Park faced the grim reality of the financial crisis only in 1968. The crisis was attributed to three factors.23 First, the chaebol had become heavily indebted after five years of hypergrowth, with a large portion of capital financed by short-term private loans on the curb market and foreign commercial loans. The high debt-equity ratios meant that the economic recession then triggered by a global downturn immediately turned into a corporate crisis, as many of the firms could not even pay the interest they owed out of their declining profits. Of the total corporate funds available in 1968, debt totaled a hefty 72.5 percent, of which 24.5 percent were foreign loans and 15 percent were informal curb-market loans.24 To ease pressures on the current account, the state tightened regulations on foreign capital and raised interest rates, only to see the financial burden on small-and medium-sized enterprises increase. Real interest rates were near two-digit figures in contrast to the negative rates the chaebol enjoyed.25 The interest rates for private curb-market loans ranged from 40 to 70 percent,26
further aggravating not only the SMEs’ but also increasingly the chaebol’ s financial positions.
To make the situation worse, the United States, South Korea’s leading export market, was under rising protectionist pressures, preventing the South Korean textile industry from leading economic growth through exports. The economy was in a slump throughout 1970. The decade of export-driven hypergrowth based on labor-intensive industries, moreover, had brought about a decrease in surplus labor and a rise in real wages, resulting in the loss of comparative advantage. As the global economy hit a deep recession with a downturn in the economies of industrialized nations, South Korean began feeling the crunch.27 More than 200 firms went bank-
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rupt in 1971, although the state tried to come to the rescue by taking over 30 of them.28
The FKI stepped in to voice the collective needs of chaebol conglomerates, calling on the state to take the steps necessary to tackle the liquidity crisis. To underline the gravity of corporate financial distress, which macro indicators like the annual GNP growth rate concealed, the FKI even proposed cutting the government budget and tax revenue by half. Realizing the gravity of the situation, Park announced an Emergency Decree for Economic Stability and Growth (EDESG) on August 3, 1972, on the recommendation of FKI chairman Kim Yong-wan, as we saw in Chapter 7. The EDESG had been in preparation since September 1971, with Kim Yong-hwan of the Ministry of Finance in charge of the working-level task force established within the Blue House. The announcement of the measure was originally planned for January 1972, but was put off until political conflict over the legislation of a special law on national security subsided. To prevent any leaks of the emergency measure, Kim Yong-hwan, as the secretary for foreign capital, received the signatures of the prime minister, the EPB
deputy prime minister, and the MoF minister, among other relevant cabinet members, without explaining the contents of the decree.29 Despite this secrecy, the press later charged that information on the EDESG had been leaked to a few chaebol conglomerates so that their owner-managers could secretly prepare for the shock of the emergency measure.30
To rescue the financially weak business community, the EDESG allowed corporate debtors to repay their private curb-market liabilities over five years with a three-year grace period at a monthly interest rate of 1.35 percent (or an annual rate of 16 percent), when the monthly interest rates in the curb market stood at 3.84 percent on average. The emergency measure also allowed debt-equity swaps at the request of lenders. It was estimated that the EDESG reduced corporate borrowers’ financial burden by two-thirds on average.31
The emergency decree was successful in relieving the pressures of the liquidity squeeze, but at the cost of paralyzing the private curb market that had served as a source of capital for hard-pressed firms, when regular bank financing was unavailable or when a quick loan without extensive paper-work was needed to cover unforeseen operational costs.32 Although the EDESG was originally designed to help firms of all sizes, the greatest beneficiaries were the chaebol, because they accounted for 64 percent of the private curb-market loans. Parallel to the freeze on curb-market loans, the state banks lowered interest rates by 3.5 percent from 19 to 15.5 percent, again benefiting the chaebol the most, as the largest debtors.33 More-
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over, the chaebol conglomerates with heavy investment in strategic industries and export sectors were given the additional benefit of financial subsidies in the form of “industry rationalization funds.”34 In return for their participation in the state’s risky program of heavy and chemical industrialization during the uncertain 1970s, they received generous state support, including low interest rates on bank loans, tax cuts, state guarantees on foreign loans, and preferential licenses. Saved by the emergency decree, big business came back strong, leading the economy to grow by a phenomenal 16.5 percent in 1973.
In the end, the EDESG had the effect of consolidating the chaebol’ s place in the South Korean economy by not only putting the chaebol on a more financially sound base but also enabling them to exploit new opportunities in HCI-led corporate growth from that position of financial strength. The EDESG, followed by heavy and chemical industrialization, sealed a rock-solid partnership between the state and the chaebol. 35 Once the frontrunners among the chaebol entered strategic heavy and chemical industries after the mid-1970s, the entry opportunities were rapidly closed down, with the effect of protecting the front-runners’ market share and political privileges. The HCI chaebol grew exponentially during the 1970s.
Daewoo, established only in 1967, became the Cinderella of the following decade, growing over 54 percent annually. Hyundai also grew at 38 percent to become the largest chaebol, surpassing Samsung. The business community’s internal hierarchy, once it had been reordered by the EDESG
and HCI drive during the 1970s, was to survive for decades to come.
