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Knowledge Sharing Program
Ministry of Strategy and Finance, Republic of Korea
Government Complex 2, Gwacheon, 427-725, Kor...
Overcoming the 1997-98 Crisis :
Public Sector Reform
The author greatly benefited from intensive interviews with Mr.JIN Ny...
Overcoming the 1997-98 Crisis : Public Sector Reform
Korea Development Institute(KDI)
Ministry of Strategy and Finance(MOS...
Government Publications
Registration Number
11-1051000-000102-01
Overcoming the 1997-98 Crisis :
Public Sector Reform
Marc...
Contents
Background of Public Sector Reform ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 7
Establishing the Reform Driver an...
Evaluation and Suggestions ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 45
1. Evaluation₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩...
<Table 1> Size of Public Corporations (1998) ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 19
<Table 2> Privatization Effor...
Background of Public Sector Reform
Overcoming the 1997-98 Crisis :
Public Sector Reform Chapter 01
#KSP공공영문전체_5차 2011.2.15...
Though Korea’s economic crisis of 1997 was mainly caused by the problems in the private
sector, the public sector was also...
interventions and the surplus labor in the public sector.
The public sector was also needlessly wasting taxpayer’s money. ...
major reform initiatives on the agenda during 1999, which will be explained in chapter 4.
Third, improving public policy a...
1. Birth of the Planning and Budget Commission (PBC)
2. Choice of Reform Agenda and Strategies
Establishing the Reform Dri...
1. Birth of the Planning and Budget Commission (PBC)
In early January, 1998, about a month before his inauguration, then P...
The PBC had two mandates: establishing guidelines for formulating the national budget and
reforming the public sector.4 As...
ministries’ functions and bureaucracy and fiscal reform. These reform initiatives were among
those listed in the final rep...
reforms in the areas that had the most resistance during the early days of the Presidency. In a
way, it was an inevitable ...
The PBC also had its own powerful tool to enforce its guidelines: budgetary discretion.
During 1998~1999, when it negotiat...
1. Privatization of Public Corporations
2. Downsizing the Public Sector
3. Massive Regulatory Reform
Reform for Small Gove...
1. Privatization of Public Corporations
The privatization of public corporations took the highest priority of any reform i...
Public corporations had many problems. They had over-expanded and eroded the private
sector. For example, Pohang Steel (PO...
months to come up with the action plans for 108 public corporations. This prompt formulation
of action plans was made poss...
Privatization Plan
The first issue was whether to allow ownership to be concentrated or to pursue a more
diluted ownership...
Overcoming the 1997-98 Crisis : Public Sector Reform
022
Immediate Privatization Phased Privatization
Table 3 | Three Type...
24 public corporations and their 75 subsidiaries — a total of 99 organizations — were
reviewed for privatization.9 11 out ...
As a result of the privatizations, the government was able to secure revenue of 24.3 trillion
won, and $10.7 billion of fo...
universal restructuring guidelines and organization-specific reform plans. The common
guidelines to both the administratio...
Public Entities
Public entities are organizations that were established and financially supported by the
government in ret...
their total employment was 93,000 people, and their total budget was $34.2 billion, with $4.4
billion of government budget...
began in 2001, the line ministries argued that the supervisory power over GAOs should be
returned to the ministries. Durin...
driven. The government, the primary and direct consumer of the research, had complained about
the lack of a customer drive...
As a result of these downsizing efforts, the public sector workforce was reduced by 141,000
during the three years between...
3. Massive Regulatory Reform
Given that one of the causes of the economic crisis in Korea was heavy government
interventio...
#KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지32 지앤피2263-3111 T
1. Review of Ministries’ Function
2. Bureaucracy Reform
3. Fiscal Reform
Reform for More Effective
Government (1999)
Overc...
1. Review of Ministries’ Function
Right before the inauguration of President Kim in February, 1998, the Presidential
Trans...
① Foreign Affairs and National Security: Ministry of Unification, Ministry of Foreign
Affairs and Trade, Ministry of Natio...
ministries or even beholden to them. For the PBC, the four-month review process was marked
by struggles with all the line ...
Another important consideration in reviewing the functions was whether functions of the
central government should be devol...
2. Bureaucracy Innovation
Open Recruitment System
The review of the government’s function produced many suggestions for re...
ranked them according to his evaluation. Finally, the CPC selected one from the three
candidates, usually following the pr...
The Fixed Annual Pay System was for political appointees, such as ministers and vice-
ministers, whose performance was ver...
office. The amount of the payment was only 50~100% of the monthly pay, which was too low
to be considered as an incentive ...
3. Fiscal Reform
Financial soundness allowed Korea to overcome the economic crisis. The first thing that the
PBC did in ea...
Presidential Office and the PBC made the reform possible.
Another important fiscal reform was the introduction of pre-feas...
#KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지44 지앤피2263-3111 T
1. Evaluation
2. Suggestions for Reform-Driver
Evaluation and Suggestions
Overcoming the 1997-98 Crisis :
Public Sector Re...
1. Evaluation26
The public sector reform of 1998~1999 was both wide-ranging and intensive. First of all, the
coverage of t...
administration has gradually improved in the IMD World Competitiveness Index, contrary to
fluctuations in other fields, sh...
The President should also nominate innovative and well-balanced reformers as heads of
public organizations. The heads of r...
Establishing a Reform Leading Organization
The President needs an organization to act as an agent that will carry out the ...
Overcoming the 1997 98 crisis
Overcoming the 1997 98 crisis
Overcoming the 1997 98 crisis
Overcoming the 1997 98 crisis
Overcoming the 1997 98 crisis
Overcoming the 1997 98 crisis
Overcoming the 1997 98 crisis
Overcoming the 1997 98 crisis
Overcoming the 1997 98 crisis
Overcoming the 1997 98 crisis
Overcoming the 1997 98 crisis
Overcoming the 1997 98 crisis
Overcoming the 1997 98 crisis
Overcoming the 1997 98 crisis
Overcoming the 1997 98 crisis
Overcoming the 1997 98 crisis
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Overcoming the 1997 98 crisis

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Title: Overcoming the 1997-98 crisis
Sub Title: Public sector reform
Material Type: Report
Author(English): Korea Development Institute
Publisher: Korea Development Institute
Date: 2010-03
Series Title; No: Knowledge Sharing Program /
ISBN: 978-89-8063-464-4 93320
Pages: 67
Subject Country: South Korea(Asia and Pacific)
Language: English
File Type: Documents
Original Format: pdf
Subject: Economy < Financial Policy
Others
Holding: KDI; KDI School of Public Policy and Management
Sponsor: Ministry of Strategy and Finance

Published in: Business, Technology
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  1. 1. Knowledge Sharing Program Ministry of Strategy and Finance, Republic of Korea Government Complex 2, Gwacheon, 427-725, Korea ● Tel: 82-2-2150-7712 www.mosf.go.kr Korea Development Institute P.O. Box 113 Hoegiro 49 Dongdaemun-gu Seoul, 130-740 ● Tel. 82-2-958-4114 www.kdi.re.kr Knowledge Sharing Program Center for International Development, KDI ● P.O. Box 113 Hoegiro 49 Dongdaemun-gu Seoul, 130-740 ● Tel. 02-958-4224 ● www.ksp.go.kr Korea Development Institute MINISTRY OF STRATEGY AND FINANCE Overcoming the 1997-98 Crisis : Public Sector Reform March 2010 Overcomingthe1997-98Crisis:PublicSectorReformMarch2010
  2. 2. Overcoming the 1997-98 Crisis : Public Sector Reform The author greatly benefited from intensive interviews with Mr.JIN Nyum (former Chariman of Planning and Budget Commission and later Minister for Ministry of Planning and Budget), Mr. KIM Tae Dong (former Senior Advisor to the President KIM Dae-Jung on Policy Planning), Mr. KIM Tae Kyum (former Director- General for Administrative Reform, PBC), and Mr. KWON Soon Won (former Director for Public Corporation Management, MPB). The views or mistakes in this report, however, are solely those of the author. #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지1 지앤피2263-3111 T
  3. 3. Overcoming the 1997-98 Crisis : Public Sector Reform Korea Development Institute(KDI) Ministry of Strategy and Finance(MOSF), Republic of Korea Wonhyuk Lim, Director, Policy Research Division, Center for International Development(CID), KDI Jin Park, Professor, KDI School of Public Policy and Management Yoon Jung Kim, Research Associate, Policy Research Division, CID, KDI Kwang Sung Kim, Freelance Editor Government Publications Registration Number 11-1051000-000102-01 ISBN 978-89-8063-464-4 93320 Copyright ⓒ 2010 by Ministry of Strategy and Finance, Republic of Korea Project Title Prepared by Supported by Project Director Author Project Coordinator English Editor Overcoming the 1997-98 Crisis : Public Sector Reform #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지2 지앤피2263-3111 T
  4. 4. Government Publications Registration Number 11-1051000-000102-01 Overcoming the 1997-98 Crisis : Public Sector Reform March 2010 Knowledge Sharing Program MINISTRY OF STRATEGY AND FINANCE Korea Development Institute #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지3 지앤피2263-3111 T
  5. 5. Contents Background of Public Sector Reform ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 7 Establishing the Reform Driver and Guiding Principles₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 11 1. Birth of the Planning and Budget Commission (PBC) ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 12 2. Choice of Reform Agenda and Strategies ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 13 Reform for Small Government (1998) ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 17 1. Privatization of Public Corporations₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 18 2. Downsizing the Public Sector ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 24 3. Massive Regulatory Reform₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 31 Reform for More Effective Government (1999) ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 33 1. Review of Ministries’ Function₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 34 2. Bureaucracy Reform₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 38 3. Fiscal Reform ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 42 Chapter 03 Chapter 02 Chapter 04 Chapter 01 #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지4 지앤피2263-3111 T
  6. 6. Evaluation and Suggestions ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 45 1. Evaluation₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 46 2. Suggestions for Reform-Driver₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 55 Conclusion₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 59 Appendix & Reference₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 62 Chapter 05 Chapter 06 #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지5 지앤피2263-3111 T
