Major Characteristics of Korean Economy Focused on Pre-Crisis Period

Corporate Structure Led by large enterprises with chaebol system.  Small number of large conglomerates (groups) composed of many enterprises in diverse sectors.  Group enterprises are interlocked thru complicated ownership structure, but ultimately controlled by a family. Chaebol system helped to nurture key enterprises within the group thru cross-subsidization.  An organizational response to underdeveloped capital market, labor market.- efficient at some stage. eg. Hyundae Motors, Samsung semi-conductor, etc.  Potentially dangerous practice. High debt ratio (debt/equity).  Expansion of the firms depended on bank loan (in many cases, sponsored by government).

Financial Structure Major banks controlled by government.  Special banks (owned by state), commercial banks (joint- stock company, but controlled by government)  Shareholding limit strongly enforced, forbidding the existence of controlling shareholder.  Top bank officials appointed/dismissed by government. Many non-bank financial institutions (secondary financial institutions) owned & controlled by chaebols.  Many kinds, such as merchant bank (specializing in short- term finance), security company, insurance company, etc.  Diverted client’s saving (or foreign borrowing) for loan to group companies- potential threat to financial market stability.

Strong Influence by government Government led the process of economic development until the 1980s.  Attempt to adjust (upgrade) the industrial structure over time. <cf: market Main tool for industrial policy: credit rationing.  Strong government influence on bank’s loan decision.  To the specific sectors and specific companies.  Non-performing loan (NPL) accumulated for most Korean banks over a long-period.  Frequent corruption/scandal. Triangle structure (of gov’t- bank- chaebol) formed, as leading entity of Korean economy.

Foreign economic relations Strong emphasis on exports.  Export performance: major criterion of bank loan decision. * contest, not-market competition.  Export/import credit & tax incentives widely utilized. Foreign capital actively utilized.  Mostly, foreign loan channeled to chaebols. Foreign debt accumulated to a substantial level.  FDI was rather discouraged, mainly for protecting domestic companies (mainly, chaebol). Opening of financial market delayed, but accelerated in 1990s without proper preparations.

Assessment of Performances Succeeded in “compressed” economic growth.  Achieve high & sustained economic growth for a relatively short period.  Tried to follow Japan in many aspects. Economic/social problems were accumulating behind the rapid economic growth.  Weak supervision of financial sector with NPL accumulating, over-investment in some sectors, weak disciplining of failed firms, etc  Widening gap in wealth distribution, corruptions, environmental pollution, etc.  Rampant speculation on real-estate (land, housing).  Democracy postponed, with some human rights abuse.  Low respect to the wealthy people.