Koreans find breaking up with chaebol hard to do

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Lee Jay-hyun, chairman of the CJ Group and a member of a prominent business family, was taken into custody

Everyone loves a good perp walk. For South Koreans, Lee Jay Hyun's made great theater.

The sight of Lee -- chairman of the conglomerate CJ Group and grandson of Samsung's legendary founder -- being led away by police last week on embezzlement and tax-evasion charges has been portrayed as an early victory for President Park Geun Hye's five-month-old government. The arrest supposedly shows that Park is serious about reining in the chaebol -- family-owned behemoths that continue to dominate Asia's fourth-biggest economy and hog much of the nation's wealth.

The reality, of course, is far more complicated. Past attempts to bring tycoons to heel have also been greeted with great fanfare, only to fizzle out. In April 2008, Lee's uncle, Samsung Chairman Lee Kun Hee, resigned after being charged with criminal tax evasion. His ignominious fall was heralded as the end of the chaebol -- until then-President Lee Myung Bak pardoned him eight months later, allowing Korea's richest man to return to work.

Park won election in December by promising "economic democratization." That meant dealing sternly with the tycoons her father, dictator Park Chung Hee, helped create after the Korean War. Every economy has a certain amount of innovative oxygen that sustains its dynamism and creates fresh jobs. The chaebol starve would-be entrepreneurs of air and impede the growth of a vibrant stable of small and mid-size companies.

Outsize influence

The chaebol are largely exporting animals. Their outsize influence hinders the growth of a vibrant services sector, which Korea needs to create better-paying jobs, increase productivity and develop a highly skilled workforce. Their dominance also makes it hard for small companies to attract good talent so they can grow into large, profitable and game-changing firms.

Pundits in Korea tend to see reforming the chaebol as a separate task from Park's effort to build a "creative economy," but it's not. Innovative startups can't thrive as long as the chaebol continue to rely only on their in-house networks of suppliers. Korea will never develop its own Steve Jobs or Bill Gates as long as getting a job at LG, Samsung or Hyundai remains the only acceptable goal for college graduates.

Koreans have much to be proud of. Their nation nimbly steered around the global crisis in 2008. A Korean helms the United Nations. Samsung's smartphones are all that stand between Apple Inc. and world domination. Pop stars and film directors are advancing Korea's soft power in ways Japan and China are rushing to emulate.

Yet Korea is in a funk. Growth is just 1.5 percent, wages have stagnated, and costs of housing and schooling in the education-obsessed nation are surging. That's led to a dangerous jump in household debt to about $847 billion from $564 billion in mid-2008. It's quite a debt load for a $1.1 trillion economy, and it speaks volumes about challenges facing the middle class.

There are worrisome signs Park is making her own Faustian bargain with the chaebol. Yes, she supported the revisions to Korea's corporate laws passed July 2 by the National Assembly. The reforms mean that subsidiaries owned by a chaebol chairman's family should find it harder to monopolize supply orders. Convenience-store operations now have new protections, and the conglomerates' influence over banks is being reduced.

But the real victors were chaebol lobbyists. Their insistence that bolder restrictions would hurt not just competitiveness but also national growth prevailed. By week's end, even Park, the supposed conglomerate slayer, was musing publicly about the central role the chaebol must play in fueling growth this year.

Extreme concentration

Such short-termism is what put Korea in this predicament. Koreans have a love-hate relationship with their behemoths: They love how they helped the nation to rise into the orbit of Organization of Economic Cooperation and Development members; they hate the extreme concentration of economic power. In 2012, exports by the 30 largest chaebol accounted for 82 percent of Korea's output, compared with 53 percent in 2002. They hire about 80 percent of new college graduates.

Why would a 22-year-old Korean roll the dice on a small or mid-size company, or start a new one, when he or she can have a stable career at a chaebol? Park can talk all she wants about transforming young Koreans into innovators and risk-takers. She can insist that the failure of a startup is a learning experience that needn't bring shame on an entire family (as many Koreans believe).

Park can roll out corporate welfare programs, play venture capitalist and pick the brains of Gates and Mark Zuckerberg all she wants. But until Korea reduces the chaebol's stranglehold over all walks of life -- economic, political and social -- these well-intentioned efforts will gain little traction.

Park has one five-year term to undo her father's legacy, and the clock is ticking. Thus far her efforts to build a more creative economy lack more than just teeth. They lack creativity.

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