  7. 7. <Table 1> Size of Public Corporations (1998) ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 19 <Table 2> Privatization Efforts in Korea in the past 40 Years₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 20 <Table 3> Three Types of Privatization Planned in 1998 ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 22 <Table 4> Results of Privatization by December 2002 ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 23 <Table 5> Changes in the Public Corporations ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 24 <Table 6> Financial Performance of Privatized Public Enterprises ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 24 <Table 7> Trend in the Number of Civil Servants ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 26 <Table 8> Classification of Public Entities during 1998 (number of organizations) ₩₩₩₩₩₩₩₩₩₩₩₩ 26 <Table 9> Distribution of GAOs by Size in 1998 ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 27 <Table 10> Summary of Restructuring Plan of Public Entities ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 29 <Table 11> Workforce Reduction in the Public Sector ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 30 <Table 12> Compensation Structure ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 40 <Table 13> Performance Bonus Rate (as of 2000)₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 40 <Table 14> The First Revision of the Performance Bonus ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 41 <Table 15> The Range of Annual Pay (as of 2005) ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 42 <Table 16> Number of Public Funds ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 42 <Table 17> MD World Competitiveness Evaluation and Ranks ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 47 <Table 18> Comparison of the Reform Driving Bodies ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 52 <Table 19> Government Reform Agenda among Top 100 National Agenda₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 53 <Table 20> Changes in Officials’ Training Institutes ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 55 <Figure 1> Public Sector Reform Agenda ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 14 <Figure 2> Number of Privatized Public Corporations ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 22 <Figure 3> Decision Tree of the Government Function Review₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 37 <Figure 4> Organizational Chart of the Reform-Leading Organization ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 57 Contents | List of Tables & List of Figures #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지6 지앤피2263-3111 T
  8. 8. Background of Public Sector Reform Overcoming the 1997-98 Crisis : Public Sector Reform Chapter 01 #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지7 지앤피2263-3111 T
  9. 9. Though Korea’s economic crisis of 1997 was mainly caused by the problems in the private sector, the public sector was also responsible. By the 1990s, the government-led growth model, which involved extensive state intervention in the private sector, was no longer applicable to the Korean economy. In particular, the state’s role in financial distribution led private companies to believe that they were insured by the government against all possible risks. Ultimately, this moral hazard led firms to over-borrow, which in turn became the internal cause of the 1997 crisis. The bloated public sector in terms of its size and responsibility was the basis for a slow and inefficient policy-making process. The public sector was an overweight patient with arteriosclerosis. The circulation of information within government bodies was not smooth, and civil servants were just repeating what they had done in the past without trying to anticipate impending risks or opportunities to the economy. It was thus not surprising that the government failed to foresee the worst economic crisis that had ever hit Korea. The surplus labor in the public sector was not only imposing a burden on the taxpayers but also creating unnecessary regulations to justify their existence. There was a dire need for reducing both the market Overcoming the 1997-98 Crisis : Public Sector Reform 008 Background of Public Sector1 Reform Chapter 01 1_ The public sector in this report refers to the administrative bodies and public entities. The administrative bodies refer to the central and local government, local offices of education and national universities. The employees in those organizations are all civil servants. On the other hand, public entities include public corporations, government-funded organizations etc. The employees in the public entities are not civil servants, but their budgets and activities are controlled by the government. The political arena such as the national assembly or local councils, and the judiciary are also a part of the broadly-defined public sector, but they are not covered in this chapter. ‘Public sector’ reform is interchangeably used with ‘government’ reform in this report. #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지8 지앤피2263-3111 T
  10. 10. interventions and the surplus labor in the public sector. The public sector was also needlessly wasting taxpayer’s money. Large portions of government expenditure was misused or abused. Such problems were even more serious in public entities such as public enterprises and government-affiliated organizations. Since fiscal soundness was the main locomotive to driving the Korean economy out of the crisis, public expenditure reform was very critical to Korea’s credit rating. With all these problems latent in the Korean public sector, the economic crisis revealed a need for public sector reform to reduce government intervention and expenditure as well as to improve the overall performance of the public sector. After the crisis, the International Monetary Fund (IMF) sought drastic reforms in the corporate, financial and labor sectors. However, other than a reduction in government expenditures, the IMF did not ask for any public sector reforms. Nevertheless, the Korean government considered public sector reform to be an important catalyst to reforming the other three sectors. In essence, the government, by reforming itself, tried to set the precedence that would drive the sweeping changes needed in the private sector. Before his inauguration in February, 1998, then president-elect Kim Dae-Jung created drivers of reform: the Ministry of Finance and Economy for corporate reform, the Financial Supervisory Commission for financial reform, the Planning and Budget Commission (PBC) for public sector reform, and the Korea Tripartite Commission for labor reform. Chapter 2 will explain one of these newly created reform drivers, namely the PBC in a more detailed way along with the strategies that it took. The goal of the public sector reforms was to achieve a smaller and more efficient, but better- serving government. This ultimate goal was targeted at three aspects of government administration: input, process, and outcome. The first effort was to reduce the input to downsize the government in terms of its budget, staff, and scope of functions. The objective was to reduce not only the input costs but also the government’s intervention in the market. There were three major reform initiatives in this category carried out during 1998: privatization of public corporations, downsizing of the public sector, and massive deregulation, which were viewed as symbols of Korea’s willingness to undergo extensive reforms. Chapter 3 covers these three reform efforts. The second aspect of the government reform was to pioneer a new business process within the public sector. Increasing the overall competency of civil servants and effectiveness in policy formulation was an integral part of the reform in preventing the recurrence of economic crises. The government tried to accomplish this goal by reviewing the functions of the ministries, and by improving the bureaucracy system and implementing fiscal reform. These three were the Chapter 1 _ Background of Public Sector Reform 009 #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지9 지앤피2263-3111 T
  11. 11. major reform initiatives on the agenda during 1999, which will be explained in chapter 4. Third, improving public policy and service, as the output of the government, was also one of the three reform initiatives. It was essential to restore the citizens’ trust of the government. These reforms, however, were conducted after 2000, along with anti-corruption and electronic government initiatives. As such, these reforms are not covered in this report, which assesses policy responses during the 1998~1999 period, immediately following the economic crisis. Chapter 5 will evaluate government reforms during 1998~1999 based on four key factors that are deemed necessary to successfully carry out reforms: presidential leadership, the reform driving organization, roadmaps and action plans, and implementation. Suggestions will also be made regarding the reform driving organization, which this report finds to be strategically the most important factor to any reform effort and the most commonly applicable to all countries. Chapter 6 will conclude the report. The objective of this report is to explain Korea’s policy response to the economic crisis from the perspective of government reform so that other countries can learn from the Korean experience. However, what Korea was able to achieve may not be applicable to other countries since each country has its own unique initial conditions in its economy and government. Instead, the way Korea went about in accomplishing the reforms could offer more universal lessons that can be applicable to other countries. This report, therefore, will focus on the strategic aspects of how Korea conducted the reforms rather than offering a simple description of what Korea did. Overcoming the 1997-98 Crisis : Public Sector Reform 010 #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지10 지앤피2263-3111 T
  12. 12. 1. Birth of the Planning and Budget Commission (PBC) 2. Choice of Reform Agenda and Strategies Establishing the Reform Driver and Guiding Principles Overcoming the 1997-98 Crisis : Public Sector Reform Chapter 02 #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지11 지앤피2263-3111 T
  13. 13. 1. Birth of the Planning and Budget Commission (PBC) In early January, 1998, about a month before his inauguration, then President-elect KIM Dae-Jung established the Government Restructuring Sub-committee under the Presidential Transition Committee. The Sub-committee consisted of both government and non-government members, and its mandate was to reorganize all cabinet ministries, mostly with the aim of consolidating or restructuring the ministries. This sub-committee prepared a final proposal, based on the reports of various sources,2 which was subsequently approved by the National Assembly on February 17, 1998, eight days before the President’s inauguration. This pre-inauguration reform initiative was different from past efforts in that non-government members played a major role in the decision-making process. Coming as it did in the wake of a major economic crisis, there was a widespread consensus that any government reform should be carried out by experts from non-government sectors.3 One of the important directions of this cabinet restructuring was to restructure the Board of Finance and Economy (BOFE), which had been criticized for its failure to prevent or foresee the economic crisis. BOFE was thus separated into three ministry-level bodies: the Ministry of Finance and Economy (MOFE), the Financial Supervisory Commission, and the Planning and Budget Commission (PBC). Overcoming the 1997-98 Crisis : Public Sector Reform 012 Establishing the Reform Driver and Guiding Principles Chapter 02 2_ For instance, the Ministry of Government Administration and the Korean Development Institute (KDI) 3_ This idea had been reflected much in the staff composition of Planning and Budget Commission (PBC) as well. PBC recruited 14 experts from non-government sectors such as universities, research institutes, and private firms in consulting, accounting, and law. #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지12 지앤피2263-3111 T
  14. 14. The PBC had two mandates: establishing guidelines for formulating the national budget and reforming the public sector.4 As a presidential commission, the PBC was expected to have strong authority to reform other ministries. The combination of the two mandates — government reform and budget planning — was an idea inspired by the US Office of Management and Budget (OMB). The budget function of the PBC was effectively used as an implementation tool for reform since many of the reform initiatives were tied with budget saving. Initially, the PBC was expected to be given wide jurisdiction over not only budget planning but also full-fledged budget formulation. However, concern about the possible over- concentration of power lying with the president led to the division of the budget function into two parts, planning and formulation.5 The PBC was given the function of budget planning and setting priorities and guidelines for budget formulation, while the actual function of formulating the budget based on the PBC’s guidelines remained in the Budget Office under the Ministry of Finance and Economy (MOFE). The Budget Office, therefore, had to report to the PBC even though the Office was under the umbrella of MOFE. The Budget Office was integrated into the PBC, thus, forming the Ministry of Planning and Budget (MPB) in May, 1999. 2. Choice of Reform Agenda and Strategies There was no clear roadmap for public sector reforms during the 1997 presidential campaign. Although the Presidential Transition Committee had a list of reform initiatives on its agenda, it did not have specific priorities or strategies much less action plans for executing each of the reform initiatives. This is why government reform had stalled for about a half year until the second half of 1999 when all the major reform initiatives explained in this report were completed. The PBC’s major reform agenda in 1998~1999 included the privatization of public corporations, downsizing the public sector, mass deregulation, followed by a review of all Chapter 2 _ Establishing the Reform Driver and Guiding Principles 013 4_ The PBC’s mandate of public sector reform came partly from the Ministry of Government Administration, which was merged with the Ministry of Home Affairs to create MOGAHA (Ministry of Government Administration and Home Affairs). In 2008, however, its name was changed to MOPAS (Ministry of Public Administration and Security). 5_ Unlike MOFE, the PBC was not a part of the cabinet, and thus, was not under the control of the prime- minister, but placed directly under the president. The division of the budget function was the result of a compromise between then President-elect Kim and the Prime Minister-to-be, the second shareholder of the co-habitant government. Both of them knew that the budget function was a source of power. #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지13 지앤피2263-3111 T
