South Korea’s Too Big to Fail
On March 10, Park Geun-hye was removed from her position as president of South Korea. Her ouster came on the heels of a scandal involving her close confidant who is accused of seeking bribes from chaebols, a group of family-owned multinational conglomerates that dominate the South Korean economy, to curry favor with the Park administration. Prior to the scandal, Park’s political party, Liberty Korea, had been accused of prioritizing the interests of the chaebols over the interests of the Korean people.
This controversy has paved the way for populist candidate Moon Jae-in, from the Democratic Party of Korea, to rise to the presidency. It is assumed that he will look to loosen government ties with chaebols. Recently, chaebols have come under scrutiny as many people feel that their overall size and dominance have constrained the economy. Currently, South Korea suffers from high youth unemployment, rising household debt and rising income inequality. Moon Jae-in has vowed to tackle each of these problems in addition to chaebol reform. This task may prove to be difficult as the chaebols have accumulated a lot of political clout over the years, thus he may find it difficult to pass serious reforms through parliament.
In this report, we offer a brief history on the origins of chaebols and their influence in lifting the country out of poverty. From there, we will focus on the role the Asian Financial Crisis played in changing public attitude toward chaebols and examine possible chaebol reforms. Finally, we will conclude with market ramifications.
The term chaebol means “wealth clan” in Korean. Chaebols were originally started by the Japanese during their occupation of the peninsula.1 As is typical with colonialism, Japan modernized Korea’s infrastructure to make it more suitable for industrialization. In addition to the infrastructure changes, the Japanese began financing chaebols to develop strategic sectors of the Korean economy. Most of the chaebols at the time were Japanese, but there were a few Korean-run chaebols. The most prominent Korean chaebol was Samsung (005930.KS, ₩2,297,000.00), which at the time was a trade company that shipped food from South Korea to Manchuria.2 Although the chaebols were profitable, much of the wealth generated was repatriated to the Japanese empire as a form of tribute, while most Koreans remained impoverished.
After the Japanese were defeated in WWII, they and the Japanese-owned chaebols were forced to leave the Korean peninsula. Following Japan’s departure, the Korean War ensued between regions north and south of the 38th parallel of the Korean peninsula. The war led to the destruction of much of the infrastructure built by the Japanese. In order to foster recovery, South Korean leaders emulated Japan’s economic development model and established chaebols. They established their role in the economy in 1961 when a coup overthrew President Yun Bo-seon and placed Park Chung-hee in power.