Opportunity for South Korea to Break Up ‘Chaebol’ system

Written by: Soeun Lee

Due to the political turmoil caused by the “Shaman President” scandal, the Korean economy is facing instability. The unstable situation resulted in the decreased amount of employment plan for 2017. In fact, a few top Chaebol companies announced that they would either reduce employment or not hire at all, and this impacted Korean society as a whole. The labor market is dependent on Chaebol conglomerates because a significant amount of job-seekers are only looking at those conglomerate firms.

As the situation worsens, some people say that the government should execute the policy which mitigates the regulation, favoring Chaebol companies, and the prosecution should not impose severe punishment. However, now it is the time for Korea to change this system. This is the right time to break the chain of collusive ties as the prosecution and independent counsel investigate the back-scratching alliance of government and Chaebol businesses. This could hurt the Korean economy in the short-term, but it will benefit the economy in the long-run by diversifying the labor market and providing opportunities for small businesses and venture companies to be developed. It would also decrease the burden for Chaebol conglomerates as many government constraints will be lifted.

Beginning in the 1960s, as the South Korean economy developed, conglomerates were the most common type of firms which led the Korean economy. In many cases, a firm started its business in one field, and has expanded to other industries; for example, Samsung started as a small store and now it is one of the leading electronics companies and also conducts business in various industries including insurance, heavy and medical industry. ‘Chaebol’ companies refer to these conglomerates that are often family owned, and have received a number of privileges from Korean government such as tax exemptions and government-related or global business opportunities for growing Korea’s national reputation.

The South Korean labor market is somewhat unique, driven by special relationships among Chaebol, small businesses and the government. Chaebol companies dominate the major businesses and industries with those massive amount of privileges, favored by the government. The government often casts a number of public contracts or financial benefits to these conglomerates. Naturally, these Chaebol companies get more profits than small companies do, and dominate the market; though Chaebol companies have to help the government when needed.

After these firms almost monopolize the market, small businesses have no choice other than making subcontracts with conglomerates. This cycle leads small businesses to have subcontracts with lower and lower cost as competition among small companies rapidly increases. Then, all the manual labor jobs are filled with workers of small companies. As the small companies have to bid the lowest cost to make the subcontract, the workers of small companies receive small wages although their tasks are more dangerous than those of employees in Chaebol companies. In many cases, workers in small businesses are what is called ‘irregular’ workers who do not have the insurance and guaranteed term for work or people who do not have opportunities for higher education. Ultimately, this system not only prevents fair income redistribution but also deprives lower-status workers of opportunities for upward social mobility.

The endless cycle among Chaebol, small firms and the government has driven the Korean economy’s current unrest. Young applicants risk their lives to be employed by Chaebol firms, and it is considered to be the only answer as they do not want to work in an inferior environment of small companies. They avoid establishing start-ups, and the variety of choices is shrinking more and more. According to the World Economic Forum, South Korea is ranked in top 20 countries with the least job flexibility. Though it is also not so beneficial for Chaebol firms. While earning more profits backed by the government, Chaebol companies should crawl to the government not to make policies which may restrict their business.

The Chaebol system has been considered as the efficient method for economic growth, and practiced for a few decades. However, South Korea has the world’s 14th largest GDP in 2016. Things have to be changed. Although there have been chances to abolish the corrupt practice, nothing really has changed. Now is the time. The prosecution has to investigate thoroughly and elicit the truth so that the long-time tie between Chaebol companies and the government can end. Also, Chaebol companies themselves should take legal responsibility and expiate, if exists, and end the corrupt tie with the government.