one of south korea's greatest economic
strengths is also one of their biggest
economic weaknesses
their country's economy is divine by a
series of massive business groups with
names familiar to everyone samsung
hyundai and lg
these groups power its export economy
and dominate its people's everyday lives
they also manipulate the korean economy
to their own advantage and pay millions
to maintain corrupt ties with the
highest levels of power in korea
corruption in korea predates the modern
state the japanese colonial state and
its agricultural economy was also quite
corrupt and unequal the large landlords
earned all the income and ruthlessly
exploited the farmers
this administration ended with world war
ii much of its legacies however passed
on to the new south korean government
which fell under the western sphere of
influence
its first president sigmundry thus was a
staunch anti-communist and i guess he
proved it first by committing a variety
of massacres against suspected
communists that left some one hundred
thousand dead
the bordeaux league massacre in 1950 i
felt was especially cruel
and second
recreated the chebul he needed to raise
funds to fight the korean war so
starting in 1946 and peaking in the
1950s his government sold off many of
the assets they seized from the old
japanese state along with a few other
prized state-owned entities
the prices for these privatizations of
public assets were determined by a
private negotiation rather than public
auction a steal by any value investing
metric
valuable companies like tong yang beers
today oriental breweries de haan textile
and tong yang cement heart of the
tongyang group
like with the zaibatsu of japan the
purchasers of these amazing assets would
eventually become the chebul
then in 1961 a park tonghi led a
military coup that ended the second
republic immediately after the coup park
arrested the heads of the chebul on the
basis that they were corruptly
accumulating wealth
but very quickly afterwards his
government negotiated a crony capitalism
deal with the chable park wanted to
emulate japan's industrialization
process and sought the company's help
the chebo would support parks policies
for import substitution and later
exports
the korean government would in turn lend
the table of foreign currency loans at
below market interest rates so that they
can acquire foreign technologies and
build up their capacities in those
industries
and oh by the way the chable will also
contribute funds for park's upcoming 200
million dollar presidential election
campaign
these came in the form of 10 to 15
percent loan commissions namely
kickbacks
companies realized that the best way to
acquire cheap capital and get rich was
to be good friends with the president
for instance park chung maintained very
close personal ties with cheung juyong
of hyundai and kim woo-jong of daewoo
the kickbacks also grew over the years
adjusted to 1990 prices the top five
chebul contributed over 800 million won
annually to the park government before
1972
that grew to 1.5 billion after 1972.
over the next 20 years the government
and the chamber ran korean society as
dominant actors the companies helped
fund the government's political
campaigns and satisfied social compact
of growing the economy
the government in turn granted the
chable privileges and used this force to
impose the costs of the chable's
excesses onto greater society
for instance in 1971 the triple found
themselves over-leveraged and requested
a bailout the korean government
converted all the chapel's private
market loans to five-year public ones
and froze private interest rates
small lenders got hosed since nominal
listed interest rates for such public
loans did not exceed inflation
but as korea entered the turbulent 1980s
the military dictatorship gradually lost
its monopoly grip on power the
partnership began to get a little shaky
as the balance of power started to shift
by the mid-1980s things had tipped
decisively in the chambel's favor the
top five chapel accounted for nearly
twenty percent of the country's gdp and
forty five percent of its mining slash
manufacturing output
the top ten table owned an average of
8.6 manufacturing businesses 20 to 40
businesses in total
korea's chable-centric strategy had
suffocated the country's small and
medium-sized business sector from 1966
to 1976 the number of manufacturing
firms in korea grew just 10 percent but
their size exploded 176 percent
by contrast taiwan pursued a less cozy
state business relationship with its
corporate elites and also did not get
hit with a devastating war they saw its
number of manufacturing firms grow by
150 percent and firm size by 29
over the same period of time
this vast imbalance between the chable
and the rest of the country started to
become an issue the people of south
korea disapproved of the outsized power
these big business groups had
the people were getting richer and with
that they wanted more than just higher
wages they wanted better environmental
regulations working conditions and a
better life in general the government
now increasingly democratic had to
respond switching from a stance of
support to one of regulation
the problem was that the government's
leader still needed the chairboa's
financial contributions to stay in power
this continued regardless of who was in
charge
pakchangi was assassinated and another
military leader chun do huan came to
lead south korea afterwards
