South Korea has been one of the world’s greatest economic success stories, emerging from rags to newfound riches in less than half a century.
Much of that success is thanks to the country’s giant, family-run conglomerates, known in Korea as chaebols, which were able to grow rapidly in the 1960s and ‘70s because of easy access to government-backed credit and relatively little competition.
Three of the biggest and best known examples of chaebols are Samsung, SK Group and Hyundai.
Despite the role they played in literally pulling Korea out of poverty, the chaebols have become targets of harsh criticism in recent years. They’ve shared the blamed for the widening wealth gap in Korean society, as youth unemployment has risen and the elderly without family have struggled to survive on pensions which amount to only about a quarter of the country’s minimum wage.
The controlling families behind the chaebols have also come to be seen as wielding an inordinate amount of political power despite the fact that they represent only a tiny minority of the country’s population. Their cause also hasn’t been helped by the fact that but for presidential pardons, a number of high-profile heads of chaebols would be in prison now thanks to convictions for fraud and all manner of misdeeds over the past couple of years.
Internationally, the chaebols tend to be viewed with a fair degree of suspicion as well. Despite the fact that the chaebol families typically own less than 5 percent of their conglomerate’s equity—the average is actually closer to 3 percent—they control their companies with an iron fist, aided by convoluted corporate structures and less-than-favorable shareholder rights laws.
As a result, since a chaebol’s fortunes often rise and fall with one man, the shares of most Korean conglomerates find themselves subject to the Korean discount—a stubborn undervaluation relative to both asset valuation and earnings growth—stemming from that concentrated risk.
So it’s little surprise that the role of chaebols in the Korean economy was a major issue in the recent Korean elections that saw Park Geun-hye, a well-known conservative and daughter of Korean strongman Park Chung-hee, elected the country’s new president earlier this week.
Despite her conservative and pro-business credentials, Park actually ran on a platform of economic liberalization characterized by support for the country’s still nascent services sector. While employing more than 90 percent of Koreans, services make only a small contribution to the country’s economic growth. She’s also expected to raise taxes, cut university tuitions and expand Korea’s health care safety net.
While her father played a starring role in the creation of chaebols, Park has also pledged stricter enforcement of “fair competition” regulations in the country—a clear shot across the bow of the conglomerates—and to not intervene in decisions taken by Korea’s courts against chaebols and their managers.
While she didn’t go nearly as far as her liberal opponent Moon Jae-in who hinted at possible breakups, Park clearly recognizes that Korea’s economic fate is largely contingent on developing its domestic economy.
Much like China, Korea has long been a manufacturing powerhouse focused on the export sector. But as labor costs have risen in the country, Asian currencies have appreciated and the dollar has declined over the past decade, helping other Southeast Asian upstarts assume the role of workshop of the world.
Consequently, many Korean exporters have lost their competitive edge and export growth has slowed markedly, particularly in the areas of electronic components, LCD panels and steel. As those product categories have become increasingly competitive, companies (as well as countries) without a cost advantage are quickly becoming also-rans.
Park recognizes these realities, as does the market: the Korean KOPSI Index has drifted aimlessly this week. However, the simple fact is the Korean economy will not turn on a dime.
I’ve seen quite a bit of punditry questioning whether Park might prove bad for big business in Korea. But while Park has pledged a crackdown of sorts on the chaebols, so far all she has really proposed is that existing laws be enforced. And greater support for small- and medium-sized companies in Korea isn’t likely to come at the expense of the chaebols.
Moreover, even if Park raises taxes, Korea still has one of the lowest corporate tax rates in the world. No one likes taxes, but any increase in the country wouldn’t be a significant hit to its global competitiveness.
The upshot? While meaningful economic reforms would be a huge benefit over the long term in Korea, for now it’s business as usual there.
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