue on how to improve business environment of Korea, in particular, through regulatory reforms. These 12 chapters are categorized into four parts by topics. Three chapters in Part I review the history of regulatory reform in the nation, and discuss how to introduce more advanced and developed regulation reform. Five chapters in Part II analyze regulations binding business activities, and suggest the direction of reform to improve business environment. Part III consists of two chapters, where the first chapter investigates regulations related to transaction or trade, and the second chapter analyzes the effect of corporate tax on firm’s performance. Two chapters in Part IV revisit the topics related to the importance of regulation reform showing that how explicit or implicit regulations may affect industry and economy’s performance. Part IV emphasizes that the regulatory reform should be continued for further sustained growth.
1. A Critical Review of Regulatory Reform in Korea | Kwang Eon Sul
Background and Purpose
Since the early 1960s, Korea has made remarkable economic growth initiated by the government. As the private sector matured in the 1980s, excessive intervention by the government and regulations that followed as a result of such intervention were seen as obstacles to productivity and national competitiveness. In the last decade or so, there has been an increasing awareness that many of these regulations have inhibited healthy competition while increasing business costs. In some cases, the consumer’s choice of suppliers and products was unnecessarily constrained.
The regulatory reforms, in earnest, began in the 1980s. The Chun Doo-Whan Administration tried to promote competition among businesses by knocking down tariff and other trade barriers and by withdrawing government intervention in market prices. The Monopoly Regulation and Fair Trade Act was also enacted and took effect in the early 1980s to promote competition in domestic markets. The successor, Rho Tae- Woo Administration, drove to lessen individual regulations in industries, which were closely related to the daily lives of the citizens.
The regulatory reform driven under the Kim Young-Sam Administration focused on administrative simplification and deregulation on business activities reflecting the progress of democratization and liberalization. Several reform bodies such as the Presidential Commission on Administrative Reform, of which members were composed of civilian experts, were established and played leading roles in dealing with a wide range of reform issues including deregulation.
The Basic Act on the Administrative Regulation was enacted in 1997 in order to pursue regulatory reforms more systematically throughout the government as well as to institutionalize them. The Act was a product drawn from experiences and lessons from government reforms of the past, focusing on regulatory reform by reinforcing the weakness of the fragmented and dispersed approach to regulatory reform in the past. Based on this law, the Regulatory Reform Committee (RRC) was established under the President in 1998 at the beginning of the Kim Dae-Jung Administration. Since then, the RRC has played a leading role in carrying out regulatory reforms.
The former president, Kim Dae-Jung, made it a priority to pursue regulatory reform in order to overcome Korea’s financial crisis. The RRC and all the ministries have made concerted effort to get rid of unnecessary regulations and improve the quality of existing ones. The Kim Dae-Jung Administration made strenuous efforts on regulatory reform and made substantial progress particularly in reducing the number of regulations. The RRC reviewed almost all the existing regulations and abolished more than half of the nearly 11,000 existing regulations in 1998 and 1999. The RRC found 2,382 regulations without legal basis and abolished 86% of these and left 14% to establish a legal basis. There is no doubt that it made substantial progress in regulatory reform. However, it was also true that there were still much to do to improve the quality of Korea’s regulatory reform.
The Rho Moo-Hyun Administration has taken actions to review all the existing regulations and to improve their quality. The government has been concentrating on these areas which have greater impact on business. It established the Special Task Force for Regulatory Reform, which consists of 50 people from the private sector and government ministries, to focus on existing regulation, whereas the RRC reviews proposed new and amended regulations. The task force concentrates primarily on reviewing compound/bundled regulations to improve their quality. The president checks the progress made by the task force at the Regulatory Reform Council, in which he presides.
Despite the substantial achievements that the government has made so far in regulatory reform, the majority voice of the business sector is not satisfied with the government’s performance. There are three reasons for low gratitude on the people’s part. First, the government carried out regulatory reform mainly focusing on reducing the number of regulations while leaving the compound or complicated regulations untouched. This approach limited the impact of regulatory reform and has become the primary cause of people’s dissatisfaction. Second, there has been a steady increase in the number of regulations, which reduced the effect of regulatory reform. Third, the way that the government officials deal with civil applications has something to do with the public’s frustration. Government officialsoften refuse to provide requested permits or delay the process of applications, demanding more document or materials.