during his administration the chable
contributed 15 to 22 billion won to
high-level political campaigns and 21 to
25 billion won during the subsequent
administration of president rote wu
this corrupt deal between the korean
government and business evolved this way
partly because of how weak korea's
political parties have been
during the military dictatorship era
parties served as simple shells for
their candidates people voted the party
simply because they wanted to vote for
the candidate
then the country democratized in 1987
holding free and open elections for the
first time but after so many years of
military dictatorship there had been no
time to build suitable political
campaigning
norms without an above-board financing
system parties and candidates found
themselves starved for cash which made
them vulnerable to corruption which
means the chable are still able to get
what they want government aid in the
form of plentiful capital favorable
regulations and protections from
competition
the asian financial crisis would
demonstrate the consequences of korea's
inability to rein in their big
businesses
in the 10 years after democratization in
1987 the chable gained substantial
political power
for instance in 1988 daewoo group was
able to force the national assembly to
amend the law so to allow the government
to bail out the ailing daewoo
shipbuilding corporation
they also used that power to get rapid
liberalization reforms to aid their
growth and expansion
one of those reforms had been to allow
the table to more easily access foreign
capital financing in other words take
out cheap loans denominated in foreign
currencies this would eventually kick
off a massive debt boom that ended in
the asian financial crisis
another major reform allowed the chebo
to take limited ownership stakes and
non-bank financial companies this
encouraged super complicated
cross-ownership structures obscuring
their true size
for instance the samsung group and its
controlling lee family the lees own a
minority of the shares in samsung
affiliated firms yet through that small
slice they exercise operating control
over almost all of those companies
these companies increasingly complex
structures meant that nobody knew which
subsidiaries made money and which ones
burned it
the profitable companies started
propping up the weak ones leading to
market inefficiencies and oversupply in
certain industries
this all came to a head in 1997 which
vastly paired back the power of the
chamber
it left an open door for reforms
encouraging a more
unquote common prosperity to steal a
term
a variety of reforms were imposed on the
ailing chebor by both the kim dae-chong
and rue mu hyung administrations the
goals were to prevent another financial
crisis from ever happening again by
limiting debt capacity and cross
shareholder structures
some of these reforms succeeded but not
without wide ranging consequences for
instance in my video about hunching
shipping i talked about how the company
had to reduce its debt to equity loads
below 200 percent
it forced hanjin to sell off ships and
lease others to retain capacity
converting those financing costs into
operating ones
reforms did cut a lot of the fat in the
korean car industry in 1997 there had
been five independent korean car
companies soon after there would be just
one hyundai
the chambo dialed back their affiliates
and further separated them in 1997 a
sample of chebour showed 819 affiliates
three years later that number became
544.
dividends to minority shareholders the
ones getting stiff the most by the cross
holdings structure increased from 2.2
trillion won in 2001 to 10.8 trillion by
2006.
the crisis also helped create the korean
export juggernaut realizing the
unfriendly domestic environment the
biggest charitable seized on a variety
of free trade agreements in the 2000s
and turned outwards
they became wildly successful by 2013 86
of samsung's revenue came from abroad
and this success drove the korean
economies a top-line recovery from 1998
to 2010 korea's economy grew at an
average rate of 5 percent
a very good number but that shiny golden
number hid a variety of troubling social
issues beneath the
surface on the basis of gdp growth alone
the korean economy grew well and
everything should be fine right
the problem however was that the
benefits of that growth fell to a very
small cohort of people
a significant gap opened up between the
haves and the have-nots in korean
society in 2013 the table brought in
over 50 percent of revenue and value add
in the manufacturing sector but they
employed less than 20 percent of the
sector's employees
as part of the negotiations during the
reform era after 1997 the government
wanted the table to become more
profitable so that they can more easily
service their debts the table agreed but
wanted to make it easier for them to lay
people off the korean government agreed
hundreds of thousands of people lost
their jobs many of them have never found
regular salaried work since and instead
work
irregularly elder poverty in korea has
since reached four times the oecd
average
income share for the top 1 percent of
korean society rose from 7
before 1997 to 12 in the mid 2010s
the korean people recognize this
inequality that they have seen and
shared none of the success by the
country's so-called national champions
and its plutocratic owners
and that is why the korean people voted
for a change of direction in 2007.