  15. 15. ministries’ functions and bureaucracy and fiscal reform. These reform initiatives were among those listed in the final report by the Presidential Transition Committee and officially selected as the PBC’s mandate in close consultation between the PBC and the Presidential Office. However, the National Assembly did not play much of a role in formulating the reform agenda. In April, 1998, the PBC announced three major public sector reforms as the following figure shows. However, the PBC did not pursue the three reforms at the same time. The input reform was initiated under the banner of “small government” until September, 1998. The need for the process reform was introduced in late 1998, and attracted the attention of the public throughout 1999. After 2000, the outcome reform on anti-corruption and better delivery of government services to its citizen was the top reform priority. This gradual progression of reform priorities (input → process → outcome reform) turned out to be an excellent approach, though it was not explicitly planned as such in early 1998. The reduction of inputs was imperative as a way to secure fiscal soundness and also as a catalyst for other reforms in the corporate, banking, and labor sectors. The sequence proved adequate from the point of conflict management and resolution as well. Since resistance from stakeholders was highest during input reform, and weakest during outcome reform, it was the right choice to start Overcoming the 1997-98 Crisis : Public Sector Reform 014 Figure 1 | Public Sector Reform Agenda Source: MPB (2002), significantly modified. Small and Efficient but Better-Serving Government 1998 <Input Reform> Downsizing 1999 <Process Reform> Operation system innovation 2000~ <Outcome Reform> Improving public service Downsizing workforce, Outsourcing Reducing employees Integration of organizations Uniform budget cuts Privatization of public corporations Regulatory Reform BPR of the Government (Business Process Reengineering) Decentralization Bureaucracy Reform Payment system Open appointment Budget process reform Performance budgeting Multi-year budgeting Public fund and special account Clean & Transparent Gov’t Anti-corruption Administrative information disclosure Improving administrative procedure e-Government 11 projects such as G4C, G2B… Customer satisfaction Citizen’s Charters Customer satisfaction survey Simplifying civil application process #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지14 지앤피2263-3111 T
  16. 16. reforms in the areas that had the most resistance during the early days of the Presidency. In a way, it was an inevitable choice for the government to focus on less controversial agendas such as e-government6 at the later part of the President’s term. The PBC had a firm principle that was applied to all the reform efforts: market over public sector. This philosophy was consistent all throughout the Kim administration and commonly shared by the members of the PBC. No other reform initiative from previous administrations had such a clear orientation. The background behind this firm orientation was the understanding that the government had been intervening in the market excessively. It was true that the NPM (New Public Management), which had been a global trend since 1980s had a significant influence on the adoption of this strategy. On the other hand, there was also criticism that the reform was biased towards neo-classical ideology. Some scholars noted that the reform was overly focused on increasing efficiency as seen in the application of private sector management practices in the government, without recognizing the difference between the two sectors. However, it was in a way inevitable and necessary to have the pendulum swing to the other extreme before an appropriate level of government intervention was reached. The reform was conducted in a top-down manner. Action plans for each reform initiative was pushed by the PBC down to the line ministries and the public entities in a rather high- handed manner. As a result, there was criticism that the PBC saw the public servants merely as a target of restructuring rather than as partners with whom to cooperate. However, the ad hoc reforms would not have otherwise taken place, given that the initiatives such as downsizing the workforce, privatization, and integration of organizations were all painful for the relevant organizations. A strong top-down approach from the PBC was, therefore, inevitable during 1998 when input reduction was a major objective of the reform. After 2000, however, the reform had evolved into one which encouraged voluntary participation from inside each of the organizations. Despite the top-down nature of the reform, however, the PBC tried to embrace the various positions of stakeholders. The PBC sought to build a consensus with the relevant ministries, who were generally cooperative because they knew that the public sector reform was strongly supported by both the President and Korean citizens. Sometimes, however, when it came to an issue that was not in their interests, line ministries would not comply with the PBC’s guidelines and directives. In such cases, the Presidential Office intervened and resolved the disagreement between the PBC and the line ministries, usually siding with the PBC. Chapter 2 _ Establishing the Reform Driver and Guiding Principles 015 6_ In early 2001, the Special Committee for e-Government was established under the President to lead government-wide e-government projects. This committee then selected 11 major e-government projects to be completed by the end of 2002. President Kim showed his interests in e-government projects by reviewing bi-weekly progress reports. #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지15 지앤피2263-3111 T
  17. 17. The PBC also had its own powerful tool to enforce its guidelines: budgetary discretion. During 1998~1999, when it negotiated with the line ministries, the PBC did not have to use its budget function as leverage, but after 2000 when public support for reform waned, the PBC actively took to the principle of “no compliance, no budget” to push its reform agenda. Another feature of Korea’s public sector reform during 1998~1999 was that it was pushed forward in an extremely drastic manner. Most of the privatization plans for public corporations were made within two months of time, and the review of all the ministries’ functions was completed in four months. This was because the public sector reform had to achieve a ‘quick- win’ in order to set a model for other sectors, as well as to facilitate a recovery from the economic crisis as soon as possible. Kotter (1996) also emphasized the creation of the guiding coalition in the early stages of reform to ensure success. Another rationale for this ‘rush job’ was the fact that as much of the reform as possible had to be accomplished while the President still enjoyed strong public support in the early years of his presidency.7 Overcoming the 1997-98 Crisis : Public Sector Reform 016 7_ In Korea, where the President is allowed to serve only one five-year term, the lame duck period generally starts from the 4th year of the presidency. #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지16 지앤피2263-3111 T
  18. 18. 1. Privatization of Public Corporations 2. Downsizing the Public Sector 3. Massive Regulatory Reform Reform for Small Government (1998) Overcoming the 1997-98 Crisis : Public Sector Reform Chapter 03 #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지17 지앤피2263-3111 T
  19. 19. 1. Privatization of Public Corporations The privatization of public corporations took the highest priority of any reform initiative on the agenda in 1998. Highly symbolic of market-oriented reforms, privatization was expected to enhance the international credit rating of Korea as well as increase revenue for the government. Initial Conditions In 1998, there were 26 public corporations, which had 82 subsidiaries operating under their umbrella. Their total employment reached 214,000, substantially more than the 162,000 people employed as central government officials, not including teachers and policemen. If the government owned more than 50% of the firm’s share, it was called a Government-Invested Institution (GII), and a Government-Contributed Enterprise (GCE), if less than 50%,.8 Since the GIIs were considered to have a more public mission than GCEs, GIIs were more tightly controlled by the government. Overcoming the 1997-98 Crisis : Public Sector Reform 018 Reform for Small Government (1998) Chapter 03 8_ However, this classification is no longer effective. Depending on its own revenue share among the total revenue, public corporations are categorized into two types: Market-type with 85% or more, semi-market type with 50~85%. All of the market-type ones have assets of more than 2 billion USD, and are generally bigger in terms of revenue and employment than semi-market type ones. (Park, 2009) See appendix 1. #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지18 지앤피2263-3111 T
  20. 20. Public corporations had many problems. They had over-expanded and eroded the private sector. For example, Pohang Steel (POSCO) had 16 subsidiaries, while Korea Telecom (KT) owned 13 subsidiaries in various fields, all competing with private companies. Furthermore, loose management practices resulted in bloated payrolls, which led to excessive expenditures on wages and welfare. In addition, these firms were overly dependent upon their supervising ministries and had little autonomy over their internal management and business decisions. To address these issues, the PBC established a principle that public corporations with potential for commercialization should be privatized. The Reform Process Mandated to manage Korea’s national assets including the government’s share in public corporations, the Ministry of Finance and Economy (MOFE) argued that any privatization effort should be led by them and, not by the PBC. However, the Presidential Office made it clear that the PBC should be the locomotive of the privatization train. It was expected that MOFE would be less pro-active in the privatization efforts since it would reduce the number of national assets to be ‘managed’ by the Ministry. As we will see in chapter 5, a ministry will not reform its own responsibilities if the change goes against its own interests. The PBC established the Public Corporation Privatization Committee, which included experts from academia along with the ministers supervising the public corporations under their umbrellas. The Chairman of the PBC also served as the chairman of the Privatization Committee, and the MOFE vice-minister served as the vice-chairman, which was the result of negotiations between the PBC and MOFE. The PBC had to work with MOFE because the laws related with the privatization of public corporation were under the authority of MOFE. In May, 1998, the PBC started to formulate plans based on data submitted by each line ministry. The names of public corporations to be privatized and detailed action plans were worked out with the help of professionals from government-funded research institutes such as KDI. The detailed privatization plan was announced in the summer of 1998. It took only 2 ~3 Chapter 3 _ Reform for Small Government (1998) 019 Public Corporations Government-Invested Institutions 13 (30) 85,000 44.0 Government-Contributed Enterprises 13 (52) 129,000 54.9 Total 26 (82) 214,000 98.9 Number (subsidiaries) Employment Budget (billion$) Table 1 | Size of Public Corporations (1998) * Six public financial corporations and their 43 subsidiaries are not included here. ** The exchange rate is set at $1 = 1,000 won for computational convenience. Source: Press release (PBC, July 1998) #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지19 지앤피2263-3111 T