The mixed purpose of regulatory reform misled and distorted the direction and the nature of regulatory reform. The successive Korean governments have considered regulatory reforms as part of an economic stimulus package. They have, therefore, not aimed at promoting competition and making the economy more efficient and open, but they have tried to improve the business environment
of existing businesses by eliminating bureaucratic intervention and red tape. When the economy was in recession, the regulatory reform was always an important issue for boosting the economy. However, if the economy recovers from the recession, the regulatory reform is no longer an object of the government’s concern. This is a major reason why the regulatory reform in Korea has had a limited success. A successful regulatory reform requires a right goal, proper policies, and the administrative machinery to carry them out, backed by concrete political support.
2. Regulatory Policy in OECD Countries: Its Trends and Implications | Sanghoon Ahn.MoonJoong Tcha
Background and Purpose
While the Korean economy is well known as one of the most successful countries that achieved rapid economic growth for the past forty years, the business environment in the nation was not particularly favorable. Regulatory reform has been always pointed out as an imminent agenda to improve the business environment and enhance the efficiency of the economy. This chapter reviews recent discussions in OECD countries on regulatory reform and compares recent developments of regulatory policy in OECD countries based on case studies and various regulation indicators, aiming to obtain policy implications for improving regulatory policy in Korea.
Recent discussions on regulatory reform policy in OECD countries underline the importance of openness to global competition and the necessity of regulatory reform in service industries (e.g., distribution sectors, professional services, and network industries). Some concrete progresses were reported in reducing administrative burdens and improving efficiency in the public sectors. On the other hand, some country cases showed that regulatory reform was delayed in sectors such as professional services, distribution, and agriculture. Some other cases showed that a poorly designed regulatory reform could create serious problems.
Regulatory indicators suggest overall improvement in OECD countries since the late 1990s. Korea made a substantial progress during this period, but indicators also reveal that the degree of regulation is still higher among OECD countries in 2003. In OECD countries, it was observed that competition-hampering effects of regulation are bigger in non-manufacturing sectors.
All in all, it is expected that regulatory reform will continue to have a high priority in the list of major tasks for structural reform in OECD countries. The positive effects of regulatory reform would be substantial, especially in non-manufacturing sectors and in some high-tech manufacturing sectors which used to be relatively less exposed to competition.
3. Innovating the Regulatory Reform in Korea: Searching for Reformative Regulations | Iljoong Kim
Background and Purpose
The purpose of this research lies in providing innovative and substantive perspectives in order to drive the regulatory reform in full force in Korea, which has not been as successful as intended. Such perspectives, if in principle designed to be a long-term blueprint, are expected to be readily transferred into a workable guideline as well in a relatively short-term time span for relevant policymakers.
This work was launched initially upon observing a few mistaken views (or preoccupation) prevailing in Korea with respect to the substantive essences of “regulatory reform.” Taking account of such misunderstandings first would thus be critical to further suggest substantive guidelines for the future regulatory reform. Subsequently, this research focuses extensively on how to find an optimal
control device among many to contain a certain problem. In other words, the major tenet of its contribution is believed to deliver a strong message to all of us that “innovating the current state of regulatory reform” shall be equivalent to “searching for new reformative regulations.”
The work consists of four sections. Section II rectifies the aforementioned misunderstandings about regulatory reform: For instance, “Regulatory reform is simply to resolve filed grievances from the private sector,” “Regulatory reform is identical to repealing existing regulations,” “‘Social regulations’ need to be strengthened, while ‘economic regulations’ should be curtailed,” and “frequently encountered wrongful causations between some deregulation undertaken and a subsequent occurrence of mishaps,” to name a few. This section then reviews the law and economics theory as to any regulation’s inherent relationship with (restricted) private property rights, which accordingly leads to a premise that sound regulatory reform must be based on strict constitutionalism.
Section III highlights the “regulatory taking” doctrine to feature a solid constitutional basis mentioned above. The regulatory taking doctrine originates from the “taking” clause, which is in fact stipulated in.23-3 of the Korean Constitution. Six critical and very sensible elements of regulatory taking are elaborated. These elements can be used by deregulatory agencies, courts, or even regulatory agencies in closely scrutinizing whether a certain (form of) regulation is justified; if not, the regulation will be repealed or changed to some alternative form. To emphasize their ready applicability, two cases (one currently existing regulation and a previous court judgment) are analyzed based on the six elements.
