When the korean war ended in in 1953, South Korea was amongst the poorest of nations with an average income of less than 2 Dollar per person per week and today the country is richer than Spain, Portugal and other European nations and the per capita income of the country has risen more than 30 times since.
And the majority of this growth can be attributed to just a couple of companies that control more than 50% of everything the country produces. These companies are usually called “Chaebols” and it includes companies like Samsung, Hyundai and LG.
So, How has Chaebols played a pivotal role behind the growth of South Korea? And we will also look at the darker side of Chaebols i.e. How they have used their influence to give rise to corruption, increase income inequality and also abuse their power.
Table of Contents
- The Rise of the Chaebols in South Korea
- The Darkside of Chaebols in South Korea
- Reforming the Chaebol System
- The Chaebol Paradox:
- FAQs:
The Rise of the Chaebols in South Korea
After the Korean war (1950-53), South Korea was in ruins, its infrastructure was destroyed and the economy was shattered. Syngman Rhee, the first president of South Korea made a bold decision, instead of nationalizing the industries, as was the trend at the time across countries, he decided to auction off Government-owned factories and resources that were valued at an estimated $1.5 billion, at bargain prices.
And companies like Samsung, that were already established trading companies saw the opportunity and capitalized on it.
The Government however did not stop at cheap sale of assets to Chaebols but also incentivized them by offering heavily subsidized loans and regulations were often loosely enforced to help Chaebols grow faster.
This partnership between the government and the chaebols resulted in explosive economic growth of South Korea. With cheap money floating and the government backing them, Chaebols were free to invest heavily in specific industries and as a result, South Korea’s GDP grew at an average rate of 8-9% per year for over 3 decades.
The Word Chaebol is made from the Korean words Chae (wealth) and bol (clan) which means “clan of the wealthy”. They are massive family-controlled conglomerates that own dozens of companies across diverse industries. They saw a significant growth in the 1960’s as South Korea began to liberalize and initially focused on export of textiles and later got into defense, chemicals and electronics industries and by 1990’s also entered the high-technology industries.
Samsung, at the time used to export goods, such as fruits, noodles, dried fishes and so on and today, it is the most profitable Chaebol which is run by second- and third-generation members of the lee family and is a diversified businesses which include electronics, insurance, ships, luxury hotels, hospitals, an affiliated university and also an amusement park.
The Darkside of Chaebols in South Korea
The very elements that lead to the rise of Chaebols – government support, access to cheap capital, and dominance in key industries has today become a double-edged sword that has led to unintended consequences.
Chaebols were responsible for over half of South Korea’s exports by the 1990’s and they started monopolizing all the industries in South Korea as they easily undercut competitors on price, making it nearly impossible for small players to compete.
The close relationship between the government and chaebols had also raised concerns about crony capitalism, a concept where certain businesses benefit by having close relationships with the government which results in getting tax breaks, legal permits, government grants and so on often at the expense of other businesses.
And even the success of Chaebols was not shared equally by everyone, while a selected few at the top i.e. the founding families of companies like Samsung and Hyundai made a fortune, others struggled.
Many Chaebols started hiring workers temporarily or on contracts to cut costs and as a result wages stagnated, cost of living rose rapidly and the gap between the rich and the poor began to widen so much that by the late 1990s, the top 1% of income earners in Korea controlled over 25% of the national income, which resulted in a growing public discontent.
Chaebols had diversified aggressively into unrelated businesses relying on the cheap loans and accumulating massive debt and this house of cards began to wobble with the arrival of the 1997 Asian Financial Crisis.
And when foreign capital dried up and interest rates soared, the Chaebols became vulnerable, their heavy debt burden became unsustainable and several Chaebols faced bankruptcy and this crisis triggered national economic meltdown which highlighted the dangers of an overly concentrated and debt-fueled economic model.
The Asian financial crisis was a wake up call for South Korea and made it clear that the Chaebol system needed reform to ensure sustainable and equitable growth for all.
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Reforming the Chaebol System
After the Asian Financial Crisis exposed the vulnerabilities of the Chaebol system, the government tightened its grip on chaebols,
- Debt-to-equity ratios were capped to prevent excessive risk-taking as previously, chaebols had borrowed heavily to fuel rapid growth, leading to many bankruptcies when the crisis hit.
- Limits were placed on cross-shareholdings which prevented subsidiaries of Chaebol could not hold significant shares in each other as this practice made it difficult to regulate them.
- Government had further cut down subsidies and passed laws to improve the rights of minority shareholders, as previously the minority shareholders were at the mercy of controlling families. For example, these reforms mandated independent board members who weren’t affiliated with the founding family.
However, these reforms weren’t without their downside, as chaebols had become more cautious about debt and streamlined their operations, it led to large scale unemployment and between 1997 and 2000, South Korea’s unemployment rate more than doubled.
The Chaebol Paradox:
So, should the government prioritize a few powerful national champions, like Samsung and Hyundai, or create a more level playing field for smaller businesses?
Supporters of the Chaebol system argue that it is because of these big corporations that today South Korea is competing on the global stage as they have the resources, research capabilities, and global reach to compete effectively and bring prestige and export revenue to Korea whereas the critics argue that they hinder the competition which results in lack of creative new ideas, which further hinders innovation.
But this debate will continue no matter what, but one thing is for sure that even today Chaebols play a dominant role in South Korea as the revenue of the ten largest chaebols in 2021 accounted for nearly 60% of South Korea’s GDP and the top 5 Chaebols taken together, represents approximately half of South Korea’s Stock Market’s value.
As of 2023, there are 82 chaebols in South Korea.