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South Korean Developmental Strategy - Essay Example

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This paper 'South Korean Developmental Strategy' tells us that South Korea exemplifies the resurrection of a crisis-laden economy and its subsequent escalation to the 15th spot on the global ladder. As is evident from the politico-economical history of South Korea, the chaebol has played a major role in shaping the economy…
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South Korean Developmental Strategy
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Interrelationship between Government and Chaebol plays the Pivotal Role in South Korean Developmental Strategy-a Discussion Table of Contents Introduction 3 2.Liberalisation of the South Korean Economy 3 3.Variations in the Government-Chaebol Interrelationship 4 3.1.Onset of Neoliberalisation 4 3.2.Capitalism or Mindless Gargantuan Hunger 5 4.The Chaebol: a Structural Analysis 5 5.The Chaebol through the Decades: a Roadmap 6 6.Problems posed by the Chaebol over the Years 7 6.1.The South Korean Economic Crisis 8 6.2.Problems Posed by the Chaebol in the Recent Period 10 7.Conclusion 11 References 13 1. Introduction South Korea exemplifies the resurrection of a crisis laden economy and its subsequent escalation to the 15th spot on the global ladder. As is evident from the politico economical history of South Korea, the chaebol have played a major role in shaping the economy of this nation in ways more than one. Chaebol are large South Korean conglomerates. These firms are family – controlled and they enjoy strong bond with the government. Though family controlled businesses existed in Korea before 1961, the particular model of government – chaebol alliance was introduced during the rule of Park Chung Hee who had improvised this strategic model on the basis of the Zaibatsu System (Japan). The most significant point of difference between the Zaibatsu and the Chaebol is that unlike their Japanese analogue, the Chaebol were not permitted to own banks (Lee, 1997 P. 19). During the regime of Park, South Korean banks were nationalised. This was done in order to supply scarce capital to corporates which the government identified to be vital for the manifestation of national objectives. Thus, the chaebol which enjoyed more favour of the government could procure more funds and could grow huge. This fact helps in inferring that the economic strength and success of the chaebol was not necessarily valid but in most cases a proportional outcome of the government-chaebol interrelationship (Watkins, n.d.). 2. Liberalisation of the South Korean Economy The industrialisation of South Korea materialised during the regime of Park Chung Hee. Prior to this, it was largely an agrarian economy. This shift was initiated by penalising the corrupt business leaders followed by reformation of the state bureaucracy and the establishment of an economic planning ministry (based on the Japanese Zaibatsu System). During the initial phase of liberalisation South Korean industrialists were chiefly export-oriented owing to the fact that they were used by Japan as an offshore platform for the purpose of re-exporting its partially manufactured products to USA. Joint Ventures (JVs) between the Koreans and the Japanese flourished and they helped the Koreans in gaining technology and knowledge of foreign markets. The Korean government patronised this export – oriented strategy through promoting the formation of chaebol through merger of Korean industries. These highly integrated, family-controlled businesses enjoyed profuse government support in all operational activities, ranging from tax advantages to making foray into overseas markets. The Korean focus on the development of the heavy industries and the core sectors initiated the globalisation of many the chaebol during the mid-1970s. By this time the chaebol had become the power centre of the exponentially growing South Korean economy. The business volume and resource base of the chaebol grew to such an extent through 1970s and 1980s that it took just three the chaebol to tantamount to one-third of the GNP (Harvey, 2007 P. 107-108). 3. Variations in the Government-Chaebol Interrelationship The monstrous growth of the chaebol started affecting their relationship with the government. By the mid 1980s they were enough powerful and influential to successfully campaign against the regulatory machinery of the state (Hundt, 2008 P.73). 3.1. Onset of Neoliberalisation Owing to their strong foothold in international trade and financial independence, the capitalist class was no longer dependent on the state. At this juncture, they ventured to modify the economy in ways which favoured their interested, thereby marking the onset of neoliberalisation. The basic tenets of this model were safeguarding the privileges of the chaebol and, quite obviously, discarding the regulations. The immediate effect was the privatisation of banks (Harvey, 2007 P. 108). 