Chaebols: Fueling the Growth of Korea’s Economy
By Harsh Sonawala, MBA 2010
South Korea had one of the world’s fastest growing economies from the early 1960s to the late 1990s. South Koreans refer to this growth as the “Miracle on the Han River,” basing it on the growth of Seoul. South Korea is heavily dependent on export and is the 8th largest exporter in the world. Korea’s growth was spurred by rapid industrialization and an adoption of an outward-looking strategy. As South Korea has low natural resource endowment, low savings rate, and a tiny domestic market, this export driven strategy promoted economic growth through labor-intensive manufactured exports, in which South Korea could develop a competitive advantage. Government initiatives played an important role in this process. The inflow of foreign capital was greatly encouraged to supplement the shortage of domestic savings. These efforts enabled South Korea to achieve rapid growth in exports and subsequent increases in income.
In my opinion, the creation of Chaebols has been a primary factor of growth for South Korea. Though they have many disadvantages as well, these Chaebols can act as vehicles for growth. A chaebol can be defined as a business group consisting of large companies which are owned and managed by family members or relatives, in many diversified business areas. In Korea, as the global competition increased and barriers to entry for labor intensive products from the Third World heightened during the 1970s, the focus of the Korean economic policy was shifted towards heavy and chemical industries. This was the period when the Korean government intervened in the allocation of resources and channeled resources to specific industry sectors to boost the economic growth. This period also saw the birth of Korean chaebols. As financial institutions (especially banks) were under quasi-government control, the government was able to have these banks loan huge amounts of money to these chaebols. Such a favorable government policy resulted in many businessmen starting industries which later morphed into conglomerates or chaebols.
This concept can be replicated in other developing nations as it creates private companies whose purpose is to grow and make profit, but still benefit the entire nation in terms of employment and increase in GDP. In the nineties the top five chaebols (Samsung, Hyundai, LG, Daewoo and SK) accounted for more than 50 percent of Korea’s GDP and the top 30 chaebols for 75 percent of all economic activity in Korea. One might say that this system is flawed and leaves money in the hands of the few, but it also leads to overall growth of a nation as well, as seen in Korea’s case. This system did undergo a slight change in the 90’s during the Asian crisis wherein the South Korean economy saw a rapid downsizing and reconstruction – not only of economic policies, but also the underlying philosophies of Korean Chaebols. The result was Korean giants like Samsung and LG have become lean profit making machines. The Korean policy on foreign direct investments has only fuelled the growth further and allowed healthy competition. Samsung and Hyundai compete on an international stage, and have really helped the “Miracle of Han” be a reality.
Other developing nations could emulate this model of using families and organizations to fuel growth, as long as the government has control to some extent, or where it rises to healthy competition. This system allows families who are capable of running large businesses to expand and grow and carry the country on their shoulders.
Recently, Korean reforms have converted the Chaebols into professional organizations. For example, in the twenty-first century, the new model for corporate governance ensures proper surveillance from both inside and outside the firm. The decision making power is being shifted from the dominant family to a board of directors that represents the greater number of shareholders. This will allow for more open market policies. But overall, this phase of growth, from using almost government extension organizations into private open market firms is a great way to move from being a developing to a developed nation.
