On October 11, Samsung issued a global recall of its Galaxy Note 7 device amid reports of battery fires. Immediately after, Samsung’s shares dropped 8 percent, shocking the South Korean economy and slowing quarterly growth to the lowest level in over a year. This recent episode reminded the world of Samsung’s grasp over South Korea’s economy. Samsung’s revenues alone accounted for 23 percent of South Korea’s GDP in 2014 and Samsung Electronics’ mobile devices make up roughly 2 percent of the country’s exports. Samsung’s global recall, due to its impacts on the South Korean economy, functions as a case study for chaebols – large South Korean corporations – and their overall influence on the country’s economy and politics. Although the South Korean government has attempted to limit the growth of chaebols in recent years, this article will argue that it is in the country’s best interest not to target its strongest economic assets.
The term chaebol (재벌) is literally translated as “wealth clan” but is used in economic discourse to represent South Korean conglomerates such as Samsung and Hyundai. However, chaebols are much more than mere corporations; they are family-owned and operate under patriarchal dynastic structures that laud nepotism. This characterization of corporate power often proves controversial, as it invokes sabotage, intense sibling rivalries, and intra-family lawsuits. However, despite such consequences, chaebols continue to play a dominant role in South Korea’s economic, political, and social culture.
According to Professor Amit at the Wharton School at the University of Pennsylvania, the eight largest chaebols (Samsung, LG, Hyundai, Kia Automotive Group, SK, GS, Lotte, Hyundai Heavy Industries, Hanwha) are responsible for approximately two-thirds of South Korea’s economic output, a remarkable feat considering the country’s $1.3 trillion economy. Moreover, Samsung’s role in the daily lives of Koreans extends so far as to make it possible to live solely depending on Samsung products. From the Samsung Medical Center to Samsung housing, Samsung-owned universities to Samsung life insurance, Samsung electronics to Samsung’s own amusement park, the conglomerate is an undeniable and dominant influence on every aspect of Korean lives.
Although chaebols seem to be a ubiquitous presence in South Korea today, they are a relatively recent component of the economy. Chaebols were first founded and flourished under President Park Chung-hee’s administration during the 1970s. President Park transformed South Korea into a “developmental-state” and helped found chaebols to spark the nation’s economic growth. While there certainly was cooperation between Park’s administration and the private sector through government loans and tax cuts, the president also used intimidation and threats to achieve his economic goals. For example, under Park’s orders, Samsung was forced to cede its bank, a broadcaster, and a fertilizer manufacturer to the government. Despite tensions, President Park’s belief in the importance of chaebols fueled the establishment of numerous new conglomerates. Under Park’s support, Hyundai, which had started as a small-scale construction firm, was hired to build the 248-mile Gyeongbu Expressway that connects Seoul to the country’s southernmost city, Busan. In fact, Park’s relationship with chaebols is often credited with initiating the “Korean Miracle.” South Korea, a country that had a per capita income of $67 in 1953, is now predicted to surpass France and Japan’s average income by 2018. The rapid transformation of South Korea’s economy has merged the nation’s success and chaebols’ success in peoples’ minds – an assumption that has made the prosperity of chaebols a national cause.
Decades later, however, the once-loved chaebols are now castigated for amassing too much power and contributing to the wage gap in Korean society. The conglomerates’ characterization as being privileged, imperious, and out of touch with the public has culminated in a populist opposition movement. This populist outrage has manifested itself in the political scene, where many politicians and prosecutors have attempted to pass anti-chaebol acts to limit the conglomerates’ expansion. Current president Park Geun-hye — ironically the daughter of President Park Chung-hee, the man who had helped found the conglomerates — even promised to challenge the growth of chaebols in her main presidential campaign platform. Of the several policies that have been passed against chaebols, the most noteworthy are the 1984 act, which controlled bank-lending to the companies, and the 1987 Fair Trade Act, which prohibited direct shareholding among companies that belonged to the same chaebol. Although the growing wage gap and the country’s evident financial dependence on chaebols are both understandable causes for concern, the government’s aggressive targeting of conglomerates will eventually be detrimental to South Korea.
