[Editorial] Profit-sharing

Former Prime Minister Chung Un-chan appears to have learned no lesson from the Sejong City debacle last year. Upon his appointment as prime minister in September 2009, Chung staked his political career on a bill aimed at changing the concept of the planned city from an administrative town to a science-technology hub.

Chung, a former Seoul National University economics professor, went in all guns blazing to support the bill, saying the new development plan made much more economic sense than the original one. But the bill was voted down at the National Assembly in June 2010 and Chung stepped down, taking responsibility for the fiasco.

He should have learned a lesson from the experience ― no matter how well-meaning a project may be, a policymaker should be careful not to overreach on it if it lacks support from its stakeholders.

Now Chung appears to be repeating the same mistake ― this time with a project aimed at ensuring cooperation between large corporations and their smaller subcontractors.

On Feb. 23, Chung, now chairman of the Commission for the Shared Growth for Large and Small Companies, unveiled a plan to develop the so-called “win-win index” ― an index that measures how far conglomerates go in supporting the growth of their suppliers.

Chung drew fire from conservative economists as well as big business lobby groups for suggesting a system where large companies voluntarily share part of their excess profits with their subcontractors. He said a corporation’s performance on this front would be reflected in its win-win index.

Critics attacked the plan as a step that goes against the profit motive, a central concept of the market economy. Rep. Hong Joon-pyo of the ruling Grand National Party even called Chung’s plan a “radical leftist idea,” likening it to a profit distribution formula at companies where labor wields strong influence on management.

On Wednesday, Chung came forward to defend his scheme. He said his idea was to establish a fund to which big businesses contribute part of their excess profits. The contributing companies will then invest the money in their subcontractors, helping them raise productivity, develop new technologies and stabilize employment.

In this regard, he said, the scheme is less about profit-sharing than about inducing large firms’ investment in their business partners. He also stressed it was totally up to big businesses how much money they would invest in their suppliers.

Despite criticism, Chung said he would launch a committee by mid-April to draft a road map to implement the planned system. The committee will consist of 15 members, five each from big corporations, small companies, and social organizations and academia.

Chung’s explanation, however, failed to calm criticism. Rather it fueled negative sentiment among large companies. They were particularly uncomfortable with Chung’s plan to establish a fund, given the high possibility of Chung’s commission taking control of it.

Top government officials also expressed negative views toward it. Minister of Knowledge Economy Choi Joong-kyung said sharing profits between separate companies could cause problems even if it promotes shared growth between big and small firms.

The presidential office said more public discussion on the matter would be necessary.

Under these circumstances, Chung needs to remember the Sejong City debacle. Even though the bill he promoted was more rational in economic terms than the original plan, it was rejected by lawmakers. By the same token, no matter how necessary the proposed profit-sharing scheme may be, it cannot succeed without support from big corporations.

If Chung overreaches on the unpopular plan, it could even lead big businesses to turn their backs on the win-win index. In that case, all the efforts made thus far to promote shared growth between large and small firms would go down the drain.