Korea, the Republic of Chaebol?
The FT editorial of 6 February claims that Korea is stuck in a time warp. Kwon Oh-seung, head of Korea’s Fair Trade Commission in an interview with the FT suggests that the chaebol have become too powerful and that this is distorting the economy. They are able to keep alive uneconomic businesses, suppress the emergence of innovative new businesses and exercise control through minority shareholding which defies good corporate governance. It is claimed that the chaebol’s dominance must be reduced to ensure a robust economy.
I agree with these sentiments but there are other issues which must be addressed. Professor Yoon, responding to this editorial in a letter on 8 February indicates that the lack of creativity in the work force together with its hierarchical structure is another very serious obstacle to long term economic growth. I agree with that as well but still there are other major problems.
First, Korea’s labour costs have been increasing at rates well above inflation for many years and now rival those in Western Europe. On an index of 100 for Germany, Korea is 66 while the major emerging economies of India and China are 3 and 5 respectively. Korea will not be able to compete with these countries in heavy industrial output and must change direction towards high tech to use the skills of a well educated work force.
Second, Inflexible labour laws which were brought in to protect workers at the time of Korea’s rapid industrial development are no longer relevant to the world’s 10th largest economy. They stifle the ability of companies to respond rapidly to changing conditions.
Reducing the dominance of the chaebol is an important factor in stimulating the Korean economy as the FT points out. But it is a mistake to believe it is the only one.