First, the top-ranking chaebol groups’ conglomeration and diversification into unrelated business sectors intensified with the HCI drive.
Whereas Lucky-Gold Star concentrated on producing electrical appliances and electronic goods, Hyundai embodied the image of heavy and chemical industry chaebol by expanding its presence in the automobile sector and entering the shipbuilding and steel industries. The synergy effects accruing from myriad backward and forward linkages were seen as justifying their respective specialization into electronics and HCI. Nonetheless, the sectoral specialization of these chaebol conglomerates should not be exaggerated. Hyundai went on to enter the electronics industry in 1983 and the oil refinery business in 1993. Moreover, its corporate origins traced to Hyundai Engineering and Construction, yet by 1971 it was also operating department stores and hotels. Lucky-Gold Star similarly operated large businesses outside the electrical appliance and electronics industry, running an oil refinery from 1963 on, setting up as a metal maker in 1971, and diversifying into the financial sector in the late 1980s.
Second, the chaebol’ s pattern of investment since the late 1960s closely
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maps onto and followed the Park regime’s economic planning and was concentrated in the state-designated strategic industries, demonstrating that state subsidies and support played an important role in investment decisions made by the chaebol. Apparently, by coming to the rescue of faltering firms between 1968 and 1972, Park succeeded in making his pledge of support politically credible to the chaebol, which helped his mobilization of business support behind the post-1972 HCI drive.
Third, by the mid-1970s, many chaebol conglomerates began to enter the construction industry to exploit the growing domestic real estate market and the Middle East construction boom. Non-bank financial institutions (NBFIs) also attracted major investment when the Ministry of Finance chose to develop NBFIs under the private sector’s leadership with the goal of developing new sources of capital and reducing demands on state bank loans. The fina
ncial and corporate distress of the early 1970s had persuaded the MoF to develop the stock market as a supplement to the existing bank-centered financial system.
Finally, by the early 1970s, the two older and largest chaebol groups—
Samsung and Lucky-Gold Star—diversified into not only the light and heavy manufacturing sectors, but also the services sector, including nonbank financial institutions, hotels, and department stores. Unlike Hyundai and Daewoo, the aggressive front-runners among the new chaebol, which were known to be favored by Park for their risk taking, Samsung and Lucky-Gold Star did not seek extensive loan packages as aggressively as Hyundai and Daewoo. Consequently, they were slower in growth and in diversification. When they entered the state-targeted heavy and chemical industries, they did so much later and on a smaller scale, after the frontrunners had tested the waters. The late entry into HCI was owed in part to their top management’s conservative business strategy of following the proven path of specializing in the production of consumer goods. However, in Samsung’s case, politics also factored in to delay its entry into HCI.
Since 1966, when Samsung’s fertilizer firm had been caught smuggling 60
tons of OTSA (used for the manufacture of saccharin) with the help of state-guaranteed foreign loans, Samsung’s relationship with Park had remained uneasy, preventing it from forging close-knit ties to his industrial projects and goals.36
Of the Big Three, Hyundai was the most dynamic. By 1972, Chông Chu-Yông laid the foundation to become the heavy and chemical industry magnate of South Korea, with six of his eight major firms each building an empire in the construction, iron and steel, oil refinery, and automobile industries. As Yi Chun-lim once recalled, the Hyundai Group’s diversification was driven by its desire to control the markets:
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[Chông Chu-yông] established an iron and steel plant to secure a reliable source of steel for Hyundai Construction. The public then complained about shoddy buildings, but at the time, there could be only shoddy buildings. We could secure steel supplies from a U.S. supplier only at the end of the year, when there were only a few months left to meet the construction deadline . . .
[W]e ended up constructing gray concrete buildings with steel beams in the middle of the winter cold, when the cement kept getting frozen. That was why Chông Chu-yông decided to build his own iron and steel plant.
Besides, Hyundai was the largest construction company, capable of building the iron and steel plant with a steady demand for its products . . . All in all, this was a good deal. Chông Chu-yông’s ideas in establishing Hyundai Motors and Hyundai Oil Refinery were similar: Hyundai was its own largest supplier and customer. Why should Hyundai pay another company for what Hyundai could produce?37
As each of the chaebol conglomerates expanded its empire through diversification and conglomeration, it came to need a new corporate governance structure to help the owner-manager ch’ongsu (commander in chief) maintain his tight rein over subsidiaries and affiliate firms. The structure of family ownership-management had to be modernized if the chaebol were to remain an effective business organization in spite of rapid conglomeration and diversification. The pioneer in organizational innovation was Samsung, who as South Korea’s largest chaebol had already faced the dilemma of family ownership-management and entrepreneurial effectiveness in the late 1950s chaebol. The establishment in 1959 of a secretariat, with full-time staff members to help the ch’ongsu systematically manage the growing Samsung Group, was a precursor to the modernized corporate governance structure that emerged out of the 1964–1972 corporate expansion. Yi Pyông-ch’ol once argued that the secretariat “must become one with the group chairman, putting into practice his management philosophy.”38 To enable the chairman to control and direct the burgeoning business group as if it were a single business entity, the secretariat enjoyed the prerogative of making policy and investment decisions for each of the member firms from the collective perspective of the entire business group.
