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Chaebol’s Economic Domination the Bane of Growing Social Disparity within South Korea

Wednesday, February 12th, 2014

Three of the most famous Korean chaebols that hold global sway across consumer electronics are Daewoo, LG and Samsung. A chaebol is a Korean term for clan-owned business that has become successful, especially as multinational companies. The term ‘chaebol’ (also spelled ‘chaebeol’) is derived from the words ‘chae’, which means wealth/property, and ‘bol’, which means clan.
Today the term chaebol is synonymous with the English word ‘conglomerate’ and also demonstrates the extent to which Korean companies have established themselves in the markets across the globe. The term chaebol first gained global currency during 1984, when it was used to exemplify the characteristics or the essence of Korea’s emerging economic growth.
The Chaebol gained their larger-than-life structure largely due to political largesse and government-backed capital. The ruling corporate families in turn quickly started cross-funding each other’s businesses, creating a niche concentration of wealth and business expertise within their family.based entities. All these factors quickly led to these companies carrying the needed leverage to enter global markets and establish themselves worldwide.
Due credit should be given to the Japanese for laying the foundation of the structural and work processes. Following Japanese withdrawal from Korea (itsimperialistic colony) in 1945, the Korean economy was in shambles. However, President Park Chung Hee, who came into power some twenty years after the withdrawal, recognized that industrialization was the need of the hour over agriculture, which was the traditional economy of the country. He, along with his government, envisioned an industrial policy that set the foundations for growth. A key factor, however, of this march to industrialization was the funding of these industrial houses. Bank loans were offered against guarantees offered by the chaebol, which soon led to them becoming a vital link and platform for all aspects of business and later the economy. In less than two decades, chaebols had grown to enormous proportions, soon playing king-maker to the very system that gave them their power . the Korean political system.Though there were public leaks of the chaebol receiving political patronage for kickbacks, especially during Syngman Rhee’s rule, the economic growth these companies were generating within the country soon put such inquiries on the backburner. However, with the onset of military rule in 1961, many chaebol leaders were accused, arrested, and had to pay heavy fines. Things changed quickly though when the government realized that they needed the support of the chaebols if they wanted to achieve the path of growth that they envisaged for Korea. This brought the chaebols back in favor and in this final stage, they reached overseas markets to soon emerge as game-changers, especially in consumerelectronics and related domains.Again in 2007, the first news of ‘corporate malfeasance’ was leaked by Kim Yong-cheol, an ex-legal honcho of Samsung Group. One of the biggest cables was that the third generation head of the group Lee Kun-he had evaded taxes and set up slush funds to bribe government officials to be spared from any indictment.The Democratic Party’s chief policymaker Lee Yong-sup said that, “Rather than complaining about chaebol bashing or waiting until they are forced to change, the chaebol would be well-advised to understand the substance of this policy and try to fulfill their social responsibility.”
Opposition echoes social unrest
However, in all this great economic growth, the South Korean society shows great disparity between the very rich chaebol and the poor workforce. In recent years, this disparity has been under open political censure, and there is an opposition leader’s claim that if they are elected to power, they will impose ‘higher taxes on the rich’.Lee Yong-sup, of the Democratic United Party, who is leading exit-polls by 5 percentage points over the present incumbent, is likely to overturn most of the unfavorable deregulation policies of the past half-decade. Lee has said that, “Chaebol must be reformed. We aim to achieve economic democratization by which large and small companies, the rich and the poor can pursue co-prosperity.”Lee added that they propose to cap investments at 40 percent of chaebol’s assets. The tax increase is likely to be around one-percent as the “tax hike on the 1 percent super-rich will give us money to raise welfare spending without raising tax on the 99 percent,” he said.However, Lee is quick to clarify that the party is not ‘anti-business’ but is only seeking to undo harmful rules of the previous regime.Another concept the Democratic United Party is likely to tackle is the ‘weak won policy’ that supports exports but restricts the growth of poor Koreans as it causes ‘higher imported inflation.’ He argues that, “The Lee Myung-bak government has carried out intervention (to keep the won down) quite a lot, but that helped only the big exporters while hurting small businesses and consumers.”Besides, the Bank for International Settlements has already provided data that clearly mark the weakening of the won by over 40 percent against the yen in only the past four years due to continued adjustments to factor in inflation. Similarly the won has weakened against the Taiwanese dollar by over 17 percent.The opposition hence seek only to address such arbitrary rules which have hurt poor Koreans. A point in example in how chaebols continue to consolidate their power was best illustrated in the case of Hanwaho Group’s head Kim Seung-youn’s trial. Kim chose to sell his company stock at a cheaper price to his sons; this is the route almost every chaebol follows, to ensure the family remains at the helm of the chaebol. Kim, the whistleblower from Samsung says that, “Deep down, chaebol owners don’t understand why they should be subject to secular law.”
