Kim Ip-sam, the FKI executive vice chairman during the entire Park era, once recollected that “Park himself confessed on several occasions that he knew nothing about the economy in meetings with business leaders immediately after the 1961 military coup.”12 Many of the innovative ideas that later became his trademark were of chaebol origin. “The strategy of export promotion was first suggested by Chôn T’aek-bo of Ch’ônusa, a producer of leather goods and toys. The idea of attracting foreign capital and commercial loans through the construction of industrial complexes was likewise put forth to Park by business leaders during the early days of military rule.” To be sure, Kim Ip-sam acknowledged that these ideas bore fruit
Economy and Society
278
only because “Park was an extraordinary person, open to new ideas and capable of transforming them into a detailed workable action program,”
and “a quick learner . . . intensely interested in the economy. He studied hard to learn about economic issues and to discover ways to bring about economic development. Nevertheless, the point is that it was the chaebol who had the ideas and the means to attain economic development.” Even during the “easy” stage of developing light industry in the 1960s, Park needed the chaebol as much as the chaebol needed him for the generation of industrial growth. The mutual dependence of the two was to become even more apparent in the 1970s, when Park embarked on the riskier program of heavy and chemical industrialization (HCI).
Rebirth of the Chaebol, 1964–1967
In the initial years of the first FYEDP, the economy performed dismally despite a comprehensive reorganization of the state and a visible shift of political priorities toward economic growth. Unfavorable external economic conditions were initially blamed, but Park soon realized that the problem had deeper roots. After the radical measures of forced saving, including the currency reform and the KIDC debacle of June 1962, paralyzed the economy, Park ordered the EPB to revise the first FYEDP in December of the same year. The revised plan, announced in February 1964, called for concentrating resources in a few strategic industries and promoting exports in order to withstand the whims of the world market. The principles of resource concentration and export promotion signaled that Park was now emulating Meiji Japan in his strategy of modernization, in which the state worked exclusively with the economic powerhouses of the zaibatsu to grow through export markets. But unlike the pre–World War II Japanese zaibatsu, which possessed both industrial firms and financial institutions within their group organization, the chaebol of the mid-1960s were strictly manufacturing entities. The nationalization of commercial banks by the junta in 1961 helped the Ministry of Finance to control the chaebol.
Once Park secured chaebol participation in FYEDP projects, a handful of top-ranking chaebol groups came to enjoy privileged access to the state bureaucracy, including the Blue House. Some of the chaebol were showered with preferential bank loans, state-guaranteed foreign loans, and oligopolistic entry licenses in return for not only taking the risk to develop state-designated industries, but also supplying political funds to Park’s ruling Democratic Republican Party. Although Park discouraged big business from itself becoming a player in party politics, he did let a handful of the
The Chaebol
279
chaebol owner-managers’ extended family members become second-tier leaders in the ruling coalition by taking on crucial DRP posts. Kim Sônggon of Ssangyong rose to the position of DRP finance chair, serving Park’s interests in holding Kim Chong-p’il’s DRP mainstream faction in check.
Both as an old-time civilian politician with a Liberal Party background and as a former entrepreneur with an extensive personal network throughout the South Korean business community, Kim Sông-gon was made for the task of building an anti-mainstream faction in the interest of maintaining a balance of power within the DRP.
The state- chaebol partnership Park constructed was Janus-faced. The partnership was fed by the rents generated through subsidized bank loans, state-guaranteed foreign loans, and selectively distributed licenses, but the politics of rent-seeking did not degenerate into the classic predatory type of plundering, because, in the last analysis, the chaebol as exporters lived in a competitive world of global market forces, and because they remained accountable to Park as the state-designated vehicles for building a “rich nation, a strong army.” Park tied the state provision of rents to the chaebol partners’ ability to achieve FYEDP target goals, withdrawing the sources of rents when he thought the recipients had failed to deliver their part of the bargain without justifiable cause.
Park’s strategy worked because the state’s capacity for generating rents was dramatically strengthened through a series of policy decisions during the mid-1960s. The signing of a normalization treaty with Japan in 1965
not only resulted in a lump-sum transfer of Japanese money in the form of reparation funds, but also cleared the way for the entry of Japanese capital on a commercial basis. To facilitate foreign loans and FDI institutionally, the National Assembly enacted the Foreign Capital Inducement Law, drafted by the Ministry of Finance, in 1966. Park’s 1964 decision to dispatch combat troops to South Vietnam in support of U.S. war efforts also provided the chaebol with the opportunity to earn foreign exchange. The war produced two Cinderellas, Hanjin as a transportation magnate in control of a shipping company, an airline, and a bus and truck company, and Hyundai as a construction conglomerate.
It soon became clear that the key to business growth was access to state-guaranteed foreign loans. The manufacturing sector took 52.1 percent of South Korea’s total foreign loans in 1966 and 69.1 percent in 1968, a huge jump from 10.3 percent in 1962.13 Moreover, in order to encourage the chaebol to take risks and foreign commercial banks to lend money to the risk-taking chaebol, the state guaranteed repayment of 90 percent of the foreign commercial loans, either directly (40 percent) or indirectly through state-owned banks (50 percent). Such a socialization of the finan-
Economy and Society
280
cial risk and costs by the state ended up in driving the chaebol to finance their business expansion and diversification aggressively through the available loans.
