Korea’s New Pro-Chaebol President Takes Office

When Lee Myung-bak is inaugurated today as Korea’s 10th president, the man famously nicknamed ”the Bulldozer” for his achievements as a construction company CEO, appears ready to help the chaebol, the vast, interlinked family-run corporations that powered the country’s initial explosive growth and then ran into trouble in the Asian financial crisis of 1997-1998, back into favor.

Calling himself Korea’s “CEO-president,” the 67-year-old Lee is in large measure a creature of the chaebol himself. Rising from poverty, he became the chief executive officer of Hyundai Engineering and Construction Co. at a young age. The construction subsidiary of Hyundai Group was at the center of South Korea’s economic transformation, and Lee was a master builder. He retired in 1992 after 27 years with the company to enter politics.

A lackluster early start to his political career saw him elected to parliament but embroiled in a campaign finance scandal in 1998. He was eventually elected mayor of Seoul in 2002, a high-profile job that elevated his political fortunes dramatically and set him on the path to the presidency.

He ran for president on a platform of restoring 7 percent growth to the Korean economy, which has been growing at just below 5 percent. The target has since been revised downward due to external factors and rising inflation but it is a promise that has stuck in many minds. “We are watching him very closely because he has promised so much,” said Heo Ji-sun, a small business owner in Seoul.

In his public statements since winning the national election by a landslide over his liberal opponent on December 19, he has made it clear that the business of Korea will be business. After ten years of liberal administrations that sought, in some ways successfully, to temper the overwhelming power of the chaebol in South Korea, critics fear that allowing the chaebol to enjoy unfettered expansion again could spell trouble should the global economy start to turn down, as it is showing every sign of doing.

“We are concerned that Lee Myung-bak’s economic policies are centered around the giant conglomerates, with no consideration for small businesses,” complained Lee Sang-jin of the Citizen’s Coalition for Economic Justice, a civic group, in the JoongAng Daily, a Seoul newspaper.

Lee, who won fame by dramatically improving the environment in Seoul by, among other things, ripping out a highway and recreating a stream that had been buried underneath it as a popular downtown pedestrian walkway, has vowed to cut regulations that he believes hamper growth. The government is to be reorganized along several broad policies including restructuring the public sector, seeking to attract foreign investment, promoting domestic investment, reforming education, and stabilizing real estate prices. The number of government ministries has been reduced from 18 to 15 and he plans to trim the payroll of government by 10 percent.

Among the first regulations expected to be modified after he takes power is a 1984 law barring non-financial companies with more than 2 trillion won ($2.1 billion) in assets from owning more than 4 percent of a commercial bank. The law, strengthened in the wake of the 1997 financial crisis, was put in place to prevent chaebol companies from funding imprudent expansion through their own tied financial subsidiaries. As the chaebol grew to dominate the economy prior to 1997, concerns grew that the failure of a large one could endanger the entire financial system. During his election campaign, Lee said he would eventually allow the ceiling to rise to 15 percent, and he is expected to encourage the creation of complex financial partnerships that will allow chaebol interests to take a leading stake in the commercial finance sector.

Eleven of Korea’s 30 largest chaebol, severely indebted to finance their breakneck expansion, collapsed during the two years of the financial crisis, 1997-1999. Closely tied to the government, they got their start in the 1960s under the government of dictator President Park Chung-hee in an incestuous public-private relationship in which they were favored by lenient government-sponsored credit to build export-led industries. The experiment largely worked, with the chaebol powering Korea into becoming the most powerful of the Asian tiger economies after Japan.

By the late 1980s the chaebol dominated Korea’s economy, particularly in heavy industries such as shipbuilding, construction and cars as well as electronics and high-tech industries, in a bewildering tangle of companies. SK Group, for example, the third-largest chaebol, is composed of 56 affiliated companies sharing the same brand, with combined 2006 revenues of US$75.8 billion.

