The indictment of Lee Jae-yong, the heir apparent at the Samsung conglomerate, is but the latest explosive development in the political scandal that has been rocking South Korea.
Already, the National Assembly voted to impeach South Korean President Park Geun-hye, the daughter of former president Park Chung-hee, on Dec. 9 last year. The Constitutional Court now has six months to justify her permanent removal from office.
Depending on its decision, a presidential election may be held in the next few months.
However, as Lee’s indictment demonstrates, more than the presidency is at stake in this crisis. At the heart of the scandal is the reciprocal relationship between politicians and the chaebols, South Korea’s giant family-owned conglomerates.
If the government takes this opportunity to transform the economy’s chaebol-dominated structure, it would reshape the country’s economic future as well — for the better.
Park is accused of using her political influence to benefit her longtime confidante, Choi Soon-sil, who is charged with forcing the chaebols to funnel about 80 billion won (US$69 million) into two nonprofit cultural foundations that she effectively controlled.
She is also suspected of interfering in various state affairs, including ministerial appointments and state visits, despite having no official position. Park is being ridiculed as Choi’s puppet.
To some extent, this is nothing new in South Korea. Most administrations have extracted money from the chaebols, often with the help of prosecutors and the tax authorities. In exchange for that money, which is used to finance costly state projects or even political campaigns, the chaebols gain favors, such as cheap bank loans or preferential regulations.
This reciprocal relationship has existed since the start of South Korea’s economic transformation in the 1960s. The country’s rapid progress is attributed to strong manufacturing exports, carried out by firms that were able to compete in global markets only with the help of government incentives.
Park’s father, who led South Korea from 1961 until his assassination in 1979, worked closely with the chaebols, helping them first to build comparative advantages in labor-intensive manufacturing and then to progress to more capital-intensive industries, including automobiles, shipbuilding and chemicals.
DOMINANCE
Today, the chaebols produce almost two-thirds of South Korea’s exports — no small feat in the world’s sixth-largest exporting country.
Samsung Electronics Co is the largest chaebol and accounts for 20 percent of the nation’s total exports. Ranking 13th on the Fortune’s Global 500 last year, Samsung’s market capitalization comprises one-fifth of the South Korean stock market.
Beyond government support, the chaebols’ ownership and governance structure has contributed to their success. With the founding families in charge, chaebols’ top management can focus on a long-term vision, instead of short-term profits, and can mobilize resources swiftly. The efficiency of this model is apparent in the chaebols’ success as “fast followers” of top US and Japanese firms.
Yet the chaebols’ hierarchical management structure is often too rigid to correct bad decisions. Many conglomerates went bankrupt during the 1997 Asian financial crisis, having made excessive and unprofitable investments.
Moreover, the chaebols’ ownership is often opaque, with webs of cross-shareholdings allowing founding families to exercise controlling power, despite holding only a small portion of equity.
The Lee family has less than 5 percent direct ownership of Samsung Electronics, but holds a 31.1 percent stake in Samsung C&T, the group’s de facto holding company, which owns a 4.3 percent stake in Samsung Electronics and a 19.3 percent stake in Samsung Life Insurance.
Samsung Life Insurance, in turn, has a 7.3 percent stake in Samsung Electronics, which indirectly invests in Samsung C&T and Samsung Life Insurance.
This type of ownership structure can be particularly problematic during transfers of ownership to new generations. As with any dynasty, no one is ever sure that the heir apparent is capable of doing the job.
Lee recently took over as Samsung Electronics’ vice chairman. At a time of strong and growing market competition, he must provide the kind of visionary leadership that characterized his father and grandfather, the company’s pioneering founder, who transformed a small local trading company into a global semiconductor and smartphone powerhouse.
CHANGING TIMES
Like the rest of the chaebols, Samsung risks losing ground in global markets, owing to the narrowing technology gap with China. Though South Korea is still ahead of China in high-tech branches like memory chips and automobiles, its lead is diminishing in many major industries, such as steel, ships, petrochemicals, and electronics.
