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."