3.2. Capitalism or Mindless Gargantuan Hunger The government-chaebol nexus existed around a locus of corruption and power (Maxfield & Schneider, 1997 P. 122-125). The intimate bond between the power-centre of the chaebol and those of the government were extremely strong. This was reflected in the lending policy of the banks being influenced by political favouritism. The urge to liberalise trade relations and flow of capital led to using easily available, cheaper and accommodating labour. This in turn initiated the export of demeaning labour practices to Latin American, South African and South-East Asian economies through the vast sub-contracting networks of the chaebol. The chaebol and weaker economies mutually benefitted through Korean FDIs aimed to offshore a bulk of production (Smith, Horisaka & Nishijima, 2003 P. 61). The chaebol achieved success at the cost of rising unemployment in Korea (Harvey, 2007, P. 108). Many scholars have also associated the chaebol with an “octopus-style diversification” (Khandwalla, 2009 P. 163). The chaebol used this strategy to gobble up smaller (and weaker) business entities. 4. The Chaebol: a Structural Analysis On the basis of the pattern followed by ownership structure, the chaebol are of three types. Type I comprises the direct-ownership businesses. The prime example of Type I chaebol is the Hanjin Group. Type II is characterised by a nuclear structure wherein a nucleus company, which is designated by the chaebol family, owns its subsidiaries. An example of Type II chaebol is the Daewoo Group whose nucleus company is Daewoo Foundation. In Type III there is a cross-shareholding structure. The chaebol family owns the holding (nucleus) company along with an intermediary. The intermediary has cross-shareholding with group-affiliated companies. Example of Type III chaebol is Samsung Group (Chung, Yi & Jung, 1997 P. 59). 5. The Chaebol through the Decades: a Roadmap During 1960s government-chaebol synergy became increasingly vital for the economic growth and exemplary successes of South Korean economy. The Park regime played an important role towards the development of the model. Armed with foreign loans and unique favours, the chaebol enjoyed huge rate growth through the 1970s. They also made an entry into foreign markets. During this period South Korea witnessed intensified industrial development through government-chaebol alliance (Kim, 1997 P. 135) In the 1980s the trend of growing exponentially continued. Globalisation was accelerated as foreign technology was available. By mid-1980s the chaebol had become the power-centre of Korean economy (Joo & Kwak, 2001 P. 32-33) and the degree of their significance was reflected through the fact that the top three chaebol together contributed to one-third of the national product. During this period the chaebol started exhibiting hunger for more power by trying to modify legislations in their favour. The 1990s saw major changes in the organisational structure and dynamics of the chaebol. The chaebol realised the need to restructure. Unlike the Japanese, the chaebol continued to be family-controlled. Management practices at par with global standards could not be completely incorporated in the administration of the chaebol because of their disparity with Korean work ethics and management styles which were unique in their approach (Kearney, 1991 P. 142). Due to formulation of stringent government regulations, the chaebol were barred from having easy access to banks. The government had started to curb the chaebol monopoly. Moreover, the chaebol showed intense vertical integration unlike their Japanese counterparts who employed foreign contractors (Savada, 1997 P. 148-149). At the beginning of the new millennium, there was a significant decrease in the number of subsidiaries in the top the chaebol. The government played an important role in revising the debt-equity ratio of sick the chaebol and saved them from bankruptcy. Daewoo went belly-up thereby pointing at the need of major financial restructuring of the chaebol and also their lack of transparency. The economic crisis (1997-98) had no remarkable effect on the market share of the chaebol taken together due to active efforts of the government to devise financial restructuring strategies (Chang, 2006 “Korean Business Groups: The Financial Crisis and the Restructuring of Chaebols”). 6. Problems posed by the Chaebol over the Years Like any other capitalist class, the chaebol was largely driven by monopolistic interests. Their initial operations were in collaboration with the government, which being a synergistic and mutually benefitting alliance, led to a booming expansion of the South Korean economy and exponential growth of the chaebol. After achieving huge growth during 1960s and 1970s, the chaebol formed an anti-government cartel which pried with the legislative machinery in order to protect their monopolistic interests and at the same time influence it towards deregulation (Kwon & O’Donnell, 2001 P. 25). The state provided financial cover to the chaebol by providing them with easy access to bank loans. On analysis, many chaebol which were otherwise hugely successful showed a tremendously large debt – equity ratio. Repayment of debt was a major problem. The public-private alliance which worked very closely with the national objective of economic development gave rise to a nexus infested by corruption. This nexus, which was too strong to be broken, paved the way