The Relation between Government and Chaebol in South Korea at Park Chung Hae Administration (1961 1979)

Oleh:
Nadira Marifa 08/265767/SP/22693 Bhakti Mega Pertiwi 08/267158/SP/22787 Fuad Hasan 09/289492/SP/23815 Andana Wiyaka Putra 09/280253/SP/23168

Chapter I
Introduction

1.1

Background The economic miracle that had shown by South Korea is part of great Asian economic

development together with Singapore and Taiwan. Their development strategy was originated by Japanese economic development after the World War II. The Japanese success on developing their economic after the great depression of World War II has inspired many countries in Asia to adopting the same economic development model. The model is called by the developmental state. In this model, the government has very great role in determining the development order. The government then involve in two policies concern which is industrial concern and social concern. Therefore, the state then plays the developmental role. In implementing the economic developmental agenda, states are usually having cooperation with the private business. This is due to their incapability to maintain the whole economic development agenda by themself. In Japanese economic development, for example, the government built very strong relationship with the Keiretsu (the business group) in order to sustain the economic development. Having similarity with Japan, South Korea also imposed the same policy. In South Korea, the government built the cooperation with the conglomerates called by Chaebol in order to succeed their economic development goal. This kind of cooperation then could e portrayed as the collusive cooperation as the government

only made the relations with a view of the chaebol. As a result, those view number of chaebols were controlling the whole domestic market and business competition. As the Chaebol were controlling the domestic business and market, therefore chaebol has the key role in the South Korean economic development. But, this paper will not focusing the elaboration on the role of chaebol rather than to the relation between the government and the chaebol itself. This is because this relationship is portrayed as the key point of South Korean success. Beside, the Chaebol is impossible to control the domestic market and business in South Korea without its relationship with the government. This kind of relationship is first build on Park Chung Hee period as the industrialization in South Korea is started. Therefore the root of this relationship is first existed in this period. Beside, the relationship of government and chaebol is might be a key factor of the success of Parks Industrialization reform. Therefore this paper will using this period as period setting for research. 1.2 Research Question As the relation between the government and big business is a key of the success of Korean economic development, it is important to understand this kind of relationship. Therefore this paper will mainly focus its explanation on how the relation between the government and big business (chaebol) in Park Chung Hee period? 1.3 Conceptual Background Developmental state could be define as one which promote long-term entrepreneurial perspectives among the industrial elite comprising key business groups and resist growthcompromising demands from special interest groups (Johnson, 1982)1. Beside of it, developmental state in classical way have definition that features two characteristics which is state guided capitalist developmental system and a plan-rational economy with marketrational political institutions (Johnson, 1995, p 28)2. In this sense we may conclude that in the developmental state there must be a huge and strong role of government that determine the
1

Linda Low, ed, Introduction and Overview, Developmental States: Relevancy, Redundancy or Reconfiguration?, 2004, Nova Science Publisher: New York, P: 05 2 ibid

development process and there must be also a big business that could be state owned business or private business. State Capacity As in the developmental state the role of government is very strong yet powerful in determining and planning the process of development, so that it is become important to analyze the state capacity. In many circumstances, state capacity is just simply defined as the ability to design and implement policy. However this definition makes state capacity varied from one developmental state to other. There are some states that have strong ability in doing so, while there are many who fail on doing it. Therefore the state capacity will not conform to be the element of developmental state as it is not standard. As a result, state capacity then defined as the role of state to pose its strength in order to be able to penetrate and mobilize the society in which the state is embedded3. Government and Big Business Relationship In the developmental state, as already mentioned above, big business has a key role in development process of state. On how big business could be very influential is due to its relationship with the government that makes them have privileges for doing business. Therefore in order to know the developmental state, we have to know about this relationship. The relation between both actors is seen as the mutual benefit relationship 4. The government needs big business as the agent to implement its plan, so that the government plan could be easily implemented and also controllable. In the other hand, for the big business, the relationship with the government will make them earn the privileges that would help them to sustain its business. Then, how the government could control the big business to stay on track and what is the privileges. As already seen in Japan, controlling big business is made through the financial policy. The government will give a financial assistant to the big business when they
3

