The Korean economy has flourished over the past decades, buoyed by the sprawling expansion of chaebol or family-controlled conglomerates. There is no denying that the business groups have contributed much to national development on the one hand.
On the other, however, a host of problems inherent in the chaebol system have been exposed amid the concentration of economic power. In its preemptive move before last year’s presidential election, then ruling party candidate Park Geun-hye took the initiative to make the so-called economic democratization a key election agenda.
Since Park’s inauguration, the government and the ruling and opposition parties have been discussing measures aimed at reining in conglomerates to deliver on their election pledges. Of all these anti-chaebol policies, a proposal to regulate anti-competitive deals between subsidiaries is causing the most heated debate.
The National Policy Committee of the National Assembly is poised to approve a revision bill to the Monopoly Regulation and Fair Trade Act that would ban inter-affiliate contracts across the board and strengthen penalties on violators significantly. The bill, if passed, would make both companies implicated in undue inter-subsidiary deals subject to fines of up to 5 percent of their respective sales. Intra-group deals are allowed only when no other firms other than subsidiaries make components, prices go up when buying goods from non-affiliates and subsidiaries offer the best contract term through open bidding.
The most controversial clause of the proposed revision bill is to make it possible to punish group tycoons criminally in addition to fines levied on associated subsidiaries in case family members own 30 percent or more of the benefited affiliate. In this case, the tycoons are obliged to prove their innocence, clearly in violation of the presumption of innocence principle.
All these anti-chaebol restrictions are understandable, given that many of the country’s large conglomerates have used in-house contracts to support companies owned by spouses or children of the largest shareholders. This deep-seated practice has been frequently used as a vehicle to hand down wealth in illicit ways. It’s commonly known that conglomerates have established logistics, advertisements, system integration and construction affiliates to expedite these undue inheritance methods.
Chaebol should have thrown away this outdated and backward management scheme long time ago, but they didn’t. And the result is intervention and pressure from the government and political parties.
Nevertheless, the revision bill runs the risk of putting restrictions on normal intra-group contracts. What’s most feared is that the latest anti-chaebol drive may put a damper on corporate investment and prompt companies to go abroad or seek global outsourcing. Chaebol’s allegations that inter-subsidiary deals are the consequences of their vertical affiliation need to be heeded, too.
In this regard, anticipated side effects must be filtered fully through the legislation process to prevent a deadly effect of a good intention, as President Park cautioned against the overblown pace of economic democratization Monday.