Regulatory Reform : Lessons for Korea

"Regulatory reform" once meant either "alternatives to rate-of-return regulation" or "the advantages of privatization". Now that a broad consensus has been reached on each of these two topics, at least among economists, one subject that has moved to center stage is "vertical restructuring". Many reform-minded economists have recommended policies of vertical separation between potentially competitive "upstream" sectors and their corresponding natural monopoly grid sectors. This paper suggests that the arguments in favor of vertical separation may be usefully grouped into three categories, and that of the three, the desire for a more competitive upstream sector is in many settings the least persuasive. The analysis is then applied to the proposals for restructuring the Korean railways and electricity sectors