[Viewpoint] Only chaebol can battle its ownFormer Knowledge Economy Minister Choi Joong-kyung, while in charge of energy and utility policy in February last year, warned of an investigation into the cost of oil prices, verbally pressuring oil refiners to bring down petroleum prices and help slow runaway inflation. “I used to be an accountant. I could calculate the cost of oil prices,” he said.
He acted upon a hint from President Lee Myung-bak, who complained of the unusual movement in gasoline prices, saying he was speaking on behalf of the people. It is a conventional work of political logic. The economic logic that visible hands do not aid consumer prices goes ignored time after time. The president ordered a close watch on consumer prices and government offices raised an uproar, but the actions nevertheless failed to rein in inflation.
This was typical in the 1970s and 1980s, but the history lesson was of no use. With government pressure, oil refiners cut gasoline prices by 100 won (8 cents) per liter (.26 gallons) last year. Gas prices stabilized for a few months and then went up again.
The president, however, recently said something entirely different. He said that the effects of cutting oil prices do not last long. The order to bring down oil prices is a makeshift and ineffective policy, he said. Instead he asked authorities to look into how Japan stabilizes oil prices. He also demanded that authorities examine whether their consumer price controls are based on a scientific mechanism. His comment hinted at feelings of regret.
Japan’s oil prices remain stable because authorities leave prices to be determined by the market. The strong yen has helped, but the real reason is competition. Its structure of production and distribution of oil is entirely different from ours. There are four refiners in Korea and eight in Japan. International company Exxon Mobile also competes in the saturated market in Japan, where independently owned gas stations are popular.
If the president is pointing to these characteristics for a benchmark, he is correct in doing so. But it is a pity that he hasn’t learned to respect free market principles and economic logic. Competition can be powerful; we can take the automobile industry as an example. During the days when Hyundai Motor, Kia Motors and Daewoo Motors competed fiercely, consumers had greater choices and benefits such as the interest-free installment deal. But after Kia was acquired by Hyundai, there was no need to fight for consumers. Recalls and consumer complaints about after-sales service also increased.
Such results are understandable from Hyundai’s position; as Hyundai takes up 80 percent of the auto market, it does not have a desperate need to go all-out to attract consumers. The fault lies more with the Kim Dae-jung administration, which authorized the consolidation of Hyundai Motor.
Instead of encouraging competition by allowing more players in the market, the Roh Moo-hyun administration also licensed mergers among oil refiners. SK acquired Incheon Oil in 2005 and their monopoly of the industry increased. The Kim and Roh administrations were outspoken on reforming conglomerates. But they ended up giving them enormous favors, and consumers had to pay the price.
As far as corporate competition is concerned, the more the better. Consumers can afford to use good products at cheaper prices. Corporate competitiveness also aids the economy. The government must be severe on price-fixing, disallow mergers that undermine competition and regulate barriers in order to prevent abuse of monopolies. But newcomers should be encouraged to make inroads into the market.
The government was right to license Aekyung Group to launch an airline from Seoul to Jeju in 2005 to introduce a new player into the local airline market, which was previously divided between Korean Air and Asiana Airlines. Local flight rates have remained stable since then. We must have more large business groups. Only conglomerates can fight conglomerates. If companies are regulated against becoming bigger, it would only benefit the existing conglomerates.
Conglomerate entries to the confectionary market should not be entirely criticized. It only helps the current major companies such as CJ, which runs the Tous Le Jour franchise, and SPC, which runs Paris Baguette. Politicians are busy with chaebol-bashing ahead of the elections, but regulations do not help the market or consumers. When political logic outweighs economic logic, good policies fall victim to populism.
by Kim Yeong-ook
* The author is an editorial writer of the JoongAng Ilbo.