국가경쟁력강화위원회

1. 국가경쟁력강화위원회 Presidential Council on National Competitiveness 6th Meeting of the PCNC 6 months of the Lee Myung-bak Administration Regulatory Reform: Achievements and Future Tasks August 28, 2008

2. CONTENTS Why regulatory reform? How was it implemented? 6 months of PCNC, what was achieved? Future tasks of regulatory reform

3. 국가경쟁력강화위원회 Presidential Council on National Competitiveness Why regulatory reform?

4. 1. The Korean Economy Now IMD World Competitiveness Rankings Stagnant National Competitiveness ranking during the past decade Singapore Taiwan China Korea Trend of the national competitiveness ranking (’00)28 (’03)32 (’06)32 (’08)31 (’97)30

5. 2. Diagnosis and Prescription Cause Solution Stagnant National Competitiveness Ranking Build a leading advanced nation Drop in investment and productivity National Competitiveness Ranking at 15th • Increase rate in equipment investment • Total factor productivity Increased investment and productivity (Improving the business environment) Excessive government regulation, outdated system Deregulation and system innovation • WB Doing Business index (30th in ‘08) • Improving the investment climate • Improving FDI related systems • Advancing the financial industry • Strengthening rule of law • Rationalizing land utilization regulations • R&D. Innovation of Non-Departmental Public Entities • Employment & lay off: 131st Opening a business: 110th • Tax payment: 106th • IMD World Competitiveness (31st in ‘07) -Labor regulations: 54th Regulation intensity: 53rd FDI: 54th

6. 3. Korea in 5 Years • If the status quo remains, Korea’s national competitiveness ranking is projected to stand unchanged at 30th, and economic growth to record 4% • In the case of successful regulatory reform, national competitiveness ranking is projected to improve to15th rank and economic growth is projected to improve to around 7% World Competitiveness Ranking [IMD] Potential Economic Growth Rate 15th Rank About 7% Regulatory Reform Regulatory Reform 4% 30th Rank

7. 국가경쟁력강화위원회 Presidential Council on National Competitiveness How was it implemented?

8. Regulatory Reform of the Lee Myung-bak Administration is Different. PCNC meetings, attended by the President, are held every month to manage regulatory reform as the government agenda with the highest priority

9. 1. Implementation Strategy 1. Two-Track 2. Systematic Approach • Urgent tasks to raise national competitiveness: • Industrial complexes, business opening • process, FEZ, financial sector, etc • Redesigning institutional framework • to improve weaknesses in competitiveness First 6 months Institutional Reform Resolving on-site difficulties • Key regulations that require social consensus: • Law & order, state-owned land utilization, etc • Strengthening future growth engines such as • R&D and service industry 2nd Half of the Year~ • Resolving on-site difficulties faced • by industries Strategic Regulatory Reform 3. User and quality-oriented 4. Global Standard • Establishment of the Public-Private Joint Implementation Group at the Korea Chamber of Commerce and Industry • Dispatch of a grade 1 (Deputy Minister-level) government official for the first time User oriented Standards of regulatory reform • Reflect global standards when reviewing institutions • Benchmark best practices Regulatory reform process Quality oriented • Participation of experts from advanced countries and foreign business representatives • Quantitative performance -> Improving quality satisfaction • Monitoring implementation of follow-up measures

10. 2. Implementation Framework Presidential Council on National Competitiveness Public-Private Joint Implementation Group on Regulatory Reform • Systematic reform of existing regulations that involve various government agencies and that have significant ripple effects • Finding on-site difficulties faced by businesses • Finding solutions by cooperating with relevant agencies Establishment of a role-sharing framework for consolidating government-wide capacity Office of the Prime Minister/ Regulatory Reform Committee Government Ministries and Agencies • Operate a regulation management system • Review new/strengthened regulations • General regulatory reform tasks related to the respective ministries and agencies

11. 3. Achievements (Government-wide) • 5 meetings attended by the President • Deregulation measures for 13 key regulations implemented, 196 detailed tasks under implementation Presidential Council on National Competitiveness Public-Private Joint Implementation Group on Regulatory Reform • 5 site visits, 24 meetings with economic groups and associations • As of the end of August, 81 structural difficulties resolved Office of the Prime Minister/ Regulatory Reform Committee • Held 2 general meetings and 42 sub-committee meetings • Reviewed 357 new/strengthened regulations → 56 deregulated, 5 abolished • 1,517 tasks selected (public convenience, business environment, land utilization) • As of the end of July, 377 tasks completed, 1146 tasks to be completed by the end of this year Government Ministries and Agencies

12. 국가경쟁력강화위원회 Presidential Council on National Competitiveness 6 months of PCNC, what was achieved?

