[OUTLOOK]The Old Way Doesn't Work Anymore

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[OUTLOOK]The Old Way Doesn't Work Anymore

Tension between labor and management has erupted again this year, although the end of this conflict is in sight. Labor disputes are ever-present in Korean society, looming in the background like a sleeping volcano. They occur on a regular basis in a country that enjoys free rights of labor.

The core of the problem in the conflict between Korean management and labor is that labor is never concerned about the profitability of the corporation. Workers at companies that are incurring losses, workers at companies under debt-restructuring programs or in court receivership also go on strikes.

Labor unions in industrialized countries take part in the firm's profit sharing programs but they do so only when their companies make extra money. They do not walk off their jobs as Korean workers do, asking for a raise in pay when their companies are not making money.

The nucleus of the problem with the Korean economy is that companies are not generating profits. They cannot even generate enough profit to pay interest on their loans. A ten-year study of manufacturers during the 1990s shows that the sector posted a 5.5 percent return on equity, whereas interest paid was 11.9 percent of equity.

A company in the red can not pay back the principals of its loans, and over time they become non-performing asset for the lending institutions. This vicious cycle brought about the 1997 financial crisis, after which the government plowed 100 trillion won of taxpayers' money into ailing financial institutions.

What has kept Korean companies from understanding the simple principle that a company must generate profits to survive? Their management focus has been on growth not earnings. Korean companies have been treated generously by banks. When they made a profit on investments made possible by the loans, they claimed it was their own accomplishment. When the investments flopped, they argued they were "too big to fail."

The bigger the company, the bigger the size of the loans, and the banks were inextricably bound to continue lending with the hope that the company would eventually make a profit and repay them. The government, with its iron grip on the banks, abetted this practice, worrying about the socio-political ramifications that failing corporations may wrought. Thus, the growth-oriented economic model and the political leadership that drove it collusively linked business and politics.

Against this background, the labor unions emerged as new players in the wake of the June 29th Democratization Declaration in 1987 by President Roh Tae-woo. Managers, knowing they would not be held accountable for losses, easily embraced the union workers' demands for a pay hike. To pay the rising labor cost, they borrowed from the banks, a burden that came back to fall on both the workers and the management.

Kia Motors, before the 1997 financial crisis, is a case in point. Its labor and management practices eventually led Korea First Bank, its main creditor bank, to bail out the automaker with 15 trillion won of public funds. Once hailed as a "national corporation," Kia Motors quickly became a corporation that "swallowed up public money."

The key to economic restructuring in the wake of the financial crisis is to enhance companies' profit-making ability. Without that, "the garbage flowing down from the upper stream," will block an economic turnaround, regardless the amount of public funds plowed into creditor banks.

In this regard, labor unions have not shown a responsible attitude. Their calls to reduce working hours, without a commensurate cuts in pay nor an alternative plan to raise productivity does not fit a profit-oriented model. Yet they hold strikes, demanding pay raises. Of course, excessive demands and actions by unionized workers are not a cloak of immunity on management and the government.

Before laying siege to workers, management should reflect on the degree to which they succeeded in overcoming the past practices of giving priority to growth rather than profit-making.

They should ponder whether companies that by market principles should fail are being sustained by their collusive ties to politics. Corporations should be asking themselves whether they are making an impossible demand in asking the government to lift regulations that are in place to check growth-oriented models of management.

The government should clarify that the goal of restructuring is to enhance corporations' profit-making ability. To do that it should make clear that labor action eroding such abilities will not be tolerated, and at the same time the government should ease regulations that harm profit making.

The walkout, for all of the hoopla, is subsiding. But the core of the problem and the accompanying dilemmas remain. Labor, management and government should take this opportunity to look squarely at the problem facing the Korean economy so that resolution of labor conflict is final, not a piecemeal approach.


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The writer is a professor of economics at Yonsei University.


by Lee Jay-min

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