  21. 21. months to come up with the action plans for 108 public corporations. This prompt formulation of action plans was made possible by the prior studies conducted during the previous administrations. Although privatizing public corporations had been done in 1968, previous efforts had never been particularly successful due to both the government’s reluctance to transfer ownership and stakeholders’ resistance. The privatization plans of 1998 were radical compared to previous efforts in the sense that they pursued privatization of ownership instead of a simple sale of the government’s ownership share. Overcoming the 1997-98 Crisis : Public Sector Reform 020 Phase Past Efforts Main Objective and Evaluation Table 2 | Privatization Efforts in Korea in the past 40 Years 1st Phase (‘68~‘73) Privatization of 11 Public corp. Korea Machinery Korea Transportation Korea Shipping Korea Ship-building Incheon Heavy Manufacturing Korea Steel Corp./ Korean Air Korea Mining Refinery Korea Saltern Corp./ Commercial Bank Korea Fishery Development Birth of private companies → market economy Successful privatization 2nd Phase (‘78~‘83) Privatization of 7 public corporations Daehan(Korea) Reinsurance Daehan(Korea) Oil Daehan(Korea) Dredging Corp. Hanil Bank / Jeil (First) Bank Seoul Trust Bank / Choheung Bank Financial market promotion Since government’s intervention was continued, the objective of the privatization was not fulfilled. 3rd Phase (‘87) Privatization of Korea Stock Exchange Reducing government share KEPCO (Korea Electricity Power Corp.) POSCO (Pohang Steel Corp.) Redistribution policy: Sale of government share to individuals rather than companies It was not a privatization in its real sense of the word. 4th Phase (‘93~’97) Privatization Daehan(Korea) Tungsten Kookmin Bank / Housing Bank Other 7 subsidiaries of public corp. Reduce gov share of 22 public corp. Original target: privatization of 58 corporations except energy and telecommunication industry but only partially successful.(Conglomerate’s dominance was a main issue.) #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지20 지앤피2263-3111 T
  22. 22. Privatization Plan The first issue was whether to allow ownership to be concentrated or to pursue a more diluted ownership structure dispersed among many shareholders. A concentrated ownership structure was considered to be more efficient due to its clear line of accountability, yet the risk remained that concentrated ownership would lead to monopoly power. The PBC thus believed that a more dispersed ownership structure had to be pursued in instances when privatization risked creating a monopoly. Another issue was whether to sell shares of public corporations to foreign investors or to Korea’s big conglomerates, chaebols. The decision to open the door to foreign capital was relatively easy since it was viewed as a symbol of Korea’s willingness to follow global standards. The PBC conducted an open bidding process with international investors by issuing foreign depository receipts (DR). However, the issue of chaebols was a different story in light of their ties with the government which was criticized as one of the root causes of the economic crisis. Since their economic power was already dominant in the Korean economy, the general public and thus the government did not want to reinforce their economic influence by transferring the ownership of major public corporations to them. As a result, the big conglomerates such as Samsung, Hyundai, LG and SK were not invited to the privatization shopping spree. The third issue was whether public corporations should be privatized right away or after some period of restructuring. Immediate privatization was deemed the solution for five public corporations. They were all government-contributed enterprises with less than 50% share of government ownership, and were less controversial when it came to the decision of privatization. By contrast, six public corporations were subjected to phased privatization because the stakeholders needed a transition period as in the case of KT&G, or because the network industries had to be reshaped to avoid a private monopoly. As the following table shows, there were three different types of privatizations for 11 public corporations. Chapter 3 _ Reform for Small Government (1998) 021 Source: MPB (2002), Ministry of Strategy and Finance, Park (2009, modified) 5th Phase (‘98~’02) Privatization of 8 public corporations (original plan was 11 public corp.) Privatization of 67 subsidiaries of public corp. (original plan was 77) Restructuring and downsizing Very extensive privatization plan Privatization of the three network industries (Electricity, Gas, Heating) was stopped by Roh administration (2003~2008). 6th Phase (‘08~’10) Privatization of subsidiaries Asset sales The three network industries have not been privatized yet. #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지21 지앤피2263-3111 T
  23. 23. Overcoming the 1997-98 Crisis : Public Sector Reform 022 Immediate Privatization Phased Privatization Table 3 | Three Types of Privatization Planned in 1998 Concentrated ownership Korea Technology Banking Corp. National Textbook Company Korea Heavy Industry & Construction Co. Korea General Chemical Corp. Dispersed ownership Pohang Iron & Steel Company (POSCO) Daehan Oil Pipeline Corp. Korea Telecom (KT) Korea Tobacco and Ginseng (KT&G) Korea District Heating Corp. Korea Electric Power Corp. (KEPCO) Korea Gas Corporation Figure 2 | Number of Privatized Public Corporations Public Corporations (24) Government-Invested Institution (GIIs, 13) Government-Contributed Enterprises (GCEs, 11) GIIs GCEs Total Immediate Privatization - 5 5 Phased Privatization 1 (KEPCO) 5 6 Restructuring only 12 1 13 Total 13 11 24 Subsidiaries (75) GIIs had 29 GCEs had 46 GIIs GCEs Total Immediate Privatization 8 25 33 Phased Privatization 14 14 28 Integration 3 3 6 Restructuring only 4 4 8 Total 29 46 75 Source: PBC, Press Release, January 1999, modified #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지22 지앤피2263-3111 T
  24. 24. 24 public corporations and their 75 subsidiaries — a total of 99 organizations — were reviewed for privatization.9 11 out of 24 public corporations were selected for either immediate privatization or in phased privatization. The privatization of their subsidiaries was even more drastic: in that 61 out of 75 subsidiaries were selected for privatization. Achievements Out of 88 public corporations to be privatized, 74 cases were completed by the end of 2002. Among 11 public corporations to be privatized, Korea District Heating Corporation, Korea Electric Power Corporation, and Korea Gas Corporation have not been privatized yet. Their privatization phases were supposed to be extended after President Kim’s administration (1998~2003). The original privatization plans were reviewed by the Roh administration (2003~2008), and subsequently stopped or nullified. The Lee administration (2008~2013) then reexamined the possibility of privatizing the three public corporations in 2008, but failed to revive their privatization.10 As the old adage goes, we must strike when the iron is hot, and so too must we work to achieve reform when it is strongly supported by the public. This approach is even more crucial in a country like Korea, where the President can only serve one five-year term. Despite some exceptions, most of the public corporations and subsidiaries were privatized. As a result, their numbers have decreased by 78.3%, and the number of employees working in those corporations decreased by 61.8%. Chapter 3 _ Reform for Small Government (1998) 023 9_ Out of 26 public corporations, two news-media corporations, Korea Broadcasting Company (KBS) and Seoul Newspaper were exempted from the review along with their 7 subsidiaries. 10_ The Roh administration did not like the idea of privatization whereas the Lee administration failed to privatize them due to a lack of public support after the candlelight vigil caused by the Korea-US beef negotiation. Immediate Privatization 5 5 Phased Privatization 6 3 Subsidiaries 77 66 Total 88 74 Planned Completed Table 4 | Results of Privatization by December 2002 Source: Summarized from MPB (2003, p.119) #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지23 지앤피2263-3111 T
  25. 25. As a result of the privatizations, the government was able to secure revenue of 24.3 trillion won, and $10.7 billion of foreign currency denominated revenue. This was, of course, a great boon to Korea, which was then undergoing a foreign currency crisis. Moreover, the financial performance of the privatized public corporations significantly improved, which implied that privatization was not merely a way of generating revenue but also of improving Korea’s national economic competitiveness. 2. Downsizing of the Public Sector For the sake of fiscal soundness, downsizing of the public sector was an essential part of the reform. Given that numerous financial institutions and private companies were to be liquidated, it was inevitable that the pain would also spill over to the public sector. The PBC had both Overcoming the 1997-98 Crisis : Public Sector Reform 024 Public Corporations 26 19 Subsidiaries 74 22 Staff # (1,000) 212 81 1998 Nov. 2002Number Table 5 | Changes in the Public Corporations *The figures do not include financial public corporation. Data: MPB (2002, modified) Korea Heavy Industry and Construction Co △24.9 (‘00) → 433.5 (Dec. ‘00) → 25.1 (‘01) 755.4(July ‘02) Korea Technology Banking Corp. △128.2 (‘98) → 81.5 (Dec. ‘98) → 13.2 (‘01) 211.0(July ‘02) POSCO 955.5(‘00) → 7,660.6 (Oct. ‘00) → 819.3 (‘01) 12,353.7(July ‘02) Daehan Oil Pipeline Corporation △28.6 (‘00) → 9.0 (‘01) Unlisted Net profit (billion won) Market value (billion won) Table 6 | Financial Performance of Privatized Public Enterprises * Decline of POSCO’s profit was due to reduced international demand. POSCO’s profitability recovered soon after, and its profit reached more than 3 trillion won in 2009. * Since the National Textbook Company was merged into Dae-han textbook, its performance is not made available. Source: MPB (2002) #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지24 지앤피2263-3111 T
  26. 26. universal restructuring guidelines and organization-specific reform plans. The common guidelines to both the administration and the public entities were targeting reduction in the number of staffs, size of budget, and pension benefits. The organization-specific actions, on the other hand, were given to each public entity but not to the ministries. Each ministry was given a prescription after a function review in 1999, as will be explained in the chapter 4. Ministries in the Administration A proposal to downsize the central government was initially suggested prior to the President’s inauguration in February, 1998, and later reinforced in May, 1999. The plan was to lay off 26,000 employees, equivalent to 16% of the total number of employees of 162,000, not including public school teachers and policemen. A plan to reduce local government employees by 30% was announced in 1998 and 1999 by MOGAHA (Ministry of Government Administration and Home Affairs). Since local governments were expected to have more slack in their payrolls, their reduction rate was expected to be higher than that of the central government. Although the central government had limited influence on the autonomy of local governments, the central government used its discretion over financial transfers to local governments as leverage in getting their cooperation on the downsizing plan. Civil servants in Korea had the benefit of lifetime employment under statutory law, unless they committed a crime. Therefore, the downsizing plan depended on the natural attrition of employees and incentives to induce voluntary retirement. In order to speed up the process, the retirement age was also adjusted down from 61 to 60 for higher ranking officials, and from 58 to 57 for lower ranking officials during 1998.11 These reforms would not have been easy had there been labor unions in the government. It was not until 2002 that the Korea Government Employees’ Union was established,12 and the union was legalized in 2005 with the right to organize and to bargain collectively but without the right of collective action such as strikes. Though the number of civil servants had increased rapidly in the five years leading up to the 1997 crisis, it dropped by 5.1% between 1997~2002, a first in the history of Korea’s public administration. Though the net reduction shown in the table during 1997~2002 was 48,000, the gross reduction was 79,000 (22,400 from the central government and 56,600 from local governments) since 31,000 new employees were hired during the same period especially teachers, police officers, firefighters and welfare workers. Chapter 3 _ Reform for Small Government (1998) 025 11_ Korea’s bureaucracy had 9 ranks, with ranks 1-5 representing higher-ranking employees and 6-9 representing lower-ranking employees. Beginning in 2013, the retirement age will be equalized for all ranks. 12_ The government employees working for the railway or postal service were allowed to have a labor union long before 2002: 1945 for the railway, and 1958 for the postal service. #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지25 지앤피2263-3111 T