13. 1. Overview of Achievements Legal & Institutional Advancement Resolving on-site difficulties • Expanded provision of industrial land, land price reduction • Simplifying factory establishment process • Improving environmental/archaeological survey systems Improving the investment environment Improving the investment environment • Reforming business-related regulations in the areas of entry, bidding, investment, etc • Promotion of FEZs • Attracting global talents • Improving the livelihood of foreigners in Korea Attracting FDI Administrative convenience-related regulations • Reforming government official-oriented systems and processes to make them business friendly • Streamlining the procedures of starting a business • Rationalizing administrative punishment • Rationalizing administrative sanctions Encouraging Entrepreneur-ship Excessive economic burden • Rationalizing taxes and quasi-taxes that burden businesses Advancing the financial industry • Entry deregulation • Reforming financial operation regulations • Advancing financial supervisory system

14. 1. Overview of Achievements Implementing 13 institutional reform tasks and 196 detailed tasks Administrative Implementation Legalization Detailed Implementation Task Task Tasks Tasks Completed Completed Total Deregulation of industrial complexes Improving archaeological survey policy Improving behaviors and perspectives of civil servants in regulatory service Streamlining the procedures of starting a business Attracting global talents Systems Reform Industrial sites supply price reduction Promoting Free Economic Zones Basic direction of financial regulatory reform and entry deregulation Rationalizing administrative punishment Rationalizing administrative sanctions Advancing regulation of financial operations and reinforcing supervisory capacity On-site Difficulties Alleviating on-site problems of manufacturing SMEs Resolving on-site difficulties of businesses

15. 2. Omnidirectional systems reform Improving the investment climate Raising entrepreneurship Promoting the financial sector as a new growth engine Attracting FDI • The key to economic revitalization is investment • However, domestic investment is dropping while FDI outflows is increasing Problems - Equipment investment rate: 11% (‘90~’96) → 5.6% (‘01~’06) - In the first half of '08, FDE outflows: USD 14.72 billion > FDI: USD 4.55 billion • Land problem: most industrial complexes preferred by SMEs are full - ratio of unsold land in industrial complexes: 1.5% (‘07) Key Factors • High land prices: land prices are about 3~5 times higher than in China • Complex factory establishment process: cost and time consuming

16. 2. Omnidirectional systems reform Improving the investment climate Raising entrepreneurship Promoting the financial sector as a new growth engine Attracting FDI • Drastic reduction of registration and approval time in industrial complexes Increasing Land Provision • Establishment of Industrial Complex Development Support Centers in city and provincial governments, provision of one-stop service • - 2-stage approval process has been consolidated into a single stage • Increased provision of small area land for SMEs • Provide budgetary support for building key infrastructures in designated areas for factories Reducing Land Prices • 20~40% reduction of land prices in industrial complexes - Introduction of a Land Bank System, secure land before development - Utilize state-owned land, supply affordable industrial sites on a rental basis for SMEs

17. 2. Omnidirectional systems reform Improving the investment climate Raising entrepreneurship Promoting the financial sector as a new growth engine Attracting FDI • Reduce time and cost by establishing an on-line system Simplifying Factory Establishment Process Current Improved(end of '08) Time 105 days reduced 150 days 45 days In the case of small-scale factory Current Improved(end of '08) Cost KRW 30 million reduced KRW 43 million KRW 13 million • Environmental impact analysis: 2 stages -> consolidated single stage analysis • Archaeological survey policy improvement Reducing Land Prices - Survey duration shortened by 100 days (140 days → 40 days) - Abolish regional restrictions for research institutions and ease criteria, leading to shorted waiting time

18. 2. Omnidirectional systems reform Improving the investment climate Raising entrepreneurship Promoting the financial sector as a new growth engine Attracting FDI • FDI potential is at 17th place, actual FDI ranks at 115 (UNCTAD, '07) • FDI as a percentage of GDP is about 8% (stock, '06), the lowest among OECD countries Problems • Excessive government regulation, insufficient incentives • Difficult living environment for foreigners • Unfriendly labor relations and rigid labor market Key Factors

19. 2. Omnidirectional systems reform Improving the investment climate Raising entrepreneurship Promoting the financial sector as a new growth engine Attracting FDI • Simplify approval and authorization processes to reduce time for development (12 → 3~5 months) • Improve living environment by easing restrictions on the establishment of foreign educational/medical institutions • Expand cash grants for attracting foreign universities and research institutes (KRW 5 → 50 billion) Promoting FEZs • Establish Contact Korea within KOTRA (June ‘08) • Ease visa issuance criteria and simplify entry and exit processes • Expand flexibility in allowing employment including recruitment of foreigners as civil servants Attracting Global Talents • Recognize international school diplomas in the national curriculum • Improve employment processes for spouses, and expand interpretation services Improving the Living Environment for Foreigners

