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.
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.