There are three primary reasons the South Korean government shouldn’t push policies to target chaebols. First, the Korean business realm lacks a tradition of entrepreneurs who are willing to risk their careers for the sake of innovation. Yoon Seong-hoo corroborates such claims in his article for the Korea Times in which he criticized Korean culture and the education system for inhibiting creative innovation. Chaebols, with their substantial capital and resources, have historically acted as the country’s main innovators. As conceded by Sung-Soo Seol, the leader of the Seoul-based Hi-Tech Business Research Institute, South Korea cannot survive without innovation, which is crucial to future economic growth, and the restriction of the chaebols would only slow the country’s innovative surge.
Second, chaebols hire millions of employees who in turn spend their incomes on local retailers and smaller businesses. The intrusive policies of the Park government have significantly reduced the chaebols’ prosperity and efficiency and affected the economic welfare of the entire nation.
Finally, the Korean Banking Act has prohibited chaebols from owning more than 9 percent of financial institutions. Although this policy may initially seem commendable, in reality, the act has only led to unintended negative effects. Because non-chaebol firms in South Korea are financially incapable of purchasing shares, the majority of Korean bank shares are now owned by foreign investors. The government, rather than target the country’s conglomerates, should cooperate with the companies to re-localize some of the nation’s bank shares. Professor Amit aptly summarizes his arguments against anti-chaebol legislation: “The presidential candidates, in their effort to win [the] election are threatening to kill the goose that continues to lay South Korea’s golden eggs.”
Furthermore, according to the Organization for Economic Co-operation and Development (OECD), the government’s anti-chaebol policies have only exacerbated political corruption; the policy-makers’ increasing negative treatment of chaebols has only incentivized companies to bribe and exercise their influence over politicians. Growing political ties between chaebols and political parties have indeed propagated South Korea’s corruption, which was quantified at 56 out of 100 Transparency International points last year. In fact, the corrupt ties between the government and the private sector culminated in President Park Geun-hye’s most recent scandal. Commonly referred to as “Choi-gate,” President Park was recently exposed of relying on her friend and mentor Choi Soon-sil for spiritual and political guidance. Not only is Park accused of sharing confidential documents with a non-government official, but she is also being investigated for helping Choi embezzle millions of dollars from chaebols. The claim asserts that Choi capitalized on her close ties with the president to allocate funds from large conglomerates to her very own foundation. Upon such allegations, President Park’s popularity fell to a record low of 5 percent as hundreds of thousands of South Koreans protested and demanded her resignation. However, this scandal mainly serves to show that with increasing anti-chaebol policies, political corruption has worsened — as evidenced by the last 4 presidencies, which have all been tainted by bribery scandals and stock manipulations.
While chaebols should not remain unrestrained in the South Korean economy, the government should lessen its restrictions on them. To address populist concerns, policy-makers should properly enforce and maintain the Fair Trade Act of 1987, which if fully enforced has enough power to limit chaebols from creating unfair economic advantages against smaller firms and businesses. In fact, in 1996, a provision was added to the Fair Trade Act that prohibited the chaebols’ ‘undue provision of money.’ It was under this provision that the Korea Fair Trade Commission was able to conduct three rounds of investigations on the chaebols: in the first round, chaebols were fined 72.2 billion won, in the second, 20.9 billion won, and in the third, 78.9 billion won. Even as lately as 2013, the Korean Fair Trade Commission added new amendments to the Fair Trade Act, increased the criminal referrals for violations of the act’s policies, and expanded the authority to request criminal referral to three additional government agencies to facilitate greater enforcement. Such provisions are sufficient to facilitate small business growth without impeding the conglomerates’ prosperity. Excessive politically-motivated attacks on chaebols are only proving detrimental to South Korea’s economic growth.