South Korea's Moon vows to rev up jobs and rein in 'chaebol'
The new president wants to remake the economy; it's a tall order
KIM JAEWON, Nikkei staff writer
SEOUL Mr. Kim, a typical South Korean worker, wakes up in an apartment complex built by construction conglomerate GS E&C, drives to the office in a car built by Hyundai Motor and does his work on a Samsung computer and smartphone. On his way home, he shops at a Lotte supermarket, dines at a CJ restaurant and watches TV on his LG set before going to bed.
South Korea's economy is driven by family-run conglomerates, or chaebol, which dominate most of the country's industries, from high tech and automaking to food processing and finance.
According to data from the Korea Fair Trade Commission, the combined sales of the country's 31 largest conglomerates was around 1,269 trillion won ($1.1 trillion) in 2016, equivalent to 84% of the country's $1.4 trillion gross domestic product that year.
BEASTS SHACKLED But newly elected President Moon Jae-in says the era of the chaebol is over and it is time to change the formula that has shaped Asia's fourth-largest economy: supporting the chaebol and sharing in their profits.
The chaebol have played a key role in South Korea's impressive economic growth. Per capita GDP rose 215 times over the 50 years between 1966 to 2016, from $128 to $27,533, according to data from the Bank of Korea, the central bank.
But the chaebol-centered policy has its downside: The preferential treatment they have received has made them profitable at the expense of small and midsize companies and their employees. Moon, a human rights lawyer-turned-politician, has vowed to cut the cozy ties between the government and business groups, which he says are central to corruption and inequality in the country.
"Under the Moon Jae-in government, connections between business and politics will disappear," Moon said in his inaugural speech at the National Assembly on May 10. "I will lead the reform of the chaebol."
Moon has pledged to limit the influence of the conglomerates' founding families and to strengthen penalties for economic crimes such as embezzlement and breach of trust. The new government will also encourage corporate governance reforms, such as electronic voting at shareholder meetings, to give minority shareholders more say in how companies are run.
He singled out the four biggest conglomerates -- Samsung, Hyundai Motor, SK and LG -- as needing to be reined in, noting they account for about half of all assets held by the country's top 30 conglomerates.
Moon said the Lee family that owns Samsung, the country's largest conglomerate, has run the group like "an emperor," controlling all aspects of the business despite having only a limited stake, while taking no responsibility for its failures. He said the family's totalitarian style of leadership needs to make way for a democratic management run by professionals.
Moon also criticized the chaebol for losing their entrepreneurial drive. "The third generation of chaebol has lost the entrepreneurship that their predecessors had. They stick to easy ways of making money by trading among each other and by launching businesses that small companies are already engaged in," he said.
SMALL BUSINESS CHAMPION The progressive president hopes to promote the growth of smaller, younger companies by giving them a bigger slice of public projects.
"The government will be a buyer, purchasing products of small and midsize enterprises and innovative startups, as well as playing the role of marketing agency for them," states a booklet of Moon's campaign pledges. It also says the government will strengthen financial support for startups by setting up investment funds and by matching them with angel investors.
The new administration has also trumpeted its plan to promote a "fourth industrial revolution," by establishing a special committee under the presidential office. The panel aims to boost key technologies, including electric vehicles, autonomous driving, renewable energy, artificial intelligence, 3-D printing, big data and industrial robots.
Experts give Moon's proposals mixed reviews.
Oliver Salmon, an economist at Oxford Economics, a consultancy, is optimistic. "Encouraging stronger corporate governance, greater competition and a better allocation of resources to promote efficiency and innovation should provide a catalyst for boosting productivity growth," he said. Woo Jae-joon, an economist at Bank of America Merrill Lynch, agrees. "Strong anti-corruption, rule of law and transparent corporate governance [are] issues long overdue," he said.
But what comes after this radical overhaul, assuming it happens? Given that neither small companies nor new technology will flourish overnight, a drastic shift away from the chaebol-centric model is certain to cause friction.
There is also the question of who will fill the void if the big business families are stripped of their influence. Shin Jang-sup, an economics professor at the National University of Singapore, said the move toward so-called economic democratization may only pave the way for institutional investors, including hedge funds, to exercise greater control over business.
"Economic democratization theory seeks to weaken chaebol's stakes in affiliates, assuming they are 'fake capital' and form the foundation of economic dictatorship," Shin recently said at a meeting of the Korea Employers Federation. "Then the vacuum will be filled by institutional investors who will ask for more dividends, worsening [economic] disparity, like they did in the U.S." That would be at odds with Moon's pledge to reduce inequality.
Some experts are also skeptical that Moon's policy of granting protection and support to smaller businesses will be good for their long-term competitiveness.
"The government needs to deal with the issues of SMEs from a broader perspective by reforming the financial markets, education, the labor market, retail structure and trading practices between conglomerates and SMEs, while encouraging technological innovation and intellectual property protection," said Kim Jeong-joo, a researcher at the Korea Small Business Institute.
WHO'S HIRING? For now, the centerpiece of Moon's economic policy will be job creation.
Moon has promised to spend 4.2 trillion won a year over his five-year term to create 810,000 jobs in the public sector. This promise aims to tackle South Korea's severe youth unemployment. Joblessness among people 15 to 29 years old hit 11.2% in April, up from 10.9% a year ago. The comparable figure for Japan during the January-March quarter was 4.6%.
The government says it has to make up for a private sector that has failed to create enough jobs. But business leaders see a contradiction in Moon's policies of "suppressing" large corporations while simultaneously trying to shore up hiring.
"Job creation is made possible through capital investment," said Bahk Byong-won, chairman of the Korea Employers Federation, in an interview with local media. "It does not make sense that [the government] believes jobs can be created without investment."
Bahk hinted that a high-handed approach to chaebol reform may invite a backlash, if not outright sabotage, from the conglomerates. "I wish the government would trust corporate leaders. They will do nothing if the government does not trust them. Then it will be impossible to create jobs," he said.
Economists also frown on the idea of expanding public spending to pump up hiring, given that South Korea faces an aging population and low fertility rate, trends that are weighing on the national budget.
"A sharp decline in the working-age population over the next decade will be hard to avoid. This will act as a major constraint on growth," write Gareth Leather and Krystal Tan, economists at Capital Economics, in a report titled, "Can Moon defuse Korea's demographic 'time bomb'?"
Share prices have risen since Moon's election, with the benchmark KOSPI index reaching record highs. There is euphoria in the market and a belief that the new administration's expansionary fiscal policy will give a short-term lift to the economy, while its corporate governance reform measures will improve companies' profitability.
"If corporate governance improves meaningfully with the passage of the corporate governance reform bills and the adoption of the stewardship code, we think the KOSPI can top 3,000," said C.W. Chung, head of Korea equity research at Nomura, a Japanese investment bank.
Moon is riding this wave of enthusiasm, saying his reforms will help the South Korean economy recover quickly. He is predicting 3% growth in the first half of his term and 4% in the latter half.
The first target may be within reach, given that growth is forecasted by private think tanks at about 2.5% this year. But speeding up the pace still further seems unrealistic unless Moon can put sound and sustainable economic policies in place.