South Korea-The Origins and Development of Chaebol

Although South Korea's major industrial programs did not begin until the early 1960s, the origins of the country's entrepreneurial elite were found in the political economy of the 1950s. Very few Koreans had owned or managed larger corporations during the Japanese colonial period. After the departure of the Japanese in 1945, some Korean businessmen obtained the assets of some of the Japanese firms, a number of which grew into the chaebol of the 1990s. These companies, as well as certain other firms that were formed in the late 1940s and early 1950s, had close links with Syngman Rhee's First Republic, which lasted from 1948 to 1960 (see The Syngman Rhee Era, 1946-60 , ch. 1). It was alleged that many of these companies received special favors from the government in return for kickbacks and other payments.

When the military took over the government in 1961, military leaders announced that they would eradicate the corruption that had plagued the Rhee administration and eliminate injustice from society. Some leading industrialists were arrested and charged with corruption, but the new government realized that it would need the help of the entrepreneurs if the government's ambitious plans to modernize the economy were to be fulfilled. A compromise was reached, under which many of the accused corporate leaders paid fines to the government. Subsequently, there was increased cooperation between corporate and government leaders in modernizing the economy.

Government-chaebol cooperation was essential to the subsequent economic growth and astounding successes that began in the early 1960s. Driven by the urgent need to turn the economy away from consumer goods and light industries toward heavy, chemical, and import-substitution industries, political leaders and government planners relied on the ideas and cooperation of the chaebol leaders. The government provided the blueprints for industrial expansion; the chaebol realized the plans. However, the chaebol-led industrialization accelerated the monopolistic and oligopolistic concentration of capital and economically profitable activities in the hands of a limited number of conglomerates.

Park used the chaebol as a means towards economic growth. Exports were encouraged, reversing Rhee's policy of reliance on imports. Performance quotas were established.

The chaebol were able to grow because of two factors-- foreign loans and special favors. Access to foreign technology also was critical to the growth of the chaebol through the 1980s. Under the guise of "guided capitalism," the government selected companies to undertake projects and channeled funds from foreign loans. The government guaranteed repayment should a company be unable to repay its foreign creditors. Additional loans were made available from domestic banks. In the late 1980s, the chaebol dominated the industrial sector and were especially prevalent in manufacturing, trading, and heavy industries.

The chaebol were often compared with Japanese keiretsu (the successor of the zaibatsu), but as David I. Steinberg has noted, there were at least three major differences. First, the chaebol were family dominated. In 1990, for example, in most cases the family that founded the major business in the chaebol remained in control, while in Japan the keiretsu were controlled by professional corporate management. Second, individual chaebol were prevented from buying controlling shares of banks, and in 1990 government regulations made it difficult for a chaebol to develop an exclusive banking relationship. The keiretsu usually worked with an affiliated bank and had almost unlimited access to credit. Third, the chaebol often formed subsidiaries to produce components for exports, while large Japanese corporations often employed outside contractors.

The tremendous growth that the chaebol experienced, beginning in the early 1960s, was closely tied to the expansion of South Korean exports. Growth resulted from the production of a diversity of goods rather than just one or two products. Innovation and the willingness to develop new product lines were critical. In the 1950s and early 1960s, chaebol concentrated on wigs and textiles; by the mid-1970s and 1980s, heavy, defense, and chemical industries had become predominant. While these activities were important in the early 1990s, real growth was occurring in the electronics and high-technology industries. The chaebol also were responsible for turning the trade deficit in 1985 to a trade surplus in 1986. The current account balance, however, fell from more than US$14 billion in 1988 to US$5 billion in 1989.

The chaebol continued their explosive growth in export markets in the 1980s. By 1990 the chaebol also had begun to produce for a growing domestic market. By the late 1980s, the chaebol had become financially independent and secure-- thereby eliminating the need for further government-sponsored credit and assistance.

Another reason for the success of the chaebol was their access to foreign technology. Rather than having to develop new areas through research and technology, South Korean firms could purchase foreign patents and technology and produce the same goods made elsewhere at lower costs. Hyundai cars, for example, used an engine developed by the Mitsubishi Corporation of Japan.

The chaebol were powerful independent entities acting in the economy and politics, but sometimes they cooperated with the government in the areas of planning and innovation. The government worked hard to encourage competition among the chaebol in certain areas and to avoid total monopolies.

The role of big business extended to the political arena. In 1988 a member of a chaebol family, Chong Mong-jun, president of Hyundai Heavy Industries, successfully ran for the National Assembly. Other business leaders also were chosen to be members of the National Assembly through the proportional representation system.

Data as of June 1990