The Korean economy is dominated by a roughly two dozen large diversified conglomerates known as chaebols — including Hyundai, Samsung, the LG Group and Lotte — which control about 80 percent of the country's gross domestic product (GDP). Chaebols are huge integrated company groups conglomerates that combine finance, research and manufacturing. The largest chaebols have several dozen affiliates a piece and have tens of thousands, even thousands of thousands of employees. They are a big as many national economies. The largest chaebol, Samsung, alone exports 20 percent of South Korea's goods and services and South Korea is Asia’s fourth largest and the world’s 13th largest economy. Smaller chaebol such as Hanjin specialize in transportation, running airlines (Korean Air) and Hanjin container freight shipping.

Chaebols are usually owned by one family or small group of investors and often have their own manufacturing, construction, trading, and financial components. Government and financial regulations are often geared to help the chaebols, squeeze out entrepreneurs, small and medium size businesses and social welfare money. In many other countries the laws to help entrepreneurs, small and medium size businesses and curtail the power and control of big companies. The Federation of Korean Industries is kind of a club for chaebol executives. [Source: Time magazine]

According to The Economist: “The founders of South Korea's chaebol (conglomerates) were an ambitious bunch. Look at the names they picked for their enterprises: Daewoo (“Great Universe”), Hyundai (“The Modern Era”) and Samsung (“Three Stars”, implying a business that would be huge and eternal). Following the Korean War, foreign aid became the most important source of funds for the reconstruction and rehabilitation of the economy. What was left of the Japanesebuilt industrial plant, most of which by the 1950s either was obsolete or had been destroyed by warfare), generally was turned over to private owners, who were chosen more often for their political loyalty than for their economic acumen. Moreover, Rhee favored certain businessmen and companies with government contracts in exchange for financial support of his political endeavors. It was during this period that a group of entrepreneurs began companies that later became the chaebol, or business conglomerates. The chaebol were groups of specialized companies with interrelated management. These groupings of affiliated companies dominated South Korea's economy in the late 1980s and often included businesses involved in heavy and consumer industries and electric and electronic goods, as well as trading companies and real estate and insurance concerns. [Source: Andrea Matles Savada and William Shaw, Library of Congress, 1990 *]

Origins of the Chaebol

Carlos Tejada wrote in the New York Times: The chaebols “rose from the ashes of the Korean War. After the conflict ended, officials steered relief funds and cheap loans to businessmen who promised to rebuild the country. The government also protected homegrown industries from foreign competition to help them develop. The recipe proved to be potent: Chaebol played a major role in South Korea’s rise as an industrial giant in the following decades. [Source: Carlos Tejada, New York Times, February 17, 2017]

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. It was alleged that many of these companies received special favors from the government in return for kickbacks and other payments. [Source: Andrea Matles Savada and William Shaw, Library of Congress, 1990 *]

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.*

Development of Chaebol Under Park Chung Hee

Devin DeCiantis and Ivan Lansberg wrote in The Atlantic: The relationship between the chaebol and the South Korean economic miracle “began in the 1960s under the autocratic leadership of President Park Chung Hee, a peasant-turned-officer who rose quickly through the army’s ranks and eventually seized power after a military-backed coup in 1961. Park’s plan for Korean prosperity rested on two main pillars: protection of key domestic industries and export-oriented industrialization. To achieve this, he formed an alliance with a small group of entrepreneurial families, providing the young chaebol with cheap financing via subsidies and low-interest loans, protection from foreign competition, privileged access to the nation’s highest political office, and favorable treatment from regulators and the judiciary. [Source: Devin DeCiantis and Ivan Lansberg, The Atlantic, March 13, 2015]

Park Chung Hee 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 Park regime nationalized the banks of South Korea and could channel scarce capital to industries and firms it saw as necessary for achieving national objectives. The government-favored chaebol had special privileges and grew large. This gave the impression of economic success for the chaebol that was not always valid. In some cases chaebol grew not because they were profitable but merely because they could borrow vast funds. When the international economy took a downturn these debt-ridden businesses were in trouble. In 1999 one quarter of the manufacturers in South Korea did not earn enough to meet the payments required for their debt. [Source: Thayer Watkins, Department of Economics, San José State University; Library of Congress]