  27. 27. Public Entities Public entities are organizations that were established and financially supported by the government in return for their service to the government. These include public corporations, government-affiliated organizations (GAO), and government-funded research institutes. Though many public corporations were privatized as described earlier, the remaining ones had to endure painful downsizing plans under the PBC. Unlike public corporations, which had their own revenue sources, GAOs were financially more reliant upon government budget because their missions did not generate market revenues. Depending on the type of financial support, GAOs were divided into three categories, as shown in the following table. Government-funded research institutes were GAOs in their legal status, but due to their different governance structures they were separately categorized. The number and the size of GAOs had been expanding rapidly because the government had used GAOs as policy agents and also because GAOs were providing job opportunities for civil servants after retirement. As a result, there were 324 GAOs in the central government. In 1998, Overcoming the 1997-98 Crisis : Public Sector Reform 026 No. of Civil Servants* Rate of increase (%) 1982 1987 1992 1997 2002 Table 7 | Trend in the Number of Civil Servants (unit: thousand persons) * Includes teachers, police, firefighters, and welfare workers. Source: MPB (2002) 648 705 8.8 886 25.7 936 5.6 888 -5.1 Public corporations (26) Gov-affiliated organizations (GAO) (324) Gov-Funded Research Inst. (59) Gov-invested Institutions (13): whose government share is more than 50% Gov-contributed Enterprises (13): whose government share is less than 50% Gov-funded Institutes (50): whose budget is entirely or partially funded by the government indicated by a law Gov-subsidized Institutes (206): whose specific projects are subsidized by the government year by year. Gov-commissioned Institutes (68): who finance themselves with public mandates commissioned by the government (no budget support) Government-funded Institutes in the field of Research (KDI, KIST, …) Table 8 | Classification of Public Entities during 1998 (number of organizations) Source: MPB, Press release (January 1999) #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지26 지앤피2263-3111 T
  28. 28. their total employment was 93,000 people, and their total budget was $34.2 billion, with $4.4 billion of government budget support. Despite their large number, the total employment and the budgets of GAOs were around 40% compared to those of public corporations because they were much smaller on average. Reform measures specific to each organization such as integration, asset sales, outsourcing, eliminating monopolistic functions, and deregulation, were suggested to each GAO. After the PBC received basic information from GAOs during May 1998, the organization-specific action plans were formulated within three months, and announced in August. After all the organization-specific prescriptions were implemented, a 20% cut on running costs was also applied uniformly across all GAOs. Since this uniform cost cutting measure was implemented after the organization-specific restructuring, the restructuring pain of the GAOs was even more serious. The PBC, therefore, tried to mitigate resistance by providing a three- year implementation period. As a result of these organization-specific plans and universal downsizing, GAOs had to shed 25% of their total employment on average. The 20% running cost cut became somewhat more flexible later because of different initial conditions, in that some organizations were more efficient than others. There was a widespread consensus that the retirement pensions of both public and private sectors were excessively generous. In December 1998, the government announced plans to abolish the cumulative system of legal retirement pensions of the public sector. The plan was expected to trigger a similar change among private companies as well. Additionally, the generous early retirement package program of the public entities was adjusted to that of the government in July, 1998. However, these reform efforts by PBC had no formal statutory basis, as each GAO was supposed to be supervised by their relevant ministry, rather than by the PBC. The PBC’s reform effort during 1998 was effective because it began in the wake of an economic crisis, especially during the first year of the Presidency. However, when the lame-duck period of President Kim Chapter 3 _ Reform for Small Government (1998) 027 Employment (# of GAOs) 2,000~ (11) 1,000~2,000 (21) 500~1,000 (14) 100~500 (74) ~ 100 (204) Total 93,000 Budget, million USD (# of GAOs) 500 ~ (13) 100~500 (23) 50~100 (19) 10~50 (64) ~ 10 (205) Total 34,200 Table 9 | Distribution of GAOs by Size in 1998 Source: PBC press release (August 17, 1998), $1=1,000won #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지27 지앤피2263-3111 T
  29. 29. began in 2001, the line ministries argued that the supervisory power over GAOs should be returned to the ministries. During 2001~2003, the reform momentum for GAOs was dramatically weakened. If the PBC, and later the MPB, had established the statutory basis to manage the GAOs during 1999~2000, the reforms would likely not have stalled. After 2001, the MPB tried to enact a law that would give it supervisory authority, but it was not successful due to the strong resistance of line ministries. It was only at the end of 2003, the first year of the Roh administration (2003~2008), that the law was finally enacted. This is a reminder that any reform which runs counter to the interests of the line ministries should be pursued in the early period of a presidency, rather than during the lame-duck period. Government-Funded Research Institutes Though government-funded research institutes, including the Korea Development Institute (KDI) and the Korea Institute for Science and Technology (KIST) are relatively insignificant in terms of their employment and budget size, their contribution to the Korean economy has been more significant than these numbers suggested. The most serious problem for these organizations was the excessive influence of the umbrella ministry, which was an obstacle to neutral and objective research. To address this problem, the PBC established five National Research Councils which functioned as boards of directors, each supervising 7~14 research institutes.13 Before 1998, all research institutes had their own board of directors, which were almost insignificant. The newly-created Councils were placed under the supervision of the Prime Minister’s Office in order to weaken the tie between the ministry and the corresponding research institutes. Each Council had a mandate to select the heads of research institutes and coordinate their research activities. The members of each Council are vice-ministers of the relevant ministries, and non-government members, mostly from academia. Through their representation in the Council, the government can partially but not fully control the selection of presidents of research institutes. Despite this change in the governance structure, the selection process of presidents is still very much influenced by the relevant ministry and the Presidential Office. However, the three year-term limit of the head of a research institute has been better protected after the Council was established. Another problem for research institutes was that their research activities were supplier- Overcoming the 1997-98 Crisis : Public Sector Reform 028 13_ The five research councils were Korea Council for Humanities and Social Research Institutes, Korea Council for Economic and Social Research Institutes, Korea Research Council for Fundamental Science and Technology, Public Science and Technology, Industrial Science and Technology. At present, there are only three councils, as the first two were merged into one new council, while the latter three were merged into two councils. #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지28 지앤피2263-3111 T
  30. 30. driven. The government, the primary and direct consumer of the research, had complained about the lack of a customer driven mindset among the institutes. The government thus reduced the ratio of financial support previously provided from 100% to 50~70% depending on the marketability of the institutes, and left them to earn the rest by paid research projects, which often required competitive bidding. Though this new system introduced competition among research institutes, there was criticism that they were forced to pay less attention to research with longer-term horizons because most of their customers generally sought research to pending issues. Since the reform of the research institutes was the first reform agenda, some suggested that the political environment accommodative to reforms immediately following the inauguration of the President was wasted in reforming research institutes, which was neither an urgent nor a critical part of the reform. On the other hand, since research institutes were relatively an easy target, this first reform initiative provided an opportunity for members of the PBC to warm up before they embarked upon more serious reform initiatives on the agenda, such as privatization and the review of ministries’ function. Summary of the Downsizing Plan Public entities including public corporations, government-affiliated organizations and research institutes were asked to downsize 59,308 staff by 2001, and to cut their budgets by 349 billion won by 1998. During the year of 1998, 40.2% of the three year target was accomplished by laying off 23,841 staff. Chapter 3 _ Reform for Small Government (1998) 029 Restructuring Plan 1998 target Accomplishment of 1998 Table 10 | Summary of Restructuring Plan of Public Entities Public Corporations By 2002, among 108, privatize 11 public corporations and 67 subsidiaries. The number of subsidiaries from 75 to 8 by 2002 (△89%) Consolidation of 7 subsidiaries Divest government shares of POSCO and KT Foreign DR of POSCO (350 million USD on (12.11) Sales of KT (12.23) Workforce reduction from 166,415 to 125,223. (△25%) Workforce reduction of 10,614 Workforce reduction 12,713 (120%) #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지29 지앤피2263-3111 T
  31. 31. As a result of these downsizing efforts, the public sector workforce was reduced by 141,000 during the three years between 1998~2001. The reduction rate was higher in public corporations and government-affiliated organizations than in the central and local government. Overcoming the 1997-98 Crisis : Public Sector Reform 030 Restructuring Plan 1998 target Accomplishment of 1998 Source: PBC Press release (January 1999) Government- Affiliated Organizations Government Funded Research Institutions Total Consolidation of 19 out of 131 Consolidation 14 11 completed Research Councils Enactment of a new Law △349 billion won △59,308 staffs by 2001 △349 billion won △21,235 staffs △356.1 billion won △23, 841 staffs Reducing budget support from 3.6 trillion to 2.8 trillion won (△22%) Workforce reduction from 62,938 to 47,352 (△25%) by 2000 Workforce reduction of 8,091 250 billion won budget reduction for year 1999 Workforce reduction of 8,656 (107%) Size of the Budget 803.9 (‘98) 707.6 billion won (‘99) Workforce reduction from 18,378 to 15,848 (△14%) by the end of 1998 Budget reduction of 99 billion won in 1999 Workforce reduction of 2,530 Budget reduction of 106.1 billion won in 1999 (107%) Workforce reduction of 2,472 (98%) Central government (excluding teachers, 16.2 2.2 13.8 police, and military) Local government (excluding teachers) 29.1 5.7 19.5 Public corporations 16.6 4.2 25.1 Government-affiliated organizations 8.1 2.1 25.5 Total 70.0 14.1 20.2 Workforce at the end of 1997 (A) Scale of workforce reduction between 1998 and 2001 (B) Rate of reduction (%, B/A) Table 11 | Workforce Reduction in the Public Sector Source: MPB (2002), modified. #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지30 지앤피2263-3111 T
