0 6 months of the Lee Myung-bak Administration Regulatory Reform: Achievements and Future Tasks 6th...

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6 months of the Lee Myung-bak Administration

Regulatory Reform: Achievements and Future Tasks

6th Meeting of the PCNC

August 28, 2008

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Why regulatory reform?

How was it implemented?

6 months of PCNC, what was achieved?

Future tasks of regulatory reform

CONTENTS

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Why regulatory reform?

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1. The Korean Economy Now

IMD World Competitiveness Rankings

Singapore

Taiwan

China

Korea

Trend of the national competitiveness ranking

(’97)30 (’00)28 (’03)32 (’06)32 (’08)31

StagnantNational

Competitivenessranking

during the past decade

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2. Diagnosis and Prescription

Cause Solution

Stagnant National Competitiveness Ranking Build a leading advanced nation

Drop in investment and productivity

• Increase rate in equipment investment• Total factor productivity

Excessive government regulation, outdated system

• WB Doing Business index (30th in ‘08)-Employment & lay off: 131st Opening a business: 110th Tax payment: 106th

• IMD World Competitiveness (31st in ‘07)-Labor regulations: 54th Regulation intensity: 53rd FDI: 54th

National Competitiveness Ranking at 15th

Increased investment and productivity(Improving the business environment)

Deregulation and system innovation

•Improving the investment climate•Improving FDI related systems•Advancing the financial industry

•Strengthening rule of law•Rationalizing land utilization regulations•R&D. Innovation of Non-Departmental Public Entities

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3. Korea in 5 Years

• If the status quo remains, Korea’s national competitiveness ranking is projected to stand unchanged at 30th, and economic growth to record 4%• In the case of successful regulatory reform, national competitiveness ranking is projected to improve to15th rank and economic growth is projected to improve to around 7%

World Competitiveness Ranking [IMD] Potential Economic Growth Rate

15th Rank

Regulatory ReformRegulatory Reform

30th Rank

About 7%

4%

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How was it implemented?

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Regulatory Reform of the Lee Myung-bak Administration is Different.

PCNC meetings, attended by the President, are held every month to manage regulatory reform as the government agenda with the highest priority

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1. Two-Track 2. Systematic Approach

3. User and quality-oriented 4. Global Standard

InstitutionalReform

Resolvingon-site

difficulties

• Redesigning institutional framework to improve weaknesses in competitiveness

• Resolving on-site difficulties facedby industries

First6 months

2nd Half of the Year~

• Urgent tasks to raise national competitiveness:Industrial complexes, business openingprocess, FEZ, financial sector, etc

• Key regulations that require social consensus:Law & order, state-owned land utilization, etc• Strengthening future growth engines such asR&D and service industry

StrategicRegulatory

Reform

Useroriented

• Establishment of the Public-Private Joint Implementation Group at the Korea Chamber of Commerce and Industry• Dispatch of a grade 1 (Deputy Minister-level) government official for the first time

• Quantitative performance -> Improving quality satisfaction• Monitoring implementation of follow-up measures

Qualityoriented

Standards of regulatory

reform

Regulatory reform

process

• Reflect global standards when reviewing institutions• Benchmark best practices

1. Implementation Strategy

• Participation of experts from advanced countries and foreign business representatives

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2. Implementation Framework

Presidential Council on National Competitiveness

• Systematic reform of existing regulations that involve various government agencies and that have significant ripple effects

Public-Private Joint Implementation Group on Regulatory Reform

• Finding on-site difficulties faced by businesses• Finding solutions by cooperating with relevant agencies

Office of the Prime Minister/Regulatory Reform Committee

• Operate a regulation management system• Review new/strengthened regulations

• General regulatory reform tasks related to the respective ministries and agencies

Government Ministries and Agencies

Establishment of a role-sharing

framework for consolidating

government-wide capacity

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3. Achievements (Government-wide)

Presidential Council on

National Competitiveness

• 5 meetings attended by the President• Deregulation measures for 13 key regulations implemented, 196 detailed tasks under implementation

Public-Private Joint

Implementation Group on

Regulatory Reform

• 5 site visits, 24 meetings with economic groups and associations• As of the end of August, 81 structural difficulties resolved

Office of the Prime Minister/

Regulatory Reform Committee

• Held 2 general meetings and 42 sub-committee meetings• Reviewed 357 new/strengthened regulations → 56 deregulated, 5 abolished

Government Ministries and

Agencies

• 1,517 tasks selected (public convenience, business environment, land utilization)• As of the end of July, 377 tasks completed, 1146 tasks to be completed by the end of this year

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6 months of PCNC, what was achieved?

