Reforming the Korean Public Sector: The use of the Performance Contracting System

Abstract

This paper examines the mechanics of the performance contracting system used in the Korean state-owned enterprise(SOE) sector and studies the impact it had on the SOE performance. The performance contracting system, called 'the Managerial Performance Evaluation System (MPES)' in Korea, is designed to improve the principal-agent setting by formalizing the relationship between the government and government-invested enterprises(GIE) through performance contracts. Just prior to the implementation of the MPES, between 1980 and 1983, the GIE sector received government subsidies totaling 3,544 billion Won or US$4.7 billion. Many accused the government of 'politicizing' operations of SOEs by imposing political objectives on managements. With mounting losses and public outcry concerning inefficient operation of SOEs, the government enacted the 'GIE Management Act' in 1984 in order to 'harden' the GIEs' budget constraint.