July 21, 2006

Regulators all over the world do silly things. The reason is that regulations are usually put in place for all of the wrong reasons. Regulations exists to protect a local power group, company or industry, to satisfy the agenda of a local politician, or worse to allow local bureaucrats to extend their rent seeking activities.

Nevertheless, the worse thing a regulator can do is to not enforce a regulation that is already in place. Investors need above all things to have stability in the regulatory environment. If regulations in place are enforced without regard to privilege, the calculus that investors use to determine the outcome of a specific investment will have a meaningful result over the term of the investment. If the regulation is absurd, the investor should avoid the investment, which will give the regulator or government an incentive to adopt a better system.

Recently one commentator chastised Korea as having regulatory risk. They felt that it was unfair for the regulator to force a competent CEO like Nam Yong of LG Telecoms to step down. According to a Financial Times article (S Korea revokes LG Telecom 3G license, Financial Times July 19, 2006) the reason for Nam Yong’s removal was that it was provided for by the South Korean telecoms law. It appears that the South Korean regulators were doing exactly what they should do, enforce the law, something rather rare in Asia.

The regulator should remove Nam Yong based on its assessment of the law, not his competence. Competence is something to be judged by the markets. If mobile operators offered illegal subsidies, they should cough up $76 million, because they broke the law.

Western Investors are so used to bent Asian regulators that they have a tendency to criticize regulators who are trying to do their job. From my research it appears that the South Koreans have actually been going after well connected executives of chaebols for violating laws regardless of the size of the company, their connections or ‘charitable donations’. It is a trend that hopefully will continue in Korea and throughout Asia.

William Gamble

EMERGING MARKET STRATEGIES

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