Privatization and Corporate Governance in a Unified Korea

Abstract

If recent history is any guide, the reunification of the Korean peninsula is a more realistic possibility today than at any time since armed conflict ended in 1953. This paper grew out of a three-year interdisciplinary project to provide policy makers with a "blueprint" for a unified Korea. Drawing on lessons from privatization experiences in Germany and Central Europe, as well as the Asian financial crisis, the paper outlines a step-by-step approach to the privatization of North Korean state-owned enterprises (SOEs). The strategy advocated is designed to obtain the corporate governance benefits of a sales-only approach to privatization and the social and political benefits of voucher-based mass privatization programs.

A two-phase privatization program is outlined: In Phase I, temporary, government-supervised intermediaries transfer significant stakes in viable SOEs to major investors in exchange for a variety of cash and noncash consideration. The process is designed to ensure effective corporate governance, maximize outside investment of capital and technology, and secure employment opportunities. In Phase II, the remaining interests in the SOEs are auctioned off to North Korean citizens in exchange for vouchers. This process returns significant ownership of firms to the North Korean people, disperses control over enterprises, and gives North Koreans an economic stake in unification.

A central lesson from past privatization experience is that institutions matter: simply moving ownership from the state to private hands in an institutional vacuum does not ensure that adequate corporate governance and supervisory mechanisms will develop spontaneously. Thus, assuming South Korean economic institutions will serve as the template for a unified Korea, the paper argues that continued reform of South Korean corporate and securities laws is a crucial component of any well-devised privatization strategy.