Chaebol and Japanese Zaibatsu

The chaebol were often compared with Japanese keiretsu (the successor of the zaibatsu). Thayer Watkins of San José State University wrote: Park modeled this arrangement on the zaibatsu system which developed in Japan during the Meiji Era. There were significant differences between the zaibatsu and the chaebol, the most significant of which was the source of capital. The zaibatsu were organized around a bank for their source of capital. The chaebol in contrast were prohibited from owning a bank. [Source: Thayer Watkins, Department of Economics, San José State University]

David I. Steinberg noted, there were at least three major differences between chaebol and keiretsu and zaibatsu.), but as . 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. [Source: Andrea Matles Savada and William Shaw, Library of Congress, 1990]

Growth of the Chaebols

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. [Source: Andrea Matles Savada and William Shaw, Library of Congress, 1990 *]

Devin DeCiantis and Ivan Lansberg wrote in The Atlantic: “In the half-century since, South Korea’s chaebol helped fuel an astounding 21-fold increase in per capita output. To put that growth in context, in 1965 the country was poorer than Bolivia and Mozambique — even North Korean per capita income was three times greater. Today, South Korea is richer than Saudi Arabia and generates nearly four times more output per person than China. During this miraculous economic ascent, chaebol policy was rarely questioned, and with good reason. South Korea’s top 10 family conglomerates have become some of the world’s most successful and admired brands — household names like Samsung, Hyundai, and LG — and account for roughly 80 percent of the country’s GDP. Without them, South Korea would look more like emerging Vietnam than developed Japan, the only other Asian country to join the Organization for Economic Cooperation and Development’s club of “developed” economies. In 2012, the chaebol were targeted for their role in South Korea's slow growth and rising inequality. Bumper stickers read: “It’s the chaebol, stupid.” [Source: Devin DeCiantis and Ivan Lansberg, The Atlantic, March 13, 2015]

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.*

Chaebol Drive South Korea’s Export-Economy in the 1980s and 90s

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. [Source: Andrea Matles Savada and William Shaw, Library of Congress, 1990 *]

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.*

Donald N. Clark wrote in “Culture and Customs of Korea”: “The chaebol were responsible for the successful expansion of South Korea's export capacity. According to Steinberg, in 1987 the revenues of the four largest chaebol were US$80.7 billion, a figure equivalent to twothirds of Seoul's total GNP. In that year, the Samsung Group had revenues of US$24 billion; Hyundai, US$22.7 billion; Daewoo, US$16 billion; and Lucky-Goldstar, US$18 billion. The revenues of the next largest chaebol, Sunkyong, totaled US$7.3 billion in 1987. The top ten chaebol represented 40 percent of all bank credit in South Korea, 30 percent of value added in manufacturing, and approximately 66 percent of the value of all South Korean exports in 1987. The five largest chaebol employed 8.5 percent of the manufacturing work force and produced 22.3 percent of all manufacturing shipments. Despite a rash of strikes against the chaebol beginning in 1987, the chaebol generally had higher compensation and better working conditions than their lesser South Korean competitors. [Source: “Culture and Customs of Korea” by Donald N. Clark, Greenwood Press, 2000]

According to 1995 data, South Korean companies accounted for the 38 largest non-Japanese companies in Asia. Korean companies occupied the top five position with Samsung Trading (US$20.2 billion turnover), Hyundai Corp. (US$16.6 billion) and Samsung Electronics (US$14.9 billion) in the top three spots.

Chaebols and the South Korean Government

Most of the chaebols's are simple, family-run empires whose leaders have traditionally had cozy relationship with top bureaucrats and government-controlled banks that supplied them with limitless credit and drove off competition. This relationships dates back to Park Chung Hee, a military dictator, and his efforts to stimulate the economy. South Korea, like Taiwan and Singapore, "grew rich under highly authoritarian governments."

