[Viewpoint] Rule of law vs. rule of people

Does a record of remarkable success precipitate disaster? As Korean conglomerates post record performances in their various areas of business, however, their ethics are coming under fire. Lurching toward a working-class friendly set of policies, the Lee Myung-bak administration joined the fray by giving a stern warning to conglomerates about their allegedly inappropriate business practices.

The government said conglomerates treat smaller companies unfairly, while making scant efforts to reinvest their profits and create jobs. The big companies, of course, said these criticisms were unfair.

At the start of its term, the Lee administration professed unusually deep affection for the conglomerates because the country depended on their success to produce a trickle-down effect for the rest of the economy. That expectation soon turned to disappointment.

According to records of the Korea Federation of Small and Medium Business, smaller companies’ raw material costs have skyrocketed, but the prices they receive for their products - mostly from tough customer conglomerates - are nearly stagnant, offering a glimpse of the big squeeze going on between big and small companies.

The unfair business practices of conglomerates have long existed. It is a perennial problem for the Korean economy, where industrialization was achieved thanks to the central role of conglomerates. Because most conglomerates are constantly trying to streamline their production processes, they pressure small companies to cut costs as much as they can.

In such an industrial structure, investments are only aimed at raising productivity, and executives in charge of purchasing are only focused on lowering suppliers’ prices.

Furthermore, as the component supply network has become more globalized, Korean component makers are coming under greater competitive pressure. Conglomerates are also increasingly transforming their businesses into “platform companies” that concentrate on developing their brands rather than producing the products themselves. Manufacturing is outsourced, further reducing the negotiating power of small suppliers. The more you rely on a totally free market, the bigger the gap between conglomerates and small companies.

Taking into account such an industrial structure, sharing prosperity between conglomerates and small companies is not easily achieved unless conglomerates have unusually high ethical standards. Although belated, it is fortunate that the government is finally paying attention to small companies.

And yet, the government must tread carefully on this issue, because it is a deeply ingrained part of Korean business culture, and resolving it won’t be simple. A hasty government intervention can distort the market rather than solve the problem.

A government can rely on either the rule of law or the rule of its people. While the rule of people relies on subjective judgments of human beings in power, the rule of law is based on a society’s objective values. That’s why the rule of people has the advantage of flexibility, whereas the rule of law is consistent and predictable.

The problem with the rule of people, however, is that it is arbitrary and temporary. When the rule of people is prolonged, everyone tries to please the president, and when the president turns his attention away from a particular issue, so do the people, and no one will work on the problem anymore. That’s why we have to be cautious when relying on the rule of people.

A good government needs both the rule of people and the rule of law. No democratic government can function without the rule of people, but respecting the limits of the rule of people is key. Pointing out unfair business practices of conglomerates at the appropriate time and making public servants pay attention to the problem is the correct way to lead. But fanning anti-conglomerate populist sentiment in society is not.

Unveiling unfair practices and making the Fair Trade Commission function as a watchdog are within the scope of the rule of people, but interfering in legitimate negotiations in a functioning market is beyond the limits of the rule of people.

Warning the conglomerates that the time has come for them to respect fair trade is the right path for the rule of people, but making them feel victimized is wrong.

Unfair business practices by conglomerates are a fundamental threat to a market economy, the resolution of which is necessary to ensure the growth of small companies. Adam Smith wrote “The Theory of Moral Sentiments” before he wrote “An Inquiry into the Nature and Causes of the Wealth of Nations.” In the first book, he wrote that fairness in trade cannot be achieved without prudence from those involved, swift and strict justice upholding the law, and benevolence.

An economy without order and proper benevolence cannot prosper. Furthermore, the global economy is currently a place of brutal competition. For an economic ecosystem to be truly competitive, coexistence is necessary. But without fairness, there can be no coexistence.

To this end, the current debate over the conglomerates’ business practices must continue until it is resolved. The government should have the wisdom to be guided by the rule of people. That will make the rule of people the rule of virtue.

*Translation by the JoongAng Daily staff.
The writer is a professor of management science at Korea Advanced Institute of Science and Technology.

By Lee Hong-kyu