Mark Beeson, DEVELOPMENTAL STATES IN EAST ASIA: A COMPARISON OF THE JAPANESEAND CHINESE EXPERIENCES, Asian Perspective, Vol: 33, no.2, 2009. P: 10 4 Meredith Woo Cummings, ed, Introduction: Chalmers Johnson and the Politics of Nationalism Development, The Developmental State, 1999, Cornell University Press: New York, P: 16

built a business that fit with the government program or as a reward to expand the business when big business has a great outlook. As a consequence it is important for the government to control the financial sector5.

Chapter II
Analysis

2.1 The Start of Chaebol and Government Relationship The chaebol are the large, conglomerate family-controlled firms of South Korea characterized by strong ties with government agencies. The name, which means business association, is properly pronounced jay BOL but the spelling pronunciation chay bol is considered acceptable by Korean speakers.6 There were family-owned enterprises in Korea in the period before 1961 but the particular state-corporate alliance came into being with the regime of Park Chung Hee (1961-1979). 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. The Park regime nationalized the banks of South Korea and could channel scarce capital to industries and firms it saw as necessary for

5 6

Ibid P: 12 What is Chaebol?. http://www.wisegeek.com/what-is-a-chaebol.htm. diakses pada tanggal 7 mei 2012 pukul 18.00

achieving national objectives. The government-favored chaebol had special privileges and grew large. South Korea's economy was small and predominantly agricultural well into the mid20th century. However, the policies of President Park Chung Hee spurred rapid industrialization by promoting large businesses, following his seizure of power in 1961. Government industrial policy set the direction of new investment, and the chaebol were to be guaranteed loans from the banking sector. In this way, the chaebol played a key role in developing new industries, markets, and export production, helping place South Korea as one of the East Asian Tigers.7 South Korea's real gross domestic product expanded by an average of more than 8 percent per year, from US$2.7 billion in 19628 to US$230 billion in 1989,breaking the trillion dollar mark in 2007. Nominal GDP per capita grew from $103.88 in 1962 to $5,438.24 in 1989,reaching the $20,000 milestone in 2007. The manufacturing sector grew from 14.3 percent of the GNP in 1962 to 30.3 percent in 1987. Commodity trade volume rose from US$480 million in 1962 to a projected US$127.9 billion in 1990. The ratio of domestic savings to GNP grew from 3.3 percent in 1962 to 35.8 percent in 1989. 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.9

PART 6: Korea under Park Chung-hee By Henry C K Liu. http://www.atimes.com/atimes/Korea/HJ25Dg01.html. 8 http://www.nationmaster.com/graph/eco_gdp-economy-gdp&date=1962 9 The Park Chung Hee Era: The Transformation of South Korea. Pyng-guk Kim,Byung-Kook Kim,Ezra F. Vogel. Harvard University Press. Hal. 133

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.10 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.11 The chaebol were able to grow because of two factorsforeign 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. 2.2 South Korea Governments Interest on Chaebol Group Basically Chaebol groups itself propose advantages upon its system which attract
10

South Korea: A Country Study. Savada, Andrea Matles. DIANE Publishing, 1 Jul 1997. Hal: 152 11 ibid

