State-owned enterprise sector reform and privatization: Theory and some evidence from Korea

The question of appropriate boundaries between state-owned enterprises (SOEs) and private firms has received little attention in mainstream economic literature, especially East Asian countries where the role of the state in their successful economic development has been extensive. This dissertation examines the fundamental theories of privatization and the impact of privatization and other Korean SOE sector reform attempts on managerial incentives. In the theoretical part, we find that altering managerial incentives through changes in compensation schemes or ownership structure alone may not be sufficient to affect the performance of SOEs. We then analyze the importance of control rights privatization over cash flow rights privatization. Last, through another variation of the incomplete contract approach, we emphasize the importance of institutional and regulatory relationships between the government, owners, and managers in determining the specific trade-offs between SOEs and private firms.;In the empirical portion of the research, we analyze various SOE sector reform options ranging from conventional performance contracts to partial cash flow rights privatization. On the former, we find the results disappointing, mainly due to its failure to formalize the relationship between the government and SOEs. The piece-meal cash flow rights privatization approach conferred little credibility to government policies, and hence failed to harden SOEs' budget constraints.;What is important in any SOE sector reform attempts is the government's credibility in depoliticization process and the sustainability of its reform programs. In addition, to radically alter the way SOEs operate, it is necessary to provide the right internal and external incentives for managers. Internal incentives relate to corporate governance and performance-linked compensation structures, while external incentives entail market structures and government policies that are conducive to efficient resource allocation. We recommend that the government should not only encourage private sector entry in to the electricity generation and steel industries, but also pursue an option to break-up these monopolies. Finally, the government needs to adopt more policies which fundamentally disengage its interventionist approach to economic development. This involves not only the privatization of key SOEs but also changing the way the state attempts to influence economic activities through its numerous industrial and regulatory policies.