The Government and Public and Private Corporations

South Korea Table of Contents

Following the Korean War, foreign aid became the most important source of funds for the reconstruction and rehabilitation of the economy. What was left of the Japanesebuilt industrial plant, most of which by the 1950s either was obsolete or had been destroyed by warfare), generally was turned over to private owners, who were chosen more often for their political loyalty than for their economic acumen. Moreover, Rhee favored certain businessmen and companies with government contracts in exchange for financial support of his political endeavors. It was during this period that a group of entrepreneurs began companies that later became the chaebol, or business conglomerates. The chaebol were groups of specialized companies with interrelated management. These groupings of affiliated companies dominated South Korea's economy in the late 1980s and often included businesses involved in heavy and consumer industries and electric and electronic goods, as well as trading companies and real estate and insurance concerns.

The chaebol were responsible for the successful expansion of South Korea's export capacity. According to Steinberg, in 1987 the revenues of the four largest chaebol were US$80.7 billion, a figure equivalent to twothirds of Seoul's total GNP. In that year, the Samsung Group had revenues of US$24 billion; Hyundai, US$22.7 billion; Daewoo, US$16 billion; and Lucky-Goldstar, US$18 billion. The revenues of the next largest chaebol, Sunkyong, totaled US$7.3 billion in 1987. The top ten chaebol represented 40 percent of all bank credit in South Korea, 30 percent of value added in manufacturing, and approximately 66 percent of the value of all South Korean exports in 1987. The five largest chaebol employed 8.5 percent of the manufacturing work force and produced 22.3 percent of all manufacturing shipments. Despite a rash of strikes against the chaebol beginning in 1987, the chaebol generally had higher compensation and better working conditions than their lesser South Korean competitors.

The Origins and Development of Chaebol

Although South Korea's major industrial programs did not begin until the early 1960s, the origins of the country's entrepreneurial elite were found in the political economy of the 1950s. Very few Koreans had owned or managed larger corporations during the Japanese colonial period. After the departure of the Japanese in 1945, some Korean businessmen obtained the assets of some of the Japanese firms, a number of which grew into the chaebol of the 1990s. These companies, as well as certain other firms that were formed in the late 1940s and early 1950s, had close links with Syngman Rhee's First Republic, which lasted from 1948 to 1960. It was alleged that many of these companies received special favors from the government in return for kickbacks and other payments.

When the military took over the government in 1961, military leaders announced that they would eradicate the corruption that had plagued the Rhee administration and eliminate injustice from society. Some leading industrialists were arrested and charged with corruption, but the new government realized that it would need the help of the entrepreneurs if the government's ambitious plans to modernize the economy were to be fulfilled. A compromise was reached, under which many of the accused corporate leaders paid fines to the government. Subsequently, there was increased cooperation between corporate and government leaders in modernizing the economy.

Government-chaebol cooperation was essential to the subsequent economic growth and astounding successes that began in the early 1960s. Driven by the urgent need to turn the economy away from consumer goods and light industries toward heavy, chemical, and import-substitution industries, political leaders and government planners relied on the ideas and cooperation of the chaebol leaders. The government provided the blueprints for industrial expansion; the chaebol realized the plans. However, the chaebol-led industrialization accelerated the monopolistic and oligopolistic concentration of capital and economically profitable activities in the hands of a limited number of conglomerates.

Park used the chaebol as a means towards economic growth. Exports were encouraged, reversing Rhee's policy of reliance on imports. Performance quotas were established.

The chaebol were able to grow because of two factors-- foreign loans and special favors. Access to foreign technology also was critical to the growth of the chaebol through the 1980s. Under the guise of "guided capitalism," the government selected companies to undertake projects and channeled funds from foreign loans. The government guaranteed repayment should a company be unable to repay its foreign creditors. Additional loans were made available from domestic banks. In the late 1980s, the chaebol dominated the industrial sector and were especially prevalent in manufacturing, trading, and heavy industries.

The chaebol were often compared with Japanese keiretsu (the successor of the zaibatsu), but as David I. Steinberg has noted, there were at least three major differences. First, the chaebol were family dominated. In 1990, for example, in most cases the family that founded the major business in the chaebol remained in control, while in Japan the keiretsu were controlled by professional corporate management. Second, individual chaebol were prevented from buying controlling shares of banks, and in 1990 government regulations made it difficult for a chaebol to develop an exclusive banking relationship. The keiretsu usually worked with an affiliated bank and had almost unlimited access to credit. Third, the chaebol often formed subsidiaries to produce components for exports, while large Japanese corporations often employed outside contractors.

The tremendous growth that the chaebol experienced, beginning in the early 1960s, was closely tied to the expansion of South Korean exports. Growth resulted from the production of a diversity of goods rather than just one or two products. Innovation and the willingness to develop new product lines were critical. In the 1950s and early 1960s, chaebol concentrated on wigs and textiles; by the mid-1970s and 1980s, heavy, defense, and chemical industries had become predominant. While these activities were important in the early 1990s, real growth was occurring in the electronics and high-technology industries. The chaebol also were responsible for turning the trade deficit in 1985 to a trade surplus in 1986. The current account balance, however, fell from more than US$14 billion in 1988 to US$5 billion in 1989.

The chaebol continued their explosive growth in export markets in the 1980s. By 1990 the chaebol also had begun to produce for a growing domestic market. By the late 1980s, the chaebol had become financially independent and secure-- thereby eliminating the need for further government-sponsored credit and assistance.

Another reason for the success of the chaebol was their access to foreign technology. Rather than having to develop new areas through research and technology, South Korean firms could purchase foreign patents and technology and produce the same goods made elsewhere at lower costs. Hyundai cars, for example, used an engine developed by the Mitsubishi Corporation of Japan.