One Korean businessman told the Washington Post, "For 30 years the military regime was possible because of the support and money they got from the chaebols. And the chaebols grew, because of the support of the military." Growth was helped by protectionism, continuous borrowing and help from the government. What began as an assistance program turned in to a hostage crisis. The chaebols built up huge debts and told the government that they needed to give them soft loans and easy credit or they would lay off workers

Carlos Tejada wrote in the New York Times: South Korea’s recipe for growth also fostered tight ties between the government and businesses. Park Chung-heeled an effort to rev up the South Korean economy — and he used many of the companies that became chaebol to do it. His government steered money to companies that chased his economic goals, such as emphasizing exports. The dynamic shifted somewhat as South Korea transitioned to a democracy in the 1980s. By then, the chaebol had become so economically powerful that they held considerable political sway. Politicians began to rely on the companies’ political and financial support to get elected. [Source: Carlos Tejada, New York Times, February 17, 2017]

Role of Chaebol in South Korean Public Enterprises

A government-led economic development policy during the 1960s was necessary because the less experienced and capital-poor private entrepreneurs lacked the wherewithal to develop several critical industries that were necessary to the nation's economic growth. The government determined that establishing public corporations to develop and manage these highly strategic industries was the fastest and most efficient way to foster growth in a variety of key areas. [Source: Andrea Matles Savada and William Shaw, Library of Congress, 1990 *]

During the 1960s, public enterprises were concentrated in such areas as electrification, banking, communications, and manufacturing. In 1990 these enterprises were, in many cases, efficient revenue-producing concerns that produced essential goods and services at low costs, but which also produced profits that were used for new capital investments or to produce funds for public use elsewhere. In the 1980s, Seoul was slowly privatizing a number of these firms by selling stocks, but the government remained the principal stockholder in each company. In the 1980s, an important function of public enterprises was the introduction of new and expensive technology ventures.*

In 1985 the public enterprise sector consisted of about 90 enterprises employing 305,000 workers, or 2.7 percent of total employment in the nonagricultural sector. There were four categories of public enterprises: government enterprises (staffed and run by government officials), government-invested enterprises (with at least 50 percent government ownership), subsidiaries of government-invested enterprises (usually having indirect government funding), and other government-backed enterprises. Government-invested public enterprises, such as the Korea Electric Power Corporation (KEPCO) and the Pohang Iron and Steel Company (POSCO), represented the core of the new enterprises established during Park's regime. In the late 1980s, roughly 30 percent of the revenues produced by public enterprises came from the manufacturing sector and the other 70 percent from such service sectors as the electrical, communications, and financial industries.*

Chaebols and Causes of Economic Crisis of 1997 in South Korea

At the end off 1997, South Korea companies were unable to pay off their loans, the stock market crashed and the Korean currency lost half of its value. The South Korean government had go begging to the International Monetary Fund for a $58 billion loan---the biggest IMF rescue package ever---but even that wasn't enough. Japan, the United States and other countries coughed up more money to prevent the South Korean economy from totally collapsing.

The crisis in South Korea was rooted in its chaebols (large industrial conglomerates) which had their fingers in many pies, often spent money wastefully and had accrued massive debts. South Korea's financial problems began in earnest with the collapse of Hanbo Steel, an arm of Hanbo, the country's 14th largest chaebol. The company had borrowed $6 billion to build a huge modern steel plant on a capital base of $343 million. By 1997, Hanbo's debt was 22 times more than its net worth. The Hanbo Group had 23 subsidiaries, 22,000 employees and annual sales of $8 billion. In early December 1997, the Halla Group, South Korea's 12th largest chaebol, went bankrupt, with debts that were 30 times its equity.

The immediate main cause of the crisis was a shortage of foreign reserves, which had been sucked up by government-backed low interest-loans given to risky investments and expansion programs by the chaebols. Knowing that the government would bail them out, the chaebols seemed more intent on taking over the world than making profits. They produced millions of products with establishing market share as their primary objective.

Chaebol waste was closely tied to corruption and cronyism between the chaebols and the South Korean government. In addition, concessions to labor created higher wages and made it more difficult to lay off workers. Companies were vastly overstaffed.