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1. Overview of Achievements

Legal & Institutional Advancement

Resolving on-site difficulties

Improving the investment environment

Attracting FDI

Encouraging Entrepreneur-ship

Advancing the financial industry

• Expanded provision of industrial land, land price reduction• Simplifying factory establishment process• Improving environmental/archaeological survey systems

• Promotion of FEZs• Attracting global talents• Improving the livelihood of foreigners in Korea

• Streamlining the procedures of starting a business• Rationalizing administrative punishment• Rationalizing administrative sanctions

• Entry deregulation• Reforming financial operation regulations• Advancing financial supervisory system

Improving the investment environment

• Reforming business-related regulations in the areas of entry, bidding, investment, etc

• Reforming government official-oriented systems and processes to make them business friendly

Administrative convenience-related regulations

Excessive economic burden

• Rationalizing taxes and quasi-taxes that burden businesses

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Implementing 13 institutional reform tasks and 196 detailed tasks

TaskDetailed

ImplementationTask

AdministrativeImplementation

Legalization

Tasks Completed Tasks Completed

TotalDeregulation of industrial complexes

Improving archaeological survey policy

Improving behaviors and perspectives of civil servantsin regulatory service

Streamlining the procedures of starting a business

Attracting global talents

Industrial sites supply price reduction

Promoting Free Economic Zones

Basic direction of financial regulatory reform and entry deregulation

Rationalizing administrative punishment

Rationalizing administrative sanctions

Advancing regulation of financial operations and reinforcing supervisory capacity

Alleviating on-site problems of manufacturing SMEs

Resolving on-site difficulties of businesses

Systems Reform

On-site Difficulties

1. Overview of Achievements

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2. Omnidirectional systems reform

Improving the investment climate Attracting FDI

Raising entrepreneurship

Promoting the financial sector as a new growth

engine

Problems

Key Factors

• The key to economic revitalization is investment• However, domestic investment is dropping while FDI outflows is increasing

- Equipment investment rate: 11% (‘90~’96) → 5.6% (‘01~’06)- In the first half of '08, FDE outflows: USD 14.72 billion > FDI: USD 4.55 billion

• Land problem: most industrial complexes preferred by SMEs are full- ratio of unsold land in industrial complexes: 1.5% (‘07)

• High land prices: land prices are about 3~5 times higher than in China• Complex factory establishment process: cost and time consuming

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engine

IncreasingLand

Provision

• Drastic reduction of registration and approval time in industrial complexes

- Establishment of Industrial Complex Development Support Centers in city and provincial governments, provision of one-stop service- 2-stage approval process has been consolidated into a single stage

• 20~40% reduction of land prices in industrial complexes- Introduction of a Land Bank System, secure land before development- Utilize state-owned land, supply affordable industrial sites on a rental basis for SMEs

ReducingLand

Prices

• Increased provision of small area land for SMEs- Provide budgetary support for building key infrastructures in designated areas for factories

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engine

SimplifyingFactory

EstablishmentProcess

• Reduce time and cost by establishing an on-line system

• Environmental impact analysis: 2 stages -> consolidated single stage analysis• Archaeological survey policy improvement

- Survey duration shortened by 100 days (140 days → 40 days)- Abolish regional restrictions for research institutions and ease criteria, leading to shorted waiting time

ReducingLand Prices

In the case of small-scale factory

Time

Cost

Current

Current

Improved(end of '08)

Improved(end of '08)

150 days

KRW 43 million

105 days reduced

KRW 30 million reduced KRW 13 million

45 days

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Improving the investment climate

Attracting FDI Raising entrepreneurship


engine


Problems

Key Factors

• FDI potential is at 17th place, actual FDI ranks at 115 (UNCTAD, '07)

• FDI as a percentage of GDP is about 8% (stock, '06), the lowest among

OECD countries

• Excessive government regulation, insufficient incentives

• Difficult living environment for foreigners

• Unfriendly labor relations and rigid labor market

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Attracting FDI Raising entrepreneurship


engine

PromotingFEZs

AttractingGlobalTalents

Improvingthe Living

Environmentfor Foreigners

•Simplify approval and authorization processes to reduce time for development (12 → 3~5 months)• Improve living environment by easing restrictions on the establishment of foreign educational/medical institutions• Expand cash grants for attracting foreign universities and research institutes (KRW 5 → 50 billion)

• Establish Contact Korea within KOTRA (June ‘08)• Ease visa issuance criteria and simplify entry and exit processes• Expand flexibility in allowing employment including recruitment of foreigners as civil servants

• Recognize international school diplomas in the national curriculum

• Improve employment processes for spouses, and expand interpretation services

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Attracting FDIRaising

entrepreneurshipPromoting the financial sector as a new growth

engine

Problems

Key Factors

• Entrepreneurship is the engine in creating new jobs

• However, entrepreneurship of the society as a whole is dropping- Business start-ups: 61,852 (‘02) → 53,483 (‘07)- Environment for starting a new business: (WB, '08): 110 th rank (out of 178 countries)