government to build a close economic partnership relation. It is due to Chaebol groups are basically economic entities that have been established, so it is already has economic system and mechanism set out. Therefore, investment to Chaebol groups could be seen as a good strategy to take by the government In the other hand the government has capital that manifested into loan which is needed by Chaebol group to run economic activities. This policy indicates the proximity of government influence in economy field of South Korea. The relationship formed between government and Chaebol groups is that the South Korean government to decide economic plan/ blueprints while Chaebol groups perform the function as the executor of economic activity. A close relationship between those two actors is believed to be one of the keys of the South Korea's economic development. The example of the relationship between government and Chaebol groups can be seen during 1970's. Park produced a policy to implement changes of economic focus from light manufacturing to "heavy and cheamical industries" (HCL).12 This policy may be viewed as a blueprint launched by the government. The government then formed an intentionally aided capital to be given to Chaebol groups. At that time, South Korea govenment offered a viable HCIs with almost "unlimited" financial support and tax advantages. Availability of capital allows Chaebol groups to widen the range of its industrial operation/product diversification activities. Policy loan is called as a strategic and effective policy to guide Chaebol groups to focus on industry sectors that the government deemed strategic for the country's economic progress. The same practice happened on export promotion policies which are then addressed by increasing the productivity and as well quality standards, and so forth. From the previous description, an outline can be understood that the South Korean government's interest in facilitating the development of Chaebol groups can not be separated from the goal of increasing economic growth in South Korea. Park used the chaebol as a means towards economic growth. Various support from government, especially support of capital, can be seen as a bait to attract Chaebol groups to develop business in the fields which government considered significant and profitable.
12

http://www.koreatimes.co.kr/www/news/biz/2012/04/291_65162.html. Accessed on May 7 2012

Loan funds from government to Chaebol groups can be further examined as an investment concept. The government is providing blueprints and capital, while the Chaebol groups run the blueprint which ensure availability of commodities and increase economic productivity which at the end brings profit to the government. Chaebol groups since then, play an important role in helping government develop the industry and new export markets. In addition to the systematic advantage of economic development, the South Korean government had also participated in the revenue from the tax imposed on Chaebol groups. Diversification and increased of productivity are relevant to the tax increases that may be derived from Chaebol groups itself. In the end, the close relation of the government and Chaebol groups hold the strategic key in the economic development of South Korea's economy toward forming of developed nation and improve living standards of its citizens. 2.3 Mechanism of Chaebol and Government Relationship The relationships between South Korean Government and the Chaebols in the South Korean economic development could be traced back to the way chaebol was formed. Acording to Sangjin Yoo and Sang M. Lee, Chaebol was founded upon these philosophies: (1)self-made founders13; (2)management by family14; and (3)close government relationships15. Point number 3, close government relationships16 according to Sangjin Yoo and Sang M. Lee defined as the Chaebols should maintain close relationship with the government17. Yoo and Lee argument based on the facts that government had a significant role in shaping chaebol into a major economic player in South Korea18. For example, according to Yoo and Lee, the government gave the chaebol role in South Korea economic development by giving the chaebol the development policy guidelines set by the government, which chaebols followed and executed the policy19. This pattern of mechanism
Sangjin Yoo and Sang M. Lee, Management Style and Practice of Korean Chaebols, California Management Review volume XXIX, number 4. (1987), http://gshp.gsnu.ac.kr/~india93/wayboard/db/free/file/Chaebol%20Style.pdf, accessed 7 May 2012, p. 100 14 Sangjin Yoo and Sang M. Lee, Management Style and Practice of Korean Chaebols, p.100 15 Sangjin Yoo and Sang M. Lee, Management Style and Practice of Korean Chaebols, p. 100 16 Sangjin Yoo and Sang M. Lee, Management Style and Practice of Korean Chaebols, p. 103 17 Sangjin Yoo and Sang M. Lee, Management Style and Practice of Korean Chaebols, p. 103 18 Sangjin Yoo and Sang M. Lee, Management Style and Practice of Korean Chaebols, p. 103 19 Sangjin Yoo and Sang M. Lee, Management Style and Practice of Korean Chaebols, p. 104
13

