Challenging the chaebol

• Published Sep 7, 2016 3:34 PM KST
• Updated Sep 7, 2016 3:34 PM KST

By John Burton

One of the main themes in postwar Korea has been the debate over the chaebol as a source of both economic progress and social inequality because of their business dominance. They have also become the cause of national embarrassment because of financial scandals that often led to top executives or members of the family owners being convicted of crimes or sent to jail.

The current scandal at Lotte, which has mushroomed from a dynastic struggle for succession and control of Korea’s fifth-largest chaebolinto an investigation about alleged bribery and embezzlement, has highlighted that little has changed despite President Park Geun-hye’s election campaign promise to pursue “economic democratization,” which meant curbing the power of the chaebol to benefit the small business sector.

Lotte is a particularly interesting case study of chaebol behavior. On the one hand, it never seemed to harbor the sprawling ambitions of the other chaebol. It focused on several related business sectors, including confectionery, food products, retail, hotels and leisure parks. On the other hand, it has shown recent signs of hubris with its building of the 555-meter-high Lotte World Tower, the tallest building in Korea.

The Lotte World Tower is, in some ways, the group’s equivalent of the so-called Skyscraper Index which is said to occur when the construction of a country’s tallest building correlates with the beginning of an economic downturn. In Lotte’s case, as the construction of the building neared completion a year ago, it coincided with the outbreak of the power struggle between the two sons of Lottefounder, Shin Kyuk-ho.

The public reaction to the succession fight was particularly negative since it reminded Koreans that Lotte has deep links with Japan, where the group was founded, and provoked a nationalist backlash. Public pressure appears to have also led prosecutors to take a close look at the group’s dealings, with the founder’s daughter, Shin Young-ja, being charged in July with embezzlement and bribery. More recently,Lotte Vice Chairman Lee In-won, the most senior non-family executive in the group, committed suicide just before he was to be questioned by prosecutors.

Whatever the outcome of the Lotte investigation and possible public anger surrounding it, the chaebol appear likely to continue to wield political influence and economic power for some time. Government attempts to rein in the chaebol have mostly proved tobe fruitless for decades.

One of the motivating factors, for example, that persuaded Park Chung-hee, the father of the current president, to mount his military coup in 1961 was to dismantle big business. Instead, he later concluded a Faustian bargain with the chaebol and allowed them to strengthen their grip on the economy in return for political support. President Kim Young-sam tried to impose financial restrictions on the chaebol in the mid-1990s, while his successor, Kim Dae-jung, ordered the chaebol to exchange businesses through “big deals” to streamline their operations. But these measures did not make much of a dent in the dominance of the biggest chaebol. The government has also proved reluctant in turning to other tools in its legal arsenal, such as aggressively enforcing anti-competition laws.

As soon as she entered office in early 2013, President Park quickly jettisoned her “economic democratization” promises. Another pledge to halt the practice of granting pardons jailed tycoons also fell by the wayside, with the release of Chey Tae-won, the chairman of SK Holdings, in August 2015 and Lee Jay-hyun, the CJ Group chairman, last month. The government repeated a longstanding justification for their release by saying it was needed to ensure continued strong corporate leadership.

Instead, the government has now resorted to small-bore measures that penalize the small fry. This is the so-called “Kim Young-ran” law that places strict limits on expense account meals, gifts or cash donations at wedding or funerals involving government officials, journalists and teachers. While the law is meant to stamp out bribery among “public service-related” individuals, it will do nothing to disturb the close ties between the political and business elite or alter the balance of economic power in favor of the chaebol.

The only true solution to curbing the power of the chaebol is to subject them to the full effects of market forces. This occurred during the 1997-98 financial crisis, which pruned at least a third of the top 30 chaebol and, for a time, created a more level playing field in terms of competition.

The current treatment of Hanjin Shipping thus represents an important test of whether Korea is willing to send the right signals on chaebol restructuring. The willingness of the government and banks to allow Hanjin Shipping to go into receivership is a good sign. But there are already calls that officials should mount an emergency rescue to save jobs and shipping assets. Meanwhile, the government continues to pour trillions of won into the troubled shipbuilding sector to keep it afloat. Korea still appears afraid of biting the bullet on chaebol reform.

John Burton, a former Korea correspondent for the Financial Times, is now a Seoul-based independent journalist and media consultant. He can be reached at johnburtonft@yahoo.com.