WORLD TRADE
ORGANIZATIONWT/WGTCP/W/166
26 June 2001
(01-3198)
Working Group on the Interaction
between Trade and Competition PolicyOriginal:  English
COMMUNICATION FROM THE REPUBLIC OF KOREA
The following is the final text of a pape r received from the Permanent Mission of the
Republic of Korea which was circulated as an advance copy for the Working Group's meeting of
22-23 March 2001.
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The Role of Competition Policy in the Process of Economic Development
I. INTRODUCTION
1. It is widely accepted that the basic function of competition policy is to establish the "rules of
the game" in economic activities.  However, the reasons for introducing competition policy, its goals
and the substance of regulatory tools vary according to the political, economic and social environment
of each country.  Advanced nations adopted competition policies in the late 19th century at a time
when business consolidations were the norm and entrepreneurs in several industries attempted to form
trusts.  At this period, the key objective of compe tition law was to alleviate the concentration of power
in hands of one or two companies.  Decades later, many developing nations began to introducecompetition policies but, in opposition to the aforementioned process, they did so with the aim of
making their economy market-friendly after they had gone through economic concentration resulting
from their governments' industrial policy.
2. Against this backdrop, this paper discusses the significance and implication of competition
policy in economic development by devoting attention to the past Korean experience, which wascharacterized by government-driven economic growth.  This paper will also discuss the greater
importance now attached by the Korean government to competition policy for the smooth operation of
the market mechanism.
II. KOREA'S ECONOMIC AND COMPETITION POLICIES IN THE PAST
1. Korea's policy for economic development and its problems
3. Korea's economic development began in earnest in the early 1960s and was mainly based on
an export-oriented growth strategy tailored by the government.  At that time, the basic objective was
the creation of fast economic growth through the nurturing of specific industries by means of
preferential treatment to specific industries in finance and taxation.  Such economic policy, coupled
with a number of factors including the favorable international trend of freer trade under the GATTregime, allowed Korea to achieve a stunning 7 per cent growth annually for the past three decades.WT/WGTCP/W/166
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4. However, such kind of government-driven economic development growing at break-neck
speed had adverse effects for Korea's long-term economic potential.  While Korea was able to grow
remarkably in quantitative terms, rapid growth generated socio-economic weaknesses in the process;
an effective and competitive financial infrastructure was not properly developed, the imbalance
among different industries grew wider, and a wide array of distortions prevented the marketmechanism from effectively regulating the domestic economy.  For example, too much economic
power was concentrated in conglomerates or chaebol, and an alarming number of debt-ridden, non-
viable firms – often chaebol subsidiaries – were unjustifiably kept afloat.
2. Competition policy in Korea - its introduction and changes
Introduction of Competition Policy in Korea
5. The Korean government first tried to introdu ce competition law in 1963, but its efforts were
not successful.  The government's concern was mainly focused on stabilizing prices of monopolies
and oligopolies and preventing cornering and hoarding practices.  There were some efforts of course
to introduce competition law, but it never passed the National Assembly due to lack of perception of
its importance and heavy lobbying from the corporate sector.  Therefore, the anti-trust law remained a
secondary means for price stability throughout the 1970s.  However, as Korea's early government-ledeconomic development strategy began to generate various problems, the Korean government enacted
the Monopoly Regulation and Fair Trade Act in 1981.  This represented an overhaul of the framework
of its economic growth strategy, that is, a signif icant departure from the past industrial strategy to
allow the market mechanism to lead economic development.
6. In concrete terms, however, the full-fledged introduction of a competition regime and the
change of public perception of the importance of competition policy were not achieved until by the
1990s.  The market distortions and malfunctions manifested during the past recent years are
remainders that late corrections make it difficult to tackle entrenched problems.
Changes in Competition Policy
7. After decades of trial and error, reaching a national consensus on the necessity of restraining
the government role to one of a market watcher was the biggest achievement.  The Korean Fair Trade
Commission (KTC) has begun to actively pursue measures designed to alleviate the concentration of
economic power and to remove obstacles to business entry into and withdrawal from markets.  It has
also taken measures to phase in competition in natural monopoly sectors, such as telecommunications
and gas.
