Chaebols and their Continued Role in South Korea

South Korean conglomerates known as chaebols have been described by academic Meredith Jung-En Woo in 1991 as "private agents of public purpose."

The history behind the "taming" of the "wild horses" (chaebols) had been briefly outlined by University of Vienna professor Ruediger Frank in an article titled Chaebol Will Continue to Play Key Role for Korea (Insight into Korea, Herald Media 2007.)

Upon assuming power in 1961, former South Korean president Park Chung Hee (pictured) arrested leaders of Korea's largest business groups, and released them only after they had promised "that they would faithfully implement his economic policy."

By controlling the country's financial system, Park ensured that "desired business decisions would be rewarded ... Big was beautiful, so beautiful that at some point it seemed that the chaebols had become too big to fail."

"If they were on the brink of bankruptcy, the government would order another conglomerate to buy the ailing companies, thereby earning the all-important political goodwill of the government, that in return provided generous funding for the integration of the new unit into a company structure of unrelated businesses,” Frank wrote.

"The chaebol were creatures of the developmental state, they were winners picked and promoted by the economic policy makers. A huge part of the South Korean economic miracle is due to the almost maverick can-do spirit that the leaders of the chaebols displayed. A frequently told exemplary story is how Hyundai won the bid for a container ship when the shipyard did not even exist and still was able to deliver the vessel in time."

But this developmental model also meant that some sectors grew at the expense of others, especially small and medium sized enterprises that mainly produced for the domestic market.

And given that the financial system was a tool of the state's economic policy, it became adept at obeying state orders, but lacked the ability to make sound business decisions.

"Over two decades, this created an economy with a few winners and many losers, with imbalances in the industrial structure, high debt rates, and increasingly displeased population."

After the country's democratic transition in 1987, chaebols witnessed fewer state regulations, and this led to massive investments into real estate speculation, rather than research and development, product innovation and facility investment.

It was not until the 1997 financial crisis that the "unilateral power" of the chaebols was checked, whereby conglomerates had to undertake "long overdue corporate government reforms."

"The crisis, not surprisingly, started with the collapse of a chaebol. When in January 1997 the steel producer Hanbo went bankrupt, the government of President Kim Young-sam decided to be a good member of the OECD that the country had joined just weeks before and not bail out the ailing chaebol as would usually have been the case."

The resulting credit crunch led to a series of bankruptcies, reaching brand names such as automobile manufacturer Kia in August 1997.

The domestic currency lost half of its value, and after the foreign currency reserves were spent, South Korea had no choice but to appeal to the International Monetary Fund for help.

"The result was the Korea we see today. The Bank of Korea became independent, the Financial Supervisory Service was established to maintain certain standards of conduct in the banking sector, the currency is floating, and the chaebols were encouraged to form legal holding companies in which their previous misbehavior would be impossible."

Coming back to Woo's description of chaebols as "private agents of public purpose", this could be seen most vividly in the case of late Hyundai founder Chung Ju-yung's efforts in spearheading the Mount Geumgang tourism project and the Kaesong Industrial Zone.

While most South Koreans welcomed the greater interaction with the North, many were unhappy with the lack of transparency in government-chaebol cooperation, especially since huge sums of money were involved.

Interestingly, Frank suggested that if a Korean unification is to be economically successful, the chaebols will have to play a major role.

"By the same logic, the opportunities and dangers of a rising China as well as the task of a united Korea to find its own, independent place in East Asia and the world cannot be mastered without the flagship companies," Frank enthused.

"The chaebols have played a major role in the past, and they will do so in the future. As the environment changes, so do the conglomerates. The owner-management system fades away ... and professional CEOs lead companies that are listed on international stock exchanges. Restrictions are lifted, privileges are scrapped."

"Chaebol reform is no rocket science. They just need to be treated as ordinary companies, neither supported nor punished for political reasons. Eventually, the image of these giants will change in Korean society from being collusive agents of the state to proud examples of Korean creativity, hard work and entrepreneurial spirit."

South Korea's Growth Strategy

We have all heard about South Korea's economic success. Well and good.

But much of that success was due to hard work, rather than efficient and innovative work, according to Dartmouth College academic David C. Kang.

The OECD estimates that in 2005, output per hour worked in Korea was 41 per cent of that in the United States, "making Korea roughly as efficient as the Czech Republic (45 per cent), Poland (37 per cent), and Turkey (28 per cent). Japanese workers were 71 per cent as efficient as the United States, with Germany 91 per cent and the UK 83 per cent … In short, for every hour worked. Korea sees less than half the output of advanced countries." (Korea’s Growth Strategy: Work Smarter, Not Harder, in Insight into Korea, Herald Media 2007.)