• Complex business start-up process: reduces the will of young and potential entrepreneurs

• Unfavorable perception of entrepreneurs and improper administrative punishment: reduces the will to operate businesses

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entrepreneurshipPromoting the financial sector as a new growth

engine

SimplifyingBusinessStart-up

Procedure

RationalizingAdministrative

Punishment

• Reduction of time needed to start a business through the establishment of an on-line system(Start BIZ) (17 → 3 days)• Abolishment of the minimum capital requirement: business start-up possible with only KRW 100→ Improvement of business start-up ranking from 110 to 15

• Provide opportunities for self-correction though warnings rather than direct business suspension

• Establish a standard of sanctions that meet the degree of violation

RationalizingAdministrative

Sanctions

• Revise joint penal provisions (392): punish the employer only when there is clear responsibility• Change punishment to administrative fines (151 cases): decriminalize by imposing administrative fines on minor violations→ Reduction of citizens with criminal records by 100 thousand

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entrepreneurship

Promoting the financial sector as a new growth engine

Problems

Key Factors

• The financial sector supports the growth of the real economy as a new growth industry

- Value added ratio: manufacturing industry 22.1%, financial industry 71.1%

• However, financial competitiveness is low due to excessive government regulation

- IMD rankings: national competitiveness 31st, financial competitiveness 40th

• Excessive entry and business regulations on the financial industry

• Rigid supervisory system: regulations based on prohibition in principle and exceptional allowances, implicit regulations

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entrepreneurship

Promoting the financial sector as a new growth engine

SettingBasic

Directions forFinancial

RegulatoryReform

Entry andBusiness

Deregulation

AdvancingSupervisory

System

• Promote market competition through entry and exit deregulation

• Establish financial regulation and supervision system that meets global standards

• Switch to a negative system• Create a new market such as financial business of selling wide-ranging financial products, and shopless internet banks• Introduce structured covered bonds, exchange-traded funds, etc

• Ensure transparency in supervision and inspection by minimizing implicit regulations

• Improve supervisory capacity such as financial expertise to meet the level of advanced countries

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3. Resolving on-site difficulties

Necessity

Regulations that are not deregulated despite

continued suggestionsfrom businesses

Structural regulationsthat involve several

government ministries and agencies

Hinders the investment sentiment of businessesDeteriorates government's reliability

High priority, urgent measures needed

Implementation Method

Establishment of the Public-Private Joint ImplementationGroup on Regulatory Reform within the KCCI

On-site visits, receive suggestions from business groups

Devise rapid and detailed measures in collaborationwith relevant ministries and agencies

Thorough ex-post management

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Outdated Regulations Administrative convenience-oriented Regulations

Excessive Economic Burden

Improvements to meet the currentsituation of the global market

Irrational restrictions on business activities

Restrictions on the application of new technology

• Expand the scope of recognition for PQ inspections to include similar construction cases in the past

• Abolish borrowing caps on individual overseas subsidiaries established by Korean companies (only maintain the total cap)

• Allow natural gas engines, which were only allowed for buses and garbage trucks, for fork-lift trucks

- Annual export increase of KRW 30 billion

• Expand frequency range of cable TVs to commercialize high-speed internet technology

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Outdated RegulationsAdministrative convenience-

oriented RegulationsExcessive Economic Burden

User-oriented Improvements

Not recognizing the activities of the private sector

Regulations on formality

• Recognize reported amount as tax base even when an individual architect designs and supervises a building

- Currently, only companies are recognized

• Grant import rights for processing beans, currently monopolized by Korea Agro-Fisheries Trade Corporation, to bean curd manufacturing associations.

• Exempt cars for export cargo loading in port areas from the obligation of license plates

• Ease requirements on mandatory small packaging of more than 10% of annual medical supplies for low-priced medicines

• Expand the on-site supervisory scope of expert technicians in construction sites costing less than KRW 500 million (2 → 3)

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Outdated RegulationsAdministrative convenience-

oriented RegulationsExcessive Economic Burden

Alleviate burdens to a reasonable level

Lessen excessive tax burden

• Exempt the Comprehensive Real Estate Tax for 5 years on unsold homes that the construction company has received as payment in substitutes• Ease regulations on imposing Capital Gains Tax when a factory is sold to move within an industrial complex• Expand the scope of Acquisition and Registration Tax exemption from new construction or expansion of a factory to include reconstruction or repair

Expand infrastructure support for SMEs

• Allow optional contracts for research institutes that are jointly managed by SMEs when using shared property

• Exempt the Basic Emission Fee (about KRW 9 million) on facilities with Telemonitoring System installed

