Financial Times: Bun Fight with the Chaebol

The challenges Korea is facing are multi-faceted and structural in nature. The Chaebol system is a part of it. I have discussed the perils of the Chaebol system many times.

The following article at the FT echoes some critical points I have made on this blog in that it touches on the structural issues Korea has to tackle in order to enhance its innovation/productive capacity.

And yet, what this article doesn’t address is the bigger picture as to how the Chaebol system could be born and prosper in the first place and how it is not going to be dissolved without a major reset in global financial reality.

The other important point one has to see re the Chaebol problem is that among policy failures during the Park regime in the early days of industrialization, perhaps one of the biggest errors is the institutional setup the administration engineered to grow the entrenched oligarchy system among civil servants, banks and Chaebols. It has persisted, hampering the wealth creating activities such as the rule of law.

From the FT:

South Korea is flustered about sticky buns, croissants and black puddings.

In the run-up to this year’s parliamentary and presidential elections, politicians have turned bakeries and black pudding vendors into a battleground where they are trying to vaunt their populist credentials.

Politicians have demanded the families behind Samsung, Hyundai and LG – the conglomerates that dominate the economy – stop selling patisseries and black pudding. The argument runs that it is unfair for big, bad conglomerates (known as chaebol) to move into food-stall territory traditionally occupied by small vendors.

The political rhetoric is melodramatic. Lee Joo-young, a lawmaker in the ruling conservative party, said it was grossly unfair that the chaebol were challenging back-street businesses.

“It’s like [Manchester United’s] Park Ji-sung trying to win at street football in the back alleys,” he said. Even Lee Myung-bak, the country’s president, has fulminated that daughters of the heads of Samsung and Hyundai should not be running bakeries as a pastime when they are putting people out of work.

All very dramatic – but the debate misses the point.

South Korea’s politicians have an uncanny knack for identifying the nation’s most serious problems – in this case the threat to national development posed by chaebol – and then prescribing ineffective medicine.

Asking big companies to step out of food retail is cosmetic. Keeping small vendors alive artificially is a way for the government to avoid substantial questions of restructuring tiny family businesses and providing a genuine social safety net.

Most crucially, cakes are not the problem. The issue is that the chaebol are stopping South Korea building up talent in Japanese-style or German-style small specialist engineering companies. If an entrepreneur starts to build innovative strength in Korea, the chaebol buys him out to strip staff and assets. South Korea is still reliant on engineering parts from Japan, with which it runs an eye-watering deficit. As China eats into Korea’s traditional export markets, Seoul faces a race against the clock to build up boutique engineers. Politicians aren’t even trying to crack this nut.

While the mainstream politicians claim they are making headway by keeping chaebol out of the pain-au-chocolat business, few Korean voters will be convinced. The danger to the status quo is an internet entrepreneur called Ahn Chul-soo who is a popular candidate among young people for president, though he has not said he will run. He is far more candid, saying that chaebol snuff out talent by putting fine minds in “zoo cages”.

It’s hard to imagine a complete outsider like Ahn could run Asia’s fourth-biggest economy. But if mainstream politicians keep focusing on cakes, he just might.

http://blogs.ft.com/beyond-brics/2012/01/27/s-korea-bun-fight-with-the-chaebol/#axzz1kjsbwYb4