WORLD TRADE
ORGANIZATIONWT/WGTCP/W/91
31 August 1998
(98-3343)
Working Group on the Interaction
between Trade and Competition PolicyOriginal:  English
COMMUNICATION FROM THE REPUBLIC OF KOREA
The following communication, dated 27 July 1998, has been received from the Permanent
Mission of Korea with the request that it be circulated to Members.
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The Impact of State Monopolies, Exclusive Rights and Regulatory
Policies on Competition and International Trade:
Korea’s Recent Experience and Suggestions
1. State Monopolies, Exclusive Rights and Privatization in Korea
State-owned and controlled enterprises are an extreme form of government regulation that has
had a long-standing incidence on the Korean economy. A belief in an omnipotent government that
prevailed in the 1960s through 1970s played a catalyst role in the rapid expansion of public
enterprises in Korea.  In addition to the textbook explanation of the raison d’être  for public
enterprises such as natural monopoly and externality, imperfections in input markets were used to
justify public enterprises in Korea.  Nationalization or state control of banks was carried out to control
credit flows as it was deemed essential for a government-led management of the economy.
Most public enterprises were granted a monopoly status or exclusive rights through laws and
regulations.  As monopolists in their respective markets, they enjoyed not only monopoly rents but
also various types of subsidies in their early years, in addition to implicit insurance in case of losses.
In many instances, price control or rate-of-return regulations were imposed on these state monopolies
to curb their abusive pricing. However, serious efforts to remove inefficiencies had seldom beenmade.
As of the end of 1997, there were 111 state-owned enterprises (three government enterprises,
26 government-invested enterprises and their 82 subsidiaries).  They employed 214,000 workers and
produced 70 trillion won of goods and services with a net profit of 1.7 trillion won.  Their totalexpenditure in 1998 is expected to reach 100 trillion won and their equity capital is estimated to be at
23.8 trillion won.  They cover such key industries as electricity, telecommunication, gas, waterworks
and sewerage, road construction, land development, railways, tourism, port facilities, steel, tobacco,
and also a portion of the banking sector.  In addition to these public enterprises owned and controlled
by the central government, there are about 400 so-called "grey area" public enterprises whoseexistence and management have strong ties to the government in various forms, and about 200 public
enterprises owned and controlled by local governments.WT/WGTCP/W/91
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Privatizing state monopolies and introducing competition in their once-controlled turf has
been a daunting task.  The public enterprises, esta blished for many years, had developed their own
inertia.  In many cases, government officials who controlled public enterprises and the employees of
these enterprises seemed to enjoy vested interests,  which made it more difficult to implement reforms.
During the past three decades, the Korean government announced four rounds of privatizationprograms in 1968, 1980, 1987 and 1993, most of which ended up being "big plans but small
achievements".  It has been observed that the underdevelopment of Korea's capital market, difficulties
encountered in introducing competition into some  of the network industries, fear of greater
concentration of economic power in the hands of conglomerates or chaebols , and strong resistance
from vested interest groups combined with weak political leadership to overcome the resistance are
among the most important factors that impeded the process of privatization in Korea.  On 3 July 1998,
the new administration announced the fifth round of privatization that applies to 11 of the largeststate-owned enterprises and their 52 subsidiaries.
2. Economic Regulations, Deregulation and Demonopolization in Korea
In an economy where discretion overrides rules, government regulations in actual practice are
much more extensive than those stipulated in laws and regulations.  Korea's past industrial policyproduced innumerable interventionist regulations, many of which were hard to remove even at a time
when they were no longer desirable.  The rapid increase of government regulations was paralleled by
the expansion of the government apparatus, which in turn made it more difficult to reform the
regulations.  Government regulations in the name of industrial policy included both economic and
administrative or procedural regulations; the former dealing with entry and exit, pricing, andinvestment and ownership, the latter designed to implement these economic regulations.
As these regulations persisted over a long period of time, they were conducive to corruption.
From the viewpoint of private corporations, "the cost of abiding by or detouring regulations"
increased while they were suspected of not yielding the desirable effects originally intended.
The regulatory industrial policy also affected Korea's industrial organization in other ways.
Entry regulations explain why many of the important markets in Korea have been maintained as
monopolies or oligopolies.  While most of the entry regulations took the form of license and permit,
there existed cases in which report/registration requirements or ownership/investment regulations
worked as de facto  entry regulations or barriers to mobility via administrative guidance or government
coercion.  The heated debate in recent years over the entry regulations in such industries aspetrochemicals, aircraft manufacturing, passenger cars, integrated steel making, telecommunications,
etc., illustrates how difficult it is to remove a single regulation.  Price regulations were even more
pervasive in Korea and had a nullifying effect on competition among firms.  Reform of price
regulations was difficult partly because it was easy to blame price deregulation for being the source of
inflation.
