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S. Korea's woes go beyond chaebols
Publication Date : 24-10-2012
With economic growth faltering, South Korea's conglomerates are once again in the spotlight.
Known locally as chaebols, these business groups were once credited with spearheading growth by promoting exports. In more recent years, however, they have come under fire for limiting the growth of smaller companies and accelerating the concentration of wealth in the hands of a small elite.
Presidential elections will be held on December 19, and all three candidates say they share a common goal of overcoming what they see as the unfair practices of these large business groupings. The chaebols have even been accused of squeezing their own suppliers to prevent them from growing.
If a subcontractor does well, say the critics, the conglomerate slashes prices or sets up its own subsidiary that makes the same product. In this way, genuinely innovative companies are stifled and the economy as a whole suffers.
Meanwhile, as exports continue to fall, the chaebols have lost one of the main arguments justifying their stranglehold on the economy.
Government statistics show that South Korean exports fell an unexpectedly sharp 5.6 per cent in the third quarter. A recent survey by the Export-Import Bank of Korea, a state-backed lender specialising in trade financing, suggests that fourth-quarter exports will fall by a similar amount.
The trade-dependent economy has therefore been growing more slowly than many had expected.
Earlier this month, the Bank of Korea cut its forecasts for both this year and the next. Gross domestic product (GDP) growth for this year is now expected to be 2.4 per cent, down from 3 per cent projected in July.
Next year, the GDP is officially expected to grow by 3.2 per cent, down from an earlier forecast of 3.8 per cent.
Normally, the government would react by stimulating the economy.
This time round, however, the sovereign debt crisis in the euro zone has made policymakers wary of doing anything that might increase the national debt and thus threaten the nation's credit ratings.
Despite appeals from industry groups, official efforts to stimulate the economy have therefore been limited. In July, the central bank cut interest rates by 25 basis points for the first time in three years, and followed this up with a similar cut at a policy meeting earlier this month.
The government also announced a fiscal stimulus last month which included some tax breaks, but no new spending.
Officials have been focusing instead on reducing the nation's sovereign debt, currently equal to 33.3 per cent of GDP, and producing a balanced budget by 2014.
All three presidential candidates seem to have tacitly accepted the point that any move to ramp up government spending, and thus increase the national debt, should be avoided in the current global environment.
But there is sharp disagreement about the extent to which the chaebols need to be reined in.
At one end of the debate stands Finance Minister Bahk Jae Wan and the administration of President Lee Myung Bak. To them, any move against the chaebols is likely to be counterproductive.
Harsh restrictions on these export powerhouses, they believe, could threaten the economic recovery. Calls for the chaebols to be subject to strict controls, adds Bahk, are "no more than a ploy to woo voters".
The argument is unlikely to be heard very often in the coming weeks. Bahk is not a presidential candidate, and constitutional provisions prohibit President Lee from standing for re-election.
Park Geun Hye of the conservative ruling Saenuri Party has already expressed her support for restricting the sort of cross shareholdings that critics say enable strategically placed family-owned minority shareholders to exert effective control over many large conglomerates.
But unlike Moon Jae In of the left-leaning opposition Democratic United Party and independent liberal candidate Ahn Cheol Soo, she has stopped short of advocating an outright ban.
Another proposal supported by both Moon and Ahn is an equity investment ceiling. This is designed to restrict the amount of their net assets that conglomerates can invest in other companies. Introduced in 1987 as a means of preventing reckless expansion, the regulation was withdrawn in March 2009.
A further issue concerns current regulations restricting the extent to which industrial groups can invest in banks and other financial companies. Moon and Ahn support tighter restrictions, while Park believes that current rules should be "cautiously" reviewed.
The problem with this debate is its narrow focus. The reality is that whoever takes power after the presidential elections needs to focus on a much wider range of factors hobbling growth. These include an excessively militant trade union movement, a rigid labour market and red tape. Trade agreements such as the one to be negotiated with China and Japan next month also require attention.
Reining in the chaebols is no panacea.