for political favouritism. Chaebols, who had already been enjoying political significance and power, used this nexus in order to procure loans from the nationalised banks. The chaebol successfully campaigned against the economic planning machinery and as a manifestation of their success worked towards the privatisation of banks in order to gain easy access to funds (Woo, 2004 P.89). The Korean economy was blemished in the overseas markets on grounds of quality of the products. This was due to the fact that the chaebol had transferred their production facilities to weaker economies due easy availability of semi-skilled, comparatively cheaper and easily available labour. The outcome was devastating as the effects were rippled through their South American, South African and South-East Asian networks. 6.1. The South Korean Economic Crisis This South Korean phenomenon dating back to 1997-98 was perhaps the most complex problem that has ever been posed by the controversial chaebol, which being the problem child to the Korean economy, is an integral component of it. This event had singlehandedly tarnished the international reputation that South Korea had been enjoying (Davis, 2004 P. 156) The investment banks which were escalated to the status of merchant banks during the period of 1994-1996 lacked the requisite experience of foreign currency transactions. Moreover their business bases were weak. Owing to these reasons, they were forced to endeavour into risky and, often illegal activities as their survival was at a stake. The above – mentioned constraints forced them to buy, at a discount, commercial papers which were issued by the power-centres, the chaebol. These commercial papers were then resold by the merchant banks to the trust accounts at commercial banks. Multiple instances of chaebol bankruptcy during 1997 burdened these merchant banks with huge amounts of irrecoverable debt. Along with this critical situation, the banks were also crippled by maturity mismatches arising from the fact that majority of the debts were short term while majority of the assets were long term (Krugman, 2000 P. 116-118). This phenomenon had taken place because “the merchant banks borrowed cheap, short term Japanese funds from Hong Kong to finance long term loans at high interest to Russia, Thailand, Indonesia and other countries in a classic instance of the so called carry trade” (Chung & Eichengreen, 2005 P. 32). This problem soon spread to the entire banking system thereby plummeting it. The concept of non-performing assets (NPAs) being nonexistent, coupled with lack of transparency which precluded the need of external audits as well as supervisory monitoring had contributed towards this unfortunate outcome. One more factor which had contributed to this crisis was the government itself and quite remarkably, the chaebol finds a mention even in this context! Owing to fact that the Korean government has been sharing a synergistic and symbiotic association with the chaebol and the banking system over decades together, a participative course was always adopted during formulation of policies related to trade and economy. Hence the government, which was used to such a well-established model of associative administration, in an attempt to alleviate the problems of the banks, fixed the rate of exchange at an untenable level and, to be precise, took the final step towards the culmination of the national crisis. Severe drainage of foreign reserves turned out to be an acute problem and the IMF had to be approached for a bailout loan (Chung & Eichengreen, 2005 P. 33). 6.2. Problems Posed by the Chaebol in the Recent Period Post crisis, chaebol problems continue to hinder the South Korean economy and have thus called for regular legislative developments. As a slight deviation from their general trend of monopolistic operations, the chaebols have shifted towards an oligopolistic approach thereby limiting the proliferation of competitors. Lack of transparency has been a major area of concern. Chaebols have been found guilty of accounting and management practices that are highly detrimental to the national economy. Instances of shared payment guarantees, the most vicious cornerstone of the chaebol model, were on a rise and hence had to be curbed. The degree of horizontal integration of chaebol businesses went up to the extent that many business lines proved to be irrational (Kim, 2003 P. 231-236). The recent developments have paved the path towards establishing regulatory reforms in South Korea. These reforms aim at creating a healthy economy free from the strangulations of the chaebol (Jacobs & Organisation for Economic Co-operation and Development, 2000 P. 159). 