Although the Korean government shifted to liberalization and pro-competition policies in the
1980s, the embedded tradition of regulatory industrial policy was hard to remove.  The overall trend
has been a gradual shift to a freer market mechanism, but interventionist industrial policy was often
revived in years of economic recession.  During the past ten years or so, deregulation anddemonopolization have been given top policy priority and, in fact, many regulations of the past have
been either removed or rationalized under the administrations.  However, the current status of
deregulation and demonopolization still calls for further reform. It is for this reason that the new
administration is emphasizing regulatory reform as its top priority task.
In addition to the strong resistance from the vested interest groups and the lack of political
commitment, there were other factors explaining the lack of success of the reforms:  lack of expertise
and in-depth industry studies coupled with the negative attitude of the bureaucrats towardWT/WGTCP/W/91
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deregulation, the institutional setting of "regulatory reform by the regulators themselves" which is
obviously inappropriate for efficient and aggressive deregulation, and other policy considerations in
such core deregulation issues as financial sector, labour, chaebol , land, etc.
As far as government regulations and exclusive rights are concerned, state-owned enterprises
are only the tip of the iceberg, and government regulations artificially generating market power and
exclusive rights are equally pervasive in the private sector.
In view of the past government-led industrial development, deregulation and privatization
have been considered as two of the most important policy issues that bear great significance to
competition in Korean markets.  Both policies, how ever, involve abrupt readjustments of interests of
different groups including corporate owners and managers, workers, consumers, local residents andeven government officials.  Resistance from these vested interest groups, private or governmental, has
made the actual implementation of these reforms fa r more difficult than originally expected under
consecutive administrations.
Though not yet widely acknowledged in Korea, clear lessons have emerged from the
experience of the deregulation and privatization policies of the 1980s through 1990s.  While the
benefits and costs of deregulation and privatization are well documented in theoretical literature, the
Korean experience shows that it takes a strong political commitment as well as the right vision and
philosophy to successfully implement deregulation and privatization policies.
3. Impact of State Monopolies and Exclusive Rights on Competition and Trade
By definition, state monopolies and their exclusive rights granted through laws and
regulations hinder competition.  Thus, the combination of regulatory reform with privatization of
state-owned enterprises will restore competition in  the targeted sector of the economy.  Applying
competition law without reforming monopoly structures and legally protected rights will have seriouslimitations on the correction of the anti-competitive practices of state monopolies or enterprises with
exclusive rights.
As described above, state monopolies and their exclusive rights still exist in many important
manufacturing and service industries in Korea.  Most of the observations in the WTO Annual Report
for 1997 on "State Trading, Exclusive or Special Privileges and Monopolies" (see Section IV.1.c of
the Report) are applicable to the Korean case; that is, competition and market access, both domesticand from abroad, are restricted due to the barriers to  (a) access to the market that is the subject of the
monopoly or position of market power, (b) access to downstream markets, and (c) access to upstream
markets.  It is not difficult to find evidence of such barriers to competition and/or market access in the
monopoly position or exclusive rights of such stat e-owned enterprises as Korea Telecom (KT), Korea
Electric Power Corporation (KEPCO), Korea Ga s Corporation (KGC), Korea Heavy Industries &
Construction (KHIC), Korea Tobacco & Ginseng Corporation (KT&G), Pohang Iron and Steel
Company (POSCO), and so forth.
The nature and extent of obstacles to competition, however, differ from industry to industry.
A few points are worth further observations:
First, partial competition has been introduced into some of these industries and begun to
effectively discipline, albeit to a varying degree,  the incumbent state-owned enterprises in their
respective markets.  Increasing import competition in the steel and tobacco markets and cream-
skimming by the latecomers in the telecommunication service market are examples.
Second, concern arises when state-owned monopolists diversify into other lines of businesses,
related and unrelated.  This phenomenon of diversification by state-owned monopolists is closelyWT/WGTCP/W/91
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related to that of cross-subsidization or the so-called "leveraging of market power" in the context of
firms operating simultaneously in regulated and unregulated markets (see the aforementioned WTO
Annual Report, Chapter IV, p.34).  In Korea, diversif ication or leveraging of market power by state-
owned monopolists has been observed not only within  the classic example of the telecommunication
sector but also in other state-owned monopolies su ch as KEPCO's and POSCO's ventures into other
markets including the telecommunication sector.  Although Korea's Fair Trade Commission (KFTC)
has not yet applied competition law to such diversification and possible cross-subsidization, such
practices may still restrain competition in the unregulated or less regulated markets and create
inefficiencies in the regulated markets due to the fa ct that the exit process implies sub-optimal scale
of investment and production or shortage of supply.
Third, the issues of essential or bottleneck facilities and mandating open access to such
facilities have not been addressed sufficiently in Korea's network industries.  By and large, network
industries have been given monopoly status by the old presumption that they are natural monopolies.
