by Alexander Chang (’23) | February 3, 2023
Weighed down by the ashes of the Korean War, the largely agrarian South Korean economy entering the 1960s was anything but successful. Nearly eighty percent of the Korean populace lived below the poverty line, and literacy barely reached twenty-two percent.
But after the ironically anti-democratic May 16th Coup, the South Korean economy exploded. Guided by illiberal military policies, South Korea engaged in extensive protectionism, propping up local industries and forcing the creation of a largely export-based economy.
However, this growth was largely facilitated, planned, and guided by government oversight. Instead of waiting for market competition, government policies supported specific family-owned companies by providing tax breaks, concentrated loans, and practically free-reign over economic activity—an economic approach now termed the Chaebol (chae: wealth/bol: clans) Structure.
Chaebols spearheaded the growth of the South Korean economy, becoming notable industry names such as Samsung, LG, and the Lotte Corporation—which made their founding families obnoxiously wealthy in the process. However, their contribution to South Korea’s rise may very well have become its Achilles heel in the 21st century.
Much like American financial institutions prior to the ’08 crash, South Korea’s twenty-four chaebols generate such vast shares of the nation’s GDP—close to eighty percent—that government agencies grant chaebol families almost complete political immunity despite public backlash.
Hyundai’s Chung Mong-Koo, Korean Air’s Cho Yangho, and Samsung’s Lee Kun-hee, for instance, have been separately charged for embezzlement and tax evasion valued in total to 572 million USD, but instead of facing the years-long sentences normally associated with such crimes, all three white-collar criminals only received four years of probation. This form of sentencing follows the “Chaebol Negotiation Rule,” under which members of chaebol families facing criminal sentences are “charged” with three years of prison time but have their sentences retracted and replaced with four years of probation instead.
However, in recent years, the abuses of power committed by South Korea’s chaebols have become more brazen. In 2014, Heather Cho, heiress of Korean Air’s Cho family, attacked a flight attendant while riding on Korean Air for serving her nuts in a bag (as was customary) instead of on a plate. Beyond throwing essentially everything in reach at the attendant, she also demanded the flight return back to her gate at JFK so that she could terminate and disembark the flight’s staff. Only after nationwide protests did South Korean officials finally prosecute Heather Cho, but she nevertheless only faced less than half of her original sentence and was once again put on probation instead.
These instances, while absurdly demonstrative of the power that chaebols wield, are minor in the face of the larger economic instability they engender. While holding nearly seventy-seven percent of South Korea’s market capital, chaebols only employ twelve percent of the South Korean people, leaving the remaining small and medium size enterprises (SMEs) to employ a whopping eighty-eight percent of the market. Simultaneously, salaries from SMEs pale in comparison to figures earned while under the employment of chaebols, widening inequality substantially.
In addition, chaebols often employ ludicrous cross-shareholder structures, where family owners collectively divide up their conglomerates into a plethora of smaller firms in order to both exert complete control over their companies by strategically purchasing shares and hide the extent of businesses they own. These structures play a massive role in chaebol embezzlement and tax evasion strategies and are often the cause of nationwide economic inefficiency and oversupply. Indeed, South Korean chaebols were largely to blame for the 1997 Asian Financial Crisis’s impact on the nation, as risky investments the conglomerates made to expand cross-shareholder structures anchored the national economy.
Fortunately, South Korea’s continuing push for democratization and transparency has begun to hold chaebols more accountable, albeit slowly. However, the government still remains in a precarious position, balancing regulation and the nation’s economy. Too much oversight and eighty percent of the national economy remains at risk; too little oversight and it finds itself in the same circumstances it faced under former President Park Geun-Hye in 2017, where the president herself was found to be in the pocket of Samsung and Lotte.
As the South Korean economy shrinks for the first time in three years, the time to reconsider the nation’s economic structure will certainly be on the mind of its leaders and voters, but if they truly wish for long-term prosperity, the chaebols will need to cede the reins.
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