president lee myeongbok is a
conservative from the pakchangi line a
former businessman and ceo of hyundai
construction his 2007 presidential
campaign emphasized economic recovery
after what he called a lost decade of
liberal rule
note again that the korean economy grew
5 a year from 1997 to 2007.
nothing like the glory years of the 80s
and early 90s but very good by almost
any measure
lee's campaign made the 747 promise to
the korean people by bringing ceo style
management to korea he would raise gdp
growth to 7 percent achieve a per capita
income of forty thousand dollars and
make korea the seventh largest economy
lee won with the highest margin in years
but record low voter participation
indicated that the korean people were
starting to lose faith in their
government's ability to curb the
country's social inequalities and bring
the good times back
fundamentally lee's business policies
indicated that he felt the previous 10
years had held back the chairboard's
abilities to compete against other
multinational corporate giants
thus not that big business was too big
for korea but big business was too small
for the world
he lowered the corporate tax rate from
25 to 20
raised the ceiling on non-bank financial
investment and amnestied a number of
executives convicted in wake of the
financial crisis
he also oversaw a continuation of
market-oriented reforms giving more
decision-making powers to the industry
one can argue that lee's goal would
bring back the era of pakchanghi's rapid
economic growth and development lee
traded on those sentiments especially
when he added puck era economic planners
to his administration
but unlike with park lee did not force
the chebo to funnel profits into new and
risky industries something wild and
crazy like quantum computers offshore
wind or fusion energy that the chamber
would otherwise not really invest in
the government failed to do that and
instead funneled money to rust-built
industries like construction and
infrastructure in the end the lee
administration could not deliver the
growth that they promised gdp growth has
continued to decline throughout the
2000s
korean presidents only have one term so
lee soon stepped down in 2018 he was
arrested for charges of bribery
embezzlement and tax fraud
during the next presidential election in
2012 conservative park geun-hye moved
leftwards on her messaging she combined
her platform of nostalgia for the glory
years with stronger emphasis on welfare
notably however she did not advocate for
a higher capital gains tax
key to the accelerating korean wealth
gap
modern corruption committed by the cebu
is done to maximize their wealth and
market power in korea and elsewhere two
areas in particular focus maintaining
control of their empire mostly through
the use of tax manipulations and
legislation and regulatory capture
i want to talk more on the latter
a lot of people today take a nihilistic
perspective to the wealth inequality and
big business corruption problem gosh it
might even be
cool to do so now
who cares we can't do anything about it
they got all the politicians in their
pockets
the reality is that these actions have
consequences and that came to be most
apparent with the 2014 said wool sinking
which claimed 304 lives most of them
high school students
a variety of things have been said about
the say well sinking most of them are
true
for instance i mentioned that the ferry
already had been quite old when it was
first purchased and converted to
passenger use and that it had been very
overloaded when it set off on its
journey
the most proximate reason why the death
rate was so high however was that safety
and rescue regulations were ignored and
had been so for a while
for too long the regulatory agency and
the company worked closely together to
ignore violations and keep the
profitable status quo
a status quo which included the
continued rotation of government
employees into the industry and the
ferry companies continued monopoly
privilege of the lucrative incheon jeju
ferry route
without pressure from either government
or market why should a ferry company try
harder why should any company
south korea's struggle with its biggest
companies continues
president park geun-hye's administration
ended in a spate of corruption scandals
and impeachment
her successor president moon jae-in has
responded with certain business reforms
and higher tax rates and it seems to
have brought about a bit of an
improvement at least in the court of
public opinion
however the south korean economy like
taiwan's to some extent is now quite
dependent on its handful of super
powerful global companies
it is more than likely that substantial
reform will weaken their place in the
world marketplace against companies in
the united states europe and china
south korean democratic society has
become increasingly polarized like many
others in the world and the issue will
be furiously debated chible reform and
what to do about it continues to be an
issue in south korean presidential
politics right up there with what to do
about north korea
alright that's it for tonight thanks for
watching subscribe to the channel sign
up for the newsletter and i'll see you
guys next time