20. 2. Omnidirectional systems reform Raising entrepreneurship Improving the investment climate Promoting the financial sector as a new growth engine Attracting FDI • Entrepreneurship is the engine in creating new jobs • However, entrepreneurship of the society as a whole is dropping Problems - Business start-ups: 61,852 (‘02) → 53,483 (‘07) - Environment for starting a new business: (WB, '08): 110th rank (out of 178 countries) • Complex business start-up process: reduces the will of young and potential entrepreneurs • Unfavorable perception of entrepreneurs and improper administrative punishment: reduces the will to operate businesses Key Factors

21. 2. Omnidirectional systems reform Raising entrepreneurship Improving the investment climate Promoting the financial sector as a new growth engine Attracting FDI • Reduction of time needed to start a business through the establishment of an on-line system(Start BIZ) (17 → 3 days) • Abolishment of the minimum capital requirement: business start-up possible with only KRW 100 • → Improvement of business start-up ranking from 110 to 15 Simplifying Business Start-up Procedure • Revise joint penal provisions (392): punish the employer only when there is clear responsibility • Change punishment to administrative fines (151 cases): decriminalize by imposing administrative fines on minor violations • → Reduction of citizens with criminal records by 100 thousand Rationalizing Administrative Punishment • Provide opportunities for self-correction though warnings rather than direct business suspension • Establish a standard of sanctions that meet the degree of violation Rationalizing Administrative Sanctions

22. 2. Omnidirectional systems reform Promoting the financial sector as a new growth engine Improving the investment climate Raising entrepreneurship Attracting FDI • The financial sector supports the growth of the real economy as a new growth industry - Value added ratio: manufacturing industry 22.1%, financial industry 71.1% Problems • However, financial competitiveness is low due to excessive government regulation - IMD rankings: national competitiveness 31st, financial competitiveness 40th • Excessive entry and business regulations on the financial industry • Rigid supervisory system: regulations based on prohibition in principle and exceptional allowances, implicit regulations Key Factors

23. 2. Omnidirectional systems reform Promoting the financial sector as a new growth engine Improving the investment climate Raising entrepreneurship Attracting FDI Setting Basic Directions for Financial Regulatory Reform • Promote market competition through entry and exit deregulation • Establish financial regulation and supervision system that meets global standards • Switch to a negative system • Create a new market such as financial business of selling wide-ranging financial products, and shopless internet banks • Introduce structured covered bonds, exchange-traded funds, etc Entry and Business Deregulation • Ensure transparency in supervision and inspection by minimizing implicit regulations • Improve supervisory capacity such as financial expertise to meet the level of advanced countries Advancing Supervisory System

24. 3. Resolving on-site difficulties Necessity Implementation Method Establishment of the Public-Private Joint Implementation Group on Regulatory Reform within the KCCI Regulations that are not deregulated despite continued suggestions from businesses Structural regulations that involve several government ministries and agencies On-site visits, receive suggestions from business groups Hinders the investment sentiment of businesses Deteriorates government's reliability Devise rapid and detailed measures in collaboration with relevant ministries and agencies High priority, urgent measures needed Thorough ex-post management

25. 3. Resolving on-site difficulties Administrative convenience- oriented Regulations Outdated Regulations Excessive Economic Burden Improvements to meet the current situation of the global market Irrational restrictions on business activities • Expand the scope of recognition for PQ inspections to include similar construction cases in the past • Abolish borrowing caps on individual overseas subsidiaries established by Korean companies (only maintain the total cap) Restrictions on the application of new technology • Allow natural gas engines, which were only allowed for buses and garbage trucks, for fork-lift trucks - Annual export increase of KRW 30 billion • Expand frequency range of cable TVs to commercialize high-speed internet technology

26. 3. Resolving on-site difficulties Administrative convenience- oriented Regulations Outdated Regulations Excessive Economic Burden User-oriented Improvements Not recognizing the activities of the private sector • Recognize reported amount as tax base even when an individual architect designs and supervises a building - Currently, only companies are recognized • Grant import rights for processing beans, currently monopolized by Korea Agro-Fisheries Trade Corporation, to bean curd manufacturing associations. Regulations on formality • Exempt cars for export cargo loading in port areas from the obligation of license plates • Ease requirements on mandatory small packaging of more than 10% of annual medical supplies for low-priced medicines • Expand the on-site supervisory scope of expert technicians in construction sites costing less than KRW 500 million (2 → 3)

27. 3. Resolving on-site difficulties Administrative convenience- oriented Regulations Outdated Regulations Excessive Economic Burden Alleviate burdens to a reasonable level Lessen excessive tax burden • Exempt the Comprehensive Real Estate Tax for 5 years on unsold homes that the construction company has received as payment in substitutes • Ease regulations on imposing Capital Gains Tax when a factory is sold to move within an industrial complex • Expand the scope of Acquisition and Registration Tax exemption from new construction or expansion of a factory to include reconstruction or repair Expand infrastructure support for SMEs • Allow optional contracts for research institutes that are jointly managed by SMEs when using shared property • Exempt the Basic Emission Fee (about KRW 9 million) on facilities with Telemonitoring System installed