The Samsung chairman’s secretariat consisted of some twenty staff members, neither too many to threaten the autonomy of affiliate firms by hoarding power, nor too few to be unable to make strategic business decisions. Yi Pyông-ch’ôl saw the secretariat as his eyes and ears to monitor performance and advise on strategic issues from a macro perspective.
Needless to say, the ultimate source of the power wielded by Yi Pyông-ch’ôl and his secretariat lay in the myriad cross-shareholding and circular shareholding that glued the member firms together. Through this mechanism, Yi Pyông-ch’ôl and his family were able to launch new business enti-
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ties with a minimum input of family wealth. Once Yi controlled parent companies with a large personal stake, he used the parent companies to establish new firms and the subsidiaries to launch still another layer of business firms. Then, from his secretariat, Yi Pyông-ch’ôl effectively controlled the entire business group without any checks and balances by professional managers or, more important, by minor stockholders. Even after some of the member companies went public under Park’s pressure to ameliorate societal discontent over the concentration of wealth in the mid-1970s, the opaque corporate governance structure of cross-shareholding and centralized managerial power enabled Yi Pyông-ch’ôl to make strategic business decisions for the firms listed on the stock exchange as if they were still family businesses.
Completion of the Chaebol Structure, 1973–1979
The HCI drive announced by Park on January 13, 1973, allowed the chaebol to complete their structure. Aware of the need to concentrate resources in order to realize economies of scale in the capital-intensive heavy and chemical industries, but also wary of the risks and dangers of stagnant monopolies, Park chose the strategy of getting the chaebol to construct an oligopolistic structure of competition in five industries: nonferrous metal, petrochemical, machinery, shipbuilding, and electronics. The sixth industry selected for massive state support—steel—was reserved for state ownership and management. Selected on the basis of Park’s trust in their owner-managers’ commitment, ten chaebol groups became the dominant players in the other five heavy and chemical industries.39 As the HCI drive progressed, business concentration accelerated. Some 70 percent of investment funds were channeled into a few large chaebol in support of Park’s HCI drive, and most of the top ten chaebol conglomerates, except Samsung and Lucky-Gold Star, came to be Park’s creation, pulled out of the second tier of the South Korean business community by him and diversified into unrelated industries under his patronage. These chaebol were chosen by Park as national champions on the basis of their performance, their loyalty, and their willingness to take risks. The risk taking was rewarded handsomely with oligopoly rights in strategic industries.
This is not to argue that the chaebol itself was Park’s creation. On the contrary, as was already visible in Samsung’s choice to supplement the strategy of funding industrial projects with state-brokered loans with joint ventures after the political fiasco of saccharin smuggling in 1967, the two largest business groups in South Korea—Samsung and Lucky-Gold Star—
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chose the option of teaming up with MNCs to secure scarce resources and minimize risk when they entered the electrical and electronics industry in the 1970s.40 Samsung gained contracts for technology transfers for Samsung Electronic Devices from Nippon Electric and Joowoo (Japan) and for Samsung Electronic Parts from Sanyo, among others.41 Similarly Lucky-Gold Star collaborated with firms such as AT&T (United States), Mitsubishi Corporation (Japan), and Siemens Aktien Gessellschaft (West Germany).42 Lucky-Gold Star opted for joint ventures outside the electrical and electronics industry, too. Among its affiliate companies, the Honam Oil Refinery signed a 50:50 joint venture with Caltex, Gold Star Company secured direct investment from the International Finances Corporation, and Lucky partnered with the National Plastic Company of Japan.43
Despite
the variation in the chaebol groups’ readiness to grow through risky state-brokered bank loans, or with MNCs as their partners in joint ventures, the HCI-driven 1970s were for all conglomerates—whether the old or new, the cautious or adventurous, or the political cronies or entrepreneurs—a lifetime opportunity for hypergrowth. To be sure, Samsung and Lucky-Gold Star fell behind, but still grew fast enough to remain within the Big Four. The two older chaebol groups annually grew by 17.2
percent in terms of total assets. The HCI drive of the 1970s, then, promised hypergrowth for all conglomerates. Equally critical, the continued corporate growth of Samsung and Lucky-Gold Star demonstrated that although state support and guidance were important, they were not the whole story. They showed that there were alternative ways to prosper, even in the most dirigiste period of the Park era.
Once Park decided to pursue HCI, export promotion became an added reason to strengthen business concentration. In the absence of sufficient domestic demand, Park designated the heavy and chemical industries as export sectors when they were only infant industries. He set the goal of increasing HCI exports to a level of 60 percent of total exports by 1981. Incredibly, the target goal was achieved.44 The success was partly owed to the establishment of general trading companies (GTCs) in the mid-1970s.
Shaken by the 1973 oil crisis and challenged by the rising tide of trade protectionism in the markets of advanced industrialized nations, Park pushed through the legislation of a law on GTCs in 1975 on the recommendation of the chaebol. Modeled after the Japanese sogo shosa, organized to deal with exports and imports of diversified products in multiple markets, the GTCs, it was hoped, would put limited resources to their best use.
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