The South Korean Chaebol System - Essay Example

The South Korean Chaebol System From the 1970s to the 1990s, South Korea has experienced an unprecedented economic growth never before seen in its history, which many eventually called as one of Asia’s economic miracles. The Korean economy has grown drastically during the last three decades, characterized by the annual gross national product (GNP) growth rate of 9.4 per cent on average from 1963 to 1993 – the fastest in the whole world compared with either the developing countries in the same period or the developed countries in the nineteenth century (their early developing period). (Shiba and Shimotani, p. 31) (See Appendix 1) The chaebols or the chaebol system is seen as the main driver for this economic miracle. This paper will explore the advantages and disadvantages of chaebols, in the context of the political and legal aspects of the PESTLE framework. It will be investigated by emphasizing how such factors influenced the economic development of South Korea and how it affects the current economic policies and prospects especially concerning competition and its international competitiveness. A Background on the Chaebol Concept and its Development The chaebol is the leading type of business group in South Korea. It can be defined as a business group which is owned and controlled by a person and that person’s family – a definition that coincides for the most part with Morikawa’s definition of zaibatsu, which is that the business group exclusively owned and controlled by the family’, and probably also fits the rest of the definition, ‘diversified industrial firms’, since it is a business group. (Shiba and Shimotani, p. 31) The chaebol concept encouraged the formation of conglomerates under a single holding company, usually controlled by a family. It was fashioned after the Japanese keiretsu. However, unlike the latter, chaebol’s do not have their own financial institutions and that they require the government’s approval of financial backing since South Korea’s banks are nationalized. (Dubois, p. 42) From the late 1950s it has emerged due to favorable import license concessions, access to scarce foreign exchange and governmental properties seized from the Japanese formed part of the Korean state policy. Samsung, Korea’s oldest chaebol, and the four other biggest conglomerates, were established during this period. It was in 1960s when the chaebols forged its strong partnership with the government. The Korean government identified talented entrepreneurs and systematically sponsored them by credit, trading licenses, tax advantages, and other measures. (Richter, p. 73) The nature of this alliance between the state and the chaebols is fundamental in the Korean impressive economic performance seen from thereon. The government support, encouragement and intervention resulted to what was called as the guided economic development wherein the government involvement enabled chaebols to monopolize spheres of activity and accumulate capital in order to finance diversification of production. According to Kong, democratization and economic liberalization policies did not break the interdependence of state and chaebols and that it even had the effect of strengthening the chaebols and generating new forms of collusion. (p. 19) By the 1980s the top ten chaebols alone held 25 percent of Korea’s manufacturing industry and the country’s economy became heavily dependent on these huge conglomerates as chaebols expand and developed sectors such as shipbuilding, heavy engineering, consumer electronics and, more recently, automobiles. (Channon, p. 35) (See Appendix 2) An underlying issue in regard to the chaebol-government alliance is the fact that such relationship has been institutionalized, characterized by political and legal foundations. It underscores how the economic sector in Korea is integrated in the political sphere or vice versa. This is highlighted, for instance in the way chaebols gain advantage, say, in the aspect of competition. The Advantages of Chaebol in the Korean Economic Environment Chaebol as a favored player by the government in important industries such as the heavy and chemical industries, enjoyed oligopoly rents and received preferential policy loans at subsidized interest rates. Ideally, bigger chaebol, with good track records, were regarded as much more reliable than small/medium size enterprises, by bureaucrats who were afraid of risk and preferred visible quantitative growth. (Lee 1997, p. 38) Since the Korean government controls the banks, chaebols benefit immensely from being prioritized in financial aid – in being granted loans and international borrowings. The loans offered by the government had two attractive conditions: they were relatively long-term and were at low interest rates. In addition, the loans were provided at a favorable term, and a period of grace for their repayment is sometimes granted and that in the case of international borrowing – the case of aid money borrowed on foreign exchanges – it was loaned out at a rate between 5 percent and 12 percent per annum for a period