Revisiting the restructuring

Seventeen years ago on Dec. 4, 1997, the Korean government agreed to receive a $21 billion bailout plan from the International Monetary Fund (IMF) and began responding to the Asian financial crisis.

After four months of economic turmoil, the short-term foreign debt repayment dues were extended and the doors for new foreign funds were opened to control the liquidity crisis. The Kim Dae-jung administration pursued financial reform to settle insolvent financial institutions primarily responsible for the crisis as well as conglomerate reform to modify the excessive debt structure that resulted in financial insolvency. The government infused over 10 trillion won ($84.3 billion) of public funds to help insolvent bonds and provided new capital to transform all banks to meet the Bank for International Settlements’ ratio requirement. In the process, many financial institutions were merged and closed, most management and executives were replaced and over 30 percent of employees were laid off.

With a sense of mission that the suffering must not be repeated, the government unified financial supervisory functions and reinforced preventative management and control. Also, a system to prevent the practice of government meddling with executive-level appointments at financial institutions was created. However, a governance system to back up creative management innovation hasn’t been established yet. That’s why the current administration’s financial reform should be focused on upgrading supervisory functions that restrict autonomy and prevent government intervention on personnel decisions.

The conglomerate reform during the financial crisis was to pursue business structural reform to lower the debt-equity ratio from 500 percent to the international standard of 200 percent in the short term and improve the management structure to secure transparency and urge owner-centered management to move to a professional management system in the long term.

The financial structure reform of conglomerates had to be actively pursued by creditor banks for their own survival and protection of the account holders, so most conglomerates reached the 200 percent debt ratio, and the outdated myth of “too-big-to-fail” was broken.

The internal trading among subsidiaries was clarified through consolidated financial sheets and mutual investment was banned. Circular equity investment was not allowed and existing investment was gradually reduced. Outside board members and external inspection systems were introduced to check and monitor the decision-making of major shareholders.

However, the Lotte Group crisis casts a suspicion that in many conglomerates, the leaders abuse power or the owner family dominates management. While the four reform goals of the current administration do not include conglomerate reform, the government needs to make sure the conglomerates that determine Korea’s global competitiveness should change the owner-oriented management to responsible management by professional CEOs.

The labor reform that the Park administration prioritizes was the key for all other reforms during the financial crisis as well. Financial institution reform and conglomerate restructuring were impossible without reorganization of structure and workforce, so the labor-management-government agreement on layoffs was the most pressing issue.

The government promised a social safety network, including unemployment plans, and companies promised that layoffs would only happen when inevitable. The mass unemployment crisis was a result of the bankruptcy of small- and medium-sized companies and closure of small businesses due to credit crunch rather than restructuring, bringing great pains on the low-income classes.

In order to protect them, the government introduced a basic livelihood security system for 1.5 million lower-income earners. The income peak system is surely an important step to reform the labor market structure. But labor reform is impossible without concessions from both labor and management. Therefore, the conglomerates need to contemplate what they can offer to get concessions from unions of regular employees.

Conglomerates need to work on expanding the “equal pay for equal work” principle to the number of irregular workers who have been increasing since the IMF bailout. Only then can the double structure of the labor market be mitigated. During the financial crisis, the government promoted public reform, reducing government regulations and pursuing privatization of public corporations. But the inefficiency of the public sector remains the same, and the abuse of authority hasn’t been improved.

At the time of the financial crisis, the government claimed the four reforms were to take effect at least 20 years in the future. Seventeen years have passed, but they have left more shadows than light. Hopefully, the four reforms of the current administration will shed light on the shadow and prepare a foundation for creative economy and cultural prosperity.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, Aug. 26, Page 31

*The author is a former minister of finance and economy.

by Kang Bong-kyun