  32. 32. 3. Massive Regulatory Reform Given that one of the causes of the economic crisis in Korea was heavy government intervention in the market, massive deregulation was a focus during the second half of 1998. As a driving force for regulatory reform, the Regulatory Reform Committee (RRC) was established under the President, with the co-chair being the Prime Minister and, most commonly, a professor. Its members were comprised of six ministers and generally twice as many experts from non-government sectors. The massive deregulation drive of 1998 was led by the Presidential Office, but it was supported by a secretariat established in the Prime Minister’s Office. The RRC set up a taut target of reducing regulations by half, which was, of course, challenged by all the ministries. The Presidential Office, however, strongly advocated the target. After months of tug-of-war between line ministries and the RRC, the ministries ultimately trimmed the number of regulations by 48.8%, out of 11,125 regulations initially screened. As a result, it was proved that this kind of strong drive can make a difference. Complaints from private companies were valuable sources of recommendations for deregulation. Furthermore, private sector associations14 played an important role in this process. Although the quantitative target of cutting by 50% was almost achieved, the qualitative aspect or the impact of the deregulation was less satisfactory because ministries suggested only trivial deregulations to meet the 50% targets. It was an inevitable consequence of having a quantitative rather than qualitative target. To this day, the RRC continues to be active: Any new regulation must undergo a review process by the RRC to determine its appropriateness. Currently, however, the total number of regulations has slightly increased compared to 2000, as the number of the newly-created regulations exceeded the number of those abolished during the reform drive. Chapter 3 _ Reform for Small Government (1998) 031 14_ Federation of Korean Industries, Korea Chamber of Commerce and Industry, Korea International Trade Association, Korea Federation of Small and Medium Business, Korea Employers Federation #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지31 지앤피2263-3111 T
  33. 33. #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지32 지앤피2263-3111 T
  34. 34. 1. Review of Ministries’ Function 2. Bureaucracy Reform 3. Fiscal Reform Reform for More Effective Government (1999) Overcoming the 1997-98 Crisis : Public Sector Reform Chapter 04 #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지33 지앤피2263-3111 T
  35. 35. 1. Review of Ministries’ Function Right before the inauguration of President Kim in February, 1998, the Presidential Transition Committee reorganized government organizations. However, there was an argument that the committee had not fully reviewed the functions of each ministry, focusing instead on the integration or creation of the ministries. There was thus a need to review the functions of each ministry to see whether its organizational trees were well-structured, and whether its operational processes needed to be re-engineered. In addition, there were multiple overlaps among ministries in their responsibility of certain government functions, indicating a need for a better division of labor.15 The initial plan was to review the functions of only a few ministries, but the Presidential Office wanted to review all the ministries. The PBC therefore categorized all the ministries into the following eight groups. In addition, some local governments volunteered for this initiative, and they were included in group ⑨. Each group was to be reviewed by a group of nine consortiums comprised of consulting companies, research institutes, and universities. Notably, this was the first time in the history of Korea’s public administration that all government ministries were reviewed by a private company or research institute.16 Overcoming the 1997-98 Crisis : Public Sector Reform 034 Reform for More Effective Government (1999) Chapter 04 15_ Examples are: (1) Consumer protection between MOFE and Fair Trade Commission; (2) Forestry protection between Ministry of Agriculture and Ministry of Environment; (3) Job Training between Ministry of Labor and Ministry of Education; and (4) Budget formulation between PBC and MOFE etc. 16_ Since the overall monetary cost amounted to more than 4 million USD, the PBC had to formulate a supplementary budget for this project. #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지34 지앤피2263-3111 T
  36. 36. ① Foreign Affairs and National Security: Ministry of Unification, Ministry of Foreign Affairs and Trade, Ministry of National Defense ② General Administration: Ministry of Justice, Ministry of Government Administration and Home Affairs (MOGAHA), Ministry of Legislation, Office for Government Policy and Coordination ③ Education and Culture: Ministry of Education, Ministry of Culture and Tourism ④ Social Welfare: Ministry of Labor, Ministry of Health and Welfare, Ministry of Patriots and Veterans Affair ⑤ Economic Policy Coordination: Ministry of Finance and Economy, Fair Trade Commission, Financial Supervisory Commission, Planning and Budget Commission ⑥ Industry, Science and Technology: Ministry of Science, and Technology, Ministry of Commerce, Industry, and Energy, Ministry of Information and Communication ⑦ Infrastructure: Ministry of Construction and Transportation, Ministry of Maritime Affairs and Fisheries ⑧ Agriculture and Environment: Ministry of Agriculture and Forestry, Ministry of Environment ⑨ Local governments17: Choongchung Province, Cheonan City, Yeongi-Gun, Gangnam-Gu The nine teams under the Government Reform Office (GRO) of the PBC were responsible for supervising the nine consortiums. Of the three director-generals under the GRO, the director-general for Administrative Reform was in charge of this mega project, supervising all nine teams in the GRO including the teams under two other director-generals. This was an example of the flexible operation of the GRO’s internal branches. MOGAHA, which had extensive experience in reviewing the functions of each ministry, joined in this initiative as one of two leading ministries with the PBC. Though MOGAGA’s experience played a role in many respects, they advocated more conservative changes than those put forth by the PBC, which called for more drastic reform measures. As a result, there was a productive tension between these two ministries that managed the project. For the PBC, it was inevitable that it request MOGAHA’s participation because MOGAHA was in charge of the National Government Organization Act. Between November 1998 and February 1999, the PBC checked the progress of the assessment every two weeks with all the nine project managers. Each team in the GRO had to suggest reform recommendations to the consulting companies. Since the ministries were major sources of information, less competent companies tended to be biased toward the interests of the Chapter 4 _ Reform for More Effective Government (1999) 035 17_ A Province or Metropolitan City is a high level local government, whereas City, Gun, or Gu are municipal level governments. A City (populated area) and a Gun (less populated area) are under a Province, and a Gu is under a Metropolitan City. #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지35 지앤피2263-3111 T
  37. 37. ministries or even beholden to them. For the PBC, the four-month review process was marked by struggles with all the line ministries and some of the less competent consulting companies, and sometimes with MOGAHA. In order to coordinate the different interests of the line ministries, the PBC established the Coordination Committee comprised of nine non-government members and four civil servants, including one each from the PBC and MOGAHA. Based on a study by the consulting companies, the PBC formulated a draft of recommendations, which was finalized by the Committee. After a public hearing, the Committee forwarded its official recommendations to the PBC and MOGAHA in March 1999. The original recommendation included radical plans for the integration of ministries. However, those ministries that were targeted for integration were mostly under the influence of the Prime Minister, who was a shareholder of the incumbent government. The President, who wanted to maintain a partnership with the Prime Minister in an upcoming general election of year 2000, ordered that the integration plan be conducted in close consultation with the Prime Minister. As a result, the integration plan was eliminated from the recommendation. However, the final plan maintained the rest of the original recommendations including: redesigning of the internal organization and business processes, and clear division of redundant or conflicting responsibilities among ministries. The review of government functions went through the following decision tree. Some of the government functions that were not a responsibility of the government were privatized or corporatized. For instance, the Korea Railroad Authority, which used to be a government agency under the Ministry of Construction and Transportation, became a public corporation in 2005 according to plans made in 1999. As in many other cases,18 the public corporatization of the railway system was a stepping stone to privatization. Some functions were outsourced to the private sector or public entities, and some were separated from the ministry, and some were put in an independent executive agency all together.19 Overcoming the 1997-98 Crisis : Public Sector Reform 036 18_ KT&G (Korea Tobacco and Ginseng Corporation) and KT (Korea Telecom) used to be a government agency before they became public corporations, and they were privatized around 2000. (Park, 2009) 19_ The idea of executive agency Korea benchmarked the U.K.’s Next Step. However, due to insufficient empowerment and poor evaluation system, the agencies have not proven to be an effective administrative arrangement in Korea. 10 executive agencies were first designated in January 2000 followed by 13 more a year later. The list of executive agencies includes: Defense Media Center, Driver’s License Agency, National Medical Center, Aviation Meteorological Office, National Livestock Research Institute, Korea Forestry Research Institute etc. #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지36 지앤피2263-3111 T
  38. 38. Another important consideration in reviewing the functions was whether functions of the central government should be devolved down to the local level. The Kim Administration (1998~2003) had listed decentralization as one of a hundred reform initiatives on its agenda. Accordingly, it enacted the law for administrative transfer to local governments in January, 1999. The nine consulting consortiums suggested that many functions of the central government be transferred, but the line ministries were not enthusiastic about the devolution of power. To push the decentralization initiative, the government established a special committee for decentralization chaired by the Prime Minister, which consisted of academics, members of civil society, and representatives from the central and local governments. However, compared to the other reform measures, the decentralization efforts did not draw much attention or results during 1998~1999. There was criticism that the government’s review of functions should not have focused on the integration of ministries, which had been already conducted in February, 1998, before the presidential inauguration. Although it was supposed to focus on the assessment of the functions and internal organizational trees, the PBC spent too much time and energy in proving the necessity for integration of the ministries because the PBC regarded it as a symbol of intensive government reform. If the PBC had actually adhered to the original purpose of the review, it could have accomplished the project with a much better outcome and with less resistance. Reformers can easily focus too much on the achievements that garner publicity but which are not, in fact, very meaningful. Chapter 4 _ Reform for More Effective Government (1999) 037 Figure 3 | Decision Tree of the Government Function Review Source: Press release of PBC (March 1999), modified significantly. #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지37 지앤피2263-3111 T
