Korea - the Role of Competition Policy in Regulatory Reform 2000

Korea - The Role of Competition Policy in Regulatory Reform 2000 The Review is one of a series of country reports carried out under the OECD’s Regulatory Reform Programme, in response to the 1997 mandate by OECD Ministers. This report on the role of competition policy in regulatory reform analyses the institutional set-up and use of policy instruments in Korea. This report was principally prepared by Mr. Michael Wise for the OECD. BACKGROUND REPORT ON THE ROLE OF COMPETITION POLICY IN REGULATORY REFORM* * This report was principally prepared by Michael Wise in the Directorate for Financial and Fiscal Affairs of the OECD. It has benefited from extensive comments provided by colleagues throughout the OECD Secretariat, by the Government of Korea, and by Member countries as part of the peer review process. This report was peer reviewed in October 1999 in the OECD’s Competition Law and Policy Committee. 1 TABLE OF CONTENTS 1. FOUNDATIONS OF COMPETITION POLICY 2. SUBSTANTIVE ISSUES: CONTENT OF THE COMPETITION LAW 3. INSTITUTIONAL ISSUES: ENFORCEMENT STRUCTURES AND PRACTICES 4. LIMITS OF COMPETITION POLICY: EXEMPTIONS AND SPECIAL REGULATORY REGIMES 5. COMPETITION ADVOCACY FOR REGULATORY REFORM 6. CONCLUSIONS AND POLICY OPTIONS BIBLIOGRAPHIE Tables 1. Actions against abuse of dominance 2. Korean industries with “market-dominant enterprises” 3. Trends in competition policy resources 4. Trends in competition policy actions 2 Executive Summary Background Report on The Role of Competition Policy in Regulatory Reform Competition policy must be integrated into the general policy framework for regulation. Competition policy is central to regulatory reform, because its principles and analysis provide a benchmark for assessing the quality of economic and social regulations, as well as motivate the application of the laws that protect competition. Moreover, as regulatory reform stimulates structural change, vigorous enforcement of competition policy is needed to prevent private market abuses from reversing the benefits of reform. A complement to competition enforcement is competition advocacy, the promotion of competitive, market principles in policy and regulatory processes. Competition policy and enforcement have promoted two fundamental aspects of reform in Korea: increased reliance on markets rather than central government direction to drive growth and increased openness and transparency of public institutions and major private enterprises. Korea’s independent competition agency, the Korea Fair Trade Commission (KFTC), plays a central role in major reform efforts, and it has stepped up its enforcement activity in recent years. Korea’s conception of the multiple purposes of competition policy—to promote balanced development and fairness as well as free competition and efficiency—has developed along with the program of reforms over the last two decades. The basic competition law, the Monopoly Regulation and Fair Trade Act (MRFTA), covers all of the principal competition policy problems -- collusion, monopoly, mergers, and unfair practices. In addition, the KFTC is responsible for issues of contract fairness and consumer protection. Most statutory exemptions have now been eliminated, although the application of competition principles to sectors being deregulated is still being worked out. The KFTC’s enforcement tools and powers are generally adequate to prevent or correct anti- competitive practices and conditions. The most prominent competition policy issue in Korea today is establishing an environment in which the chaebol compete on equal terms with other market actors. The principal criticisms of these diversified industrial groups—that ownership structures, finances, and management are not transparent enough, that their huge size and the perception that they are “too big to fail” distort financial markets and indeed the entire economy, and that the complex web of internal financial and other ties magnifies, rather than reduces, the risk of catastrophic failure—are not themselves issues of competition policy. Concerns are also expressed about conventional competition policy issues such as market domination, exclusion, and discrimination. A high priority for the KFTC recently has been to detect and punish “undue” internal transactions within the chaebol. Although many of the concerns have more to do with corporate governance and financial prudence than with competition policy, the KFTC may be well-placed to deal with them, because of its enforcement tools and experience. Since 1986, the MRFTA has given the KFTC powers to regulate the chaebols’ corporate and investment structures. Major reforms of corporate law and finance are now under way and new agencies such as the FSC have been established to specialise in those subjects. Because of the magnitude of the problem, the extent of the crisis, and the scope of the changes, it may be some time before these reforms take full effect. As they do, the KFTC should be able to concentrate on policing distortions of the competitive process. The KFTC’s independent position has not hampered its participation in reform, because the KFTC’s status provides direct access to the policy process. The KFTC has promoted important steps to make competition policy universal by reducing exemptions and special treatments. Other reforms have scaled back potentially intrusive regulatory roles of the KFTC itself, for example, by ending the KFTC’s practice of issuing a list annually identifying dominant firms whose prices and conduct would receive special scrutiny. The KFTC should build on its solid institutional and policy base to ensure that principles of competition, rather than central direction, govern the relations between the Korean state and the market. It should focus its resources to emphasise the policy goal of efficiency, a direction evidenced already by its significantly increased attention to horizontal issues. Here, the KFTC may need additional powers to gather information. In dealing with the conduct of the chaebols and with actions to restructure market relationships, the KFTC’s principal concern should be correcting problems of anti-competitive exclusion and dominance. 3 1. FOUNDATIONS OF COMPETITION POLICY 1. Korea’s competition policy institutions developed as its economic policy has shifted since the early 1980s from central direction toward reliance on markets. The roots of those institutions, and the problems they address, are in the earlier, development era. Even now, the purposes of competition policy are broad enough to support programs like those of the previous period, of structural intervention and regulation, as well as those of market-based reform. Adapting institutions to the present tasks will mean shifting the emphasis among the many elements of Korea’s competition policies. Competition policy grew out of an environment of state-led growth, and now must deal with the chaebol structures and practices inherited from that period. 2. Competition policy played little role in the era of state-led development of the 1960s and 1970s. Although the economy’s forms were those of markets and private investment, many markets were controlled, directed, and protected. Investment was targeted, as the government tried to allocate resources directly through systems of control such as business licenses. The national goal was rapid economic development, so the government assigned top priority to industrial and trade policies intended to maximise investment and market share. Box 1. Competition policy's roles in regulatory reform In addition to the threshold, general issue, whether regulatory policy is consistent with the conception and purpose of competition policy, there are four particular ways in which competition policy and regulatory problems interact: • Regulation can contradict competition policy. Regulations may have encouraged, or even required, conduct or conditions that would otherwise be in violation of the competition law. For example, regulations may have permitted price co-ordination, prevented advertising or other avenues of competition, or required territorial market division. Other examples include laws banning sales below costs, which purport to promote competition but are often interpreted in anti-competitive ways, and the very broad category of regulations that restrict competition more than is necessary to achieve the regulatory goals. When such regulations are changed or removed, firms affected must change their habits and expectations. • Regulation can replace competition policy. Especially where monopoly has appeared inevitable, regulation may try to control market power directly, by setting prices and controlling entry and access. Changes in technology and other institutions may lead to reconsideration of the basic premise in support of regulation, that competition policy and institutions would be inadequate to the task of preventing monopoly and the exercise of market power. • Regulation can reproduce competition policy. Rules and regulators may have tried to prevent co-ordination or abuse in an industry, just as competition policy does. For example, regulations may set standards of fair competition or tendering rules to ensure competitive bidding. Different regulators may apply different standards, though, and changes in regulatory institutions may reveal that seemingly duplicate policies may have led to different practical outcomes. • Regulation can use competition policy methods. Instruments to achieve regulatory objectives can be designed to take advantage of market incentives

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