As the Korean economy becomes increasingly open to
international competition, the changing economic environment
sheds new light on the chebol issue. The past concentration of
economic power in a heavily protected and regulated economy is
now and in the future will be given a new interpretation from
the perspective of the global competition facing the Korean
economy and chaebols. Similarly, elements of the domestic
environment such as political democratization can also change
the nature of the chaebol issue, sine the close intertwining of
business and politics is becoming less justified and sustainable.
For the Korean economy to continue growing, today's
bread-winning industries in Korea need restructuring. In this
restructuring the chaebols are expected to play a major role and
continue to be the engines of growth for the Korean economy.
Given this, drastic policies such as breaking up the chaebols are
neither feasible nor desirable. Korea's future industrial
organization is then expected to be one with big businesses of
chaebols ar the core and small- and medium-sized firms as the
fringe surrounding the core.
The future reform of the chaebol policies should be directed
towards strengthening competition and enhancing efficiency. The
discussion in this paper has the following implications for it.
■ In Light of their insufficient deterrence effects and
serious negative effects, regulations in chaebols' diversification
need to be reformed. The direction of reform could be based on
new knowledge identifying market fundamentals and other
factors explaining chaebols' diversification. Appropriate cures are
not along list of symptomatic treatments but ones which directly
address these fundamentals.
■ Although ownership dispersion may habe many desirable
effects, such as the establishment of 'property right democracy'
and more equitable distribution of income and wealth, it will
take a long period of time and requires the development of a
mature capital market. Since ownership deconcentration is a
long-term vision, the role of policies and laws to expedite the
deconcentration process has certain limitations. Any
misconceptions with respect to the time horizon must be cleared.
■ The separation of ownership and control is neither
desirable for efficiency reasons nor supported by practical
requirements in the foreseeable future, and the choice should be
left in the meantime in hands of the private firms. Therefore, a
warning should be given to any attempts by the government to
impose a particular type of management structure via coercive
policy instruments. We instead argue that competitive pressures
in the output markets will stimulate chaebols to improve their
control and management structure sine the owner-managers
facing the threat of severe competition have a strong incentive
to restructure their corporate control and management.
■ Transparent rules of entry and exit into the industries
must be established. In fact, some of the chaebol regulations are
anti-competitive since many of these regulations are likely to
protect incumbents form the important sources of potential
competition. Entry regulations intended to prevent so-called
'excessive competition' and 'duplicative investment' are in fact
severely limiting competition in such markets as
telecommunications, electricity, steel, and automobile. These
regulations obviously violate the basic premise of competition
law which protects not the competitors but the competition.
Entry regulations for small and medium industries also have
■ The TBTF argument and distortions in the
government-business relationship tell us how important it is to
have properly-functioning exit market in Korea. As long as the
exit market is manipulated on an ad hoc basis by the
government, the moral hazard of chaebols will remain a reality,
and the chebol issues in Korea will not be free of the
illegitimacy concern. If the Korean government wants to escape
from the vicious circle of 'symbiosis- insurance- moral hazard-
illegitimacy', it needs to rethink the validity of the TBTF
argument and develop institutions for an exit market whose
forces will discipline chaebols. This implies an overhauling of the
government-business relationship and korea's financial sector.
The task will not be easy to accomplish considering the many
obstacles lying ahead.
■ Once the historic separation between the commercial
banking sector and the chaebols is relaxed, commercial banks
are expected to become subsidiaries of the chaebols. The
govermance structure of the chaebols today a implies that the
corporate separateness of a bank-subsidiary would not be clear
and transparent. A serious concern for bank regulator is then
whethers its monitoring technologies and firewalls for the public
safety net are powerful enough to make clear and transparent
the possible relationship between the bank-subsidiary and the
other firm-subsidiaries. Requiring the firm-bank conglomerates
to report comprehensive combined financial statement to the
regulatory authority would help make such relationships more
transparent. But it would not be a sufficient condition for the
corporate separateness of the bank-subsidiaries, since combined
financial statements do not cover all the possible relationships
between the bank-subsidiary and the other firm-subsidiaries that
could inflict costs on the public safety net. They could be the
transfer of valuable inside informations to other affiliates or,
more broadly, the govermance structure of the chaebols today
itself that is very much centralized over the affiliates.