And that was despite Korean workers putting almost 15 extra weeks of work per year, as compared to the US.

"Simply put, Korean wealth and prosperity is a result of sweat," Kang wrote, adding that the Korean economy is mainly an input-based economy that grows through accumulation and work, and not increases in productivity and efficiency.

So for Korea to join the ranks of the most advanced economies, it has to combine its capacity for hard work with "the institutions, laws, and companies that make efficient – i.e. productive – work possible."

It should also work towards improving its productivity in three key areas – finance, labor, and small businesses.

The financial sector is in need of greater liberalization and institutionalization, and a clear legal and political framework for business activities such as foreign investment, accounting, bond market, and even bankruptcy should be put in place.

Currently, Korea's bankruptcy system makes it difficult for "young firms to take chances, because Korea's bankruptcy laws tend to "criminalize" them. At present there are almost 100 provisions in various laws that discriminate against bankrupt persons. The task … is to find a balance between promoting entrepreneurship and risk-taking while at the same time protecting investors and allowing inefficient firms to fail."

Labor reform is needed to provide flexibility in hiring and firing.

SMEs also needed to be restructured to increase productivity and competition, especially since they accounted for almost 85 per cent of employment and 50 per cent of manufacturing output.

The Problem with Korea's Retail Sector

What is wrong with South Korea's economy?

According to Daniel Melser, while Korea's externally focused manufacturing sector is first class, the domestically oriented service is "decidedly second rate."

He added that the failure to modernize in the service sector "has proved a drag on growth," adding that systemic problems have "bedeviled part of the services sector." (Korean Economy Needs New Playbook for Growth, in Insight Into Korea, Herald Media 2007).

As evidence, the Sydney-based economist cited the "sclerotic retail industry" which has remained largely untouched by the "mega mart revolution" which has swept through most of the world.

"Instead small and medium-sized enterprises continue to dominate the retailing (pictured) landscape. These establishments are individually small but tend to soak up a large chunk of employment. They run on wafer-thin profit margins and act as a drag on growth and productivity."

Changes have been stifled by high barriers to entry and exit, tight retail zoning rules, restrictions on competition, and labor laws which make it difficult to dismiss workers.

Hence, it is not hard to see why "service sector productivity has languished."

The situation is not helped by the exclusion of the services sectors from the Free Trade Agreement (FTA) with the United States, and the unwillingness of politicians in addressing the problem for fear of "suffering the electoral consequences."

The Early Chinese Communists

A final blog entry from J.F. Jenner's book The Tyranny of History - The Roots of China's Crisis (The Penguin Press, 1994) where he painted a positively upbeat picture of the early Chinese Communists (pictured).

When the civil war ended in 1949 the units of the People's Liberation Army that entered the cities "seemed very different" from the Nationalist forces they had just driven out.

"They behaved properly and did not loot or rape. The officials who came with them in shabby cotton uniforms evidently believed in what they were doing, and did not seem to be trying to enrich themselves," Jenner wrote.

It was hard to oppose a party doing such things as rapidly restoring an economy ravaged by over a decade of war, protecting the property of nearly everybody, including most business people, and addressing urgent pressing problems that were in obvious need of solutions.

"Even the widespread killings during the land reform in the villages were mainly of the more privileged and did not challenge the principle of private ownership of land. Raging inflation was brought down to imperceptibly low rates. Corruption, whether by officials or business, was harshly punished. And China's part in the Korean war showed that the Communists were capable of standing up to the world’s greatest military power. All these achievements were fired by a nationalism whose values were collective and very earthly Chinese," Jenner noted.

The Party had replaced "chaos with order, war with peace, weakness with strength, impoverishment with a modest turn towards prosperity, confusion with certainty, (and) aimlessness with purpose."

In almost all respects the Communists "were performing far better than any predecessor."

There was also a sense of everyone working together to bring about visible improvements in the lives of most people. The educated minority who had been exposed to American, Japanese and other overseas influences were "only too eager to win acceptance as authentically Chinese by rejecting foreign ways, and for a time they seemed to have found themselves places in the new order."

Jenner said that "the party's ideology was not complete nonsense" as it "offered a view of China's traumatic modern history that, while open to some criticisms, made a lot more sense than the incoherent nationalism of the Guomindang."

The communists "ran a more powerful, effective and honest dictatorship," Jenner concluded.