The benefits accruing to a chaebol from being designated as a recipient of state-guaranteed foreign loans exceeded the simple sum of foreign loans and included a wide range of privileges from low interest rates on domestic loans, to easy access to scarce foreign exchange, and even to legal prohibi-tion of labor organizations. The benefit of low interest domestic loans became particularly great when Park introduced a “reverse interest rate system” in 1965, which put the domestic bankers’ deposit rates above lending rates.14 To make loan-financed business growth even more irresistible, the average rate of inflation was then roughly 21 percent per year—3 to 5 percentage points below the state-owned banks’ lending rates. Equally critical, whereas the South Korean domestic banks’ interest rates ranged between 24 and 26 percent during the 1965–1970 period, the rates on export-policy loans, many of which were provided to the foreign loan–
financed chaebol, stood in the range of 6.0–6.5 percent. The press even charged that some chaebol were re-lending their bank loans in the private curb market, where interest rates hit 50–60 percent, rather than investing in risky manufacturing projects.15 It was in a certain sense profitable for companies to acquire as many domestic bank loans as possible.
At the same time, Park allowed the chaebol to organize their corporate governance structures, inter-firm relations, and internal hierarchy in the direction that would enable them to raise capital with a minimum threat to their corporate control. The chaebol established multiple businesses with a minimum amount of equity capital through a system of cross-shareholding and cross-loan guarantees, while legally protected from threats of hostile takeovers. The chaebol also had their subsidiaries support each other through insider trading and subsidies, while centralizing internal decision-making processes through the establishment of a planning and management of
fice with an eye to orchestrate a concerted action of mutual assistance among their affiliate firms. What we know as the chaebol of today emerged from these organizational experiments of the mid-1960s: a group of business firms that seem to be independent but are actually run by one owner-manager family through an opaque corporate governance structure, including cross-shareholding, cross-loan guarantees, inter-firm insider trading and subsidies, and centralized planning and management offices.
This structure enabled a chaebol to participate as a monolithic actor in diversified unrelated markets, with systematic control over affiliated firms with regard to financial, personnel, and management issues. As such, the chaebol constituted the South Korean business firms’ way of mobilizing
The Chaebol
281
scarce resources and managing business risks that included market uncertainty and international disadvantage.
Consequently, despite inter-firm and inter-sectoral variations in organization, the chaebol exhibited several common characteristics. First, all firms in the group were controlled by a central company, which was typically operated by an owner-manager family. Second, most of the member firms were of a significant size, and they worked under the coordinated initiative of the centralized management at the top. Third, they tended to be involved in multiple sectors, with the managers transferred from one sector to another, thus ensuring unity of strategy and cross-fertilization of experience.
The mid-1960s saw a furious competition among entrepreneurs to enter the club of chaebol. Chungang and Ssangyong competed for the license to construct a cement factory, Han’guk and Yônhap Steel for a cool strip iron mill, and Taehan Electric Wires and Gold Star for production of electrical products. The winners of licenses were provided with state-guaranteed foreign loans, which were the ticket to corporate expansion. The foreign-loan financed projects of the mid-1960s went to K¤msông Chemicals, Ssangyoung Cement, Sinjin Motors, Samyang, Taehan Industries, Inchôn Heavy Industries, Yônhap Steel, and Hyundai Engineering and Construction, many of which formed close alliances with Park.16 The Lucky-Gold Star Group also consolidated its political edge when it beat its rival, Taehan Electronic Wire Company, in securing foreign and domestic loans at preferential rates. In particular, Park formed a special partnership with Chông Chu-yông of Hyundai, based on their shared vision of rapid industrialization and their similar orientation toward risk taking, “can do”
spirit, and sheer drive. In spite of its second-tier status within South Korean big business at the time of the 1961 coup, Hyundai was chosen over other more established business groups as a partner in national reconstruction because of its owner-manager’s credibility as a risk taker.
The 1960s’ competition for loans and licenses dramatically restructured big business. Faced with a politically driven high-risk and high-payoff marketplace, four of the ten largest chaebol in 1960 dropped from the top ten list by 1965. The second- and third-largest chaebol of 1960—
Samho and Kaep’ung—joined the list of declining chaebol and dropped from the top ten list by the early 1970s. In their place was a new group of bold risk takers: Hanjin, Sinjin Motors, Ssangyong, Hyundai, Hanhwa, and Taenong. These new chaebol invested more in the heavy and chemical industries, Park’s strategic sector, whereas the old chaebol were largely involved in light manufacturing and in commerce. By the end of 1969, foreign loans were concentrated in the hands of the largest chaebol, including
Economy and Society
282
Ssangyong, with a total of $150 million, and Lucky-Gold Star, with $123
million.17
The rise of Hyundai during the late 1960s was particularly spectacular.