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4. Inspire the service mindset of civil servants

Service behavior of front line civil servants should change firstCustomer satisfaction: 64 (‘04) → 64.5 (’05) → 64.9 (‘06)

StrengthenedIncentives

EnsuringExpertise

ImprovingAudit

Practices

• Introduction of "Good Service Awards“ (Invitation to dinner accompanied by spouse at the Blue House)• Introduction of civil affairs handing mileage system• Special promotion for civil servants well-handling civil affairs

• Provide education for local high-level civil servants on policy directions of regulatory reform of the new administration

• Provide specialized education for civil servants handling civil affairs

• Shift from asking "Why did you allow it?" to "Why did you not allow it?“• Tolerate small mistakes made in the process of proactive work

- Overall audit operation improvement plans will be reported by the Board of Audit and Inspection in October

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Future tasks of regulatory reform

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Building a Leading Advanced Nation

Accelerate efforts to makegood systems

Key institutionalreform

Systematic Regulatoryreform

Introduction ofsunset clauses for

regulations

Consensus building on regulatory reform

Strengthen efforts to communicate with the public

Ⅳ. Future tasks of regulatory reform

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1. Improvement of key institutions

Reforming key institutions for strengthening national competitiveness: law & order, state-owned land utilization, etc

Issues are intermingled with complex interests that are sensitive to institutional changes

Requires strategic implementation under national consesus

Strengthening Rule of Law

• Korea's level of abiding law and order is among the lowest in the OECD

•With the rule of law brought up to the level of the OECD average, Korea is expected to gain an additional annual growth of 0.9%p (KDI)

→ Measures will be devised though relevant research, hearings and international conferences

Rationalizing State-Owned

Land Utilization

• With Korea’s limited land area, and irrational state-owned land management is leading to high land costs

→ A cause of outbound phenomenon of domestic companies, hinders FDI

• Total land cost is about 3 times the GDP ('07). In advanced countries, it is about the size of GDP• Redesigning basic framework of rigid land utilization regulations for metropolitan, farming, and mountainous land

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1. Improvement of key institutions

Improving R&D Support

System

• The quality of R&D performance compared to R&D investement size is still low- Total R&D investment is 5th highest in the world (3.23% of GDP)- Average thesis citations is about 28th in the world (3.22 times, '06)

• Prepare plans to improve the efficiency of R&D investment by R&D capacity building and strengthening cooperation among industry, academia and research institutes

Revisingthe Management

System ofNon-Departmental

Public Entities

• Non-departmental public entities continue to show inefficiencies despite national economic significance

- 35 large public entities: value added per capita has increased by 1.8% per year between '02~'07, personnel cost has increased by 6.6%

• Remaining public entities, after realignment of functions of SOEs, will undergo managerial efficiency improvements

- Improving the management evaluation system, strengthening the public announcement of management information, simplifying management appointment process

Improving the service sector

such as tourism and medical

services

• Further develop the service industry to expand future economic growth engines

• Prepare plans to deregulate the tourism and medical services sector and strengthen competitiveness

- Tourism: deregulation, contents development, and new growth industries such as conventions- Medical services: deregulation for domestic medical institutions, promote medical tourism such as attraction of foreign patients

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2. Introduction of sunset clauses for regulations

Shift from individual regulatory reform to a structural and systematic regulatory reform

Relevant legal provisions were enacted in 1997, but with little results

Implementation Direction

• In principle, apply sunset clauses in all new/strengthened regulations

• For existing regulations, assess the need for applying sunset clauses

- Entry, price, transaction-related regulations, regulations that do not meet global standards- Regulations that need to flexibly change in accordance to environment or technological advancement

FutureSchedule

• Prepare the sunset clause application criteria based on further research (Dec.)

• Determine regulations for application of sunset clauses and revise relevant laws (1st Q, ‘09)

- Application criteria, sunset period, etc

- Organization of sectoral review boards, set application scope and period

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3. Strengthen efforts to communicate with the public

Actively inform regulatory reform details to allow rapid implementation of new policies in the actual business arena

Find efficient regulatory reform measures through diverse collection of opinions and suggestions

On-Site Presentations

• Hold regional regulatory reform presentations (beginning in September)- Seoul, 6 metropolitan cities, Jeju, etc- Participated by PCNC, Public-Private Joint Implementation Group, 5 economic associations, relevant ministries and agencies

• Hold meetings with business associations and groups (beginning in September)• Hold joint seminars and forums in collaboration with Korea Economic Society, Korea Society for Regulatory Studies, etc

Media PR

•Linked PR with associations and groups (PCNC → spread information though association journals and PCRM)

* Inform the public though newspaper articles and TV broadcasts

* Post information on the websites of PCNC and government ministries and agencies

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