Time to redress economic imbalance
Published : Feb 28, 2012 - 19:23
Updated : Feb 29, 2012 - 14:57

Politicians’ renewed focus on curbing chaebol yet to be tested for
effectiveness, sincerity

A heavy silence hung over the meeting of board members of the Federation of Korean Industries, the country’s main business lobby, early this month.

There was no objection or applause when FKI chairman Huh Chang-soo proposed to adopt a resolution pledging to add stability to people’s livelihoods.

After the adoption of the resolution, an FKI official said it reflected an “opinion shared by large corporations that they should clear themselves of arrogance.”

It committed big companies to helping forge an environment under which small enterprises and self-employed people “can run their businesses freely.”

The unusual gesture by the group representing the interests of large firms came in response to mounting public calls for curbing the ever-growing influence and unbridled expansion of the nation’s family-controlled conglomerates, known as chaebol.

Public sentiment against the chaebol has recently been exacerbated by their encroachment on areas traditionally claimed by small backstreet stores.

President Lee Myung-bak joined other politicians last month in lashing out at daughters and granddaughters of conglomerate owners for running bakeries as a “pastime,” driving small entrepreneurs out of business.

In the wake of his veiled warning, bakery and caf affiliates run by the children of chiefs of Samsung, Hyundai Motor and Lotte announced they would pull out of the sector.

“Large conglomerates should have been more cautious not to aggravate public discontent especially at a time when political parties are zeroing in on them,” said an electronics company executive surnamed Choi.

In recent months, big businesses have seen the ruling and opposition parties alike preoccupied with working out tighter regulations on them in the run-up to the April parliamentary elections which will be followed by a presidential vote in December.

Korean business circles have long been accustomed to politicians’ repeated bids to expand support from voters by vowing to get tough on the chaebol and protect small businesses ahead of major elections.

But many corporate officials say the pressure they are feeling now is harder than ever.

Koreans have had an ambivalent attitude toward large conglomerates. On the one hand, the chaebol have been praised for driving Korea’s growth into a major economic power. On the other, they have faced increasing criticism for hoarding profits and failing to fulfill social responsibilities.

Such ambivalence is shared by many college students, who are critical of the chaebol but want to work for major conglomerates such as Samsung, LG, Hyundai Motor, CJ and SK after graduation.

Political groups have differed over how to handle the chaebol, with conservatives stressing chaebol’s positive aspects and liberals focusing on their problematic sides.

Such differences, however, are now being blurred as the ruling Saenuri Party, a successor to the country’s main conservative parties, appears to be competing with the liberal main opposition Democratic United Party to suggest measures to curb chaebol activities.

In the past, Korea’s political configuration was formed along regional rivalry and ideological confrontation connected to security posture against North Korea.

‘Economic democratization’

With the polarization of society deepened in line with the demise of neoliberalism following the 2008 global financial crisis, conservative forces as well as their progressive rivals have been forced to push “economic democratization” as their key election agenda, said Kim Min-jeon, a political science professor at Kyung Hee University.

Political observers note the failure of Lee’s business-friendly policies in spreading the benefits of growth to working class people has further amplified public frustration with the chaebol.

A survey of 3,741 adults, conducted early this month by the Yeouido Institute, the ruling party’s think tank, found that nearly 75 percent believed large conglomerates to be unethical, up 4 percent from last August.

Figures show that income polarization between the corporate and household sectors and between large and small businesses has widened.

Over the decade through 2010, after-tax profits for corporations increased by an annual average of 16.5 percent while household income rose by a meager 2.3 percent, according to data from the Bank of Korea.

The gap has widened more quickly under the Lee administration, which has strengthened support for large companies to overcome the global economic recession.

In 2010 when Korea posted a 5.5 percent growth in gross national income, corporate profits jumped by 26.8 percent, compared to a 2.5 percent gain in household income.

With household income declining, the ratio of saving, which remained at an average 19.8 percent in the 1990s, shrank to 4.7 percent in the 2000s, far below the average of 7.4 percent for the 34-member Organization for Economic Cooperation and Development.

