Understanding risk’s cost

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Understanding risk’s cost

The Sewol ferry accident, which killed 295 people, with nine still missing, was a critical juncture in Korea’s long history of man-­made disasters. In its aftermath, there is some apprehension that the relative quiescence in recent years was an anomaly and Korea is regressing to its past safety negligence. A cursory look at workplace safety and traffic accident statistics shows widespread disregard for safety throughout society. Koreans are exposed to freak accidents on their way to work, at work, in the air and at sea. Korea has the highest work-­related fatality rate among the OECD countries, and one of the highest traffic fatality rates. One could reasonably argue that in a society so affected by risk, it was just a matter of time before a major disaster such as the Sewol tragedy happened.

What drives Korea’s culture of risk? One important factor is clearly weak oversight by government agencies entrusted with enforcing safety standards. In the case of the Sewol, entities entrusted by the government to ensure the ferry’s safe passage - the Korean Register of Shipping (KRS) and Korea Shipping Association (KSA) - both were too lax on safety protocols and prioritized the interests of ship operators over the safety of the passengers. The KSA included among its members the operator of the Sewol. Such collusion also extended to those who were supposed to oversee the overseers: top management at KSA and KRS was staffed with former officials from the supervisory agencies.

However, when one digs deeper into the issue, a more complex picture emerges. For instance, one of the entities involved, the KRS, is a classification society that ensures international safety standards for global shipping. As such, it is one of the largest classification societies in the world. The KRS safety inspections are supposedly top notch, and the company has also had a good reputation among shipbuilders and global shipping operators throughout the years. Yet the high standards the KRS applies to global shipping have not extended to domestic shipping, as shown in the case of Sewol.

One reason for the dichotomy in safety standards between the domestic and international sectors is Korean society’s tendency to ignore and downplay the hidden cost of social risks. Ferry services operating in Korea’s littoral waters are not economically lucrative due to the small size of the market, yet the state offers few subsidies. The only way small domestic firms can make profit in such a market is by cutting corners in areas hidden from public view. Safety is a prime target for cutting costs, because ensuring safety is expensive, but the payoff is neither immediate nor visible and the possibility of adverse outcomes is remote.

In order to understand how the culture of risk in Korean society resulted in official collusion and tragedy, one should take into account the fact that the Sewol was operated by a small domestic firm. It avoided competition and the cost of meeting safety regulations by lobbying the regulatory agencies because corruption was cheaper that competition, which also had the added benefit of ensuring the company’s monopoly over littoral shipping routes. The KRS, which fiercely competes for clients against major classification societies in the global market, also was shielded from competition in the domestic market as the government granted it a monopoly on domestic ship inspections. Such a small corner of the Korean economy could remain hidden from governmental and non-governmental watchdogs for a long time.

So what would be the possible solution to Korea’s penchant for risk? One example that is worth considering is Korean Air, which drastically improved its safety record after suffering a series of deadly crashes for most of the 1990s. The sorry state of Korean Air during that time even received best-seller treatment by Malcolm Gladwell, who wrote about Korean Air extensively in his book “Outliers”.

Gladwell’s book was so successful that the rigidly hierarchical nature of Korean culture became widely accepted as the cause of Korean Air’s poor safety record in the 90s. But upon closer inspection, such a facile “cultural” explanation falls part. The turnaround story of Korean Air started in the late 1990s when the firm hired a former Delta Air Lines executive, who introduced global safety standards such as “crew resource management” in the cockpit. As a result, Korean pilots, far from being stubbornly attached to their “culture” of hierarchy, were able to successfully adopt and implement global safety standards in a short time. In truth, Korean Air’s turnaround pokes holes in Gladwell’s reasoning.

The example of Korean Air demonstrates that what raises safety levels is the implementation of global safety standards. When Korean companies compete globally, market dynamics ensure that safety standards are met, either through the need to compete on safety or to meet safety standards in advanced economies. However, domestic markets, that either cannot achieve the economy of scale or are shielded from competition through regulation and collusion, suffer from perennial freak accidents that result in unnecessary deaths and injuries. It is worthwhile to note that 80 percent of workplace fatalities in Korea occur at small and midsize businesses with fewer than 300 employees.

Thus, the impressive improvement in Korean Air’s safety records show that the way forward is globalization and competition. Of course, such a prescription cannot be generalized to all areas of Korean society. In fact, as the above example of workplace fatalities illustrates, many areas of Korean society are exposed to risks that can’t be decreased by market mechanism alone. Raising safety standards in small, niche markets and industries might even lead to their disappearance due to the burden of additional cost. Korean society would have to then decide which sectors should be subsidized with taxpayer money and which are not worth keeping. Obviously, this is going to be a long and painful political process.

In order to achieve a safer society, Koreans first would have to come to terms with the hidden costs of risks, both political and economic.

*The author is a research fellow at the Asan Institute for Policy Studies.

by Go Myong-hyun

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