Potential perils of restructuring

Restructuring has become a buzzword in Korea, casting a heavy pall over the already weak economy. Restructuring is an essential part of an economy’s evolution and necessary for its health but still remains a painful and bitter process. It must be carried out in a way that the woes of the people aren’t worsened. But the new work won’t be easy, as bureaucrats and politicians still cling to this idea of “too big to fail” when it comes to large companies.

Even before the government officially declared it was launching restructuring, jobs at many smaller dockyards or subcontractors to major shipbuilders and shipping companies and temporary works have been cut. When large companies are restructured, we have repeatedly seen how their losses translate to social costs, even when they kept earlier profits to themselves. Since state banks involve taxpayer money, the government must quickly and firmly clean up the troubled companies. But it must stop bailing out large companies.

We have seen how much worse corporate entities managed by the Korea Development Bank and Export-Import Bank of Korea have become, so we know the government is hardly qualified for the task of restructuring. Domestic and global economic conditions these days do not condone outdated state interference. Distress is not limited to shipping and shipbuilding companies. The ratio of publicly trading companies that weren’t able to pay interest on their debt with their operating earnings for more than three years shot up to 33.3 percent in the first half of 2015 from 25.8 percent in 2009. The ratio of chronically ill companies also rose to 10.6 percent in 2014 from 8.2 percent. Of 30 major business groups, 17 are either ill or show symptoms of serious trouble.

Restructuring work that started with shipping and shipbuilding sectors may have to spread to all industries. The rebuilding of large companies does not necessarily aid the smaller companies in the supply chain. In fact, the losses would be shifted to the smaller companies, worsening their woes.

There is also the concern about the corporate troubles spilling over to the household economy. Household debt exceeds 1,200 trillion won ($1.007 trillion), and whether that can be fully repaid is in doubt. The ratio of debt to disposable assets that had been at 140.5 percent in late 2007 jumped to 169.9 percent by the end of 2015, hovering way over the 140.5 percent average of the member countries of the Organization for Economic Cooperation and Development as of the end of 2014.

Unless the country’s productivity dramatically improves through upgrades to technology and organization, Korea’s potential to grow will continue to weaken. There is little hope for growth in the workforce as the number of working-age people will likely to start thin from 2017 due to the low birthrate and aging, and the country may be headed for a demographic cliff from 2020. Growth from capital expenditures also has been slow because lucrative companies stack up billions of dollars because they cannot find places to invest while ailing ones simply cannot afford to invest.

Growth driven by exports also cannot be expected as shipment remains sluggish due to global demand failing to recover from the 2008 crisis. State-led restructuring could raise trade frictions and complexities as Korea Inc. now has interests all over the world.

These local and external economic changes and conditions first of all call for a stronger social safety net. Employers dither in restructuring and unions resist it because of the painful toll it takes on workers. Various benefits and programs such as extended unemployment subsidies, aid for the unemployed and promotion for retraining and startup must be available so that workers are less fearful of being out of work. The work requires enormous funding, but if it leads to a stronger safety net, the returns for the economy will be bigger in the long term.

Secondly, individual restructuring must be carried out in the context of broad industrial retooling. The capital and skills stemming from large companies that go under restructuring should be used to advance small and mid-sized enterprises. Third, government interference must be kept to a minimum so that ailing companies can cleaned up by the market.

The government cannot know the industry and companies better than the market. The burden of sustaining zombie corporations that rely on government bailouts and support would dampen corporate profitability and will to invest and hire. The society and economy also have to pay dearly for the messy aftermath.

Moreover, the government should stop bugging the Bank of Korea to use its money printer to help restructuring. It must shake off the old ways if it wants to rebuild the industry and economy anew.
Translation by the Korea JoongAng Daily staff

JoongAng Ilbo, May 23, Page 31

*The author, a former prime minister, is the director of the Korea Institute for Shared Growth.

Chung Un-chan