JENNIFER MOORE The Chaebol and their Role During the Growth, Crisis, and Restructuring of South Korea

Introduction 1960 GDP: $ 2.36 billion 2013 GDP: $ trillion GDP per capita PPP: $ 32,798

Introduction

Purpose To understand the chaebol’s role in the emergence of the Korean economy, its contributions to the financial crisis in 1997, and the subsequent restructuring that ensued as a result.

Chaebol Structure Three Business Traits: 1. Composition of many subsidiaries branching out into a multitude of varied industries 2. Ownership and control is placed solely on a single family of blood relation 3. National income in disproportionately composed largely of business group revenue

Management style is based on FARS, which is a system in which upmost importance is placed on the relationships with: Family Alumni Region State

Corporate Governance Defined as how an enterprise distributes ownership and control within their company Unique to the chaebol is autocratic control of the firm by the family with very little shareholding  Interlocking and cross shareholding

SOURCE: Murillo, David & Sung, Yun-dal. (2013). Understanding Korean Capitalism: Chaebols and their Corporate Governance. ESADEgeo-Center for Global Economy and Geo-Politics

Three View Points of the Chaebol’s Role 1. Korea, INC. 2. Crony-capitalism 3. Symbiosis

Korea, INC. { Government holds the majority of power in directing business } Evidence for this view:  Creation of the Economic Planning Board  Excessive government subsidization of select chaebols  Development of the notion of government backed loans  Lead to problems when government allows firms to default

Crony-Capitalism { Usurpation by firms of the government for personal gains } Evidence for this view:  Change in chaebol-state relationship in 80’s  Liberalization of financial sector  Popularity of non-bank financial institutions (NBFIs)  Instances of fraud, rent-seeking, and moral hazard  The chaebol problem

Symbiosis { The state and chaebol benefiting through usage of each other } Evidence for this view:  Previous two views to simple of an explanation  Four founding rules of Park 1. Support of entrepreneurs with history of risky behavior 2. Built a structure that catered to oligopolistic competition 3. Heavily subsidized resources 4. Limited political involvement of business  Monthly Export Promotion Meeting  Businessmen directly able to influence direction of policy

Financial Crisis 1997 Contributing Factors:  General structural deficiencies  Market dominance by a few chaebols  Reliance on debt financing  Excessive chaebol diversification  Reliance on government guaranteed loans  Poor corporate governance

Restructuring the Korean Economy Broad Reforms in these Areas:  Dissolution of non performing loans (NPLs)  Reorganization of company management of both conglomerates and banks  More supervision and oversight regulation in both the private and public sector  Failing firms and financial institutions were liquidated  Reorganization of corporate governance  Opened country to more foreign direct investment (FDI)

IMF Action Conditioned aid on the following reform initiatives:  Reforms in the financial and corporate sectors, the trade and capital account, and the labor market  Provisions for a bill creating an agency to oversee the liquidation and rehabilitation of financial institutions  Greater financial transparency  Fast track resolutions for NPLs  Allowance for foreign entry  Trade liberalization  Stop to subsidized support of corporate bailout  Reduction in debt/equity ratio

Concluding Remarks The role chaebols played was rather large in the emergence of the economy as well as in the causes of the crisis, and therefore were central to a lot of the reforms that occurred after. Despite their being 3 views on the role the chaebol played, I think it is more appropriate to consider them all being applicable, just after different times through the economy’s history.

Q/A