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Industry, Service and Trade 9.Industry, Innovation, and Infrastructure 10.Reduced Inequalities

Chaebol Policy for Suppression of Economic Power Concentration

General Background

The Korean word ‘chaebol’ literally means a group of individuals related by blood, who have accumulated massive wealth. Yet the word is commonly used to refer to a business group consisting of numerous big companies, owned and controlled by a person or family. 

A chaebol family typically owns a large portion of shares in only one or two core companies, but its control power reaches a large number of companies. One of the means is the so-called equity investment between affiliated companies. Given a high ratio of inside shareholding in affiliated companies, the chaebol owner exercises exclusive control rights in them. 

Two issues are to be raised about the chaebol of South Korea. One concerns the disparity between ownership and control; many a company is under exclusive control of a person or family who owns few or no shares in it. This disparity leads to the so-called agency problem. The controlling minority shareholder is likely to pursue his or her private interest at the cost of the company and other shareholders. It is said that the agency problem of this kind can be resolved through good corporate governance. The government-led “chaebol reform” focused on this issue after the economic crisis of 1997. The Commercial Act, for instance, was amended to make it easier for small shareholders to file a derivate suit against directors. The Securities and Exchange Act was amended to ensure that outside directors represent at least a quarter of the board of directors. The corporate disclosure rules were upgraded and the penalties for violation were strengthened. The government also proceeded to introduce such institutions as cumulative vote and class action suit.

Prior to the 1990s, the agency problem was not quite the major issue pertaining to the chaebol. People were more concerned with the economic power concentration. A large number of big companies had been under exclusive control of a few individuals. The economic power concentrated in their hands had effect on other areas of society as well. It is this problem that the chaebol policy was primarily designed to resolve in the 1980s.

A number of chaebols grew rapidly in the 1960s and 1970s. Their rapid growth resulted largely from the government’s policy for economic growth. The government designated a few industries to develop, and a few companies to enter each of the industries. In addition to the protection from domestic and foreign competition, the designated companies were provided with loans at preferential interest rates through the state-owned banks. The designated companies could also borrow from foreign investors thanks to the state-owned banks’ guarantees of repayment. A company was more likely to be designated and reap the benefit of privilege if it belonged to one of the top chaebols. 

The top chaebols kept growing much faster than the national economy in the 1980s, further raising their share in the national economy. People were ambivalent to the fast growth of chaebols. Their growth led the growth of the national economy, which was praised. Their growth also accompanied the underprivileged and retarded sectors, which was deplored. The voice of discontent got louder, and the government took measures against the disproportionate growth between the chaebol sector and others. 

“Prevention of excessive concentration of economic power” had been an aim of the government before the phrase was put in the first article of the Monopoly Regulation and Fair Trade Act (MRFTA) in December 1980. Induced or enforced public offerings were one of the earlier anti-concentration measures. The Credit Management System was another, and continued to be used in the 1980s.

When the MRFTA was promulgated in December 1980, the Act included no particular measures against economic power concentration. Four such measures were enacted through amendments in December 1986, with another measure coming in December 1996.

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Inha University

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