15th Market Economy Colloquium: Strategy and Direction for Reforming Public Institutions under the New Government

15th Market Economy Colloquium

Date and Time: May 15, 2026, 11:00 a.m.

Venue: Pureun Hall

Topic: Strategies and Directions for Reforming Public Institutions Under the New Government

Presenter: Hyun-jo Choi, Researcher at the Center for Free Enterprise (CFE)

Discussants: Giman Kim, Secretary General of the Citizens Forum for Good Regulation; Jaewook Ahn, Professor Emeritus at Kyung Hee University; Sung-no Choi, President of the Center for Free Enterprise (CFE); Yoonseok Jeong, Professor at Myongji College; Gwang yong Go, Policy Director at the Center for Free Enterprise (CFE); and 7 others

Strategies and Directions for Reforming Public Institutions Under the New Government

Hyun-jo Choi, Researcher at the Center for Free Enterprise (CFE)

Ⅰ. Background and Problem Awareness in the Debate on Public Institution Reform

Reform of public institutions has repeatedly emerged as a topic in discussions of administrative reform in Korea, but its tangible results have always been limited. Successive governments have pointed to problems such as lax management, parachute appointments, abuse of employee benefits, mounting debt, and the need to streamline overlapping or duplicative functions. However, each change in administration brought different priorities and speeds of implementation, and structural reform was never sustained on the basis of consistent principles.

Recently, the new government’s direction on public institution reform has become clearer, encompassing functional reorganization as well as mergers and consolidations. President Lee Jae-myung directly mentioned the need for sweeping restructuring, saying that “we may need to consolidate and merge public institutions as well.” In January 2026, the government announced that it had designated 342 public institutions and would, for the first time, disclose the status of undesignated institutions. However, at a time when low growth, population aging, fiscal pressure, and the crisis of regional extinction are advancing simultaneously, reform of public institutions should not be approached merely as a matter of reducing the number of institutions. It must be treated as a task of state governance that redesigns which functions the state must perform and which should be left to the market.

Ⅱ. Changes in the Scale and Workforce of Public Institutions and Diagnosis of Structural Problems

1. Not a Moderate Increase but Structural Expansion

According to the 2025 Handbook on the Status of Public Institutions, as of January 2025 there were a total of 331 public institutions, an increase of 15 from 316 in 2015. On the surface, this appears to be a moderate increase, but in reality it should be understood as structural expansion that goes beyond simple numbers, given that the public sector’s reach has widened further through the growth of subsidiaries, affiliated institutions, outsourced organizations, and policy programs. The number of public institutions expanded to 350 in 2020 and then underwent some adjustments, but the fact that it fell to 327 in 2024 before rising again to 331 in 2025 shows that one-off reductions are insufficient to change the structure.

The expansion of public institutions has not occurred evenly across all ministries. Rather, it has accumulated intensively in specific sectors such as energy, SOC, education, and health and welfare. According to the handbook, as of 2024, based on authorized staffing levels, public institutions under the Ministry of Trade, Industry and Energy employed 95,347 people, those under the Ministry of Land, Infrastructure and Transport employed 86,578, and those under the Ministry of Education employed 54,951. This suggests that reform, too, should not proceed uniformly but instead requires a differentiated approach by sector and function.

2. Entrenchment at the 420,000 Level and the Aftereffects of Expansion

In 2024, the authorized workforce of public institutions stood at 423,069, equivalent to 56.3% of the authorized number of national administrative civil servants. Over the past five years, staffing levels at public institutions have remained in the 420,000 range, indicating that the personnel structure of public institutions has entered a stage of entrenchment beyond temporary policy responses. Staffing has steadily increased at institutions such as the National Health Insurance Service, Korea Railroad Corporation, policy finance institutions, and public medical institutions in line with the expansion of policy programs and growing demand for services. Yet once staffing levels increase, they have tended not to decline easily even after projects end or functions are reduced.

What is notable is that while total staffing levels have been maintained or increased, new hiring has fallen from 30,002 in 2020 to 20,194 in 2024, and youth hiring has also declined from 23,014 in 2020 to 16,966 in 2024. A structure in which staffing is maintained at a high level while new entry declines makes it harder for young talent to enter and may also distort competition with the private sector for talent.

Ⅲ. Domestic and International Cases of Public Institution Reform and Their Implications

1. Overseas Cases of Public Institution Reform

Since the 1980s, the United Kingdom has progressively privatized large state-owned enterprises while at the same time establishing independent regulatory agencies and externalizing the executive functions of central ministries. Between 1988 and 2010, 217 executive agencies were established or reorganized. The core of this approach was the separation of policymaking, regulation, and execution functions, alongside a permanent restructuring system that continuously reevaluated executive organizations. New Zealand improved efficiency by combining autonomy and competition after corporatizing state-owned enterprises, and in the electricity sector it introduced competition among public enterprises, showing that unconditional integration of similar functions is not always the best solution.

2. Korea: Failure of the LH Integration Reform (Korea Land Corporation + Korea National Housing Corporation)

By contrast, Korea’s LH case offers a cautionary example of the risks of mergers and consolidations. After the 2009 integration of Korea Land Corporation and Korea National Housing Corporation, LH’s debt rose by about KRW 36.8 trillion, from KRW 121.5 trillion in 2010 to KRW 160.1 trillion in 2024. Operating losses from rental housing also surged during the same period, from KRW 0.5 trillion to KRW 2.8 trillion. Mergers carried out under the rationale of financial integration for debt transfer not only may fail to produce the expected results, but can also worsen the situation. Taken together, domestic and international cases show that the key to successful public institution reform lies not in the form of ownership, but in functional redesign and the quality of discipline.