Today, Korea is one of the largest economies in the world, but some of its chaebols such as Samsung or Hyundai have net profits that are almost half of the government’s entire spending power. Critics are therefore crying hoarse that Korea should show some change that will lead it to a more egalitarian society and that they will not, for the sake of reversal, scrap the “controversial free trade agreement with the United States,but would seek to renegotiate some aspects of it.” That there is unrest on this factor is repeatedly highlighted with increased public voicing of the stranglehold that chaebols have over retail business. One such recent development has been the continued penetration of Chaebol grandchildren into the retail domain business. Where earlier chaebols were into large-scale manufacturing and production, third generation chaebol are increasing investing in owning flagship stores for some of the leading brands from to lifestyle products to cafés.Today retailers across several sectors such as bakeries to coffee shops to premium range lifestyle products find that they are no longer able to run their businesses well because ‘generation Y’ chaebol owners are using their clout to edge out smaller competition, whether regarding real estate to house the business or the processes of running the business itself. This has led anti-trust officials to study in detail if chaebols are indeed proving to become ‘uncompetitive’. The Korean Federation of Small and Medium Businesses commented that, “In 2003 there were 17,000 independent bakeries, but this dropped to 3,000 in 2011. Over the same period franchised chains controlled by the chaebol have proliferated. Paris Baguette for example, an offshoot of SPC Group, opened another 300 stores last year, taking their network to over 3,000. Tous les Jours, another franchised bakery and cafe run by the CJ Group now has 1,400 stores.”
The concern raised here is whether chaebols are illegally soliciting stores that are located in prime properties at lower prices to run their chains. It has been found that most of these flagship, premium-range lifestyle and fashion products are housed in stores belonging to chaebols. Besides luxury retail, motor and automotive sectors, ‘stand alone’ retail sectors too are experiencing trouble.As if to prove the point, media reports say that, “DFMS is controlled by the great-grandsons of Doosan Group’s founder, who have the franchises for Honda, Land Rover and Jaguar. Also, offspring from the Hyosung Group’s shareholders import Mercedes-Benz and Toyota while Audi and Bentley franchises are run by sons of the Charmzone Group’s chairman.” Besides, automotive chaebols such as Hyundai continue to grow globally, with the most recent investments being in India. It has grown to be a top-ranked non-Indian auto company, second only to India’s own Maruti Suzuki. It is expecting to meet new demands in the Indian market for diesel engines (since the Indian government subsidizes diesel) by importing nearly 10,500 this month as against 7,000 previously. Similarly, chaebols have globally established themselves in local markets and continue to import from parent companies, thereby being able to maintain delivery of goods, whenever shortfalls have occurred in local markets. Therefore, the working process and the dynamism of chaebols needs to be appreciated; however, their growth in the face of killing-off all competition, in the form of local Koreans in the retailing sector, is indeed disappointing. Perhaps it is time for some changes to be introduced, if there is a political will to support the required changes.
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