That response tells you almost everything you need to know about why South Korea was able to develop so quickly after the war. One could relate it to the Buddhist capacity for overcoming and refusing to accept one’s lot; one could also relate it to the Confucian ethic of merit and constant hard work.
Kim Dong-jin tells another very illuminating story concerning Jeong. In an interview, he asked rhetorically, “Why do you think he built six, seven, and eight dry docks at his Ulsan shipyard, when other shipyards only have one or two?” The answer was not because he thought he would need them. It was that President Park believed in shipbuilding so much that he would always give Jeong money to build another dry dock, even when one was not needed. Jeong of course wanted the money for something else, so he learned how to build dry docks more cheaply and divert the remainder into the real project.
A System That Suited Its Time
This tells us plenty about Jeong’s character, but it also reveals some of the negatives of government-mandated chaebol development. Imagine if, in your country, a privileged insider was being lent government money—and then not even spending it on the intended purpose. It sounds outrageous, and the stuff that leads to scandal and resignations.
Yet Jeong was capable enough to use these resources to great effect. Today, companies bearing the name Hyundai employ hundreds of thousands of people globally. His firm and others, like Samsung, LG, and Lotte, were at least partly responsible for South Korea’s urbanization, attracting farm laborers from the countryside to the cities. Seoul had a population of around 2.4 million in 1960 and today stands as one of the world’s true megacities, home to 10 million within the bounds of the city proper and 24 million within its metropolitan area—half the population of the country. The chaebol have changed the landscape and the way people live. There are even entire chaebol cities: the city of Ulsan developed as a place for Hyundai employees to live and work, and now has a population of over a million.
The chaebol-government compact of the 1960s and 1970s suited its time. It is not a system suited to a large, modern economy, but it did, despite its faults, enable South Korea to generate enormous economic growth and dig itself out of poverty. Exports rose from $100 million in 1964 to $10 billion in 1977, and GDP per capita went from around $120 to $1,040 in the same period. The arrangement was characterized by favoritism and “lent itself to a certain amount of corruption,” in the words of Mr. Kim, but it was also a practical solution that combined the power of the state with the profit incentive and harnessed Confucianism’s ability to bring everyone in line under their chairmen, who in turn fell in line under President Park.
After Park Chung-hee
How much has changed since the 1960s and 1970s? In legal terms, virtually everything. In the 1980s, the military dictator Chun Doo-hwan set a course of economic liberalization. A group of U.S.-trained, neo-liberal advisors in the government’s Economic Planning Board (who had been virtually ignored by President Park) were given great influence over economic policy. They dropped the kind of quantitative targets set by Park’s government (for instance, the export of a certain dollar value of products) and began reducing import tariffs, and selling off stakes in banks to private investors.
Chun was not completely above intervention, though, at least for his own ends. In 1984, according to the New York Times (March 25, 1998), Cho Bong-gu, chairman of top-ten chaebol Samho, refused to bribe Chun beyond his usual U.S.$700,000, despite being advised that a golf course or hotel would be necessary. Chun retaliated by simply handing Samho over to a rival company named Daelim (with whom he had excellent relations) and confiscating Cho’s personal assets too. Cho ended up fleeing the country.
In 1997, the Asian economic crisis broke, resulting in twenty-five chaebol bankruptcies in just one year, including that of carmaker Kia (Kia was eventually taken over by Hyundai Motor). This crisis was largely the result of decades of corporate debt addiction, which began in the 1960s, finally coming to a head. Heavily indebted Daewoo, which had once been responsible for 10 percent of South Korea’s GDP, finally went under in 1999, despite the best efforts of founder Kim Woo-choong to keep it alive by cooking the books. The reform-minded Kim Dae-jung administration, which came into power in January 1998, used the opportunity to pass laws geared towards improving corporate governance, protecting minority shareholder rights, and cracking down on corruption between politicians and the chaebol.
In recent years, Korea has continued to reduce import tariffs and protectionist legal hurdles, especially for those countries with which free-trade agreements have been signed. This means that chaebol now have to compete against foreign firms in their own backyard: Apple, for instance, sold almost two million iPhones in Korea in 2010, despite Samsung Electronics making a very similar product. Thankfully for Samsung, though, its own Galaxy S phone is so competitive that it has become a worldwide success, more than making up for Apple’s encroachment on Korean soil.
Despite liberalization, the weakening of Confucian top-down thinking, and legal changes, the chaebol chairmen still have a gigantic head start over anyone else in Korea. Groups like Samsung, Hyundai, Lotte, and LG have so much money, political influence, and sway over the media that their power is still overwhelming. Their dominance of the industrial landscape is also intact: of the top fifty companies listed on the Korean Stock Exchange, only three are not chaebol (or former state-owned firms): NHN, NCSoft, and Shinhan Bank, an old bank that was reorganized by Japanese-Koreans and brought to Korea in 1982.
Chaebols often use their dominant market power to squeeze both suppliers and consumers. Small firms that sell to chaebol complain they are simply told what price to sell at. That price will inevitably be one that enables the supplier to survive, but not actually earn enough of a profit that it can expand. For shoppers, chaebol price-fixing acts as a kind of extra sales tax. Since markets for most consumer goods are dominated by a tiny handful of companies, it is very easy for collusion to occur. In January 2012, Samsung Electronics and LG Electronics were fined for a long-running operation in which they colluded to drive up the price of computers and home appliances. Unfortunately, the total fine levied—the equivalent of US$42 million—was only a fraction of their illicitly earned profit.
Perhaps one vestige of the old system is the power of chaebol chairmen to get away with almost anything. On occasions like Liberation Day (August 15), there is a tradition of presidential pardons. In a spirit of forgiveness, thousands of convictions—usually traffic offenses—are expunged. Rarely does such an occasion pass without a chaebol chairman being forgiven for bribery, tax evasion, or even violent crime. Kim Seung-yeon of Hanwha Group was convicted of abducting and beating bar workers with an iron bar (with the help of a group of henchmen) in revenge for an assault on his son. He was forgiven on Liberation Day 2008, as was Chey Tae-won of SK Group, who had been found guilty of accounting fraud worth over a billion U.S. dollars.
The justification for such pardons is always that the economy needs these men, and that it is not good for Korean businesses that are competing internationally to be living under a cloud of perceived criminality. Of course, the best way to improve the image of Korean business would be for those convicted of crimes to serve their full sentences, in order to deter further criminality. South Korea has improved immensely in recent years as an economy, a democracy, and a rule-governed society. Yet many investors around the world do not seem to be aware of this, and part of the reason is the perception of unfairness that comes from practices like the pardoning of corporate criminals simply because of who they are.
It is to be hoped that this culture changes at some point, and that more is done to encourage real entrepreneurship in Korean society. No one should wish for the weakening of the likes of Samsung Electronics—South Korea’s flagship firm and biggest export earner as a world leader in semiconductors, mobile phones, and computers—but a more advanced economy requires a freer exchange of ideas, more competition, stronger creativity, and above all, the opportunity for those with talent to build up new businesses that can take on world markets.
For the most part, the large chaebol firms today are highly efficient companies that produce products the whole world buys: Samsung televisions, Hyundai cars, and LG refrigerators. In the long run, South Korea needs to find ways to encourage a new generation of entrepreneurs to rise up and join them rather than bow before their almighty presence.