What Yan'an Stood For

J.F Jenner argued that it would be easy but wrong to dismiss the Chinese and foreign observers who "saw something remarkable" developing in the Communist-controlled parts of China during the 1940s.

Against over-whelming odds, and through their ability to mobilize support, the Communists built "a political, military and moral culture: that enabled them to conquer the whole of China."

"Only the most dedicated and tough revolutionaries survived such ordeals as the long marches of 1934-6. Only extraordinary self-discipline and acceptance of the Party's goals made it possible for the isolated Eighth Route Army (pictured) and guerrilla commanders to subordinate their own interest to those of the cause during the Japanese war, even at a time when the centre was in no position to enforce obedience," Jenner wrote. (The Tyranny of History - The Roots of China's Crisis, The Penguin Press, 1994)

During the civil war of the 1946-9 one of the biggest advantages the Communists enjoyed over the Nationalists was that it could use its initially much smaller forces in ways that made the best political and military sense, and without having to worry about the loyalty of generals whose units had to be sacrificed to the greater good of the Communist cause.

Jenner suggested that even though the Red Army and its successors were also sharply factionalized and held together not only by shared dedication to the cause but also by draconian discipline and structures of personal loyalty, their commitment to the Communist cause was stronger than those ties, and that defections and surrenders were less frequent than in the Nationalist forces.

"The Communists were on the whole coherent, vigorous, dedicated, uncorrupted and competent. Despite the ruthless purges and ideological campaigns that were carried out in the rustic Communist capital, Yan'an became synonymous with a way of life that was frugal, disciplined and dedicated to the revival of China. Chiang Kaishek's Chongqing, by contrast, was characterized by rampant corruption, incompetence, conspiracy and the ruthless exploitation of soldiers and peasants."

Jia Qinglin, Li Ruihuan and CPPCC

In a current affairs book published in Hong Kong, the author analyzed the difference between former and current Chinese People's Political Consultative Conference (CPPCC) chairmen Li Ruihuan (李瑞环) and Jia Qinglin (贾庆林, pictured). The author also outlined the changes within the CPPCC under Jia's leadership.

贾庆林和李瑞环比, 还差一大截. “小木匠” 作为工人阶级和劳苦大众的重视代表, 在任政协主席那十年间, 开明务实, 协调各方, 仗义执言, 享誉海内外. 贾庆林底气不足, 虽然在政协能兢兢业业工作, 却缺乏号召力和应有的权威. (中共政局全破译, 极目 编著, 新文化图书有限公司, 2007)

("As compared to Li Ruihuan, Jia Qinglin was not as competent. Li, who was nicknamed "the little carpenter" was a pivotal representative for the working class. During the decade when Li was CPPCC chairman, he was open and dealt with concrete matters. He was a good coordinator, spoke boldly in defence of justice, and was internationally renowned. In comparison, Jia was not as able. Even though Jia was conscientious and tried his best, he lacked appeal and the needed authority.")

政协里的不同声音略有增强, 是一大亮点. 全国政协出访团组29个, 出访人员开阔了视野, 也换了脑筋. 同各级人大一样, 各级政协也有一些改革性的探索. 总体上说. 贾庆林执掌的政协是平稳的. 但平稳有些过头, 未见大的开拓. 泥沙俱下, 鱼龙混杂, 一些政协委员素质不高, 甚至有不三不四的人披上了政协常委, 委员的外衣. 丑事不断, 一盘散沙.

("One positive change within the CPPCC was the increase in alternative voices, as well as the over 29 foreign visits which had broadened the horizons of and injected new thinking within members. Similar to the various levels within the National People's Congress, the different levels within the CPPCC had also undertaken some fairly exploratory changes. Generally speaking, CPPCC under Jia's leadership was stable, but this stability had been rather extreme, and did not come with any major exploratory steps. Furthermore, the calibre of its members had been uneven, and there were even shady characters who were appointed, leading to a series of scandals, and the impression that members were not united.")

他和厦门远华大案的关系, 和赖昌星的关系, 令他忐忑不安. 本属平庸人物, 登上高层, 面对群英, 自然内心胆怯. 没有新思维, 一切按部就班, 四平八稳, 是贾庆林的缺憾. 他在十届全国政协一次会议上的得票率为百分之93,反对票和弃权票达151张. 这么多人对他是不认可的.