practiced prevalently first under Park Chung-Hee presidency20 with intention to accelerate the nations industrialization21 and economic development rapidly22. Beside through governments development projects, the relationship of government and chaebol also comes by giving full support from government to the chaebol23 for example through financial regulation support,24 such as easy availability of credit25, anti-labor policies26 or through trade barrier support such as the restriction on Foreign Direct Investment 27 also in infrastructure support such as cheap electricity28 Another form of Chaebol-government relationship is through lobbying process.29 The Chaebol own a lobby organization called the Federation of Korean Industries30 which function is to lobbying the government to make policy suited to them31. One example, according to Reuters that FKI successfully failed the government policy to share their wealth and help promote small busines32. In return of all regulation ease, chaebols are expected to give the government both economic benefit and development. For example, chaebols were among the largest South Korean products exporter33.
Jack Kim and Ju-Min Park, Analysis: South Koreas unloved chaebol, Reuters, 5 April 2012, http://www.reuters.com/article/2012/04/05/us-korea-chaebol-idUSBRE83405T20120405, accessed 7 May 2012 21 Mohammed Hadi, Kyunghee Park and Jun Yang, Hyundais Heavys Shareholder Losses Increase With Chaebol Concern: Real M&A, Bloomberg, 13 June 2011, http://www.bloomberg.com/news/201106-12/hyundai-heavy-s-shareholder-losses-increase-with-chaebol-concern-real-m-a.html, accessed 7 May 2012 22 Jack Kim and Ju-Min Park, Analysis: South Koreas unloved chaebol 23 Sangjin Yoo and Sang M. Lee, Management Style and Practice of Korean Chaebols, p. 96 24 Sangjin Yoo and Sang M. Lee, Management Style and Practice of Korean Chaebols, p. 96 25 The Chaebols in South Korea: Spearheading Economic Growth, Emerging Market Spotlight, Chicago: Thomas White International, Ltd. November 2010, http://www.thomaswhite.com/pdf/emergingmarkets-spotlight-korea-chaebols-november-10.pdf, accessed 7 May 2012, p. 4
20

Choe Sang-Hun, South Korean Family Conglomerates Pressured, The New York Times, 13 September 2011, http://www.nytimes.com/2011/09/14/business/global/south-korean-chaebolunder-increasing-pressure.html?pagewanted=all, accessed 7 May 2012. 27 Kang-Kook Lee, The Post-Crisis Changes in the Financial System in Korea: Problems of Neoliberal Restructuring and Financial Opening after 1997, TWN Global Economy Series, 2010 cited in The Chaebols in South Korea: Spearheading Economic Growth, Emerging Market Spotlight, p. 3 28 Choe Sang-Hun, South Korean Family Conglomerates Pressured 29 Jack Kim and Ju-Min Park, Analysis: South Koreas unloved chaebol 30 Jack Kim and Ju-Min Park, Analysis: South Koreas unloved chaebol 31 Jack Kim and Ju-Min Park, Analysis: South Koreas unloved chaebol 32 Jack Kim and Ju-Min Park, Analysis: South Koreas unloved chaebol 33 Sangjin Yoo and Sang M. Lee, Management Style and Practice of Korean Chaebols, p. 96
26

Chapter III
Conclusion

After all, as the conclusion of the explanation, this paper inferred that in Park Chung Hee Period the relationship between the government and the Chaebol is needed as both side are mutually beneficial from the relationship and has an interdependent interest. In the development agenda of South Korea in Park Chung Hee era, play as the authority who set the plan or blueprint while the Chaebol is the executer of the plan. The mechanism of the relationships between those actors could be seen in financial regulation made by the government. This is the mechanism used by the government to maintain and control its relationship with the chaebol. The regulation is then manifested by the loan mechanism, cheap electricity, resisting the foreign direct investment, etc. Beside of it, the mechanism of relationship is also through lobbying where the Chaebol could play its role in order to pose its interest. As a final, even the relationship between the government and the Chaebol are made through mutual benefit, however the government is still has the biggest power in this relationship. It is due to the government control the key sector of business which is financial sector.