HONG KONG (Reuters Breakingviews) - South Korea has a chance to reset. Its president has been ousted in a corruption scandal that is also threatening to bring down the nation’s top business leader. The political crisis lays bare the fundamental problems of an economy built around a few conglomerates, and sets the scene for real reform.
Park Geun-hye this month became the country’s first democratically elected president to be impeached. She’s now facing prosecution, accused of colluding with the daughter of a cult leader to receive bribes from Samsung and other big business groups. The alleged crony capitalism by a list of the nation’s who’s who, including Samsung heir Jay Y. Lee, has rightly outraged the public.
At the heart of that anger is a sense of deprivation. The younger generation talks about financial hardships, referring to the country as ”hell Joseon“, a play on the name of an old Korean dynasty that ruled through a feudal system. They also fret about being doomed for life, born without a ”golden spoon” - a reference to family fortunes handed down for generations.
Inequality is a byproduct of South Korea’s economic success. Over the past half-century, the nation has emerged from poverty to become Asia’s fourth-largest economy through the relentless expansion of family-run groups known as chaebol, like Samsung, Hyundai Motor and SK. All three are caught up in the growing governance scandal.
Today, chaebol, with government blessing, stifle domestic competition and keep wealth from trickling down. The 10 largest conglomerates by assets generate revenue equivalent to two thirds of South Korea’s gross domestic product but hired just 3.6 percent of the workforce nationwide in 2015, according to research firm Chaebul.com.
Chaebol are hiring more contract workers and moving production overseas. Samsung now accounts for more than 20 percent of Vietnam’s exports, for example. Yet millions of small and medium-sized enterprises struggle to attract talent, because of the lower salaries and inferior social status they offer. Chaebol dominance also means entrepreneurial success is a long shot.
The global economic slowdown has thrown key industries such as shipbuilding into a dire state, hitting companies like Hyundai Heavy Industries. Meanwhile, electronics powerhouses Samsung and LG are losing market share to Chinese rivals. The net result is that more than 10 percent of job seekers under 30 years old are not on anyone’s payroll.
This shows that the chaebol-led, export-driven growth formula has hit its limits. The South Korean economy is projected to expand less than 3 percent in 2017. The country’s population is forecast to start declining in less than 10 years, raising the risk of Japan-style stagnation. Stronger domestic demand is critical to avoid that fate but requires more job creation and support for small businesses.
GRAPHIC: No job creator: reut.rs/2nBURBk
Candidates to succeed Park are pledging a reset if they win a snap election scheduled for May 9. Front runner Moon Jae-in, a member of the opposition and a former human rights lawyer who ran for election in 2012, promises to take action to encourage small businesses while toughening rules for top conglomerates, such as imposing a cap on new investments in domestic businesses to limit their expansion.
That strikes at the essence of the charges Samsung’s Lee is facing. He is accused of paying bribes to win state backing for a controversial merger of two units, which has strengthened his grip on the family empire. Lee denies any wrongdoing but, if convicted, he may end up behind bars. That would mark a break from the past. Lee’s father was convicted of tax evasion, awarded a presidential pardon, and never actually served time in prison.
The unknown is if Moon will follow through. Past promises made by politicians to overhaul chaebol have failed to materialise. In fact, the ousted Park also campaigned on a range of promises to “democratise” the economy, only to turn back the clock on reform.
Meanwhile, powerful right-wing groups argue that shaking down chaebol could destroy the economy at a time when South Korea faces big geopolitical risks. North Korea is carrying out a series of missile tests, rattling the region. Meanwhile, South Korea’s top trading partner, China, is retaliating over the deployment of a U.S. missile defence system on Beijing’s doorstep. The crackdown against South Korean businesses in China has whacked retail giant Lotte, and Hyundai Motor suspended production at a factory for a week in its biggest overseas market.
Still, South Korea has sufficient fiscal strength to accommodate domestic reform and the public is, for the large part, calling for it. Whatever the external risks, the status quo for chaebol in South Korea is unsustainable — and the current political climate offers a golden opportunity for change. Wasting another five years would be a shame.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.