Swept under the rug

A prosecutorial probe unearthed covered-up losses at Daewoo Shipbuilding and Marine Engineering (DSME), irregularities at the state-run Korea Development Bank (KDB), which was responsible for managing the shipbuilder, and collusive deals between the two. Both DSME and KDB face separate parliamentary hearings next month. Yet authorities appear to be evading the fundamental problems and may sweep them under the rug.

In retrospect, we have been negligent about an essential problem on which our sustainability hinges in this century. We have failed to address flaws in our industrial structure. The sudden rise of China blinded us to the rapid changes in industry and the global economy. We were too engrossed in exploiting the boom in the Chinese market. Korea’s mainstream industries lost their chances to restructure for the sake of new growth. We are now at a crossroads in terms of economic viability. Korea Inc. is helplessly watching the dawn of the fourth industrial revolution without a ticket to get on the bandwagon. We have often missed opportunities because we dithered at moments when alternative ways and political decisions were needed.

In addressing the irregularities and troubles at DSME, authorities in charge of spearheading restructuring dumped the matter in the hands of the state institutions. Over the last decade, the government — out of fear of stoking confusion and the political cost of industrial restructuring — chose to ignore the signs of economic transition and instead told state financial institutions to throw lifelines to ailing industries. State funds were also used to fend off challenge from China. As a result, state lenders have become structurally weak. We need an entirely new industrial map, and the role of state lenders must be redefined to meet a new age.

In the early stage of development, when the public finance base was weak and financial markets underdeveloped, the government needed to play a major role to ensure market flexibility and expansion. Institutions like the KDB, Export-Import Bank of Korea and Korea Credit Guarantee Fund played that role.

They acted as icebreakers to clear a path for Korea Inc. trying to expand domestically and externally. Their efficacy came into question amidst competition with commercial lenders as the economy matured through globalization and liberalization. The benign function of the public institutions lessened, while side effects increased. Instead of redefining their role, they became complacent with the status quo. They kept lending and their brood of zombie companies became bigger and bigger.

What caused all this is the deep-rooted, shady connections among politicians, bureaucrats, financial institutions, large companies, and labor unions. The tradition of collusion has made policy financing a bargaining chip, and the ruling party used its authority to fill executive positions in state financial institutions and troubled companies. Ailing companies were propped up through every economic crisis through policy funding. Neither the government nor the corporate sector bothered to come up with a strategy to beat Chinese competitors. Industry stagnated. The cost of the failures of industrial policy fell on state lenders. They degraded into a wasteland of sick companies.

Instead of trying to restore their reputations, state lenders sank further into complacency and moral hazard. Self-indulgent in their jobs and happy with their fat paychecks, they ended up as hotbeds of financial troubles. The executives descending on parachutes merely banked their paychecks and collaborated with the militant unions to sustain generous working conditions. In the meanwhile, public funds went down the drain.

Public financial institutions must be entirely reconstructed for a new industrial environment. To do so, murky networks must be dismantled. The institutions must be governed by legally and politically neutral forces. The work of public lenders must be stretched and the targets of assistance must be strictly selected. Overlapping public enterprises must be merged and accountability enhanced. The ailing companies on their books must be sold off.

Authorities could benchmark the development banks of Germany, Singapore and Japan that were launched following the 2008 financial crisis by integrating development, trade, small business and housing financing. Reform and reconstruction could be painful, but is necessary in order for the country to stay ahead in the age of the fourth industrial revolution.

Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, Aug. 31, Page 32

*The author, a former minister of commerce, industry and energy, is the chairman of the North East Asian Research Institute.
Chung Duck-koo