The last two sections concentrate especially on the task of “searching for reformative regulations.” Section IV starts with an important but easily neglected proposition that there exist a variety of social control methods dealing with a specific problem (say externality) arising in the market. More specifically, the following four sub-propositions are carefully demonstrated: a) there are distinctive advantages and disadvantages in the usual government regulation (i.e., “ex ante regulation”) and the liability rules (i.e., “expost regulation”); b) the exclusive use of one of these is hardly efficient except under very
special circumstances; c) a combined use of both can frequently be optimal; and d) exerting efforts to find an optimal combination (i.e., “reformative regulation”) is the backbone of the innovative regulatory
reform. Again, with the purpose of showing the applicability of these propositions, an experimental analysis is undertaken for the entire regulatory system governing the Korean securities market currently, indicating in turn a lucrative potentiality and the desired direction of further future research.
Motivated by the foregoing discussions on optimal regulatory methods, Section V goes one step further theoretically and empirically, featuring c) and d) above in particular; even in the case where ex post regulation theoretically causes some defects, considering ex ante regulation’s prohibitively high enforcement costs, an exclusive use of only the former can often achieve a higher level of efficiency. Again, for an illustrative purpose, tentative statistics are presented against the existing regulation requiring regular auto-safety inspection in Korea, although more rigorous costbenefit studies are imperative to warrant a more concrete conclusion.
The preceding research results particularly concerning regulatory choices can readily be implemented into the various stages of on-going deregulatory processes. Better yet, the endeavor to pinpoint an optimal social control will be beneficial to policymakers as well who, due to an emergence of varying market conditions, should introduce new regulatory instruments somehow. Innovating regulatory reform will strongly require the active participation of all three branches of the government (i.e., executive, legislative, and judiciary bodies). Particularly, it appears that there is a huge potential of contribution
on the part of the judiciary. Courts are entitled to the judicial review power as stipulated in .107-1, .111, and .107-2 of the Korean Constitution. Through judicial review, they can either get rid of nefarious
government regulations or help make them more efficient, for example, changing an ex ante regulation into liability rules. After all, it is of utmost importance for everyone to believe in and try to substantiate the penetrating ideas underlying the equation, “Innovating regulatory reform = Searching for reformative regulations.”
4. The Present Condition and Recommendations for Regulations of Startups | Kwang-Hee Kim
Background and Purpose
Starting a business plays a key role in economic regeneration and job creation. However, recent data show that the number of new startups in Korea is in a downward trend. This study has following intentions: To grasp the present regulation status of startups in the business sector, to identify and emphasize the reform that will promote startups, and finally suggest some solutions.
■ Commercial startups without plant establishment | It requires ten steps of cumbersome procedures to establish a corporation and about 26 separate paperwork to complete these steps. In addition, it costs 195,000 Korean won to process the work including notary costs, buying public bonds, and stamp taxes.
Moreover, according to the minimum capital requirement system (50 million won) under commercial law for establishing a corporation, startups must set up a special deposit account in a bank to be eligible to receive the certification of paid-in capital, which is required as an attachment when applying for the registration of entry business. However, in most cases, startups temporally use private
debt instead of deposits. The reason for causing camouflaged-payment on a paid-in capital comes from wrong procedures. Changing the incorporation flotation procedure can easily solve this problem.
■ Industrial startups with plant establishment | It takes 499 days to fulfill necessary procedures from securing sites to completing business registration, and even though the terms of seeking site and constructing plant are excluded, it takes 179 days to implement necessary administrative procedures. When starting a business in the manufacturing industry, reforming regulations on location is a key solution, because 45% of the major regulations are related to plant site and most complaints come from individual locations.
In relation to regulation reform on incorporation business, the most crucial point is to find a way to simplify necessary procedures and paperwork by allowing the applicants to register on-line using the Internet and issue appropriate registrations on-line as well. As a model, in Canada, an entrepreneur submits registration form via online and registers at the tax office by obtaining a business number.
With this simple registration, the necessary registration process is completed.
Regulations on location concern the interests of two parties: One who wants to develop and one who protects the environment. Therefore a “proper regulation” through a compromise between both parties is needed.
In the case of selecting locations, irregularity of individual locations causes various problems and an increase in civil appeals, leading to more regulations. As an alternative, activating planned locations is suggested because this would reduce exceeding regulations related to overflooding plants, environmental permits, and startups. Therefore, inducement of activating planned industrial complex for the private sectors should be considered.