In emerging markets, Samsung Electronics has already lost market share to Chinese smartphone makers such as Huawei and OPPO.
It is in this high-pressure context that last year, then-South Korean health and welfare minister Moon Hyung-pyo allegedly pressured the National Pension Service to back a controversial merger of two Samsung group affiliates that was essential to ensure a smooth transfer of managerial control to Lee.
Moon, who then became chair of the NPS, has now been arrested for that move.
Lee’s indictment, too, is linked to this effort. He is charged with donating to Choi’s two foundations, and of bankrolling Choi’s daughter, in exchange for the support he received.
He is also accused of embezzlement and perjury. (The judge ruled that there was insufficient reason to issue the requested arrest warrant.)
While the government makes deals with the chaebols, start-ups and small and medium-size enterprises (SMEs) are struggling to make their way into the market.
SMEs’ labor productivity is just 35 percent that of large firms. And labor productivity in the services sector is 45 percent that of the manufacturing sector — just half the Organisation for Economic Co-operation and Development average.
To create a healthier business climate for innovative small firms and venture start-ups, the chaebols’ dominance must end. South Korea’s leaders must implement stronger regulations to prevent illegal transactions and unfair practices, including collusion between chaebols and government officials. They should also strengthen the rights of minority shareholders and outside directors to prevent expropriation by founding families.
There was a time when what was good for the chaebols was good for South Korea. However, times have changed, and the chaebols system is now doing more harm than good.
With Park’s impeachment, South Korea has gained an ideal opportunity to leave behind her father’s legacy as well.
Lee Jong-wha, a professor of economics and director of the Asiatic Research Institute at Korea University, served as chief economist and head of the Office of Regional Economic Integration at the Asian Development Bank.
Copyright: Project Syndicate
Recently, China launched another diplomatic offensive against Taiwan, improperly linking its “one China principle” with UN General Assembly Resolution 2758 to constrain Taiwan’s diplomatic space. After Taiwan’s presidential election on Jan. 13, China persuaded Nauru to sever diplomatic ties with Taiwan. Nauru cited Resolution 2758 in its declaration of the diplomatic break. Subsequently, during the WHO Executive Board meeting that month, Beijing rallied countries including Venezuela, Zimbabwe, Belarus, Egypt, Nicaragua, Sri Lanka, Laos, Russia, Syria and Pakistan to reiterate the “one China principle” in their statements, and assert that “Resolution 2758 has settled the status of Taiwan” to hinder Taiwan’s
Singaporean Prime Minister Lee Hsien Loong’s (李顯龍) decision to step down after 19 years and hand power to his deputy, Lawrence Wong (黃循財), on May 15 was expected — though, perhaps, not so soon. Most political analysts had been eyeing an end-of-year handover, to ensure more time for Wong to study and shadow the role, ahead of general elections that must be called by November next year. Wong — who is currently both deputy prime minister and minister of finance — would need a combination of fresh ideas, wisdom and experience as he writes the nation’s next chapter. The world that
The past few months have seen tremendous strides in India’s journey to develop a vibrant semiconductor and electronics ecosystem. The nation’s established prowess in information technology (IT) has earned it much-needed revenue and prestige across the globe. Now, through the convergence of engineering talent, supportive government policies, an expanding market and technologically adaptive entrepreneurship, India is striving to become part of global electronics and semiconductor supply chains. Indian Prime Minister Narendra Modi’s Vision of “Make in India” and “Design in India” has been the guiding force behind the government’s incentive schemes that span skilling, design, fabrication, assembly, testing and packaging, and
Can US dialogue and cooperation with the communist dictatorship in Beijing help avert a Taiwan Strait crisis? Or is US President Joe Biden playing into Chinese President Xi Jinping’s (習近平) hands? With America preoccupied with the wars in Europe and the Middle East, Biden is seeking better relations with Xi’s regime. The goal is to responsibly manage US-China competition and prevent unintended conflict, thereby hoping to create greater space for the two countries to work together in areas where their interests align. The existing wars have already stretched US military resources thin, and the last thing Biden wants is yet another war.