Some regulations are needed
Korea was no exception. Deregulation began gradually in the Chun Doo-hwan administration, and then it was diagnosed that Park Chung Hee-style state intervention was largely to blame for the foreign currency crisis of 1997. Deregulation became a national goal. The Park Geun-hye administration also advocates boosting economic vitality through deregulation.
The underlying philosophy of deregulation is that companies are most efficient and innovative when given maximum liberty and that restricting corporate liberty lowers efficiency and innovation, ultimately slowing down the economy. Of course, there is an impact on efficiency and innovation made by regulations. But the role of regulation on an economy is not so cut and dried.
First, some regulations are necessary socially, even if they result in lower corporate profits. A pertinent example is safety standards, an issue of high concern in the aftermath of the Sewol ferry disaster. Regulations on maximum cargo loads, work hours of professionals and fire-safety preparedness may add costs that companies have to pay. But they are essential.
Second, some markets cannot exist without regulations. Consumers can figure out the quality of products such as electronic goods and automobiles for the most part, but it is hard for the general public to understand the safety or the effect on health of medicines. That market cannot exist at all unless the government regulates and controls the quality of products to the point that consumers buy medical products with trust.
Third, some regulations help corporations by creating an environment for companies to make long-term investments. From the 1960s to the 1980s, the Korean government regulated entry into industries that require large investments, such as automobiles. Thanks to those regulations, the companies that invested in such industries secured a certain level of profit, and reinvestment helped them quickly expand production and lower their costs to gain international competitiveness. In contrast, Taiwan did not regulate entry into the automobile industry, and more than a dozen small companies competed in a limited market. Its automobile industry sputtered and died.
Fourth, some regulations help corporations by prohibiting companies from hurting themselves in the long run. For example, the use of child labor impedes the education of children and lowers the quality of the future workforce. It is harmful to all. A certain company may not realize this or care. It feels it has to use child labor to compete with other companies that do so. Conscientious capitalists in 19th-century Europe made sure that the government controlled child labor, and everyone benefitted.
A modern example is environmental regulation. When the environment is destroyed, all companies’ survival is threatened. However, if companies are allowed to set their own environmental standards and choose production technology, they would compete to select the lowest standards that yield the most profit, and the environment would be destroyed. The government is needed.
Statistics on growth rates illustrate that many regulations actually help the economy. In the 1950s and ’60s, when regulations were tight and tax rates were high, developed economies enjoyed an annual average of 3.2 percent growth. Then the growth rate fell to 1.8 percent in the next three decades of deregulation and tax cuts. In Korea, the growth rate was 6 percent in the development-driven years but fell to half that since the late ’90s, when deregulation began. While slow growth is not entirely due to deregulation, such trends show that regulations are not always detrimental to economic growth.
We need to abandon the blanket idea that regulations are not good for companies or economic growth. We don’t want companies demanding the elimination of regulations that are necessary for the entire society or country. As such a perception prevails in society, companies that violate regulations and the bureaucrats who fail to implement them don’t feel guilty. They should.
Unless we abandon our blind deregulation policy and come to a more balanced understanding of the issues, the safety, health, environment and vitality of our economy could be threatened.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, May 8, Page 35
*The author is a professor of economics at the University of Cambridge.
By Chang Ha-joon