Last but not least, the government needs to have an accurate view on the necessary procedures, associated time, and cost by enhancing the transparency of startup procedures. Offering a guidebook, both on- and off-line, for starting a business would make the startup procedures more comprehensible, raise its transparency, and predict the results. Furthermore, it is of the utmost importance to launch an on-line system of business registration that will alleviate the frustrations faced by startups.
5. Locational Regulation on Industrial Site in Seoul Metropolitan Region | Sang-Cheol Lee
Background and Purpose Much controversy surrounds the effects of locational regulation on the industrial site in Seoul Metropolitan Region. One group of observers argues that resources would be allocated inefficiently due to the regulation, reducing external economies of agglomeration. Another group, however, highlights congestion problem from the diseconomies of agglomeration and regional
imbalance problem between Seoul Metropolitan Region and the other regions, and advocates locational regulation as a solution for these two problems.
Recently, as construction of new administrative city and relocation of public institution are underway, improving the existing locational regulation in Seoul Metropolitan Region becomes the center of public interest.
This chapter approaches this issue by examining the effects and limits of locational regulation in Seoul Metropolitan Region for the last 20 years, and highlights the roles of metropolitan area as a consumer city as well as a producing city. And, it also focuses on the role of Seoul Metropolitan Region as an incubator for the startups, which are mostly knowledge-based ones.
Present locational regulation on industrial site cannot be the best solution for the congestion problem, if it insists on the locational regulation of manufacturing firms. Industrial structure of Seoul Metropolitan Region is changing rapidly. Seoul Metropolitan Region is transforming from the center of manufacturing towards the center of service, and non-manufacturing activities are very vigorous.
On the contrary, the size of manufacturing firms are becoming smaller and smaller in Seoul Metropolitan Region, partly because of locational regulation of manufacturing firms.
More and more small firms and startups are heading for Seoul Metropolitan Region, due to both localization economies and urbanization economies. But unfortunately, Seoul Metropolitan Region lacks the ability to spillover scientific and technological knowledge, which would be an essential ingredient for the knowledge-based startups to grow sustainably.
6. Examination of Employment Regulations on Hiring, Firing, and Labor Management Relations | Yong-seong Kim
Background and Purpose
In order to secure economic competitiveness in the international market, the Korean government introduced and carried out various reform measures in the labor market. In spite of enormous efforts to
enhance the labor market flexibility, many international institutions still pointed out many areas need to be improved. The Tripartite commission consisting of the representatives from the government, business, and labor unions has discussed the issues of temporary non-regular workers, and based on the results the government is now preparing the new labor legislation. In addition, the ‘Roadmap of Labor-Management Relations’ was announced and made suggestions for 34 items. Unfortunately, however, the legislation for temporary non-regular workers is still a controversial issue between the management and workers, and the implementation of the Roadmap is uncertain. This study reviews the various regulations in the current labor laws and suggests some alternatives in order to enhance the labor market flexibility.
The study begins by briefly surveying the employment regulatory reforms in the case of developed countries and Korea and proceeds to identify what and how to reform in the current situations. First, it reviews the employment regulations regarding hiring and firing workers, and makes some suggestions. The second part deals with the issues of temporary non-regular workers. It analyzes the trend of temporary non-regular workers over past several years and discusses the matters on the duration of contract, and discrimination against temporary non-regular workers. The final part is assigned to
labor management relationship. It explains the ‘Roadmap for New Industrial Relations.’
The main points of the study are as follows. Currently, the employment regulations on hiring and firing workers enforce 60-days notification period before dismissals. However, it is desirable to introduce
a flexible notification period depending upon the size of dismissals. Moreover, the criminal disciplinary provision against unfair dismissals needs to be removed since its effectiveness is in doubt. Instead, economic punitive measure may be considered without causing excessive economic burdens on employers. The current system is insufficient to protect workers in the event of firing. By guaranteeing workers’ defensive rights and by introducing mandatory reconciliation system in the process of firing, unnecessary prolonged disputes over dismissals between employers and workers can be minimized.
Given the tensions between employers and labor unions, it is urgent to address issues of temporary and non-regular workers. In spite of increasing concerns about temporary and non-regular workers,
there is no consensus on the proportion of these workers in the labor market. This is partly because the definition of temporary and non-regular workers is ambiguous. Therefore, it is necessary to clarify the definition of temporary and non-regular workers so that the policies can precisely target these groups of workers. To prevent abuse of temporary and non-regular workers by repetitive contracts, it is important to set a term limit in contracting workers. However, specific terms and duration of contract need to consider various aspects such as types of employment contract, and the possibility of rehiring. Another issue is the discrimination against temporary and non-regular workers. Although it is unquestionable in principle to prohibit discrimination in the labor market, its implementation is not easy. Reasonable approach is to first remove non-wage discrimination (such as social insurance coverage) between regular and non-regular workers and then to solve the wage discrimination gradually.
