South Korea’s economy has a highly developed mixed economy. By nominal GDP, the country has the 4th largest economy in Asia and the 10th largest globally. However, there is something special about the South Korean economy that distinguishes it from others: it is dominated by chaebols. Understanding these chaebols is a necessity for anyone who aims to understand South Korean capitalism and society.
The word ‘chaebol’ (재벌) translates literally to ‘rich family’ or ‘money faction’. It refers to large, diversified industrial conglomerates that are controlled by individual people or families in South Korea. As a result of the chaebols’ meteoric rise in the 1960s, they now wield unprecedented power in South Korea, and the extent of their market concentration is clear: as much as 80% of South Korea’s GDP is derived from chaebols. One need look no further than Samsung, the largest of the chaebols, for more evidence of this fact: it is solely responsible for 20% of South Korea’s exports. This article will aim to historically contextualise their existence, examine their role in South Korea today, outline the main criticisms that they receive, as well as speculate as to their futures.
As mentioned above, the current role of chaebols in South Korea’s economic and political spheres is colossal. This is made visually evident in Figure 1, which shows the revenue generated by the top 5 chaebols as a percentage of South Korea’s GDP in 2019.
In order to understand the role chaebols play in the South Korean economy, one must first start by analysing the historical development of South Korea and the role of chaebols in this process. South Korea experienced a period of rapid economic growth from the 1960s to the 1980s, after General Park Chung-Hee became president in 1961. This period is known as the ‘Miracle on the Han River’ (coined after West Germany’s ‘Miracle on the Rhine’).
General Park instituted a protectionist economic policy with the aim of reactivating internal markets to increase economic growth. With a large focus being placed on development, South Korea pursued a policy of export-oriented industrialisation that was followed; the government closed entry of almost all foreign products into South Korea (with the exception of raw materials) closes, enacted agrarian reforms, and nationalised the financial system. However, the vanguards that truly enabled this Miracle on the Han River were the chaebols. They began to dominate the domestic economy in the 1960s and 70s with the aid and incentivisation of the state, who offered tax breaks, cheap (or free) financing, guaranteed loans, and virtual immunity from prosecution. This government-chaebol cooperation was crucial to South Korea’s growth; the government was intent on reducing the country’s reliance on consumer goods and worked with the chaebols to realise this intention and other industrially expansive plans. The chaebols played key roles in developing new industries and markets, as well as in export production. As a result of the increasing ubiquity and prevalence of the chaebols, South Korean workers began to see a rise in real wages and an improvement in living and working conditions, which in turn perpetuated economic growth. The South Korean economy grew by an average of nearly 10% each year, from $2.7 billion in 1962 to $230 billion in 1989, and eventually to $1 trillion in 2006. Figure 2 provides a visual demonstration of this, showing the meteoric rise in South Korea’s GNI per capita from 1952 to 2016.
There are three main factors that determine whether an institution is a chaebol or just a large conglomerate.
First, chaebols are dynastic in leadership and structure. The chairman serves as an omnipotent patriarch, wielding absolute power over the chaebol and its subsidiaries. Within chaebols, key managerial positions are almost always given to relatives of the chairman, and the succession of leadership positions is hereditary. For example, LG Electronics’ current CEO, Koo Kwang-mo, inherited the shares and position from his late father and former LG chairman Koo Bon-Moo after his death.
Second, chaebols must have businesses in a minimum of two disparate areas. Samsung Group, for example, is primarily known for Samsung Electronics (its flagship), but owns a huge number of subsidiaries that operate in sectors ranging from life insurance to shipbuilding.
Third, chaebols almost always have complex cross-shareholding structures that ensure ownership and control are maintained by the ruling family. As summarised by Park Sang-in, a professor at Seoul University, “…the chaebol is compromised of multiple companies with robust internal transactions, all controlled by a single, near all-powerful chairman that acts as both manager and the de-facto owner of the entire enterprise.”
The most frequent criticism levied at chaebols concerns their monopolistic behaviour. To this day, chaebols maintain dominance across all industries. They have achieved economies of scale to a degree that makes it incredibly difficult for startups or SMEs to overcome the high barriers to entry. These companies are often acquired by chaebols, further perpetuating the latter’s economic dominance. Chaebols, as part of their preferential government treatment, are often offered political immunity when faced with legal troubles. This is the case for both the company as a whole and the individuals within it. The Korean judiciary system has been notorious for its lenient rulings toward chaebol executives. Its approach is known as the “three-five rule,” which refers to a three-year prison sentence whose execution is suspended for five years and then exempted if no further violations are made by the individual. This sentencing method is applied solely to members of chaebol families. It’s clear, therefore, that the extent to which the government is willing to support chaebols is not limited to the economic level.
What of the future of chaebols in South Korea? Contrary to one’s initial conception of chaebols’ success and prevalence, recent financial statements actually show that chaebols are slowly losing power. This is due to either international competition, or internal disruptions from newly emerging startups, which, against odds, are surmounting the high barriers to entry in their chosen markets. For decades, there has been a push in South Korea for the government to limit these chaebols’ power, thereby ending their monopolies and democratising power and wealth. However, only time will tell whether this goal will become a reality.
etonomics.com 