[VIEWPOINT]Choosing an economic model

Ever since the financial crisis of 1997, we have tried to improve our corporate management structure. But we need to start discussing a broader plan to change the structure that includes not only investors and management but also employees.
There are American and European models of corporate structures. According to Professor Mark Roe of Harvard University, the two models are distinguished by the different approaches they take to accomplishing social peace, especially peaceful labor-management relations. The changed political environment resulting from the elections in April demands a clear understanding of the two models and the citizens’ wise choice.
Peaceful labor relations are the prerequisite for companies’ active production and operation. The United States and Europe, two economic entities with different political philosophies, have invented distinguished ways to achieve labor peace. In Europe, social democracy is dominant while liberal democracy prevails in the United States. The difference in political philosophies leads to clear distinctions in the corporate structures made up of ownership, management and employment and influences the competitive structure of the markets and the development of the stock markets.
In Europe, labor peace would be attained by prioritizing the interest of employees over those of shareholders and managers. For example, German companies protect the interest of employees by including them in management. In the United States, the interest of shareholders is considered the most important. But, in the United States, peaceful labor relations are maintained by preventing the rise of controlling groups and providing a public social safety net, private pension systems and the share-in-savings system for employees.
Let’s look at the effects of politics by comparing the examples of the United States and Germany. First of all, German companies prioritize employees and thus have little labor flexibility. The unemployment rate is generally over 10 percent. The supervisory board of directors, half of which is made up of employee representatives, is not functional because there is no lively exchange of information and discussion.
Germany has failed to develop a systematic way to converge the interests of managers and shareholders. Managers receive relatively little compensation, hostile mergers and acquisitions are rare, and transparency is low. As a result, managers pursue expansion, become risk averse, and avoid restructuring.
Because the agency cost is high, a dispersal of ownership would not be effective. So the ownership of companies is concentrated among major shareholders. As a result, the number of public companies is small and the stock market is relatively underdeveloped. Market competition, which inevitably calls for restructuring, tends to be discouraged. In every aspect of the corporate structure, American companies show the opposite trend from German companies.
Until the 1980s, no model was proven superior. The American model was more efficient, but Europeans preferred long-term social peace. But facing fierce competition from globalization, European nations began to imitate the American model, which they had once despised.
Which model should Korea follow? Since the National Assembly election, the European model is increasingly popular. But Korea is bound to choose the American model for three reasons. First, we have already adopted many American-style features since the financial crisis. Second, the Korean economy is highly dependent on trade, and therefore the flexible American market economy model is more suitable. Third, the American model has absolute advantages for the industries of the new economy that Korea has to develop.
If we choose the American model, we should also prepare a labor plan. The most urgent task is to reform the social safety net and introduce a corporate pension system that can supplement the public pension. Labor flexibility and the share-in-savings system should be adopted simultaneously. In order to share profits with its employees, a company can create a system where a certain portion of net earnings is invested in a fund to compensate laid-off employees. When a company needs to restructure, those laid off will be paid from this fund. Tax benefits should be provided for the reserve.
Without peaceful labor relations, economic growth is impossible. Considering the economic structure, we should pursue profit-sharing instead of including employees in management.
Recently, the political axis has shifted towards the progressive group that prefers the European social democratic model, but for the survival of the Korean economy the American liberal democratic model is undoubtedly the best option.

* The writer is a professor of finance at Yonsei University and the president of Korea Securities Research Institute. Translation by the JoongAng Daily staff.

by Park Sang-yong