between 8 and 20 years, and is repayable in equal installments, in local currency. (Lee, p. 38) Indeed, in a study from 1975 to 1984, it was found that chaebol performed better than independent Korean firms. (Haggard, Lim and Kim 2003, p. 113) Like the keiretsu and, its predecessor, the zaibatsu of Japan, this Asian economic model has facilitated and driven the explosion of growth, unparalleled among countries across the globe regardless of their category. The reason for this is simple, there was an economic system characterized by a partnership between a strong government and carefully selected successful entrepreneurs that has brought about increased productivity, innovation and sustained ambition. Such system worked as manifested by the rapid industrialization and wealth generation in South Korea. It is for this reason why chaebol still dominates the Korean economy as well as the related state policies today. The Criticisms of Chaebol that highlight its Weaknesses Although the chaebol is seen as major contributor to the South Korean economic miracle, many also see them as negative forces, which sometimes have bearing or directly responsible for major economic crises that have hindered the momentum of the Korean economic performance. One of the most important examples of this is the state-chaebol relationship in itself. Kong argued that the ideology and the interests behind the state-chaebol relationship are also responsible for the malpractices, such as the high levels of business concentration, wasteful competition, corruption, bias against the non-chaebol sector, among other factors that render the Korean economy so vulnerable to externally induced shocks. (p. 19) The close relationship between the state and the chaebols encouraged widespread corruption and it provided the chaebol with ready access to state supports in times of crises. The allocation of government resources, for instance, in the drive to support chaebol, was primarily undertaken based on personal discretion and bias and were largely made in the spirit of the priority system. Lee explained that the eligibility of applicants was thoroughly examined by bureaucrats, who were relatively freer from external pressure in decision-making, and, hence, susceptible to bribes, patronage and malpractice. (p. 26) This situation has permeated and over time, the level of insolvent debt held by Korean banks and the chaebol increased considerably. During the 1997-98 Asian economic crisis, chaebol was widely blamed in Korea. The chaebol’s operations appeared too vast and ill-focused, their debt too huge, and their profit too slender, eventually threatening their survival and the stability of the Korean economy in general. When the stability of the Korean won struck the South Korea during the Asian crisis, it severely affected the chaebol and the Korean economy because the collapse of the currency increased the level of international debt to the extent that many chaebols were unable to meet their debt payments. Richter further explains this in his use of pre-crisis Samsung as an example – a chaebol that controlled about sixty subsidiaries extended across ten industries ranging from electronics to newspapers (See Appendix 3): All the subsidiaries share a web of cross-shareholdings and overlapping commercial relationships that are difficult to localize. Some of the core firms…even form mini-chaebol within the larger corporate structure. In pre-crisis Korea, Samsung Electronics had about 100 affiliates of its own. (p. 74) The problem with the above situation is that the chaebol has been overstretched. The Asian economic crisis has, particularly, has severely affected this system that nearly toppled the chaebols and the Korean economy as a whole. This experience highlighted the disadvantages of the chaebol and its penchant for diversification and the overstretching of its resources. Haggard, Lim and Kim underscored in their analysis that in the 1993-1997 period the inefficiencies in the chaebol’s way of doing business due to excessive diversification, crony capitalism, among other factors, were more serious than its presumed advantages. (p. 113) Chaebol and its Role in the South Korean International Competitiveness Under a 1998 agreement with the International Monetary Fund for economic aid, South Korea was required to open its financial and corporate sectors to foreign investment. (Dubois, p. 42) A series of legislations have been enacted for the purpose of achieving this pledge. However, the democracy in South Korea and the well-entrenched power and influence of the chaebol makes it hard for the emergence of competition or new entrants to the Korean market. Rather than promoting competition, globalization, the free market system and liberalization today has actually intensified the domination of chaebol in the Korean economy. Instead of the increased competition, the current trend actually intensified the chaebol influence. Kong posited that, “less constrained by state power than before, the chaebol took full advantage of the financial liberalization measures of the 1990s.” Indeed, by doing so, the