by Pan Suk Kim
In the midst of one of the most severe economic crises in South Korea'shistory, President Kim Dae Jung's administration was inaugurated in February 1998. The new administration came in with a philosophy that mightbe described as "parallel development of democracy and market economy." As a part of initiatives taken by the new administration to overcome the economic crisis, the new government moved to reform practically every facet of society by focusing on four major sectors: finance, business, labor, and the public sector.
In the financial sector, the government set up the Financial Supervisory Commission (FSC) last April to oversee restructuring programs. As part of these programs, five banks were closed and nine others were merged to form larger ones. Moreover, negotiations are currently going on to sell two banks to foreign investors and to shut down 16 of 30 merchant banks. President Kim Dae Jung pledged his full commitment to the free market principle and made a series of crucial decisions on how to react, and on what to and what not to do. Because the problem Korea faces is not cyclical but structural, the FSC targeted the core of the problem first by making the resolution of the ailing banks a top priority. The government also decided not to hand over Seoul and Korea First Bank to the chaebol (domestic conglomerates), though that move may restrict the eligibility for potential bidders and hinder the process of selling its assets.
The government has called on the chaebol to restructure by carrying out voluntary measures such as swapping business lines among the top five business groups. This will improve transparency and strengthen their financial structures. The government and the private sector have already made some progress in implementing changes in three key areas: corporate governance (including managerial transparency), capital structure, and downsizing/scaling back the degree of diversification in the conglomerate's business lines.
Regarding labor reforms, the Labor-Management-Government Tripartite Committee (LMGTC) agreed to introduce a flexible dismissal system and a work dispatch system--both firsts for Korean businesses--that have provided flexibility in the labor market. The formation of the committee was a major step toward President Kim's goal of establishing a participatory democracy. It is expected that unemployment will peak in the first half of 1999, and then decrease; it should remain in the range of 5 percent to 7 percent thereafter. Moreover, real wages will continue to decline in 1999, and corporate welfare programs will also be curtailed. The labor movement will put more stress on political activities and participation in the policy-making process.
President Kim Dae Jung has defined the current situation as the greatest national crisis since the Korean War. The root of this unforeseen crisis was the inability of the Korean government and the business and financial sectors to adapt flexibly and in a timely manner to recent and rapid changes in an increasingly competitive international economic environment. At the base of the current reform drive is the realization that protection and regulation are not the solution; they are the problem. In response to the crisis, therefore, the government has called for a thorough overhaul and reform of all parts of the economy to regain its former growth momentum. Specifically, the administration has called for reform in four major sectors: business, finance, labor relations, and government administration. This essay focuses mainly on current reforms in the public sector.
Public Sector Reform
The ultimate objective of the current reform drive is to build a system governed by market principles and democratic values. This means breaking away from the previous government-led and government-directed system and toward a new system that relies instead on individual initiative as the driving force. The old system, which had served Korea well during the past 30 years of rapid economic growth, has been proven inadequate to meet the challenges of today's volatile, fiercely competitive, and increasingly complicated world.
It is widely known that, since the 1960s, the Korean government has been deeply involved in the country's economic development. Initially, the private sector had little capital, few commercially viable technologies, and a fragmented market. Moreover, the nation faced a serious military threat from North Korea. This situation left the government little choice but to become actively involved in almost every aspect of developing the nation.
Rapid economic development led to government growth in size and in number of employees during the 1960s and 1970s. Despite the government's size and large workforce, since the late 1970s many began to see it as an inefficient monolith incapable of providing quality services to the nation or the people. Many Koreans now argue that government has become a hindrance to Korea's continued economic development. To support this argument, they cite the recent economic debacle as evidence that government policies and procedures are outdated and inadequate in today's global environment. They feel that excessive government regulation and intervention in the market economy has stifled Korea's competitiveness at home and abroad.
Consequently, reforms have been undertaken to combat the main weaknesses of the Korean government: centralization, lack of transparency, flexibility, and low competitiveness. President Kim's administration set three objectives for carrying out the Public Sector Restructuring Program: 1) to realize "a small but efficient government" by streamlining government functions and vastly reducing its size; 2) to achieve "a highly competitive government" by incorporating the principal of competition among civil service organizations and personnel; and 3) to pursue "a customer-oriented government" by fostering desirable actions and attitudes among government employees.
Reform of the government and the public sector in this context means two things. First, reform must make room for more individual initiatives--especially from the private sector--to enable market mechanisms to work properly. There must be less government involvement and influence in the country's economic activities. Second, the public sector cannot be exempt from what is asked of the private sector. It must account for and justify the use of taxpayer money, provide better value for that money, and give the highest priority to customer satisfaction. A more efficient government that will provide better services is needed. The goal is to reduce the size of the government and improve its quality and productivity.
The effort to boost efficiency by eliminating redundancy and implementing incentive structures was applied to almost every part of the public sector. This includes not only the central and local government, but also state-owned enterprises, quasi-governmental organizations, research institutions funded by government, and private organizations that rely on government support. In all these different levels and branches of government, serious efforts are being made to pare down organizations and manpower, to rationalize operations, and to initiate procedural or institutional changes.
The Kim Dae Jung government set five principles for government reform: 1) restructuring government functions toward core competence; 2) streamlining government organizations and their workforces as much as possible; 3) devolution and decentralization based on a balance between responsibility and authority; 4) building operational management systems for high productivity and proactivity; and 5) building a customer-oriented service delivery system. Furthermore, the direction of government reorganization has changed from producer to customer, from government-driven to people-centered, from centralization to decentralization, and from big government to small but strong government.
