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Regulation kills innovation

We need a system that encourages flexible interpretation of laws.
Jan 25,2018
A phone for diabetics was banned in Korea because it fell somewhere between a medical device and communication equipment. A forklift truck wasted four years caught between an automobile and construction machinery designation.

These are typical cases of innovative products scrapped or sacrificed because convergence and integration were not recognized. Each ministry only focuses on the regulations under its jurisdiction, and this hinders the market environment for innovation.

A recent discussion on regulatory reform at the Blue House mentioned a three-wheeled electric vehicle whose release was delayed because there was no category for it. At the meeting, President Moon Jae-in said, “It should be reviewed to allow at least pilot businesses to check if certain products can be commercialized in the market, even if existing laws prohibit it.” He also ordered a review of the premise that businesses can operate only when there are applicable provisions.

Clearly, we need a drastic approach in regulatory reform that breaks the existing frame. The context of the latest regulatory reform is very different from the past. Regulations are introduced with the purpose of controlling and managing certain social risks, but most regulations in Korea are ex-ante.

Such regulations might have worked when society was stable and there was little convergence. Regulatory reform involved reviewing each case and improving unreasonable regulations.

But today, when technology is rapidly changing and active convergence adds complexity, outdated regulations pose a major obstacle. Risks that should be managed with regulations extend across different ministries, and it becomes increasingly difficult to detect the risk in advance or find effective control measures.

Rather than approaching each case individually, we need a broader approach of overcoming fragmented regulations and creating a system that encourages flexible interpretation of laws. We need to transition from ex-ante to ex-post regulation.

Regulatory reform is hard to attain for obvious reasons: the passive and rigid attitude of bureaucrats and resistance from the establishment. Society’s concern for possible adverse effects makes it harder to transition to ex-post regulations.

So how should we approach this? First, we need the “nudge” of administrative governance that encourages active participation from the public. The Sinmungo of the previous administration is a good example.

The Sinmungo accepted 3,850 suggestions from the public between March 2014 and end of 2016. Thirty-five percent of them were wider interpretations of existing laws without requiring revision.

The system worked because once a suggestion was submitted, department or section chiefs at the relevant ministry would provide an answer with their real names within 14 days, and if the answer was not enough, it would be addressed by higher-level directors at the ministry, also with names attached.

Revising the Special Act on Promotion of ICT to provide the legal grounds for a “regulatory sandbox” is a step in the right direction. Pilot projects like regulatory sandboxes are useful in many ways. When new technologies, products or services clash with existing regulations, pilot projects allow for a temporary release to the market, in limited space with various conditions. From that, we can observe the adverse effects and prepare suitable response measures.

Ultimately, pilot projects will determine whether a technology is ready for the market. They can offer safe channels to improve regulations for bureaucrats, who have to take public responsibility and blame for possible side effects.

The fundamental cause of sluggish regulatory reform has been easy-going understanding of the current reality of the Korean economy. Considering the rise of China in all directions, the “sandwich theory” of the Korean economy caught between high-efficiency Japan and low-cost China is a bygone story.

The dominant understanding now is that the technological gap between Korea’s key manufacturing industries and China’s counterparts is already closing or will soon disappear. In science, technology and artificial intelligence, China is already no rival for Korea. Rushing isn’t going to help, but we cannot afford to leisurely waste another year or two. It is the time to feel the tension and pursue speedy regulatory reform.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, Jan. 24, Page 29

*The author is director of the Center for Regulatory Studies at the Korea Development Institute.

Lee Su-il