7. Conclusion Chaebols, as has been illustrated through this research, typify the extent to which public private partnership (PPP) can work towards augmenting a nation’s economy (Suh, 1998 P. 65). Like every other models even the government-chaebol interrelationship has its advantages and limitations. While the beneficial aspects of this model were immensely successful in placing South Korea on the Global Business Map, its limitations proved to be too costly for the nation’s economy. A close analysis of Korean economy shows that the role of the chaebol was extremely crucial in transforming the economy from agrarian to technological (Nelson, 1993 P. 375). This was achieved during the 1960s as a manifestation of the export-oriented growth strategy of the government. This period, along with the following two decades, witnessed extensive globalisation of the chaebol. Korea came to the forefront as a strong economy through overseas operations that had enhanced through technology sharing and access to foreign capital. On a hypothetical growth-curve, this phase can be compared to the log phase. During the exponential phase (1970s and 1980s), the trend of globalisation was more intense and the operations of chaebols expanded to South America, South Africa, Middle East and South East Asia. It was also during this phase that the powerful and independent chaebol became so desperate for expansion that it launched an anti-government campaign and succeeded in its mission. As an immediate after effect, banks were privatised to allow the chaebol easy access to funds. The phase that followed was the lag phase wherein the chaebol, driven by insatiable hunger for growth, ventured into weaker economies in search of easily-available, cheaper labour that were mostly semi-skilled. Using these places as offshore production facilities turned out to be detrimental to the quality standards of Korean products. As a direct effect, Korea started to lose credibility. Through close association with the government and the banking system, the chaebol had been enjoying a protected domestic market. This had pushed them into a zone of self-deception which had partially hindered their foresight. Lack of transparency prevailed in the accounting system. Management styles did not comply with those adopted by stronger and developed economies. Moreover, globally accepted management philosophies could not be incorporated in the chaebols as they were different from the indigenous work-ethics. As a long term effect of the corruption – ridden government-chaebol nexus, the banking system crippled completely during 1997-1998 leading to a severe economic crisis. In an attempt to condense the government-chaebol interrelationship, it can be said that this South Korean model, if applied in a controlled manner, is a tool for sustainable development. It is very important that this model be kept under constant supervision because owing to the strong dynamics of political power, wealth and above all the obvious human element of insatiable hunger, this model remains extremely susceptible to corruption. As a closing note, it can be added that the chaebol has indeed utilised their close ties with the government in order to manifest their monopolistic interests and caused problems, which were not only detrimental to South Korea’s reputation but were also globally significant. References Chang, S. 2006. Business Groups in East Asia: Financial Crisis, Restructuring, and New Growth. Oxford University Press. Chung, D. & Eichengreen J. B. 2005. The Korean Economy Beyond the Crisis. Edward Elgar Publishing. Chung, H. K., Yi, H. & Jung, H. K. 1997. Korean Management: Global Strategy and Cultural Transformation. Walter de Gruyter. Davis, E. D. 2004. Discipline and Development: Middle Classes and Prosperity in East Asia and Latin America. Cambridge University Press. Harvey, D. 2007. A Brief History of Neoliberalism. Oxford University Press. Hundt, D. 2008. Koreas Developmental Alliance: State, Capital and the Politics of Rapid Development. Taylor & Francis. Jacobs, H. S. & Organisation for Economic Co-operation and Development. 2000. Regulatory Reform in Korea. OECD Publishing. Joo, S. & Kwak, T. 2001. Korea in the 21st Century. Nova Publishers. Kearney, P. R. 1991. The Warrior Worker: The Challenge of the Korean Way of Working. I. B. Tauris. Khandwalla, N. P. 2009. Management of Corporate Greatness: Blending Goodness with Greed. Pearson Education India. Kim, M. E. 1997. Big Business, Strong State: Collusion and Conflict in South Korean Development, 1960-1990. SUNY Press. Kim, S. S. 2003. Koreas Democratization. Cambridge University Press. Krugman, R. P. 2000. Currency Crises. University of Chicago Press. Kwon, S. & O’Donnell, M. 2001. The Chaebol and Labour in Korea: The Development of Management Strategy in Hyundai. Routledge. Lee, Y. 1997. The State, Society, and Big Business in South Korea, Volume 6. Routledge. Maxfield, S. & Schneider, R. B. 1997. Business and the State in Developing Countries. Cornell University Press. Nelson, R. R. 1993. National Innovation Systems: A Comparative Analysis. U.S: Oxford University Press Savada, M. A. 1997. South Korea: A Country Study. DIANE Publishing. Smith, H. P., Horisaka, K. & Nishijima, S. 2003. East Asia and Latin America: The Unlikely Alliance. Rowman & Littlefield. Suh, M. 1998. Developmental Transformation in South Korea: From State – Sponsored Growth to the Quest for Quality of Life. Greenwood Publishing Group. Watkins, T. No Date. The Chaebol of South Korea. [Online]. Available at: http://www.sjsu.edu/faculty/watkins/chaebol.htm [Accessed on January 11, 2010]. Woo, M. 2004. The Politics of Social Welfare Policy in South Korea: Growth and Citizenship. University Press of America. Read More
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