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Deregulation & Subsidy
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Deregulation & Subsidy
  • By Jack H. Park
  • March 31, 2014, 06:20
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The Park Geun-hye government has recently announced a new three-year plan for economic reform in a movement towards deregulation and public sector renovation.

The problem is that past administrations have pursued the same goal with similar initiatives, only to result in an increasing number of regulations imposing a heavier burden on the corporate sector. According to the Regulatory Reform Committee, a total of 15,007 sets of regulations are in place as of the end of June last year. The number has increased 44.7% from 1998, when the current system for regulation registration was put into practice. The reasons for the past failures need to be examined thoroughly if the new attempt will be successful.

One of the most urgent parts to examine is government subsidies. Public sector reform and deregulation cannot but fail yet again unless the complex subsidy structure is overhauled. Regulation and subsidies are like two sides of a coin. Even at this very moment, excessive subsidy-based projects are mushrooming, and this moral hazard is harming the economy with a large amount of subsidies from the government misused and misappropriated. This will hamper the growth of the creative economy, acting as a roadblock to Korea’s efforts to reach US$40,000 in per-capita income.

The story is exactly the same for financial support for small and midsized enterprises. More than 100 types of subsidies are in place for them, and even the beneficiaries themselves are having a hard time drawing distinctions between them. Besides, the types of subsidies for R&D activities amount to hundreds as of now. This implies that many regulation criteria are in place in that regulations coexist with privileges. The government’s budget allocated for research institutes, which amounts to 16 trillion won (US$14.9 billion), is currently executed inappropriately by any means. Still, new support measures are pouring out day after day for the purpose of venture and start-up promotion.

Almost all of the ministries, including the Ministry of Science, ICT and Future Planning, the Ministry of Trade, Industry and Energy, and the Small and Medium Business Administration, have decorated their recent reports to the President with demands for more subsidies. Even the central government repeated the same old habit in the three-year plan by promising an extra 760 billion won (US$709 million) for the Young Start-up Fund, 200 billion won (US$186 million) for the Korea Yozma Fund, expansion of the Creative Economy Vitamin Project, etc. Many organizations are already using their heads to get more of the money. The government provides 900 million won (US$840,500) for each of those attracting just 100 million won (US$93,400) of new investment from a venture capital or an angel investor. Inevitably, fraudsters can be found all around. A second venture boom can have no meaning at all with the situation as it is, because a cut in the supply of the financial resources will lead to an immediate collapse.

As mentioned above, regulation and government support are two sides of a coin, functioning in the same way to distort free market structures. When government support is the yardstick to tell the winners from the losers, market participants defying the status quo and challenging the risks are thought of as fools. The government subsidy structure has to be overhauled immediately if mature entrepreneurship is to take root.