3. Cases from Major Foreign Countries and Their Implications

Taken together, the cases of Korea and major foreign countries show that successful public institution reform generally shares the following common features. These are consistent with the reform principles recently emphasized by the OECD (OECD, 2024).

First, they distinguished between functions the state must perform directly and functions that can be left to the market. Second, even when public institutions were retained, they demanded private-sector levels of efficiency, transparency, and board accountability. Third, they emphasized competitive neutrality so that public institutions would not rely on government favoritism and implicit support.

These cases offer three policy implications for Korea.

First, similar and overlapping institutions should be boldly merged and consolidated, but in sectors where competition is needed, maintaining separation is preferable. Second, in areas that can be handled by the private sector, a wide range of options should be considered, including market opening, equity sales, transfer to the private sector, and phased privatization. Third, for state-owned enterprises that the government will continue to retain, professional ownership management and clear performance accountability should be strengthened.

Ultimately, Korea’s reform of public institutions must move beyond the binary choice of “merge or maintain” and instead be designed around differentiated reform by function, promotion of competition, financial accountability, and professionalization of governance.

Ⅳ. Exploring Strategies and Measures for Reforming Public Institutions Under the New Government

1. Basic Principles and Criteria for Judgment

The goal of public institution reform is not simply a smaller government, but the restoration of a “small but capable government” that improves public convenience while reducing fiscal burdens and inefficiency. To this end, reform should be diagnosed not at the institutional level but at the functional level, and the criteria for judgment should consist of: ① national necessity, ② possibility of private-sector substitution, ③ feasibility of introducing competition, ④ presence of similarity or overlap, ⑤ fiscal and debt risk, and ⑥ contribution to public convenience. Accordingly, reform tools should be applied in a differentiated manner among: ① retention plus strengthened performance management, ② merger and consolidation, ③ market opening, ④ equity sale, and ⑤ transfer to the private sector and privatization.

2. Direction of Structural Reform of Public Institutions

Mergers and consolidations should be pursued not from the perspective of reducing the number of institutions, but from the perspective of reallocating policy functions. When institutions performing similar or overlapping functions coexist, the result for the public is inevitably a more complicated interface and blurred accountability. Whether to merge or consolidate should be judged according to the following five criteria:

① Is this a function that the state must necessarily perform directly?

② Do similar or overlapping functions cause administrative costs and confusion over responsibility?

③ Would integration increase public convenience, or would it suppress competition?

④ Is private-sector substitution or market opening possible?

⑤ Would there be substantial savings in fiscal support, debt, and organizational maintenance costs?

Alongside mergers and consolidations, market opening must also proceed in parallel. In areas where the public sector holds a monopoly or enjoys de facto protection, but where private participation is possible, those areas should be opened gradually. Equity sales are an intermediate measure that can preserve public interest while strengthening market discipline, and privatization can secure policy legitimacy only when accompanied by monopoly regulation and user protection mechanisms.

On the other hand, structural reform does not always mean integration. If the effect of promoting competition is large and efficiency can be improved through performance competition among public institutions, maintaining separation may be the more rational choice.

3. Review of Merger and Consolidation Cases and Policy Recommendations

KORAIL (KTX) + SR (SRT) – Maintain separation

As a structure of limited competition within public rail services, integration raises strong concerns about a return to monopoly. It is preferable to adjust only inefficient functions.

KEPCO’s 5 power generation subsidiaries – Maintain separation

Separate operation itself has enabled comparative competition and performance evaluation within the power generation sector, and a return to a single public enterprise structure would run counter to the direction of reform.

Incheon International Airport Corporation + Korea Airports Corporation + Gadeokdo New Airport Construction Authority – Oppose full integration

There is a strong risk of creating an LH-style structure in which Incheon Airport’s finances are used to cover Gadeokdo construction costs. Functional diagnosis by area and reorganization of temporary entities should come first.

Korea Housing Finance Corporation (HF) + Housing and Urban Guarantee Corporation (HUG) – Functional realignment needed

Because housing finance and guarantee functions overlap, merger and consolidation or unification of policy guarantee functions and reduction of redundant organizations are needed.

Export-Import Bank of Korea + Korea Trade Insurance Corporation – Partial integration or functional reorganization

Since export support policy tools overlap, only high-risk public supplementary functions should remain, while general financial support should be transferred to the private sector.

61 small public institutions – Reorganization by type

As the practical benefits of maintaining them as independent corporations are low, a package approach by five categories is needed, including absorption, integration, abolition, and private outsourcing.

Ⅴ. Conclusion: Policy Recommendations

The new government’s reform of public institutions must not remain at the level of symbolic restructuring in the early stage of the administration. In the short term, a comprehensive diagnosis and functional classification of the entire public organizational landscape is needed, including designated institutions, undesignated institutions, subsidiaries, and invested institutions. In the medium term, mergers and consolidations, equity sales, transfers to the private sector, debt reduction programs, and reforms to job- and competency-based pay systems should proceed in parallel. In the long term, the division of roles between the public and private sectors should be reestablished, and the results of reform should be disclosed continuously to the public through a digital performance disclosure system.

Ultimately, the new government’s reform of public institutions must not follow the approach that “if functions are similar, they should always be integrated.” Instead, it must be a sophisticated, function-centered reform that applies integration, continued separation, functional adjustment, and market opening in differentiated ways based on national necessity, the possibility of private-sector substitution, the need to promote competition, the presence of similarity or overlap, and public convenience. It must not be satisfied with merely reducing numbers, but should lead to structural reform that redesigns functions, introduces competition and market discipline, and normalizes debt as well as personnel and compensation systems.

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Original title: 제15회: 새정부 공공기관 개혁의 전략과 방향

Author: Market Economy Colloquium

Date: 2026-05-15

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=collo&pn=1&idx=28932