("Jia's links with the Xiamen Yuanhua incident, coupled with his relationship with Lai Changxing had made him nervous and fidgety. He possessed ordinary talents but yet managed to assume the highest leadership. Therefore when he encountered other talented people, it is natural for him to feel anxious and worried. Devoid of new thinking, he followed the prescribed methods of doing things so as to ensure stability. This is said to be Jia's biggest deficiency. During the first session of the 10th CPPCC, he received only 93% of the votes, with over 151 opposing and abstention votes. This is an indication that many do not approve of him.")

Late Maoist Culture

J. F. Jenner suggested that being Chinese in the twenty years from 1956 involved "making conscious choices to do things the hard way." (The Tyranny of History - The Roots of China's Crisis, The Penguin Press, 1994)

Like the city kids sent to remote parts of the countryside at the end of the 1960s who deliberately did farm work with their bare hands instead of using tools, and "who did not rest from the mid-day sun in summer, and who gloried in making the most meaningless of sacrifices."

Few could have been more pointless than the self-destruction of a former Red Guard (Red Guards pictured) who drowned in August 1969 in an attempt to recover from the river a floating telegraph pole that was no longer part of a communication network, but was simply a length of driftwood.

The incident was given the full treatment by the propaganda authorities, who made no attempt to hide what by any standards but Maoist ones would have been a waste of a young life.

"They turned it into an act of martyrdom. It was almost as if the very disproportion between the possible gain and the actual loss was something admirable in itself and another sign of a national moral superiority: nowhere else in the world could match the pure revolutionary dedication of China's proletarian youth armed with the invincible thought of Mao Zedong."

Such deaths did not seem unusual or shocking in the late 1960s after years of "purposeless killings" during the countless persecutions during the Cultural Revolution.

Indeed, the willingness to undertake and "exact sacrifices that benefited nobody" was an outstanding feature of late Maoist culture, Jenner argued.

Jenner concluded that the converse of this was that rational cost-benefit analysis of anything was made very difficult for over twenty years from the mid-1950s.

Chinese Writer Lu Xun

J. F. Jenner had provided a great account of renowned Chinese writer Lu Xun (pictured), whom he described as "one of those writers, very rare in any culture, whose honesty, intelligence, perception and ability to handle written language makes almost any page he wrote a pleasure to read."

Jenner added that Lu Xun's language is dense, sometimes hard to unravel, closer to classical than to the standard, Peking-influenced vernacular style, "and all that is part of the delight of it." (The Tyranny of History - The Roots of China's Crisis, The Penguin Press, 1994)

Lu Xun is said to have overcome "the normally irresistible tendency in the culture to write dishonestly and to strike poses, and he refuses to play nearly all the games to which so many of his talented contemporaries and successors succumbed."

Jenner added: "Cao Xueqin and Lu Xun are among those few writers in all of literature who grow with repeated reading. They use the infinite resources of written Chinese, at all its levels, with such mastery that one is convinced while reading them that even in recent centuries it is the supreme medium for written expression."

"But they are such towering exceptions to the run of Chinese writers in the last few hundred years that their achievements only remind us just how difficult it is to write Chinese that is both vigorous and subtle, that draws on the riches of the past without being overwhelmed by them, that is as vague or precise as the writer chooses, and that can breathe with the rhythms of speech or cut free from them."

Breathtaking description, I thought.

Zhiqing as a Subversive Force?

J. F. Jenner offered an interesting take in 1994 on zhiqing (知青), or urban youths sent to the countryside during the Chinese Cultural Revolution (pictured) beginning in 1966.

In his book The Tyranny of History - The Roots of China's Crisis (The Penguin Press, 1994), Jenner suggested that these former zhiqing could potentially be a subversive force.

He observed that "the millions of half-educated, no longer young ex-urbanites returning to the cities from their rural exile in the late 1970s were a more subversive force in the history of Chinese culture than any previous generation."

"With a few exceptions the best of them believed in no ideological system and felt no need for a belief package. Earlier generations had attacked tradition but only to try to replace or modify it with something else - Buddhism, new varieties of scientism, Marxism, militarism, fascism and other sets of ideas."

"If you have beaten up, possibly killed an official or a school teacher or two in your teens and rebelled against your parents and the local Party bosses, you can never quite be re-absorbed by a value system that depends on unquestioning acceptance of the authority of such people."

"And when you have been cruelly deceived by the alternative "revolutionary" system, there is not much room left for illusion ... This generation and its successors have been unable to put together what was broken, even when some of them try to find strength and meaning in the traditions they rejected in their youth."

Was Jenner right? Even with the benefit of hindsight, I cannot say with absolute certainty.