The chaebols invested heavily in wasteful projects. They sunk billions into semiconductors and auto manufacturing and even things like aircraft making and movies. Samsung and Ssangyong started mult-billion auto industries in a market that was already flooded. Samsung invested $6 billion in a plant capable of producing 60,000 luxury cars a year "because the chairman likes fast cars." The chairman of Ssnagyang was a "car maniac" who once owned 20 cars including a Jaguar, Lotus, Lamborghini, BMW and Mercedes.

Much of South Korea's debt was owed by the chaebols. The chaebols maintained debt burdens three times that of businesses in the West. Their debt to equity ratio was an astonishing 400 to 1,000 percent. They started costly businesses at the drop of a hat and were so heavily in debt they tied down much of the country's money.

During the Asian financial crisis of 1997-98, half of the top 30 chaebol went bankrupt because they had expanded recklessly. Daewoo was the most prominent one. In 1997, seven chaebols announced they were insolvent. Among the other major chaebols that went bankrupt in 1997, in addition to the Hano and Hall Groups, were Sammi Steel ($2 billion in debt) and Kia Motors. Jinro Distillery, the nations 19th largest company nearly went bankrupt. Even though Kia was bankrupt it still produced 40,000 cars a month and talked about becoming a "top-10 global automaker in the 21st century." Its plant was capable of producing 650,000 cars a year, with 90 percent of the work done by robots. Daewoo acquired Ssangyong's car plant without paying a penny. It simply assumed 60 percent of Ssnagyang's debt.

The bankruptcies also hurt thousands of subcontractors that did businesses with the bankrupt companies. Unable to get credit and payment they too had to declare bankruptcy. In 1998, 1,000 companies went bankrupt a month.

Chaebol Reforms After the Asian Economic Crisis of 1997-98

▪After the Economic Crisis of 1997-98, the chaebols went through profound changes, many of them mandated by the government. They slimmed down, sold off divisions and concentrated on their core businesses. They were broken into pieces and each unit had to stand on its own. Sudbisdaries that couldn't make the grade on their own were written off or allowed to fail.

Half the chaebols were allowed to fail, break up, or come under foreign ownership. Companies began operating under the principal of increasing shareholder value. Emperor-like chairmans lost their power. The units that were left were downsized and restructured in part to lure back foreign investors.

Some critics claimed the reforms were superficial and mostly “smoke and mirrors." Later corruption scandals showed a bribe-free system in South Korea was wishful thinking. And although the chaebol families own only an average of 5 percent of their companies they still managed to run them like fiefdoms.

The chaebols ended becoming more powerful than less. In 1998, top five chaebols accounted for 37 percent of gross output and 44 percent of exports as sub-contractors and small business went bankrupt. In 2001, the government bailed out Ssangyong, one of the worst managed chaebols, with debts of $2.5 billion. Investors and reformers saw this as a bad sign. Other losers heped out by the government included Hyundai Engineering, with debts of $3.4 billion, Hyundai Electronics, with debts of $6.2 billion, and Daewoo Motors.

According to The Economist: Defenders of the chaebol say that the crisis spurred reforms, curbing the tendency of the chaebol to overborrow and overexpand. They don't hog credit as much as before—Samsung Electronics now generates oceans of cash to finance its expansion plans. But in general the giants still crowd out small entrepreneurial firms: a former boss of Samsung Electronics has warned that South Korea has too many eggs in too few baskets. [Source: The Economist, October 1, 2011]

Image Sources: Wikimedia Commons.

Text Sources: South Korean government websites, Korea Tourism Organization, Cultural Heritage Administration, Republic of Korea, UNESCO, Wikipedia, Library of Congress, CIA World Factbook, World Bank, Lonely Planet guides, New York Times, Washington Post, Los Angeles Times, National Geographic, Smithsonian magazine, The New Yorker, “Culture and Customs of Korea” by Donald N. Clark, Chunghee Sarah Soh in “Countries and Their Cultures”, “Columbia Encyclopedia”, Korea Times, Korea Herald, The Hankyoreh, JoongAng Daily, Radio Free Asia, Bloomberg, Reuters, Associated Press, BBC, AFP, The Atlantic, The Guardian, Yomiuri Shimbun and various books and other publications.

Updated in July 2021

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