Many countries have engaged in massive state reforms. The fundamental element in most of these efforts has been the reduction ofstate influence through reorganization, a cutback in number of employees, and substantial reform of public enterprises. The Korean central government is also moving in a similar direction. The unique characteristics of the current major reform measures are more economically motivated than those of the past. This is especially true today. Major reform measures include privatization and outsourcing, streamlining organizational functions and work force, regulatory reform, pay system reform, establishment of executive agencies, the building of a customer-oriented government, behavioral changes in public bureaucracy, reform the budget system, and management assessment for government organizations.
The need for change arises in government sectors because citizens increasingly insist on equal performance standards in both government and business. The driving force for change in private sector performance arose from global competition and an increasingly borderless economy. Accordingly, a growing consensus on the need to change the way government is managed is visible. It is no longer defensible to keep people waiting for weeks for claims to be processed when electronic devices can process information almost instantaneously, and it no longer makes sense to retain a centralized power structure when information can easily flow across organizational boundaries. It is fair to say that the old-fashioned way was not bad, but that times have changed. Remarkably similar pressures confront governments around the world. Citizens demand smaller, smarter, and more effective governments. They want services to be more responsive and to be delivered more efficiently.
Continual innovation in government is thus not optional; It is a political and administrative imperative. Governments all over the world must adapt to change. Those who have avoided it will at some stage be forced to face up to it one way or another. Governments almost everywhere have downsized, privatized, reengineered, and sought improved customer service. They work to improve the performance of government and to reduce its costs. They try to increase the skills of government workers, the flexibility government workers have in doing their jobs, and the accountability of government workers to government policy. Government must pare back government services while attempting to regain the trust of citizens.
Why did all these issues burst so suddenly and universally into civic consciousness? In part, these movements grew out of the profound economic crises of the 1970s. Economic orthodoxy had developed to tackle either high inflation or high unemployment. Its inability to deal with stagflation is what plagued the global economy following the oil shocks of the 1970s. Slower economic growth and higher inflation ate away at many citizens' standards of living. Taxes thus became all the more burdensome.
Moreover, reformers sought to shrink government for another reason. In program after program, performance lagged behind promise. Governments and government officials faced rising citizen expectations and lower confidence in their ability to deliver. This was in part because governments were trying to do very difficult things, such as eliminate poverty and promote global competitiveness. Performance was far too often substandard. As the reform movement spread throughout the world, it developed four common characteristics: 1) the search for a "smaller" government-through efficiency gains rather than through cutting programs; 2) the development of new processes such as the reengineering of service systems, outsourcing, performance management, and accurate accounting; 3) a new focus on transparency of government operations; and 4) a strong emphasis on customer service. Although these strategies vary significantly, reform efforts led governments almost everywhere to face a productivity challenge: to avoid tax increases, to deliver tax cuts where possible, and to find new tactics to avoid fundamental reductions in the levels of government services.
As of December 1998, Korea's foreign reserves totaled more than US$47.3 billion. Foreign investment capital is flowing into Korea at an increasing rate. Many countries have expressed confidence in the determination of Koreans to overcome the economic crisis. The financial turmoil has at least stabilized, and the IMF considers it unlikely that Korea will be hit with a second financial firestorm. Many Koreans believe that, with its reform efforts, Korea will soon overcome its economic dilemma and see the economy turn around next year.
Despite the tangible progress achieved in attempts to resolve the crisis, many Koreans have not yet recovered their former standards of living. Reform is an ongoing process; it shows no sign of slowing. It requires strong political and public leadership with a shared commitment to better government. How Korea handles the current economic challenge will affect Korean competitiveness well into the new millennium. By turning the crisis into an opportunity for another economic takeoff, Korea is expected to be reborn as a stronger participant in the international community. However, that process of reform will not be smooth. There will be difficulties, social changes, economic pains, and many political debates. The result of the reform process is expected to give the country a stronger and more vibrant economy. The current crisis will continue in the short term, but so will the necessary reforms for Korea.
To meet the challenges of globalization and the current economic crisis, administrative reform in Korea is being driven by the need to create good governance that will provide a strong foundation for economic recovery and sustainable growth. As such, current reforms entail a thorough review of the role of all government agencies with an aim to privatize, decentralize, automate, and restructure. A change in work culture consistent with the promotion of efficiency, transparency, and accountability is also an integral part of the reform package.
Despite the progress in reform, significant challenges are down the road. Due to the structural adjustment in the public sector, significant unemployment is a serious problem. Unemployment in the private sector has made it more difficult for the private sector to absorb workers from the public sector. In addition, the role of government is changing rapidly from the initiator to the supporter of economic and national development. One of the most significant challenges Korea faces today is how to cope with the transition period wisely. Other challenges ahead for current reform efforts include sustaining the momentum for reform as the economy recovers; coordinating reforms that have been undertaken by various agencies; building capacity for local governments and autonomous public organizations to handle their increased roles; focusing on outcomes and how to measure progress toward them; developing further electronic self-service functions at the agencies; and overcoming resistance to implementation (that is, making it happen) in later stages.
Pan Suk Kim is Professor of Public Administration at Yonsei University, in Seoul. He is also Editor of the Korean Review of Public Administration.