Will Pro-Chaebol Policy Help Revive Economy?

President-elect Lee Myung-bak, center in the front row, poses along with business tycoons including Samsung Group Chairman Lee Kun-hee for a photo ahead of a meeting with the country’s business leaders at the Federation of Korean Industries (FKI) headquarters in Yeouido, Seoul, on Dec. 28. / Yonhap

By Ryu Jin
Staff Reporter

President-elect Lee Myung-bak's power transition committee is speeding up efforts to ease various regulations on private enterprises. Largely hailed by chaebol, his ``business-friendly'' policies could backfire, however, by increasing the socioeconomic polarization.

Under the incoming Lee administration, scheduled to be inaugurated late next month, the country's economic paradigm is expected to experience a major ``U-turn'' from that of the incumbent Roh Moo-hyun administration.

Roh, a liberal politician from a poor farm family, featured prioritization of wealth redistribution over economic growth, heavier taxation, big government and restrictions on chaebol, or family-controlled business conglomerates, in his five years in office.

On the contrary, Lee who is a more conservative politician with a firm belief in the market, lays more emphasis on economic growth rather than wealth redistribution, reduced taxes and partnership with industrial giants.

One of the most drastic changes under his reign is likely to be the alleviation or even outright elimination of various regulations against chaebol such as the equity investment limit and the separation of financial and industrial capital.

Lee, a 66-year-old former corporate chief executive, has openly pledged to ease or get rid of various anti-chaebol rules and create a ``business-friendly'' environment to help reinvigorate the economy.

``One of the most urgently needed tasks to create the business-friendly environment is the reform of various regulations on enterprises,'' spokesman for the transition team Lee Dong-kwan said last week. ``So we consider a task force solely for that mission.''

He indicated that the task force would first of all focus on the abolition of the equity investment ceiling system and the alleviation of the rules on separation of financial and industrial capital.

Under the investment limit, subsidiaries of business conglomerates with assets worth more than 10 trillion won (roughly $10.5 billion) are banned from investing more than 40 percent of their net assets in other companies.

The measure was designed to stop chaebol such as the Samsung Group currently mired in a slush fund scandal from using a complicated web of cross-ownership to control their publicly traded units, sometimes damaging the interest of minority shareholders.

As well predicted even before Lee's election, the transition team made clear earlier this month that the country would now go without the equity investment ceiling system, which has been a symbol of anti-chaebol regulations over the past two decades.

Lee's economic team also said that it plans to ease the current rule on the separation between industrial and financial capital to which the outgoing Roh administration has adhered over the past five years on a gradual basis.

Chaebol are not allowed to own banks or other financial institutions under current rules, as the industrial conglomerates could utilize their financial arm as a ``private safe'' to strengthen their grip on subsidiaries.

But Lee, who met with business leaders late last month, also sided with the business community. His team is now moving to raise chaebol's voting rights in banks from the current 4 percent to 15 percent in stages, according to sources.

Warm Responses

Business circles have expressed hopes for the new administration. Large companies, in particular, expected that Lee's policies such as corporate tax cuts would help promote corporate activities in a better business environment.

And major business groups came up with aggressive investment plans for this year. A recent survey showed that the top 30 business groups are ready to increase their yearly investment by about 25 percent from a year earlier.

``It marks the first time since the 1997-1998 Asian financial crisis that the country's top 30 business groups have set up plans to increase their investments by over 20 percent,'' said an official from the Federation of Korean Industries (FKI).

Samsung Group, the country's largest conglomerate, has not finalized its investment plan for this year yet. But the group reportedly plans to invest some 25 trillion won, up 11.11 percent from last year's 22.5 trillion won.

Hyundai-Kia Automotive Group raised its annual investment to 11 trillion won, up 57.14 percent from 7 trillion won last year. LG Group and SK Group also plan to increase their investment by 15 to 25 percent, respectively.

In the meantime, the FKI said that it also decided to set up a corporate investment council, which consists of executives in charge of investment from each group, so as to ask for government support.

Worsening Economic Surroundings

In December, when South Korean voters elected the CEO-turned-politician as their new head of state, the consumer price index posted a 3.6-percent rise from a year ago, the highest increase in 38 months.

International crude oil prices fluctuated near the $100-per-barrel level and food and services prices were also expected to climb drastically, as inflationary pressure was likely to mount steadily in the coming months.

Adding fuel to the simmering market were some misleading signals sent from Lee's transition team, which showed a ``zigzag'' attitude on some crucial policy issues such as real estate prices, mobile phone rates and oil-related taxes.

Lee has promised to revamp real estate policies to better meet demand through the reduction of various restrictions on development and renovation of taxations as well as the increased supply of houses.

His pledge has raised expectations for higher real estate prices in some affluent areas, including the southeastern part of Seoul dubbed ``Gangnam.'' But the market has almost frozen due to mixed remarks by some officials in the transition team on taxes.

Lee, who suggested a 7-percent economic growth for this year as part of his campaign pledges, lowered the goal to 6 percent this month. But government agencies and private research institutes say the target is unrealistic.

Officials from the Finance and Economy Ministry forecast last week that the country's gross domestic product (GDP) would rise 4.8 percent this year, the same as last year's, while consumer prices might increase 3 percent on average, up from 2.5 percent last year.

Lee's aides, in the meantime, also urged major mobile telecommunications firms to cut mobile phone rates as part of efforts to relieve the cost of living, which contradicted Lee's own position not to intervene in the market.

``He urged mobile carriers to cut phone rates while talking about the market-oriented economy,'' said Kim In-ha, who worked for the Citizens' Coalition for the Presidential Election. ``What is the difference between his approach and that of late President Park Chung-hee?''

Rep. Roh Hoe-chan of the Democratic Labor Party (DLP) also condemned Lee for trying to ``rebuild the chaebol-led system'' of the 1970s and 1980s, when chaebol colluded with the military regime for growth.

``Lee, for example, says that he would abolish rules on the equity investment limit. It is not a reform but the revival of old evils,'' he said. ``It is a dangerous attempt, which would damage the transparency of the economy by allowing monopoly.''

Labor groups and anti-globalization activists also expressed concern that Lee's ``pro-chaebol'' approach would further accelerate neo-liberalism in the country, allowing only large enterprises and the haves to monopolize the benefits of economic growth.

``Lee, like his nickname `bulldozer,' seems ready to knock down and move anything for what he calls growth,'' said Im Sang-hun, 33, an office worker in Seoul. ``But, what if his policies ended up deepening the gap between the haves and have-nots?''

jinryu@koreatimes.co.kr