[OUTLOOK]Focus on the Recipients, Not the Bailouts

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[OUTLOOK]Focus on the Recipients, Not the Bailouts

Around Christmas of 1999, some people in Germany were happier than usual. One was German Chancellor Schroeder, and others were the employees of the German company Holzmann.

The employees were rejoicing in the fact that their firm had been saved from bankruptcy by the chancellor, who decided to supply several billion dollars of public funds.

But the decision to inject public funds into an ailing firm for its resuscitation was not without criticism. The European Union and the World Trade Organization voiced their disapproval.

The logic was that the action ran counter to market principles and that the company showed no signs of a turnaround. But the action was seen as a populist gesture by the government, and the chancellor was happy that he suffered no political damage.

The majority of Germans agreed that public funds were necessary where forward-looking economic restructuring was taking place, or for launching new projects or for a short-term economic stimulus.

But they opposed putting public money into ailing companies, believing that past-looking investments only result in a waste of resources. As if to prove them right, Holzmann has still to make a turnaround following the past two years of using government bailout money.

A policy of injecting public funds with a view to minimizing the failures of the markets is often used as a policy tool in industrialized nations. Airbus, a consortium of European Union member nations, automakers of Germany and France, biomedical companies in Germany and the German steel industry in its diversification phase all received public funds.

But the allocation of funds brewed a public debate on methods, recipients and duration of public bailouts. The debate was sparked not because the public disagreed with any bailouts, but because they did not believe the companies that received money could ever be viable.

Thus, policymakers asked themselves whether the public funds were going into sectors with prospects for future growth. This primary concern with growth prospects intensified as the world economy became more competitive.

There are some differences between the above situation and what is currently going on in Korea, where creditors plan to swap debt for equity in Hynix Semiconductor, Ssangyong Cement Industrial Co. and Seoul Insurance Guarantee Corporation.

One school of thought is that the use of public funds is inevitable for the sake of the nation's economy, and another is that since those companies are too decrepit to recover, the matter should be left to the market.

It is my belief that the use of public funds will be a drag on the Korean economy's competitiveness. This is not a claim made on an ideological basis that all things should be left to market forces, but because the use of public funds for these companies is a far cry from being an investment in the future of the Korean economy.

Take a closer look at the ailing companies, and the real picture emerges. These are companies that are lagging in product development, marketing and management leadership compared to their competitors.

Putting public funds into such companies is not likely to revitalize them.

Since the outbreak of the financial crisis, Korea has pumped 140 trillion won of public funds into bailouts, but those efforts have had no positive results. And now, those same companies that devoured much of those funds are back again, asking for a further bailout.

In addition to the direct waste of public money, the funds transfers have had bad side effects as well. Conflicts between companies that have climbed out of the economic pit with the help of public funds and those that were forced out of the market are stirring social problems. During my latest visit to Seoul, I saw construction firm employees staging a demonstration, protesting why other companies had received public funds and their company had not.

They vented their frustration on the streets, protesting the ambiguous guidelines on the distribution of public funds. Such social conflict is not going to be an easy problem to solve.

The two pillars of President Kim Dae-jung's governance policy, "DJ-nomics," are market principles and a mature democracy. But he should be reminded that to survive in the global economy, companies must be internationally competitive.

That means investing in forward-looking venture firms, not in near bankrupt ones. I beseech the Korean government to invest in the future of the Korean economy, not in fading companies whose time has come and passed.


The writer is a professor of economics at Free University of Berlin.

by Park Sung-jo

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