Such belief is still hard to shake even if the economics of technology allude to the possibility that
these monopolies are no longer "natural".
All these issues point to a clear policy direction:  privatization of the state-owned enterprises
and introduction of competition wherever possible, which is what the Korean government has pursued
during the past decade.  But the real problem is that the Korean government still does not have a
clear-cut answer to how to effectively introduce co mpetition into these industries.  We have yet to
determine whether competition is feasible and desirable in these sectors.  Another special issue ofconcern is whether breaking up state monopolies when privatizing them is desirable given efficiency
considerations, though doing so would be undoubte dly an effective way of promoting competition.
The issue has been raised for many of the state-owned enterprises including POSCO, KT&G,
KEPCO, KT, and KGC.
The impact of state monopolies or exclusive rights  on international trade can be analyzed in a
similar fashion to the extent that competition overlaps with market access.  An issue for discussion
would be any peculiarities that are confined to inte rnational trade but not related to competition.  Any
practices of the state monopolies and associated government regulations fall into this category if they
discriminate against foreigners.  In most cases such practices and regulations have been exposed to
bilateral or multilateral trade negotiations.  There may exist other practices and regulations of subtler
forms.  Commercial practices and management decisions by state monopolies in their dealings withdomestic buyers, suppliers and subcontractors may have the effect of restricting market access by
foreigners.
4. Impact of Regulatory Policies on Competition and Trade
The impact of regulatory policies on trade and competition is more pervasive in its scope
across the economy than state monopolies and their exclusive rights, though the nature of such impact
is similar.  Most of the economic regulations - regulations on entry, exit, investment, ownership,
pricing - are likely to restrain competition and protect the incumbent businesses by harming
consumers and potential competitors.  In many cases, regulations motivated by safety, health and
environmental concerns also have the indirect effect of deterring entry and restricting competition.  Tothe extent that competition and market access overlap, we can make similar arguments on the impact
of regulatory policies on international trade.
Thus, regulatory discriminations against foreigners boil down to the issue of national
treatment in terms of government regulations.  It is not only international trade but also domesticcompetition which is adversely affected by such regulatory discriminations, since they block an
important source of competition from abroad.  In Korea, typical cases of such regulatory
discriminations have existed in the form of regulations of foreign direct investment, foreignWT/WGTCP/W/91
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ownership, import diversification policy intended to control imports from Japan, and so on.  As these
regulatory discriminations are being removed or turned into non-discriminatory regulations under the
policy shift to overcome the current economic difficul ties, the resulting enhanced level of competition
is expected to bring concrete benefits not only for domestic firms but also for Korea's trading and
investing partners.
5. Competition Advocacy Role of KFTC with Reference to State Monopolies and
Government Regulations
Applying competition laws to regulated sectors and state monopolies is necessary to correct
anti-competitive business conduct.  Due to the nature of regulations and state ownership, competition
laws nevertheless face serious limitations.  In Korea, KFTC has been increasingly active in enforcing
competition law on the restrictive business practices of regulated industries and state monopolies.  Itis also true, however, that KFTC has repeatedly experienced limitations in its enforcement of the law
as monopoly power or exclusive rights are warranted by other laws and regulations.
This limitation is the very rationale for the competition advocacy role of KFTC.  That is, it
will be most effective if KFTC can directly challenge the adverse impact of state monopolies andregulatory policies on competition and market access by initiating regulatory reform and privatization.
Thus, as in other economies, the advocacy of pro-competitive changes in regulatory and other
government policies is viewed as an important element of competition policy.  The real question,
however, has been whether KFTC can actually initiate regulatory reform and privatization of state
monopolies.  The answer depends on political dy namics in Korea, KFTC's status within the
government, and the recognition by political leadership that state monopolies and government
regulations are bona fide competition policy issues.  KFTC has had a mixed experience with advocacy
role in this regard:  in regula tory reform, KFTC has been very active in reforming anti-competitive
government regulations while its role in privatization of state-owned enterprises has been quite
limited.
6. Suggestions for Further Discussions
Based on their past experiences, many economies around the world share the view that simple
adoption and enforcement of competition laws is not sufficient to ensure effective competition and
free market access in markets dominated by state monopolies, exclusive rights and regulatory policies.
Regulatory reform and privatization of state monopolies have proved to be an important prelude to an
effective antitrust enforcement.  In this respect, OECD's recent efforts toward regulatory reform are
viewed as an important step forward.  Korea sugge sts that future discussions in this Working Group
also include the issues of regulatory reform and privatization of state monopolies to promote
competition and market access.
Another issue for further consideration would be the role of regulatory reform and
privatization of state monopolies in enhancing efficiency, especially in the context of the economies
now suffering from serious setbacks and experiencing rapid restructuring of their financial as well as
corporate sectors.
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