To build credibility in international society advanced and peaceful labor-management relation is top priority. As of 2006, the labor union law allows enterprise-level multiple unions. However, there is no agreement on how to carry out collective bargaining in the multi-unionism era. Unification of negotiation window is essential and the union representative must be selected in a democratic way such as
majority or proportional rule. Employer’s payment support for full-time union representatives is controversial. In principle, it is undesirable for one party to provide monetary remuneration to the other party in the negotiation. However, given the financial fragility of small- and medium-sized enterprise unions, the employer and union workers need to share the cost of full-time union representatives for the time being. Employer demands ‘right to operate business’ by the use of replacement workers in the event of a strike. Allowing replacement workers, however, incurs unnecessary tension between the management and union workers. Accounting for this aspect, it is advisable to consolidate the principle of ‘no work no pay’ so as to share the cost of labor disputes fairly between employers and workers.
This study reviews employment regulations in the Korean labor market and focuses on the issues of hiring and firing workers, non-regular workers, and labor-management relations. Several cases from developed countries are also surveyed. Suggestions are made in order to improve labor market flexibility. It is important to keep in mind that legal and institutional settings are necessary conditions for the better labor market system. Breaking bad customs of long standing and building confidence among the labor market participants are much more crucial.
7. Competition Policy and Investment Efficiency | Insuk Cheong
Background and Purpose
Investment incentives are determined by various market characteristics and effects. Appropriability and various investment competition effects (business stealing effect, preemption effect, and efficiency effect) encourage firms to invest, while technical spillover and replacement effect discourage. Intensified product market competition may increase or decrease incentives to invest. As a result, the resulting investment level in competitive market may be either excessive or insufficient from the social point of view.
There are two regulatory approaches in the context of competition policy: ex ante and ex post regulations. It may not be easy to specify clear and detailed rules on ex ante regarding which actions should be allowed or disallowed. The reason is either that the welfare effect of firms’ actions may depend on specific environments, or that different economic agents are affected differently by the actions. The latter problem may be resolved by clear policy goals like maximization of total surplus or consumer surplus. The former problem cannot be fully handled by detailed ex ante regulatory rules which on the contrary
may result in two types of policy errors; that of restraining desirable actions and that of not restraining harmful actions. It is advisable to specify simple rules and principles of ex ante regulatory approach
and strengthen ex post approach.
The policy on Chaebol needs to be reformed in such way to weaken ex ante rules and restrict policy intervention to the cases where specific firm actions caused clear harmful effects on the society. ‘Unfairness’ in the restraint of abuse of market power should be interpreted as anti-competitiveness, and that in the restraint of unfair trade behaviors should be restricted as violating the social norms or ethical codes. On telecommunications market regulation, rigid and political rate-setting process reduces incentive to invest in local telecommunications markets, and asymmetric regulation in the mobile sector discourages and distorts competition and investment incentives.
Rigid and political rate-setting process reduces incentive to invest, and asymmetric regulation discourages and distorts competition and investment incentives. Desirable policy intervention as to investment decisions will be to decentralize individual firm’s diverse decisions as long as they are not very likely to disrupt lively market competition.
8. An Innovative Approach to Environmental Regulation | Jong Ho Hong
Background and Purpose
Environmental problem is an exemplary case of market failure, which allows for market intervention by the government. There can be, however, many approaches to the extent and method of the intervention. While understanding the importance of integrating environmental performance and creative firm activities to attain sustainable development, the purpose of this chapter is to design the
future direction of environmental regulatory policies of Korea. An innovative approach, such as information-based incentive mechanisms, will be introduced and investigated.
Based on Korean environmental laws and government documents, the current status of Korean environmental regulatory policies is investigated in relation to starting businesses and firm activities. It can be said that most of the regulatory measures fall in the category of command-and-control approach, which may not necessarily be desirable in providing the right incentives for the firms to improve their environmental performance.