Established in 1947, Hyundai Construction remained a solo operation without affiliate companies and subsidiaries until 1955, although it made its name as a construction magnate during the Korean War (1950–1953) by signing numerous exclusive construction contracts with the U.S. military to build barracks and other army facilities along the rapidly changing front lines.18 With many of the lucrative businesses, including the three white industries, under the control of the older chaebol groups, Hyundai could find new markets only through a major expansion of the economy.19
The military coup created opportunities for corporate growth for the latecomers by shaking up the state-business nexus that had been previously mediated and constructed by the Liberal Party and through opening up the heavy and chemical industries as a new frontier of growth without any established front-runners. The 1960s saw Hyundai transformed into an industrial conglomerate with six affiliate companies by entering these new frontiers of growth: Hyundai Construction (1947), Hyundai Marine and Fire Insurance (1955), Hyundai Securities (1962), Inchôn Iron and Steel (1964), Hyundai Oil Refinery (1964), and Hyundai Motors (1967).20
By contrast, Samsung’s case was more turbulent. After close collaboration during the junta, its relationship with Park soured when one of its affiliate firms was charged with the smuggling of saccharin in 1967. Yi Pyông-ch’ol was forced to “donate” to the state its foreign loan–financed Han’guk Fertilizer Company as part of an effort to win back Park’s trust.
The damage was already done, however. In spite of the nationalization of the fertilizer company, the public remained furious, accusing Samsung of illegally profiting from state-guaranteed foreign loans and charging the Park regime with corruption. To appease the populace, Yi Pyông-ch’ol’s son, Ch’ang-h¤i, was arrested, while Yi Pyông-ch’ol stepped down from his position as Samsung’s group chair.21 After this incident, Yi Pyông-ch’ol kept a healthy distance from politics and sought ways to secure less politically vulnerable sources of capital, including joint ventures with foreign capital. He was also more guarded regarding the use of state-controlled and, hence, politically vulnerable bank loans than Hyundai’s Chông Chu-yông and Daewoo’s Kim U-jung because of his less adventurous management style. Moreover, because Samsung was already in control of many of the commanding heights in the South Korean economy as its largest chaebol, Yi Pyông-ch’ol could afford the luxury of letting other chaebol groups enter state-designated strategic industries and test the waters before he decided on his business options.
The Chaebol
283
In spite of the differences in management styles, however, the powerful and charismatic owner-managers of both old and new chaebol groups, from Yi Pyông-ch’ol of Samsung to Chông Chu-yông of Hyundai and Ku Cha-gyông of Lucky-Gold Star, were all self-made visionaries with distinct management styles. The founders typically tapped the resources of their entire extended families, recruiting brothers and in-laws into the management and pooling together the family wealth.22 Later they became powerful CEOs, making up what the press called the “royal family of the founder,” enjoying unparalleled access to top managerial posts and making strategic and operational managerial decisions unilaterally, without the watchful eyes of auditors and minor stockholders. The “imperial” corporate governance structure relied on the leadership of owner-managers for firm growth, making the chaebol organizationally flexible in adjusting to changes in market signals, but at the cost of hasty decision making.
Financial Crisis and Corporate
Restructuring, 1968–1972
Backed by Park’s expansionary drive, manufacturing firms increased in number at a rate of roughly a thousand per year during the 1960s. Although most of the newly established manufacturers were small- and medium-sized enterprises in light industry, the decade also witnessed the launching of 509 large-sized enterprises. The takeoff period of 1963–1969
was particularly productive, with 409 large firms newly established. Industrial concentration increased as well, as the chaebol diversified into unrelated industries. Industrial concentration had been high even before Park’s big push, with 12.5 percent of business firms accounting for 39.8 percent of South Korea’s total value-added and 36.6 percent of its total production in 1960. By 1968, however, large firms, accounting for 12.4 percent of South Korea’s total numb
er of business enterprises, were responsible for 65.2 percent of the total value-added and 64.8 percent of the total volume of production.
However, it was at the height of hypergrowth that the South Korean economy began showing signs of trouble. The root cause lay in Park’s failure to fine-tune the conflicting requirements of competition and concentration. On the one hand, South Korea had to concentrate resources in a few strategic projects if it was to exploit the economies of scale within its given conditions of limited markets and scarce resources. On the other hand, for firms to have an incentive to cut costs and open up new markets, there had to be competitors. The challenge was to establish the “right” number of
Economy and Society
284
firms, neither too many nor too few, that would ensure market competition without getting caught in a downward spiral of surplus capacity, low profits, and financial distress. By the end of the 1960s, it became clear that Park had failed in getting that right number of firms. The intrinsic difficulty in forecasting future market conditions was part of the problem, but Park also faced intense business lobbying for entry licenses. Consequently the heavy concentration of wealth in the leading chaebol took place with too much duplication of investment projects, which began to pose a serious threat to the sustainability of not only those chaebol but the entire national economy. A large number of foreign loan–financed chaebol started to show signs of insolvency by 1967, but Park could only defer adjustment because of great political pressure to increase the money supply to ensure a DRP victory in both the National Assembly and the presidential elections of 1967.
Park Chung Hee Era Page 40
