Overcoming the 1997 98 crisis

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
Center for International Development, KDI
● P.O. Box 113 Hoegiro 49 Dongdaemun-gu Seoul, 130-740
● Tel. 02-958-4224
● www.ksp.go.kr
MINISTRY OF STRATEGY
AND FINANCE
Overcoming the 1997-98 Crisis :
Public Sector Reform
March 2010
Overcomingthe1997-98Crisis:PublicSectorReformMarch2010

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

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

Government Publications
Registration Number
11-1051000-000102-01
March 2010
MINISTRY OF STRATEGY
AND FINANCE

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

Evaluation and Suggestions ₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 45
1. Evaluation₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 46
2. Suggestions for Reform-Driver₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 55
Conclusion₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 59
Appendix & Reference₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩₩ 62
Chapter 05
Chapter 06

<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

Background of Public Sector Reform
Public Sector Reform Chapter 01

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
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.

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

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.
010

1. Birth of the Planning and Budget Commission (PBC)
2. Choice of Reform Agenda and Strategies
Establishing the Reform Driver and
Guiding Principles

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).
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.

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.

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
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

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.

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
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.

1. Privatization of Public Corporations
2. Downsizing the Public Sector
3. Massive Regulatory Reform
Reform for Small Government (1998)

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.
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.

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)

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.
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.)

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.
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.

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

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%.
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)

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
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)

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.
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.

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,
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)

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
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

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-
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.

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.
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%)

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.
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
8,091
250 billion won budget
reduction for year 1999
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
2,530
Budget reduction of 106.1
billion won in 1999 (107%)
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.

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.
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

1. Review of Ministries’ Function
2. Bureaucracy Reform
3. Fiscal Reform
Reform for More Effective
Government (1999)

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
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.

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.

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
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.

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.
037
Figure 3 | Decision Tree of the Government Function Review
Source: Press release of PBC (March 1999), modified significantly.

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
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).

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.
039
22_ This part is based on Jin Park (2006), but has been significantly modified.

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
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)

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.
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

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
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.

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.
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.

1. Evaluation
2. Suggestions for Reform-Driver
Evaluation and Suggestions

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
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.

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.

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.
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.

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.

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