By Liberty Smith
President Moon Jae In’s drive to create “an inclusive economy” is an ambitious objective, especially as the Korean government is simultaneously engaged in intense negotiations with North Korea and the United States. Faced with slowing growth, rising income inequality, and high youth unemployment, Moon pledged to revitalize the drivers of the economy and create opportunities for less-resourced market players. This will require a major shift in the power relationship between large and small businesses – so far, the government has seen modest progress. But Seoul should consider widening and accelerating the pace of regulatory changes to ensure robust long-term growth.
Who are the Chaebol?
Chaebols are today so integral to the Korean economy that you would be hard pressed to have a discussion about the country without a reference to their role. Indeed, these family-owned mega-conglomerates like Lotte, Samsung, SK, and LG represent Korea’s globally competitive brands. During the period of rapid industrialization from the 1960s to the early 90s, the government supported the growth of select firms that achieved Seoul’s export quotas through subsidized loans, protectionism, and a voice in crafting legislation.
This legacy can still be felt prominently to this day. Chaebols are responsible for 62% of Korea’s exports – and in a country that is deeply export-dependent, this translates to the top ten chaebols controlling 67.8% of Korean GDP. Firms like Hyundai, Samsung, and Lotte dominate an array of through capital ventures and leverage-based expansion, chaebols have effectively strong-armed all of Korea’s most profitable industries without any real restraints. Chaebol-friendly policies, price-fixing, squeezing of suppliers, a lack of substitute partners, predatory mergers & acquisitions, intellectual property theft – to name a few – are hindering free market principles. These family-owned conglomerates have arguably become too big to play fair in the Korean market.
The Other Guys
The chaebol’s dominance in the domestic market creates insurmountable challenges for small to mid-sized enterprises (SMEs), which employ 88% of the labor force. Many of these firms rely on a working relationship with mega-conglomerates and only a few have cultivated clients abroad independently. In this power dynamic, chaebol firms are able to squeeze their SME suppliers. The disparity in bargaining power is evident in the significant wage gap between employees of SMEs and chaebol firms.
In addition to its enormous leverage in the market, chaebols also often utilize illegal means to maintain their dominance, including accounting fraud, tax evasion, embezzlement, bribery, and other corporate malfeasance. Despite these well-cited cases, previous administrations have not seriously dealt with these frequent offenses, citing the entities’ importance to the national economy.
The ousting of President Park Geun-Hye may symbolize a new beginning. Although the government faced high criticism for the release of Samsung and Lotte executives who were implicated in the Park influence-peddling scandal, meaningful progress looks – albeit shaky – not out of reach.
Established at the start of President Moon’s term in 2017, the Ministry of SMEs and Start-ups is tasked with leveling the playing field between small businesses and chaebols by financing new exporters and support for firms engaged in newly emerging tech industries. Ambitious tactics include government reimbursement for new hires, funding for research and development, streamlining tech start-ups, meeting labor shortage demands through vocational training, and a host of others. These policies aim to propel small businesses to the front of the line in competitiveness and elevate their negotiating positions with large firms.
The effectiveness of these measures would be arguably limited without establishing some protections from chaebol’s bad behavior. The Monopoly Regulation and Fair Trade Act (MRFTA) permits a regulatory body, the Fair Trade Commission (FTC), to restrain abuses stemming from concentrations of economic power. In line with President Moon’s vision in his campaign platform, the FTC has begun directing corporate governance reforms and criminal prosecutions to make the big guys play fair. With Moon’s appointment of FTC Chief Kim Sang-jo – nicknamed the “chaebol sniper” – the agency has set a standard of zero tolerance for corporate malfeasance. It has so far lowered the threshold for who may be indicted in white collar crimes to include non-managerial positions in an effort to boost supervision. In addition, a new revision to the Fair Transaction Act gives legal grounds for subcontractors to share rising labor costs with clients. A new series of proposed rules are also set to restrict family-owned holding companies from close control of their subsidiaries.
The Road Ahead
Despite these well-intentioned measures and goals, critics argue that these measures only target low-hanging fruit. They claim that the strategy comes short of affecting change in chaebol dominance, and policymakers are still far from advancing revisions to the antitrust law that could bind future administrations to react strongly to improprieties. Observers have also pointed out that reforms to-date have focused heavily on how chaebols self-govern rather than focusing on malfeasance against other parties such as predatory subcontract practices. Politically, the scrutiny against chaebols appears to have been deprioritized. Many reports suggest that President Moon is refraining from rocking the boat as he looks to recruit chaebols to assist him when inter-Korean economic cooperation is greenlit.
The inescapable reality is that achieving real growth and inclusivity in this economy requires SMEs to increase their bargaining power. Oversight agencies will have to remain aggressive, and signal their intentions to maintain current regulatory standards even under future administrations.
The FTC and FSC should also be held accountable through legislation that would subject any governing body knowingly withholding an anti-trust investigation to a corruption probe. Implementation of these policies would more clearly demonstrate the government’s intention to usher in a new economic structure.
Korea is short on time. The adverse global market environment does not show any signs of improvement and a global recession may be just around the corner. These external factors will make it even more difficult for the administration to advance these reforms. The hour of change is now.
Liberty Smith is currently an Intern at the Korea Economic Institute of America. The views expressed here are the author’s alone.
Photo from user Altostratus on Wikimedia Commons.