  39. 39. 2. Bureaucracy Innovation Open Recruitment System The review of the government’s function produced many suggestions for reforming bureaucracy. The most notable change was the introduction of an open recruitment system to appoint 20% of the director-generals through a competition open to the private sector. Prior to this change, Korea’s bureaucracy was a closed system in which the government recruited young staff, mostly in their twenties, who generally remained a bureaucrat until retirement. In this closed bureaucratic system, almost all the positions were filled by those who were already in bureaucracy. Since the entrance exam was tightly administered by the central government, the closed system worked as an effective way to ensure that the recruitment process was not subject to any kind of nepotism or corruption. The system was also effective in shielding the civil service from political influence, thereby building a sense of duty among government employees. However, the closed system had two problems: a lack of specialization and a shortage of competition. Since civil servants had to rotate regularly, they tended to become generalists rather than specialists. In addition, competitive forces were relatively weaker than in the private sector because promotions, in many cases, were based on seniority rather than on competency, and because lifetime employment was guaranteed by law. In order to expose the civil service sector to competitive forces while still maintaining the merits of the closed system, an open recruitment system was partially introduced in May, 1999. Initially, 30% of the director-general positions were supposed to be open to wider competition,20 but the ratio was reduced to 20% to allay the concerns of government officials. All the ministries tried to designate unpopular positions as ‘open positions’, but the Central Personnel Commission (CPC),21 which was newly created under the President in May, 1999, actively negotiated with the line ministries to select positions in a way which ensured that the newly introduced open system had some impact. In this open system, when there was an opening in a designated position in a ministry, civil servants in that ministry or other ministries were able to apply for the job, but they had to compete with applicants from the private sector. A minister then chose three finalists and Overcoming the 1997-98 Crisis : Public Sector Reform 038 20_ In 2002, some divisional head positions were also opened for competition. 21_ CPC was created with the personnel management function separated from MOGAHA in 1999. In 2008, however, the CPC was remerged with MOGAHA to form the Ministry of Public Administration and Security (MOPAS). #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지38 지앤피2263-3111 T
  40. 40. ranked them according to his evaluation. Finally, the CPC selected one from the three candidates, usually following the preferences of the minister. Despite this screening process by the CPC, not many experts from the private sector joined the government. Out of 119 open positions, only 18 (15%) experts from the private sector were selected through the open competition process with civil servants. We cannot exclude the possibility that there may have been bias on the part of the line ministries when they chose the three finalists from the pool of applicants. Another reason was that there may not have been many qualified applicants from the private sector. During 2000~2002, less than two years before the presidential elections, potential candidates in the private sector may have presumed that they would have to leave the government after a 2~3 year contract. Additionally, the terms of the contract—including salary and working conditions—were not good enough to attract many capable experts from the private sector. All these problems have been corrected over the years, and the ratio of external hires filling the open positions rose to around 45% during the Roh Administration (2003~2008), who emphasized the effective implementation of this open system. The lesson here is that an open system cannot be successful unless the political leader pays attention to its effectiveness. Moreover, in order to neutralize the vested interests of the line ministries, the approval process should be strongly conducted by a neutral third party, such as the CPC in Korea. Performance-based Payment22 Another important reform in the bureaucracy was the introduction of performance-based pay schemes. Before this system was introduced, annual pay rates for Korean civil servants were determined by a number of factors, including seniority and rank, the private sector’s pay scheme, the financial state of the government, and the standard cost of living, with more emphasis of course given to seniority and rank. This pay scheme tended to discourage civil servants from achieving high productivity and efficiency in their performance. In 1999, however, the government introduced three different types of annual pay systems: Fixed Annual Pay System, Performance-Related Annual Pay System, and Job-Based Performance Pay System. Chapter 4 _ Reform for More Effective Government (1999) 039 22_ This part is based on Jin Park (2006), but has been significantly modified. #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지39 지앤피2263-3111 T
  41. 41. The Fixed Annual Pay System was for political appointees, such as ministers and vice- ministers, whose performance was very hard to measure. Under this system, a fixed amount is provided based on the level of difficulty and responsibility of the position. The amount is also determined by the annual pay increase rate set at the beginning of each year. The Performance-Related Annual Pay System is applied to high ranking officials, and their annual salary is divided into a base salary and a variable performance-based pay scheme which depends on a performance evaluation through the MBO (Management by Objective). Though the initial base salary is determined by seniority and rank, its annual increase rate also depends on the results of an evaluation, as the following table shows. Therefore, the current year’s base salary would determine not only next year’s performance-based pay but also the base salary. In this respect, the performance evaluation has emerged as a major factor in determining the annual salary of mid or high-ranking civil servants. Lower ranking officers receive a fixed monthly pay depending on their seniority and rank. To induce a competitive environment, a performance bonus (PB) system was introduced in 1998. A non-cumulative, extra lump-sum bonus is paid once a year in February based on a performance evaluation of the previous year. There used to be a similar scheme, called a special bonus, which the government provided only to the top 10% of civil servants in each bureau or Overcoming the 1997-98 Crisis : Public Sector Reform 040 Types of Pay System Coverage Factor Fixed Annual Pay Political Appointee Position Performance-Related Annual Pay (cumulative) Assistant Ministers Director-Generals Division heads More by performance Less by seniority and position Basic Salary + Performance Bonus (non-cumulative) Associate division heads or lower More on seniority and position Less by performance Table 12 | Compensation Structure Source: Park (2006), modified Excellent (S) Outstanding (A) Normal (B) Understanding (C) Top 20 % Next 30 % Next 40% Bottom 10 %Distribution +10 % + 7 % + 3 % 0 % Increase rate of basic payment Table 13 | Performance Bonus Rate (as of 2000) Source: Park (2006) #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지40 지앤피2263-3111 T
  42. 42. office. The amount of the payment was only 50~100% of the monthly pay, which was too low to be considered as an incentive scheme. The government thus revised this system and adopted a performance bonus system, which is applied to all public servants including military officers, police officers, and teachers.23 The first version of the PB introduced in 1999 offered a bonus that ranged from 0% to 200% of their monthly pay as the following table shows. The government revised this first version because the bottom 50% of civil servants felt excluded and thus experienced a drop in morale. The government therefore revised the PB system in 2000 so that differentials in PB among individuals were reduced. Since then, the distribution and pay rate has become more evenly distributed with greater autonomy at the line ministries. In Korea, the performance-based pay scheme started in an ambitious manner, but has gradually lost its ability to differentiate individual performance, resulting in only confusion. The lesson is that a performance-based pay system for the civil service should be gradually introduced. Prior to the 1997 crisis, the salary level of civil servants was only about 65% of the private sector. The government, however, had a clear vision that the level of remuneration for government officials should be increased to enhance productivity and reduce corruption. In order to persuade the citizens and the National Assembly of this idea, the government used three strategies: downsizing the public sector, improving government services to the citizen, and introducing competition in the pay scheme. As a result of these efforts, the annual salary for civil servants has reached round 93% of the private sector’s as of 2005,24 with an expanded spectrum as the following table shows. The lesson here is that citizens are willing to accept public sector pay raise more comfortably when the increase begins with a performance-based payment. Chapter 4 _ Reform for More Effective Government (1999) 041 23_ The performance bonus system has faced very strong resistance from teachers who even returned their bonuses as a collective action, and it is not very effective as of now. 24_ The ratio was the highest in 2004 (95.9%) and 2005 (93.1%), but has been brought down since then: 2006 (91.8%), 2007(89.7%), 2008(89%), 2009(89.2%). (Internal report of MOPAS, 2010) 1999 Range Top 10% Next 15% Next 25% Bottom 50% Pay Rate 200% 100% 50% 0% Range Top 10% Next 20% Next 40% Bottom 30% Pay Rate 150% 100% 50% 0% Table 14 | The First Revision of the Performance Bonus Source: Park (2006). 2000 #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지41 지앤피2263-3111 T
  43. 43. 3. Fiscal Reform Financial soundness allowed Korea to overcome the economic crisis. The first thing that the PBC did in early 1998 was to review large-scaled infrastructure projects, such as high-speed railways and the Incheon International Airport. However, many of the projects had already been launched and the initial budgets were granted, so the PBC could only assess possible adjustments to the project schedules. In facilitating a recovery from the economic crisis, one of the more significant fiscal reforms involved the public fund system. The public fund is a secured and flexible budget source for each ministry, separate from the general account of the national budget. Line ministries had excessively increased public funds as a fiscal source, since it was out of the control of the budget authority. As a result, the total fund size was bloated to twice as much as the national budget. However, the lack of transparency and operational efficiency was an inherent problem of the fund. In June, 1999, the PBC announced a plan to reform the public funds, which included the abolition of public funds and improved operational transparency. As a result, the number of public funds started to decline after 2000, and the total size of the funds started to fall after 2002. This reform created serious resistance from the line ministries, but the strong will of the Overcoming the 1997-98 Crisis : Public Sector Reform 042 Maximum 78,336 72,367 67,823 62,045 Minimum 52,224 48,246 45,217 35,789 Grade 1 Assistant Minister Grade 2 Director- General (DG) Grade 3 Deputy DG or Division Head Grade 4 Division Head Table 15 | The Range of Annual Pay (as of 2005) Unit: USD, Exchange Rate: 1 USD=1,000 Korean Won. Since the actual exchange rate is around 1USD=1,200 won in 2010, the above levels are slightly exaggerated. Source: Park (2006) grade Year Number of Funds 75 75 75 61 62 58 Total Fund size (billion USD) 82 165 197 220 232 193 1997 1998 1999 2000 2001 2002 Table 16 | Number of Public Funds Source: MPB (2002, P.128), modified. #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지42 지앤피2263-3111 T