As an alternative, the mandatory environmental information disclosure program is introduced. It is a structured information release program by regulatory authority relying on non-regulatory measures to create incentives for firms to improve their environmental performance. To explore the effect of the release of Monthly Violation Report (MVR) by the Ministry of Environment of Korea, the event-study methodology is used to see the extent to which investors react to environmental news.
The result shows that, of those events with negative market reactions, the average percentage reduction in market value has been calculated to be 9.7%. This average reduction in market value is much higher than results obtained in Canada and the United States. This would tend to say that capital markets in developing countries may attach a greater premium to information which otherwise may generally not be as readily available as in more developed markets.
A more innovative approach to environmental regulatory regime is needed to enhance the effectiveness of environmental policies and to integrate company’s economic and environmental performance. An environmental disclosure program, unlike the traditional command- and-control regulatory approach, can provide a viable option to this cause. Korea’s environmental policy can be benefited from shifting to more flexible and incentivebased regulatory alternatives such as information disclosure program.
9. Trade Regulation: Regulatory Reform and Competition Policy | Jae Hyung Lee
Background and Purpose
This paper aims to evaluate the regulatory reform performance and the factors that contributed to the rapid progress in the area of trade in Korea for over the past 20 years. Presently, the effects of comprehensive regulation in the field of trade are almost nonexistent, hence firmly establishing trade rules that will enhance competitive market order is the utmost importance. Therefore, this paper reviewed the relationship between government regulations and competition policy on trade in order to examine the ways to improve the future trade policy reform.
In general, trade denotes the balance between supply and demand in the market and hence, it is the fundamental activity of business in the market. However, many concerns about the scope and speed of regulatory reform currently underway are raised, although the reform efforts in the area of trade have produced remarkable results over the past two decades. This negativity can be seen mainly due to the fact that business trade is an area where the market factor plays a influential role and regulations can be overcome by changes of economic environment and conditions, and the dynamics of the market, as well as the changes in the mindset and attitudes of market participants whereas regulations in other areas depend more on the system than the market forces.
Regulatory reform in the area of trade has been pushed by three different forces: 1) the market forces overriding regulations, 2) continuous regulatory reform, and 3) the introduction and development of competition policy.
The regulatory reform in trade shows great improvement from the past although the degree of advancement differs according to different industrial sectors. Therefore, what is necessary in the future in this area is a more sophisticated method of regulatory reform and the fine-tuning of policies to streamline existing regulations to meet the needs of different industrial sectors and markets, rather than a fundamental overhaul of the present framework of regulations. This will create demands for better policy development capabilities. In the past, reforms that took a general and fundamental approach were more prominent, but in the future, more detailed and proficient approach will be required in order to enhance the quality of policies.
This paper focuses on the three major tasks of regulatory reform in trade centering on competition policies: 1) countermeasures for restraining competition in connection with administrative guidance, 2) improvement in regulatory measures against unfair trade practices, and 3) resolution of problems involving business associations and government-led cartels. These tasks can be met using the basic idea of regulatory reform. The objective of regulatory reform is to enhance the efficiency and dynamics of economy through fostering competitive market environment. In pursuing this goal, regulatory reform and competition policy are the two wheels of a same wagon. While regulatory reform streamlines government regulations, competition policy sculpts private regulations. The market economy will be
advanced with the two policies supplementing each other producing a significant synergy effect.
10. Industry-level Tax Regulation and Its Impacts | Tae-Jong Kim.Young Lee.Taeyoon Sung
Background and Purpose
This chapter measures the industry-level differences in tax burden by using the OSIRIS database which provides the balance sheet data of 30,000 firms in 120 countries. Given the estimated tax burdens, we also analyze the impact of industry-level tax burden differences on the growth of total economy and each industry. From the analysis, we could provide the policy implications in terms of taxation, regulation, and industrial and economic growth.
The main results and policy implications of this analysis are as follows:
First, the effective corporate tax rate is about 29% in the 2000s, which is in the middle range. Since the 1990s, the effective corporate tax rate dropped rapidly due to lower legal tax rates. In the 2000s, we could also observe the reduction of corporate tax rates in other countries. Particularly, in Hungary, Taiwan, Hong Kong, and Singapore, lower effective corporate tax rates are considerably notable.
Second, we could find only little evidence on the industrial policy through taxation, compared to other countries. After the late 1980s, discriminative taxation has been significantly reduced. Internationally, the degree of discriminative taxation at the industry level shows cross-country differences significantly. Specifically, Asian countries show a higher degree of discriminative taxation at the industry level, while the U.S., the U.K., Germany, and Japan show lower levels.