chaebol deepened the traditional weaknesses of the Korean economy such as the disparity between the chaebol and non-chaebol sectors (including foreign companies), high debt-equity ration, heavy international exposure, dependence on Japanese imports, and so on. It is helpful to emphasize that the government perceives chaebols as its own creation and perhaps pivotal to the security of the state, hence, it is viewed as public entities. What must be underscored here is that despite the state rhetoric on competition, Korea’s policy on chaebol is an offshoot of the machinations of political economy rather than one aspect of industrial policy. As a result, government policy on chaebols and the Korean market as a whole has not only produced many distortions and inefficiencies in the market, but also, it has caused the inconsistencies in several important economic policies such as financial policy, privatization of public enterprises, deregulation, and, most importantly, competition policy and environment. These factors are adverse to South Korean international competitiveness. Conclusion Unarguably, chaebol has contributed so much to the industrialization and the emergence of South Korea as a wealthy country. However, the Asian financial crisis has highlighted several of the chaebol system’s many vulnerabilities. For instance, the strong support it enjoys from the government has been abused to the point that cronyism, patronage, unethical practices have become the culture between such relationship. This has been aggravated through the weakening of the South Korean political system and institutions through the democratization and the liberalization phenomena. These factors reinforced the chaebol system, further entrenching their influence, values, practices and domination on the economy. Its standing as a favored partner of the government, led to complacency and recklessness. In the end, it has brought about the string of bad business decisions that has led it to its insolvency and near collapse. It must be underscored that South Korea is still within this slow process of realization that the chaebol can do a lot of harm in its economy today. Critical Reflection An examination of the advantages and disadvantages of the chaebol system is important in the discourse of competition in the South Korean market as well as the country’s international competitiveness because, presently, chaebols are dominant players not just in the economy but also in the political policymaking. This has been sufficiently supported by the body of literature currently available, both statistically and theoretically. The sources I have used are mostly books that are recently published. The sheer number and diversity of these materials underscore the breadth of the arguments raised as well as the elimination of possible bias on my part in this paper’s investigation and analysis. Furthermore, I made sure that both sides of the arguments in the chaebol discussion are sufficiently outlined. Finally, as previously stated, I have tried to confine the discussion of this paper within the Political and Legal parameters in the PESTLE framework. The discourse on chaebol is dominated by strong political and legal variables that have emerged and took root in South Korea for decades. The fact that the entire system has been successful explains its importance in the general policies currently in effect and those to be drafted today and in the future especially in regard to foreign investment. However, it is also difficult to leave other elements such as the economic and the social behind. This paper, for instance has emphasized that there is the interplay of economic and political forces in the creation and existence of chaebol. With all these things considered, this paper found that the chaebol reflects the unique South Korean economic landscape and that it plays a significant part in the country’s strategy in dealing with international competition as well as its future prospect in the wider global economy. References Channon, D 1999, The Blackwell encyclopedic dictionary of strategic management, Volume 2. Malden: Wiley-Blackwell. DuBois, J 2004, Korea. 2nd ed.. Marshall Cavendish. Haggard, S, Lim, W and Kim, E 2003, Economic crisis and corporate restructuring in Korea: reforming the chaebol . Cambridge University Press. Hillebrand, W 1996, Shaping Competitive Advantage: Conceptual Framework and the Korean Approach. London: Routledge. Kong, T 2000, The politics of economic reform in South Korea: a fragile miracle. London: Routledge. Lee, Y 1997, The state, society, and big business in South Korea, Volume 6. New York: Routledge. Richter, F 2002, Redesigning Asian business: in the aftermath of crisis. Westport, CT: Greenwood Publishing Group. Shiba, T and Shimotani, M 1997, Beyond the firm: business groups in international and historical perspective. Oxford: Oxford University Press. Appendices Appendix 1: South Korea’s GNP (Hillebrand, p. 130) Appendix 2: Top 10 Chaebol 1960-1987 (Lee, p. 26) Appendix 3: Number of Subsidiary Firms of the Top Five Chaebols (Shiba and Shimotami, p. 32) Read More