Korea’s Crony Capitalism

Kim Joo Young is a young lawyer with his own practice. His office, in the heart of Seoul’s financial district, is surrounded by skyscrapers bearing the names of the well-known Korean corporations. And just across the street is the Seoul Stock Exchange building.

“Companies aren’t a Korean invention,” says Kim. “Shares aren’t a Korean invention. They are foreign concepts that have been introduced here. But if we accept these aspects of modern capitalism, we also have to introduce the system of accountability that goes with them: shareholders’ rights. That’s the global way.”

Kim wants Korean capitalism to grow up. “The history of capitalism in Korea is very short,” he observes. He is a leading member of one of South Korea’s most successful nongovernmental organizations, the People’s Solidarity for Participatory Democracy (PSPD). In recent years, the PSPD has attracted thousands of new members.

The Seoul Stock Exchange first opened its doors in 1956. But concepts like the accountability of a company’s management to its shareholders as well as respect for the interests of minority shareholders were not a real concern on anybody’s mind for decades.

So, when the financial crisis hit South Korea in 1997, you could hear the mental walls beginning to crumble. Yet, far from an indictment of globalization, the trauma was widely seen as a vote of no confidence in the South Korean model, dominated by gigantic, rapacious conglomerates called chaebol. And there were plenty of scoundrels to point to.

One of them, Kim Woo-Choong, is now enshrined in the Guinness Book of World Records as “the greatest manipulator of accounting books of the century.” He ended up fleeing the country after the pervasive book-cooking of his Daewoo empire was exposed.

After the economic crisis hit, the Daewoo Electronics founder developed a nasty habit of faking assets and hiding debts — debts which added up to almost 50 trillion won (or $38 billion) by the time Kim Woo-Choong skipped town.

Much of the money he borrowed ostensibly for “investment purposes” was in fact funneled into his own personal — and secret — British bank accounts. The rigged financial structures of South Korea helped make the massive deception possible. In the end, some 34 Daewoo executives and accountants were indicted for accounting fraud. But Kim Woo-Choong is still in hiding.

If Korea is now introducing reforms, it is not because of threats from the presumed gunboats of western capitalism such as the IMF. Change is being propelled by the desires of Kim Joo Young, the young lawyer in Seoul, and other ordinary Koreans for greater openness and global norms.

A former legal adviser to the chaebol, Kim has now switched sides. “I got tired of seeing how they were systematically breaking all the laws and regulations. Even if they are public companies, they don’t care about shareholders — and they ignore stock market law,” he says.

When the South Korean economy crashed in the autumn and winter of 1997, Kim joined many of his countrymen in blaming the collapse on chaebol mismanagement. He resigned from his job with one of Seoul’s leading legal practices, set up shop on his own — and joined the PSPD. Today Kim is a moving spirit of one of South Korea’s most influential political movements, the campaign for the rights of minority shareholders.

His goal: Clean up Korean business life. In Seoul, “shareholder value” is not a dirty word but a radical, progressive idea, a logical extension of South Korean democratization. Like the struggle for political democracy itself, the campaign for shareholder value represents a demand for social justice.

Major reform is possible. And there is precedent. During the 1950s, South Korea introduced land reforms. In 1944, the wealthiest three percent of farming households owned 64 percent of all agricultural land.

Twelve years later, the wealthiest six percent of farming households owned only 18 percent of the land. Yang, the landed aristocracy, had lost its privileges. The land reforms opened the way to industrialization and to South Korea’s economic resurgence. Equally sweeping reforms are needed today — if the country’s economy is to be emancipated from the new chaebol aristocracy — and live up to its true economic potential.

“The biggest corporations have a lot of power and influence over politics and the banks. Neither politicians nor banks can force the necessary changes. Only the shareholders can,” says Kim.

Junior managers in the mismanaged Korean companies are also getting involved. They know the problems first-hand, and many are discreetly tendering their personal support — in the form of financial contributions — to the PSPD’s campaign against the financial abuses of their own employers.

“The civic movement for shareholders’ rights is good for Korea. It spurs management to run their companies more efficiently and fairly. That in turn makes Korean enterprise more competitive,” says Lee Hyo-Cha, head of the Korea Federation of Small Business.

The Korea Herald also underscores the importance of the effort. It observes that, by uniting global trends and local activism, civil organizations have emerged as “a leading force for democracy and change in every sector of society.”

And what about Kim Joo Young? He sees the big Korean corporations as black holes into which the savings of average Koreans disappear, never to be seen again. So it’s not enough to sit back and wait for the market to deal with the problems. Every kick in the pants helps.

“Through the courts, we are hastening a process which has to come about anyway. But we won’t go on forever. Gradually, responsibility will be transferred to the real shareholders.”

Kim hopes it won’t be too long before market mechanisms become sufficiently robust to make his work in the People’s Solidarity for Participatory Democracy unnecessary.

Adapted from “The Race to the Top” by Tomas Larsson.
Copyright © 2001 by the Cato Institute.
Used by permission of the Cato Institute