Over the years, the chaebol have continued to expand their clout.

Korea’s top 10 conglomerates accounted for more than half of the overall industrial output of domestic listed firms in the first three quarters of last year, with their combined sales reaching 470.8 trillion won ($421.1 billion), according to local financial information provider FnGuide.

Separate data from, another corporate information service company, showed the market capitalization of the 90 listed firms affiliated with the 10 largest conglomerates stood at 647.9 trillion won as of the end of last December ― 52.8 percent of the market total of 1,226.6 trillion won. The figure represented an increase of more than 10 percentage points from 40.7 percent in 2007.

The widening imbalance has brought mounting demands for policies to shore up small businesses and boost people’s standard of living.

According to surveys by Gallup Korea and the East Asia Institute, a Seoul-based private think tank, more than 60 percent of Koreans believed economic growth should be given top priority in 2004 but the proportion shrank to 39 percent last year. In contrast, the share of Koreans who place distribution of wealth ahead of growth climbed from 30 percent to 57 percent over the cited period.

Key battleground

On the back of the public sentiment, political parties have been pouring out a flood of measures to curb chaebol, turning their wealth and influence into a key battleground for the upcoming elections.

Departing from its relatively favorable stance toward large conglomerates, the ruling party has pledged to stop them from squeezing suppliers, giving outsourcing work to their affiliates and fixing prices of their products.

The main opposition DUP has gone beyond the measures to propose harder regulation and taxation on the chaebol.

It put forward a set of proposals last month, which included the reintroduction of a ceiling on chaebol’s equity investment to restrict their expansion into non-core businesses and the introduction of a new tax on the dividends that chaebol’s subsidiaries pay to their parent companies.

Kang Chul-kyu, former chairman of the Fair Trade Commission, who heads the work to nominate DUP candidates for parliamentary elections, recently said he would recommend as many figures with the will to reform the chaebol as possible.

A splinter left-wing United Progressive Party has pushed for more radical measures aimed at dismantling the structure of large conglomerates by severing the chain of equity investments among their subsidiaries.

Doubt over relevance

Chaebol executives and economic policymakers have criticized the measures put forward by political parties as corporate bashing mainly aimed at attracting votes. They say the populist push could undermine the competitiveness of corporate Korea, whose growth has slipped to a two-year low.

Kim Hyun-jong, a senior research fellow at the Korea Economic Research Institute, said it should be understood that corporate executives have been compelled to focus on increasing profits since the foreign exchange crisis in the late 1990s.

He conceded such trend has resulted in some corporate behaviors subject to criticism for being greedy but indicated imposing an across-the-board curb on chaebol companies could lead to losses for general shareholders.

“What is needed now is to cautiously sort out problems rather than rushing to put forward half-baked measures,” he said.

Lee Ji-soo, a lawyer and researcher at the Center for Good Corporate Governance, disagreed with the arguments that the moves by political parties were nothing but chaebol bashing.

“The current atmosphere against large conglomerates has been caused by the abusive use of their dominant position in the market, which is proved by a series of statistics,” said Lee.

But he raised doubts about how persistent and sincere politicians would be in pushing for chaebol reforms.

“I wonder whether they would show the same will after the elections,” Lee said.

He also noted he was unsure whether the measures hastily drawn up by main political parties in the run-up to the elections would tackle the problems, saying many of the proposed regulations seem to miss the point or lack effectiveness.

Several former presidents took office with pledges to rein in the chaebol but stopped halfway in the face of concerns the entire economy could lose steam if the large corporations are discouraged too much.

Experts raise the need to focus on measures to prevent corporate owners from exercising unchecked power and tighten penalties on their illicit practices rather than putting the conglomerates under a broad net of regulations.

“Concrete measures to penalize illegal cases may be more effective than a hoard of regulations,” said Kim.

Many experts also call for the chaebol to try to recreate themselves.

They say the big conglomerates must act their size and stop making inroad in non-core businesses and preying on smaller competitors.

“I admit now is the time for large businesses to perceive they can no longer get along on their own,” said Choi, the electronics company executive.

By Kim Kyung-ho