Third, the depreciation rate was quite low in Korea but recently, the depreciation rate has been increased up to 3.7% against assets. However, this level is still quite low compared to the international average. This provides a policy implication that we need to find out the reasons why corporations are not fully utilizing the depreciation scheme. Fourth, the industrial policy or industry-level distortion
through taxation could induce an increase in the industry output. However, the policy does not enhance the economic growth of total economy. This indicates that the impact of industrial policy on economic growth is not positive, at least in the case of industrial policy through taxation. Finally, in Korea, we could observe low effective tax burden in the finance, technology, and energy sectors, but high effective tax burden in telecommunications, medical industry, and utilities.
Since the differences in industry-level tax regulation indicate some sort of industrial policy through taxation, this study can be interpreted to measure a kind of industrial policy and its impact on economic
growth and industrial output. The effective corporate tax rate was about 29% in the 2000s, which is in the middle range. Since the 1990s, the effective corporate tax rate dropped rapidly due to lower legal tax rates.
11. Analyses of the Effects of Regulation on Industrial and Economic Growth | Sanghoon Ahn.MoonJoong Tcha
Background and Purpose
This chapter analyzes the impacts of regulation on economic growth. It is conjectured that regulation has a strong influence on business activities, and hence, an effective improvement in regulation could work towards enhancing and sustaining long-term growth of an economy as well as industries. At the industry level, this chapter looks into the links among entry regulations, the entry rate, and the growth rate of each industry. At the cross-country level, this chapter investigates influences of regulation on economic growth using IMD’s data covering 42 countries.
From industry-level analyses, we found that the regulations on entry have substantial deterring effects on entry. It is also shown that growth of an industry (in terms of establishments’ number, shipment, and employment) is strongly affected by entrants to that industry. It means that the entry regulations tend to have negative effects on industry growth by hampering entry and competition.
This study also uses country data published by IMD, and shows that (explicit) regulation affects the economic growth of nations. The quadratic relationship between regulation indexes and economic growth indicates that countries with few regulations do not necessarily grow faster than those with more regulations to some extent, while countries with many regulations are found to grow slower.
The main contribution of this study includes that this is one of a few studies which quantitatively examine the effects of entry regulations to industry growth, using the Korean data. In addition, as it is
believed that firms’ and industries’ growth is closely related to growth throughout the whole economy, in general, regulations are supposed to have negative effects on economic growth. This study explores this possibility, and confirms the relationship between regulation and growth.
12. Social and Institutional Environments as Implicit Regulations and Economic Performance | MoonJoong Tcha
Background and Purpose
Recent rapid changes that Korea has experienced include intensive reforms of social and institutional environments. Social and institutional customs and variables are known to affect economic environments, and work as indirect regulations on firms. Scholars and researchers have been interested in these phenomena and analyzed the effects of these variables on economic performance.
While the detailed results are different across individual research depending on countries, variables, and periods observed, they, in general, support the view that some social and institutional variables affect economic performance through various channels. This study concentrates on the effect of corruption, as an exemplary variable of implicit regulations, on a range of economic activities. International Country Risk Guide (ICRG) data are used for empirical analyses, and implications for Korea are drawn out.
The study uses both theoretical and empirical analyses, and provides several results. First, a theoretical analysis indicates that when corruption plays a role in the entry regulation, it may decrease the output of firms which already entered and operate in the industry, as well as decrease the total output of the industry. Further, profit of a firm also may decrease due to that implicit regulation. Second, implicit regulations such as corruption distort the intertemporal consumption behavior of consumers.
Third, an empirical analysis shows that corruption and economic growth are somehow related, while there is no evidence that the relationship is linear. This result may arise because the corruption
variable used is an “index.” Nevertheless, given the results, it is shown that the level of corruption Korea maintained during the 1990s and early 2000s was, in general, high, which strongly implies that if some were removed, the growth rate could have increased. Also the relationship between corruption and economic growth found in this study indicates that growth rate slows down in the process
of removing corruption.
From these results, it is suggested that the possibility of higher growth may have been lost due to implicit regulations such as corruption. A higher growth rate will be obtained if the existing implicit regulations in the form of social customs and institutions are removed. The results also suggest that patience and continuous efforts to fight corruption should be needed as a temporary slowdown of the economic growth may be experienced when corruption is being eliminated.