Is chaebol reform sustainable or political gimmick?

Is chaebol reform sustainable or political gimmick?

Supporters of the Unified Progressive Party hold a rally at the KINTEX convention hall in Goyang, Gyeonggi Province, Sunday, calling for stronger regulations governing the activities of chaebol, Korea’s family-owned conglomerates. / Yonhap In election year, parties playing voter-pleasing old tricks and they appear to be working By Kim Tong-hyung Korea as a society has become a striking example of Darwinism, where the wealthiest people and companies hog the economic pie like fat kids at a bakery sale. The rapid enrichment of those at the top in recent years raises serious questions about the feasibility of social mobility in the country and feeds the public’s resentment for big businesses that politicians are desperate to exploit as elections near. In a nation where many still cringe at the sights and sounds of socialism, it’s interesting to see lawmakers, both in liberal and conservative camps, competing to throw out new ideas to restrain chaebol’s consolidation of economic power. The plans, which include tax rearrangements and reviving restrictions on corporate equity investment, are precisely the type of proposals their authors might have denounced as anti-business sentiment in any other year. However, with the parliamentary and presidential polls just months away, massaging the public’s ego is now the top priority for political parties, which are upping verbal attacks on industrial cartels like Samsung and Hyundai in attempting to galvanize voters. The corporate behemoths, while clearly frustrated by the verbal abuse, seem determined not to step on any toes. Samsung, Hyundai, and LG have all announced their plans to retire bakeries and other small food stores operated by the daughters and granddaughters of their founding families, following fierce criticism that they are encroaching on business territory traditionally occupied by small vendors. In truth, shutting down a few dozen cake shops doesn’t come close to qualifying as reform. ``The problem is that Korea for too long has been run by governments that act and talk as if the Great Depression of the 1920s never happened, allowing this inequality to grow while talking about a trickle-down effect that never materialized,’’ said a Seoul-based economist. ``Chaebol reform should be more than just a campaign pledge as the health of the overall economy is at stake. Despite the conglomerates piling up record profit and cash, it’s becoming harder to motivate them to use the money to invest. While government officials have been placing all the eggs in the baskets of a very few corporate heavyweights, they should think harder about what the United States did in the early 20th century to break up monopolies across markets to jolt economic growth.’’ The most controversial corporate reform plan currently debated in the political arena is reintroducing restrictions on corporate equity investment, which were retired by President Lee Myung-bak in 2009 to encourage companies to invest more and create quality jobs. The move clearly didn’t work as prescribed as chaebol families used the freedom to set up their own companies and allow their children to make easy money leaching off group affiliates. Now, lawmakers from the opposition Democratic United Party (DUP) are pushing to restore the equity investment ceiling, banning top-10 business groups from investing in other companies in excess of 40 percent of their net worth. The ruling Saenuri Party, or the artists formerly known as the Grand National Party (GNP), is against reviving restrictions on equity investment, but is calling for stronger competition laws to restore a sense of parity in the business sector. The parties are also discussing raising corporate tax rates, strengthening consumer protection on financial products and even empowering unionists to recommend directors on the boards of their companies. Regardless of which party wins the presidential election, one can expect there will be changes in the way the government governs chaebol and that the changes could be more than cosmetic. While some would downplay the current discussions as typical chaebol bashing in an election year, it’s hard to deny that there is increasing recognition in the public that what’s good for the business of companies like Samsung isn’t always good for the rest of the economy. Even as Korea’s growth in gross domestic product (GDP) has pulled back sharply in recent years, the country’s leading business groups have been setting record after record in profits. Despite sitting on historic piles of cash, the companies have used only a tiny proportion of this sum on productive investment, which is the beef of politicians now. There’s no denying that inequality is one of the biggest issues facing the country as it poses a serious threat to its economic future. According to data from the Fair Trade Commission (FTC) and the National Tax Service, assets held by the country’s top 30 business groups nearly tripled over the past decade, as the firms successfully exploited weakened competition following the late-1990s economic crisis and leveraged their domestic dominance in global markets. The top 30 conglomerates held a combined 1,164.4 trillion won (about $1.04 trillion) in assets in 2010, compared with 437.86 trillion won measured in 2001, while the number of subsidiaries they control jumped from 624 to 1,087 in the same period. The combined market capitalization of the 90 listed firms controlled by the top 10 business groups was measured at 648 trillion won last year, which accounted for nearly 53 percent of the value of the local stock market. Critics say the widening chasm between the wealthiest firms and the rest indicates the country’s glaring ineptitude in sustaining healthy competition across markets, a problem that has been exposed by the recent downturn. Korea’s biggest firms have faced little or no regulatory resistance in taking over key business segments merely by brute strength and the compromised vibrancy in domestic markets is a grave concern for a country that needs another growth engine beyond exports. It’s hard to imagine advanced nations like the United States or those in Europe ever allowing one carmaker to build up an 80 percent market share and raise prices on new vehicles whenever it wants, just as Hyundai is doing here. Also unthinkable in Western economies would be a mega-sized conglomerate blocking its hundreds of thousands of employees from forming labor unions, while its founding family designs a complicated ownership scheme to control corporate wealth like personal assets, a description that defines Samsung. The government’s extremely long leash for chaebol has often come at the cost of consumer interest. While the FTC detected over 3,500 cases of price-fixing in 2010, only 66 led to fines and the average penalty amounted to just 2.3 percent of the unfairly earned revenue. Just last month, Samsung and LG were exposed for fixing the prices of laptop computers and flat-screen televisions in 2008 and 2009, the third time in the past two years the local technology giants have been caught for collusion. Samsung was hit with a 25.8 billion fine, while LG’s 18.9 billion won fine is to be waived due to a leniency clause. Since recovering from late-1990s financial meltdown, Korea has had a succession of leaders in Kim Dae-jung, Roh Moo-hyun and Lee, whose export-supportive economic policies have consistently favored big corporations. Inequality, the inevitable result of this approach, was considered as something that should be tolerated as the cost of national prosperity. The strengthening argument is that this polarization has hurt the country’s long-term growth potential and made it more vulnerable to financial downturns like the current one, where exports take a dip from worsening global conditions. Unequal enrichment among corporations is a problem that is closely connected to issues related to the widening gaps among households which, except for the financial elite, have been struggling mightily to combat historically high levels of indebtedness, stagnant wages and crippling unemployment. The chasm between the very rich and the rest has taken the life out of consumption, severing an important recovery route for the economy as it attempts to navigate out of the current crisis. It’s critical that Korea finds a way to boost income more broadly. And this can only be achieved by inspiring entrepreneurship and fostering small- and medium-sized businesses, which would go a long way in leveling the wealth across families, firms and industries. This would require a dramatic departure from the current environment, where chaebol routinely poach the ideas and staff of start-ups and ruthlessly squeeze the smaller firms that supply them.