[OUTLOOK]Jaebeol, Finance and Economic GrowthAmong the three men who won the Nobel prize for economics last week, Joseph Stiglitz, a professor at Columbia University, is particularly interesting. During the Clinton administration, Mr. Stiglitz served as the chairman of the Council of Economic Advisers and was also a senior vice president of the World Bank. Mr. Stiglitz is not a believer in "market fundamentalism" or in whatever consensus happens to be current in Washington, and thus clashed frequently with other senior U.S. government officials, including Larry Summers, the secretary of the treasury. The Washington consensus was for policies of deregulation, privatization and liberalization as the prerequisites for economic development.
Mr. Stiglitz believes that a certain amount of government intervention is necessary to overcome market failures, and that such intervention improves public welfare. He often cites the examples of Korea and other East Asian countries as well as the past economic policies of the United States to show that government intervention could significantly improve a country's economic performance. Now that Mr. Stiglitz has won the Nobel prize, a new debate on market failures and government failures as well as the proper role of the government in the working of the economy could begin.
The proper economic role of the government has been a subject of keen interest among economists ever since the days of Adam Smith. John Maynard Keynes went so far as to say that the main task of economists was to distinguish what the government should and should not do. That statement goes to show how difficult it is to define the proper economic role of the government and how important it is to adjust the role of government according to changing circumstances.
Mr. Stiglitz emphasizes that the government's role should constantly be re-evaluated to minimize government failures. In developing countries, where imperfect markets and a lack of information is more pronounced than in industrialized countries, it is vital to periodically re-evaluate the role of government and develop new policy options that take into account the rapidly changing economic circumstances inside and outside the country.
Let's think about the Korean government's policy on jaebeol, large business conglomerates, from this perspective. In a word, regulations and tools on jaebeol should be comprehensively reviewed and revised, considering fundamental changes here and abroad.
More than anything else, to survive amid the cutthroat competition in the global era, multinational corporations today do not hesitate to engage in mergers and acquisitions to increase their size, as if to say "big is good" rather than "small is beautiful." Consequently, regulations that were born with our own notion that big things are always a problem should rightly be discarded or revised.
Of course, a close evaluation of reform policies implemented since the onset of the financial crisis, including the improvement of corporate governance structure and the enhancement of transparency in management and finances, should come before the jaebeol policies are changed. The evaluation should address past practices such as encouraging loans over capital adequacy, diversifying over focusing on one business area, and stressing market share over profitability. It should examine how reform policies have changed those practices. It should also examine whether cross-shareholding and loan guarantees among affiliates have disappeared.
The business community, which is demanding that the government relax regulations that were introduced before reform policies were implemented, should present detailed evidence to explain how companies have changed through restructuring.
The debate over whether industrial conglomerates should be allowed to enter the financial business is a different matter. When the financial industry is free of regulations and when the interest rate is set according to market mechanisms, the benefits of an industrial conglomerate having a significant share of the financial industry would not amount to much. But there remains the possibility that a troubled affiliate of a large conglomerate could be put on life support indefinitely through help from a financial company belonging to the same conglomerate. Thus, the entry of industrial conglomerates into the financial industry is not desirable from the perspective of establishing a clear rule to force troubled companies out of the market in accordance with market mechanisms.
Like all biological elements, the government and corporations should exhibit wisdom and adjust to changing circumstances as the principle of "survival of the fittest" dictates. Only then will prosperity become possible for us.
The writer is the chairman of the Institute for Global Economics.
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