But the drive for expansion drove too many of them to risky investment strategies and vast overcapacity, financing their business not only through independent banks but their own financial services subsidiaries. The country had built up unsustainable operations — on the eve of the crisis South Korea, with the 26th largest population the world, had seven major automobile manufacturers. The debt was so big that banks found themselves hostage to their debtors, unable to foreclose or write off bad debts without risking their own collapse. Daewoo Group collapsed in 1999 with US$80 billion in debt, which at the time was the largest corporate failure in history.

Chastened to a certain extent but still unbowed, the chaebol have spent the last decade rebuilding. The top 10 biggest by revenues are Samsung, Hyundai Motor, LG, SK, Hanjin, Hyundai Heavy Industries, Lotte, Doosan, Hanhwa and Kumho Asiana.

Because of their integral role in Korea’s economy, however, the government has been strikingly lenient towards its top industrialists. Repeatedly charged by prosecutors with violations of corporate and electoral law, many have simply paid fines, apologized, and escaped further punishment.

Samsung, which dominates the Korean economy, is a case in point. The corporate behemoth’s influence in politics, media and nearly everything else is so pervasive it cannot be ignored. It accounts for more than 20 percent of the country’s economy.

Korea’s biggest company and the world’s fifth-largest, it is currently under investigation by a special prosecutor after its former chief lawyer blew the whistle on an alleged network of slush funds worth more than US$200 million supposedly used to bribe politicians, journalists and prosecutors. The funds are alleged to have been used largely to allow the company, most of which is publicly traded, to keep control within its founding family through a complex holding company structure. In 2002, prosecutors dropped a slush fund case against Samsung’s chairman. In 2006, allegations of secret funds were also dropped because the evidence reportedly consisted of an illegal tape recording.

The results of the Samsung probe are due within weeks and if, as expected, prosecutors announce indictments against at least some of the Group’s chief officers it will be an early test of Lee’s approach to the chaebol.

Nor is Samsung alone. In September 2007, a court suspended the 18-month prison term for criminal assault of Kim Seung-youn, the chairman of chemical and insurance giant Hanwha Group, the country’s ninth largest conglomerate Earlier the same week, the three-year prison sentence of Chung Mong-koo, the chairman of Hyundai-Kia Automotive Group, for embezzlement and fraud was suspended on appeal after the company offered to donate nearly US$1 billion to charity. The court took Chung up on the offer, saying his value to the Korean economy was such that he should not serve any time in jail.

It is into this atmosphere that Lee Myung-bak has entered as president – after escaping his own allegations of corruption after a special prosecutor investigated him on charges of stock manipulation, embezzlement and forgery related to the defunct investment company, BBK. He was also accused of real estate fraud. Prosecutors said they had found no evidence linking Lee to any of the charges despite the fact that opposition parties turned up a film of the president-elect touting the failed company to investors. Prosecutors dropped the charges last week, saying there was no evidence that Lee had anything to do with the embezzlement.

Certainly, businessmen are looking forward to Lee’s five-year term in the Blue House, Korea’s presidential mansion. One of the first things he did after his election was to meet with leaders of the country’s top chaebol at the Federation of Korean Industries in late December, including Lee Kun-hee of Samsung, Chung Mong-koo of Hyundai-Kia Automotive Group and Cho Suck-rai, the chairman of the Hyosung Group, promising to improve the investment environment. The federation, which went into eclipse under the leftist administration of former President Roh Moo-hyun, has repeatedly argued for easing regulations as the way to encourage investment.

Asked about the meeting Cho Suck-rai said in an interview with a Korean newspaper, “It could not have been better. There has not been a business-friendly atmosphere in government policies in recent years. Now the atmosphere is changing. To create jobs, investment should be expanded. President-elect Lee expressed agreement with the business world’s view that an environment for investment should be created.”

Cho, who is also chairman of the Federation of Korea Industries, said in the interview he hoped that the focus on better governance of corporations would be ended under Lee.

“Why is corporate governance so important?” Cho asked. “What benefits does the reform of corporate governance give? If ownership is separated from management, does it mean an improvement in corporate governance? The important thing is whether management is efficient. If the company owners seek only their own profits in management, they had better remain just shareholders. But not all business owners do that.”

In other words, trust big business to do the right thing. Lee Myung-bak may do just that.