28. 4. Inspire the service mindset of civil servants Service behavior of front line civil servants should change first Customer satisfaction: 64 (‘04) → 64.5 (’05) → 64.9 (‘06) • Introduction of "Good Service Awards“ • (Invitation to dinner accompanied by spouse at the Blue House) • Introduction of civil affairs handing mileage system • Special promotion for civil servants well-handling civil affairs Strengthened Incentives • Provide education for local high-level civil servants on policy directions of regulatory reform of the new administration • Provide specialized education for civil servants handling civil affairs Ensuring Expertise • Shift from asking "Why did you allow it?" to "Why did you not allow it?“ • Tolerate small mistakes made in the process of proactive work Improving Audit Practices - Overall audit operation improvement plans will be reported by the Board of Audit and Inspection in October

29. 국가경쟁력강화위원회 Presidential Council on National Competitiveness Future tasks of regulatory reform

30. Ⅳ. Future tasks of regulatory reform Building a Leading Advanced Nation Accelerate efforts to make good systems Systematic Regulatory reform Consensus building on regulatory reform Introduction of sunset clauses for regulations Strengthen efforts to communicate with the public Key institutional reform

31. 1. Improvement of key institutions Reforming key institutions for strengthening national competitiveness: law & order, state-owned land utilization, etc Issues are intermingled with complex interests that are sensitive to institutional changes Requires strategic implementation under national consesus • Korea's level of abiding law and order is among the lowest in the OECD • With the rule of law brought up to the level of the OECD average, Korea is expected to gain an additional annual growth of 0.9%p (KDI) Strengthening Rule of Law → Measures will be devised though relevant research, hearings and international conferences • With Korea’s limited land area, and irrational state-owned land management is leading to high land costs Rationalizing State-Owned Land Utilization → A cause of outbound phenomenon of domestic companies, hinders FDI • Total land cost is about 3 times the GDP ('07). In advanced countries, it is about the size of GDP • Redesigning basic framework of rigid land utilization regulations for metropolitan, farming, and mountainous land

32. 1. Improvement of key institutions • The quality of R&D performance compared to R&D investement size is still low - Total R&D investment is 5th highest in the world (3.23% of GDP) - Average thesis citations is about 28th in the world (3.22 times, '06) Improving R&D Support System • Prepare plans to improve the efficiency of R&D investment by R&D capacity building and strengthening cooperation among industry, academia and research institutes • Non-departmental public entities continue to show inefficiencies despite national economic significance Revising the Management System of Non-Departmental Public Entities - 35 large public entities: value added per capita has increased by 1.8% per year between '02~'07, personnel cost has increased by 6.6% • Remaining public entities, after realignment of functions of SOEs, will undergo managerial efficiency improvements - Improving the management evaluation system, strengthening the public announcement of management information, simplifying management appointment process • Further develop the service industry to expand future economic growth engines Improving the service sector such as tourism and medical services • Prepare plans to deregulate the tourism and medical services sector and strengthen competitiveness - Tourism: deregulation, contents development, and new growth industries such as conventions - Medical services: deregulation for domestic medical institutions, promote medical tourism such as attraction of foreign patients

33. 2. Introduction of sunset clauses for regulations Shift from individual regulatory reform to a structural and systematic regulatory reform Relevant legal provisions were enacted in 1997, but with little results • In principle, apply sunset clauses in all new/strengthened regulations • For existing regulations, assess the need for applying sunset clauses Implementation Direction - Entry, price, transaction-related regulations, regulations that do not meet global standards - Regulations that need to flexibly change in accordance to environment or technological advancement • Prepare the sunset clause application criteria based on further research (Dec.) • Determine regulations for application of sunset clauses and revise relevant laws (1st Q, ‘09) Future Schedule • Application criteria, sunset period, etc • Organization of sectoral review boards, set application scope and period

34. 3. Strengthen efforts to communicate with the public Actively inform regulatory reform details to allow rapid implementation of new policies in the actual business arena Find efficient regulatory reform measures through diverse collection of opinions and suggestions • Hold regional regulatory reform presentations (beginning in September) - Seoul, 6 metropolitan cities, Jeju, etc - Participated by PCNC, Public-Private Joint Implementation Group, 5 economic associations, relevant ministries and agencies On-Site Presentations • Hold meetings with business associations and groups (beginning in September) • Hold joint seminars and forums in collaboration with Korea Economic Society, Korea Society for Regulatory Studies, etc • Linked PR with associations and groups • (PCNC → spread information though association journals and PCRM) • * Inform the public though newspaper articles and TV broadcasts • * Post information on the websites of PCNC and government ministries and agencies Media PR