[VIEWPOINT]What's happened to the reforms?

Five years have passed since the International Monetary Fund bailed out Korea. The financial crisis has been overcome, but it cost us an enormous sum in economic and social expenses. Since the 1997 Asian financial crisis, more than half of the 30 biggest jaebeol have disappeared or are still controlled by creditor banks because of financial problems. The number of bankrupt small and medium-sized businesses is also large. There are some dramatic stories in the rise and fall of many Korean companies that went through heartbreaking reversals.

I admit, of course, we had many system reforms to adopt so-called global standards, and our people's understanding of the market economy has improved a great deal. But we had to invest 156 trillion won ($129 billion) in bailout funds and we still have ailing mammoth companies. In particular, the sale of nationalized banks and the handling of ailing companies have emerged as important issues that will determine the future of the Korean economy. The sale of state-run banks and faltering companies can move the economy forward. But if we do not handle them correctly, we just repeat bad habits and increase social costs.

The results of restructuring during the past five years are not satisfactory. We still do not have the social consensus that would allow us to deal with ailing companies efficiently. Many opinion leaders and politicians do not understand the social costs of dealing with bankrupt firms. Or do they, in which case they are just spouting populist slogans?

Whenever I read discussions of the pros and cons of selling Chohung Bank, I get worried. In the past, the objections to nationalizing firms were usually from the company's managers who were responsible for running the firm into the ground. They insist that government sales will squander the nation's wealth, lead to uncertainty in workers' minds and undermine the industrial base. They claim that the selloffs are fire sales and a gift to influential buyers, and that the company could recover on its own. Final-ly unions take to the streets and politicians support nationalization of the failed concerns.

If their solution could work, it would be very nice. But that logic has proved to fail both here in Korea and abroad. Just look at Daewoo Motor. At the first bidding, the offer price was more than $7 billion, but the deal fell through because public opinion said the firm was being sold at too cheap a price. After two years of court receivership, Daewoo Motor has now been sold for a mere $2 billion. During the court receivership, the automaker was supported by its creditors to the tune of 1.7 trillion won in new funding. If the company had been sold at the right time, we could have saved some huge social costs.

Daewoo Motor is not the only case. We can find similar examples at Kia Motors, Hynix Semiconductor, Korea Life and Hanbo Steel.

The value of a company does not always increase as time goes by. An ailing company's value is prone to decline rapidly. The best workers and managers leave, investors are not willing to supply new funding, consumer confidence plummets and creditors clamor for their money back. Gresham's law, which says that bad money drives out good, rules at the ailing company. There is no exception in the case of banks that benefited from government bai-lout funds. That is why fin-ancial scandals, such as embezzlements, have taken place frequently at bailedout merchant banks and at Daewoo Securi-ties, which is under the control of Korea Development Bank.

How can we get out of this vicious cycle? Dramatic restructuring and a new standard for judging the health of banks and companies is needed. How can we possibly make reforms if we plod along with our old-fashioned system? We have to speed up the sales of the government stakes in our banks. Politicians and bureaucrats should not be bankers. There is no guarantee that stock prices will go up if we delay the sales; on the contrary, there is a greater chance that stock prices will decline, and meanwhile government money is tied up in floundering institutions. Only privatization can improve the banks' performance, so why do we agonize so much and so publicly in the course of trying to make the right decision?

Sell Chohung Bank. It has to be free from the stain of being run by the government. It must be revitalized by being privatized. If politics calls the tune and another sale falls through, our international competitiveness will lag even more and the future social costs will snowball.

* The writer is a professor of economics at Yonsei University.

by Jeong Kap-young