III. THE ROLE OF COMPETITION FOR ECONOMIC DEVELOPMENT
Benefits of competition
8. Various developing nations have already embarked on privatization and deregulation efforts
with a view to securing benefits of competiti on.  The enforcement of a sound competition policy can
prevent such efforts from only transforming government monopolies into private monopolies, thereby
upgrading the level of economic efficiency.  This process also facilitates the operations of newentrants such as small and medium enterprises which fuel economic dynamism and raise the level of
competition in the domestic economy, which is positive not only for consumers but also for the
economy as a whole.
9. The introduction of competition policy can also counter the abuse of monopoly power by
multinational corporations operating in developing countries.  For example, developing countries canWT/WGTCP/W/166
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use competition policy to prevent abuse of intellectual property rights not fully regulated under the
TRIPS Agreement.
10. Another benefit the enforcement of competition law brings is the possibility of preventing
abuse of dominance by multinational companies in a given domestic market.  In the case of Korea, the
KFTC issued a corrective order against a multinational company in 1995 that unduly obstructed thebusiness activities of other enterprises by abusing its dominant position.  Also in 2000, it issued the
"Guidelines for the Investigation and Handling of the Violation of the Monopoly Regulation and Fair
Trade Act by Foreign Enterprises".  By doing so, it made clear that it would take sanctions including
the assessment of surcharges against foreign firms if their acts injured domestic corporations.  In
addition, it initiated a probe into the alleged price fixing of imports into Korea by six graphite
electrode producers overseas.
Complimenting growth-centered economic  policy with competition policy
11. Korea's experience demonstrates that it is better to introduce competition regime at the initial
stage of economic growth, when monopolies has not yet gained political and economic power.
Despite their merits of achieving economy of scale, large monopolies, if left unchecked, are very
likely to engage in excessive facility investments,  cause price hikes resulting from their inefficient
operations, and hinder opportunities for new entrants.  This eventually necessitates the introduction
and enforcement of competition policy to remove anti-competitive elements in the market under the
political and social pressure stemming from the rising public discontent against the unbalanced
distribution of wealth.
12. Some could also argue that enforcement of competition policy might inordinately restrain
business activities and increase the cost of compliance on the part of businesses.  However, when a
fair referee enforces effective rules of the game, which makes market the playground of economic
activities, market competition ultimately eliminates wastes and enhances efficiency, and complements
the industrial policy pursued by the government.
Competition for long-term, sound economic growth13. Korea's experience is an illustration that, in the long term, relying more on market and
competition is more efficient than depending on go vernment intervention for economic growth.  It is
regretful that the Korean government did not introduce a competitive environment early.  Pinpointing
exactly which stage of the economic development is most appropriate for introducing competition is a
difficult task, given the differences in socio-economic background of each country.  However, it is
certain that the later its adoption, the harder it gets to correct market distortion and boost competition.
IV. IMPLICATIONS OF KOREA'S EXPERIENCES
14. Korea had to pay dearly for its failure to reconcile industrial policy with competition in the
domestic economy from the initial stage of economic development. In many ways, the 1997 financial
debacle and the ongoing malaise experienced by chaebol  are linked to the absence of a competitive
domestic economic environment during the past decades.  Building on lessons learned the hard way,
the Korean government is currently making strenuous efforts to establish a pro-competitive marketstructure, although it is encountering various problems in the process as vested interests in the status
quo are showing more resilience than expected.  The nurturing of monopolies or oligopolies through
industrial policy has created these vested interests and, after decades of expansion and dominance
over the economy, their necessary conversions exact a heavy toll on the economy.  The Korean
experience points to the importance of having faith in the benefits of competition from the early stageof economic growth and of incorporating competition policy based on the market function of
autonomous adjustment into the basic framework of economic policy.WT/WGTCP/W/166
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15. With the progressive liberalization of world trade, developing countries can no longer resort
to the export-oriented economic growth policy through the protection of domestic industries.
Therefore, competition policy should be put into operation from the early stage of economic
development to respond pro-actively and promptly to the rapidly changing economic conditions at
home and abroad. Greater competition will ensure that unrestrained interaction of competitive forceswill yield the best allocation of economic resources, thereby helping promising small and medium
enterprises to grow on market-driven foundations and form a healthy industrial platform.
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