Chaebols reforms, an ideal fraud
May 09, 2019 by Hayun Lee
Chaebol, large industrial conglomerates run and controlled by families, has become a keyword describing the South Korean social and economic landscape today.
Since the emergence of chaebols during South Korea’s guided capitalism growth era, they have dominated South Korean economics. According to Korea’s Fair Trade Commission (FTC), South Korea’s regulatory authority promoting economic competition, there are now 45 conglomerates that fit the chaebol stereotype, and the top 10 chaebols own more than 27% of all business assets in the country. The top 5 chaebols-Samsung, Hyundai, SK, LG, and Lotte-represent half of the country’s stock market’s value.
The term chaebol instantly brings two incidents into a South Korean’s mind. The first, comparatively minor incident is the 2014 December ‘Nut rage incident’, whereby Cho, the vice president of chaebol group Korean Air, ordered a plane to return after take-off and threw out the flight attendant that enraged her by serving nuts in plastic packages. This case highlights the extent of chaebol power tripping and their lawless actions.
The second incident is former President Park Geun-hye’s impeachment. On December 2016 Park Geun-hye was impeached after the Choi Sun-sil political scandal and collusions with chaebols. For this, several chaebols were charged for bribing President Park. This included Samsung’s de facto head, Lee Jae-yong, who was prosecuted and sentenced to 5 years in jail for bribery and four other offenses, but got out in six months after the court suspended his jail term.
These two recent incidents barely scratch the surface of chaebol controversies. Chaebols, by dominating the South Korean market through expansion into all fields,, including electronics, cars, food and hotel businesses, have accumulated popular discontent for years. According to studies, public disapproval of South Korean chaebols, have historical roots. The chaebols are products of almost 3 decades of guided capitalism. During Park Chung-hee and Chun Doo-hwan’s reign, the state directed capital towards select industries and companies, ensuring the development of these key industries as well as chaebol groups, to the extent one may even term Korean capitalists as “state-made men”. On the basis of this historical background, the great private wealth of chaebols is seen as illegitimate accumulation by the public. Additionally, during Park and Chung’s regime, the chaebols reaped from the military governments’ stronghold on labor policies. South Korean capitalists have in turn supported the “historical accommodation of authoritarianism”. These historical factors contribute to public distrust and aversion to chaebols.
The relationship between South Korean chaebols and the government has changed since. However, the 2017 Choi Sun-sil scandal, whereby several chaebols were pressured to donate money to Choi’s companies to curry favor with Park Geun-hye, has thrown the whole country into mayhem again.
Moon Jae-in, the incumbent president of South Korea, opportunistically tapped into this popular discontent with the policy pledge to rage a crackdown on the chaebols and pursue economic democratization. Economic democratization means that Moon will pursue economic justice-resolving inequality and narrowing the wealth gap by creating new, quality jobs and expanding welfare for the marginalized population. In his inaugural speech to South Korea’s National Assembly, Moon vowed: “politics-business connections will disappear… I will lead the reform of chaebol.”
However, chaebol reforms and economic democratization has been stalled by reality. Parliamentary and corporate opposition prevents Moon from making significant reforms to South Korea. Despite Moon’s landslide presidential election victory, his party, the Minjoo party only has 120 out of 300 seats in the National Assembly. Even with the liberal coalition formed alongside the People’s Party and the Justice Party, they lack the 3/5 majority necessary to push for legislations. Moreover, South Korean economy’s reliance on the chaebols’ export performance means that no harsh regulation will likely be imposed. Furthermore, Moon’s primary economic policy of income-led growth requires fundamental cooperation with the corporates, in order to increase employment growth.
Kim Sang-jo, head of the FTC clarified that “Chaebol reforms are never about destroying and disbanding the chaebols. Chaebol reform is about helping and inducing them to grow into important assets in the country’s economy through rules.” The FTC stresses the need to create a level playing field for small and medium-sized companies in a chaebol-dominated environment. The FTC has received some successes by pressuring chaebol groups to stop murky cross-shareholdings and pull back from unfair intragroup deals.
Chaebol reform has lost more steam due to the economic slowdown. Park Sang-in, professor of Seoul National University said, “The government should be working to reduce the dominance of these groups and lay the groundwork for fair competition…but in this regard, the government has done nothing.”
On the other hand, chaebol reform is not only enforceable through government policy, but also through public accountability. For example, in March 2019, Hanjin Group Chairman Cho Yang-ho, a chaebol, failed to be reappointed to the board of directors at Korean Air’s general meeting for shareholders. Shareholders judged that the corporate damage due to the Cho family’s illegal and controversial behavior was far too great for Cho to be trusted with governing powers. Cho is the father of the protagonist of the ‘Nut rage incident’. This case would serve as a warning to other chaebol families that their impropriety will not be unaccounted for and can have direct impact on their business reputation.
Corporate bashing and chaebol reform is a favorite policy pledge of South Korean election candidates. As unlikely as it may seem, the impeached President Park’s 2012 election campaign also included chaebol reforms. However, her presidency ended by reconfirming the collusion between politics and business.
Moon’s chaebol policies have failed to formulate in his 2 years of presidency. He has been elected on a ‘justice’ platform, vowing to bring economic justice to South Korea and finally end the deep-rooted business-politics collusion. The public will be able to judge the extent of Moon’s chaebol reform policy if he manages to not get embroiled in a corruption scandal like South Korea’s last three presidents.
So far, Moon’s economic policies are deemed a failure, his national security stance too soft. Raising the minimum wage by almost 30% since 2017 has brought hardship onto small and medium sized businesses. Moon was supposed to help these businesses compete with chaebols, but chaebol reform does not seem to be high up on his policy list.
Moon enters his third year in office this year. The third year of a single-term South Korean president has always proved to be challenging. His political leverage is rapidly squandering away with economic downturn and other scandals, evidenced by Moon’s all-time low 44% approval rate. Does Moon have enough political leverage left to pursue chaebol reform?