  44. 44. Presidential Office and the PBC made the reform possible. Another important fiscal reform was the introduction of pre-feasibility studies in 1999. In the past, feasibility studies had been conducted by the very ministry which proposed the project. As a result, 32 out of 33 feasibility studies before 1998 approved the projects, meaning that the study was merely a rubber stamp. Starting from 1999, however, large scale budget projects over 50 billion Korean won were asked to go through a pre-feasibility study by KDI. In the first year of the feasibility study, 12 out of 19 projects were approved by KDI, and during 1999~2002, only 54 out of 120 projects passed the tough screening process. Reducing the burden of ‘quasi-taxes’ was also an important stepping stone to a more market- friendly government. Quasi-taxes refer to monetary obligations other than taxes in the course of corporate activities. Most of the quasi-taxes were imposed through government regulations, but implicit pressure, at times, by the government for charitable donations was also a form of the quasi-tax. The government thus collected recommendations from private companies and unveiled a plan to abolish 11 taxes and to defer one tax. The government also enacted a law in December, 2002, to prevent the abusive imposition of quasi-taxes. As for the fiscal reform at local governments, MOGAHA adopted a Fiscal Assessment System in 1998 as a way to assess the fiscal soundness of local governments. It was a measure to balance empowerment and monitoring as Osborne and Plastrik (2000) suggested.25 To enhance the effectiveness of the evaluation system, MOGAHA’s financial transfers to local governments were tied to the results of the fiscal analysis, and those with poor results had to submit a plan that sought to improve their fiscal soundness. There were many other fiscal reforms during 1998~1999, including the implementation of performance budgeting, budget ceilings, budgetary incentive systems, etc. All these reforms sought to give more control of the budget authority to the PBC over the line ministries. However, fiscal reforms that sought to give more autonomy to the line ministries, such as top- down budgeting, and reforms that may have reduced the flexibility of the budget authority, such as mid-term fiscal planning, were very slow to materialize. There is a wide consensus that the fiscal reform carried out during the Kim administration (1998~2003) was relatively more sluggish than the other reforms. This seemed to be the result of a conflict of interest among the reformers, the PBC, and then later, the MPB (see appendix for its organization), which controlled the budget function. This is a clear proof that a reform should be conducted by an organization that does not have a conflict of interest. Chapter 4 _ Reform for More Effective Government (1999) 043 25_ It suggests that the control strategy (empowerment) should be coupled with the consequence strategy (evaluation) since devolution of power could result in an uncontrollable situation without a proper evaluation scheme, which is more so in developing countries. #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지43 지앤피2263-3111 T
  45. 45. #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지44 지앤피2263-3111 T
  46. 46. 1. Evaluation 2. Suggestions for Reform-Driver Evaluation and Suggestions Overcoming the 1997-98 Crisis : Public Sector Reform Chapter 05 #KSP공공영문전체_5차 2011.2.15 11:14 AM 페이지45 지앤피2263-3111 T
  47. 47. 1. Evaluation26 The public sector reform of 1998~1999 was both wide-ranging and intensive. First of all, the coverage of the reform was incomparably more extensive than previous efforts. The reform targeted not only the central and local governments but also public entities such as public corporations and government-affiliated organizations, which previous administrations had not attempted to reform. The scope of the reform included all three aspects of government: input reduction, process innovation, and outcome enhancement, such as better government services to citizens. The outcome reform, however, started after the year 2000, and was not covered in this report. In addition to being extensive, the intensity of the public sector reform was equally unprecedented, especially during 1998. Former President Kim even stated that, “rough-and- ready reform is acceptable as long as it is innovative and necessary.” This radical drive for reform was made possible by the prevailing sense of crisis. Though the intensity of the reform was diminished after 1999, and became even weaker after 2001, the overall intensity and performance of government reform during 1998~1999 should be acknowledged. As a result of such public sector reform, the efficiency in government administration has improved substantially according to IMD’s evaluation. The table demonstrates that government efficiency has increased by the largest margin. Since 1999, the efficiency of government Overcoming the 1997-98 Crisis : Public Sector Reform 046 Evaluation and Suggestions Chapter 05 26_ The main ideas regarding the success factors are from Jin Park & J.I. Yoon (2008; 41~45) with significant modification. #KSP공공영문전체_5차 2011.2.15 11:15 AM 페이지46 지앤피2263-3111 T
  48. 48. administration has gradually improved in the IMD World Competitiveness Index, contrary to fluctuations in other fields, showing the biggest improvement among the listed fields. What were the factors behind the success of the government reform during 1998~1999? What could have improved the outcome of the reform? This chapter will evaluate the early efforts of the government’s reform under President Kim during 1998~1999 based on four preconditions necessary for a reform to be successful: presidential leadership, a reform driver, roadmaps and action plans, and implementation.27 Presidential Leadership for the Reform It goes without saying that the outcomes of any reform depend heavily on leadership. No matter how much effort civil servants invest, reforms will not be successful without a political leader’s support. Unless the President shows keen interest and support for the reform agenda, government reform will never be successful. The leadership of the President can be evaluated by the following three sub-criteria. First, the President should stress the importance of reform and address any resistance and problems that occur in the course of reform with a firm and consistent approach. Usually, important stakeholders such as line ministries and labor unions try to measure the President’s determination for reform and match their degree of resistance accordingly. For instance, ministries who did not show much resistance against the reform drive in 1998 suddenly raised their voice and strongly opposed government restructuring in early 1999 when President Kim said: “make the process of reform prudent”. Chapter 5 _ Evaluation and Suggestions 047 Year Nation as a whole 36 41 28 28 27 + 9 Economic performance government administration corporate management economic infrastructure 1998 1999 2000 2001 2002 change 22 42 35 38 38 43 40 39 13 33 27 28 19 31 31 34 24 25 27 28 - 2 +17 +8 +10 Table 17 | IMD World Competitiveness Evaluation and Ranks Data: IMD World Competitiveness Yearbook, issues from 1998 to 2002 27_ These four criteria are the revised version of 8 steps of transformation presented by Kotter (1996): 1. Establishing a sense of urgency; 2. Creating the guiding coalition; 3. Developing a vision and strategy; 4. Communicating the change vision; 5. Empowering broad-based action; 6. Generating short-term wins; 7. Consolidating gains and producing more change; 8. Anchoring new approaches in the culture. #KSP공공영문전체_5차 2011.2.15 11:15 AM 페이지47 지앤피2263-3111 T
  49. 49. The President should also nominate innovative and well-balanced reformers as heads of public organizations. The heads of reform-leading organizations such as the PBC, MPB, and MOGAHA are especially important as they are the leaders who actually drive the reform process. Heads of line ministries and public corporations are the implementers of reform. In this respect, we need three layers of leadership in place to undertake government reform: the President, Reform Driver, and Line Ministries and Public Entities. It is the role and responsibility of the President to ensure that reform-minded leaders be appointed to those positions. It is crucial that innovative leaders should make up the third layer of the leadership so that reforms can be implemented in a more deep-rooted way. However, under the Kim administration, there were many cases in which reform-minded leaders such as ministers or vice-ministers had to step down, and were then replaced by those considered to be less innovative. However, the inaction of the ministers and heads of public entities was partially overcome by pressure from the reform driving ministry, the PBC. This is why government reform under President Kim was criticized for its top-down nature and for lacking the spontaneous participation of the public sector. The President has a responsibility to form favorable political conditions to promote government reform, especially to mitigate against resistance from stakeholders. Japan’s Prime Minister Koizumi demonstrated his leadership in this way when finalizing the privatization plan of the postal service, though it is now being delayed by his successors. As President Kim was the first president to be elected as a candidate of the opposition party, he started with very strong support from the public under the banner of ‘change’. After a series of corruption scandals involving members of his staff and family, he lost much of the support. Another important political condition for reforms is being driven by a sense of crisis. The Kim administration in August 1999 announced a complete recovery from the economic crisis with early redemption of the IMF bail-out loan. While this announcement initially heightened the national pride of the Korean people, public support for reform decreased significantly afterwards.28 Although the political leadership for reform got off track somewhat after the second half of 1999, and although some of the ministers and heads of public entities were not very innovative, the government reform during 1998~1999 was successful due to a sense of crisis, presidential support and the well-established reform leading organization, the PBC. Overcoming the 1997-98 Crisis : Public Sector Reform 048 28_ Another incidence that stalled the pace of reform was the so called strike-provocation of June 1999. In order to manufacture a reason to repress the labor union of Korea Mint Corporation, the president of the corporation and a senior prosecutor colluded to instigate a strike by the labor union. #KSP공공영문전체_5차 2011.2.15 11:15 AM 페이지48 지앤피2263-3111 T
  50. 50. Establishing a Reform Leading Organization The President needs an organization to act as an agent that will carry out the reform agenda. The most important factor to ensuring the success of reforms is the reform leading organization, such as the PBC in Korea’s case during 1998~1999. The PBC, and later the MPB, had a Government Reform Office (GRO) which played a pivotal role in driving the reform. There is a Korean saying that “a Buddhist monk cannot have his hair cut by himself,” meaning that you need someone else to take care of your own problems. Under the PBC and MPB during President Kim’s administration, the progress of fiscal reform was very slow because the formulation of the national budget was one of its main missions. On the other hand, MOPAS (Ministry of Public Administration and Security), which is leading the government reform under President Lee (2008~2013), is not very enthusiastic about reforms in the bureaucracy because bureaucracy management is their main mission. No one wants to reform themselves, and that’s why we need someone else to reform others.29 It is extremely important to establish a reform driver in the right way, and such an organization must have several features in order to be successful. First, it should be a permanent body. If the reform driving organization will not exist in the next administration, as was the case of the PCGID (Presidential Commission on Government Innovation and Decentralization) under President Roh, line ministries may not take any reform action; instead they may choose to wait until the end of the President’s term. In addition, a temporary organization will have to recruit staff from the line ministries, and these individuals may have a conflict of interest when it comes to a reform that relates to their home ministries. Since the PBC was newly created, it recruited many of its staff from other ministries, but its staff did not consider going back to their original ministries because the PBC was a permanent organization. This permanent nature is especially important in a country like Korea where the President can only serve one 5 year term. Second, the reform should be a core function of the reform driver. When responsibilities other than government reform represent a core function, reform is easily forgotten. In the government, tasks which are important but not imperative receive lower priority than less important, but more urgent tasks.30 Public sector reform is not viewed as critical for any government official because problems of the status quo are not easily perceived by the citizens. The PBC’s core mission was therefore public sector reform, and budget planning was not a Chapter 5 _ Evaluation and Suggestions 049 29_ Of course, there are reforms that can be better performed spontaneously by insiders. However, too much reliance on such a voluntary approach usually results in only marginal changes. 30_ This is what Osborne & Plastrik (2000, Ch. 3) notes: when an organization is able to conduct both the steering and rowing functions, civil servants tend to focus on rowing, rather than on steering, because steering is relatively less urgent. #KSP공공영문전체_5차 2011.2.15 11:15 AM 페이지49 지앤피2263-3111 T
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