The chaebol were powerful independent entities acting in the economy and politics, but sometimes they cooperated with the government in the areas of planning and innovation. The government worked hard to encourage competition among the chaebol in certain areas and to avoid total monopolies.

The role of big business extended to the political arena. In 1988 a member of a chaebol family, Chong Mong-jun, president of Hyundai Heavy Industries, successfully ran for the National Assembly. Other business leaders also were chosen to be members of the National Assembly through the proportional representation system.

The Role of Public Enterprise

A government-led economic development policy during the 1960s was necessary because the less experienced and capital-poor private entrepreneurs lacked the wherewithal to develop several critical industries that were necessary to the nation's economic growth. The government determined that establishing public corporations to develop and manage these highly strategic industries was the fastest and most efficient way to foster growth in a variety of key areas.

During the 1960s, public enterprises were concentrated in such areas as electrification, banking, communications, and manufacturing. In 1990 these enterprises were, in many cases, efficient revenue-producing concerns that produced essential goods and services at low costs, but which also produced profits that were used for new capital investments or to produce funds for public use elsewhere. In the 1980s, Seoul was slowly privatizing a number of these firms by selling stocks, but the government remained the principal stockholder in each company. In the 1980s, an important function of public enterprises was the introduction of new and expensive technology ventures.

In 1985 the public enterprise sector consisted of about 90 enterprises employing 305,000 workers, or 2.7 percent of total employment in the nonagricultural sector. There were four categories of public enterprises: government enterprises (staffed and run by government officials), government-invested enterprises (with at least 50 percent government ownership), subsidiaries of government-invested enterprises (usually having indirect government funding), and other government-backed enterprises. Government-invested public enterprises, such as the Korea Electric Power Corporation (KEPCO) and the Pohang Iron and Steel Company (POSCO), represented the core of the new enterprises established during Park's regime. In the late 1980s, roughly 30 percent of the revenues produced by public enterprises came from the manufacturing sector and the other 70 percent from such service sectors as the electrical, communications, and financial industries.

Pohang Iron and Steel Company

In the 1960s, the Park government concluded that selfsufficiency in steel and the construction of an integrated steelworks were essential to economic development. Because South Korea had not had a modern steel plant before 1968, many foreign and domestic businesses were skeptical of Seoul's decision to invest heavily in constructing a steel plant. Despite the skepticism, however, POSCO began production in 1972, just four years after the company's inauguration in April 1968 with only thirty-nine employees.

Japan provided the money for the construction of the initial plant, following an agreement made at the Third South Korea-Japan Ministerial Meeting in 1969. Financing included US$73.7 million in government grants and loans, US$50 million in credit from the Japan Export-Import Bank, and technical assistance from Nippon Steel and other corporations. This cooperation was one consequence of the normalization of relations with Japan in 1965 and reflected the view of the government of Japan as noted in the Nixon-Sato communiqué of November 21, 1969, that "the security of the Republic of Korea is essential to the security of Japan."

POSCO is located in the southeastern port city of P'ohang. Previously a fishing port whose major industry was processing fish and marine products, P'ohang is now a major industrial center with almost 250,000 people. In addition to the huge integrated steel mill, P'ohang has an industrial complex housing companies that manufacture finished steel products of raw materials provided by POSCO.

POSCO first began to sell plate products in 1972 and focused its sales policies on the domestic market to improve steel selfsufficiency at home. Special efforts were made to supply quality iron and steel to related domestic companies at below export price to strengthen their international competitiveness.

POSCO's growth has been immense. By the late 1980s, POSCO was the fifth biggest steel company in the noncommunist world, with an annual production approaching 12 million tons worth 3 trillion won. The further expansion of POSCO's productivity and size, however, was sought at a time when the steel industries of the United States and Japan were declining. POSCO's second-phase mill at Kwangyang was completed in August 1988. A third-phase mill was expected, by the early 1990s, to further increase crude steel production to a total output of approximately 17.2 million tons a year. In terms of productivity, POSCO was rated the world's best steel manufacturer throughout the late 1980s and also was rated at the top in terms of facilities.

In 1987 Seoul announced that it was going to transform POSCO into a private company in line with the government's new policy of privatizing state-run corporations. The government planned to retain a majority share of the stock; initial reports in the South Korean press in 1988 indicated that the sale of public shares was going slower than anticipated.

Korea Electric Power Corporation

KEPCO is a government agency whose goal is to provide abundant electric power and to develop reliable power resources. The south of Korea traditionally had received its electric power from power stations in present-day North Korea, but the P'yongyang government cut off power to South Korea in 1948. The catastrophes of the Korean War also posed electrical supply problems. The situation had not improved greatly by 1961 when the new military junta merged three smaller electric companies to form the Korea Electric Company (KECO). Seoul invested heavily in KECO, realizing that adequate sources of power were a basic prerequisite to industrialization. In 1982 KECO was reorganized as a public corporation and became known as KEPCO. All shares were owned by the government. In 1988 Seoul decided to sell 30 percent of all shares to the public.

KEPCO, one of the largest public corporations in South Korea, with 30,289 employees, serviced about 99.8 percent of the populace in 1988. It derived about 12 percent of its electricity from hydroelectric sources, 50 percent from thermal sources (coal, oil, and gas-fired), and the rest from a growing number of nuclear power plants. It was hoped that nuclear power would be developed further to lower reliance on oil, gas, and coal imports. KEPCO officials pronounced their nuclear power plants safe from any potential nonmilitary accidents and said that extraordinary measures had been taken to protect the plants in case of a North Korean attack.

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Source: U.S. Library of Congress