Korean Studies Internet Discussion List KOREAN STUDIES REVIEW
The Evolution of Large Corporations in Korea: A New Institutional Economics Perspective of the Chaebol, by Jwa Sung-hee. Cheltenham, UK: Edward Elgar. 256pp. (ISBN: 1-8406-4883-X).
Reviewed by Matthew Shapiro
University of Southern California
The Evolution of Large Corporations in Korea was written to show why all current government intervention into the market, specifically that which affects the functioning of Korea's chaebol, or large corporations, must cease. As stated in the introductory chapter, "the role of the [Korean] government should be limited to defining the external economic and social environments, and should be confined to preserving the spontaneity and endogeneity of the market order." The text, thus, continues the neoliberal-developmental state debate of the World Bank, Alice Amsden, and other scholars of East Asian political economy.Author Sung-Hee Jwa focuses upon the chaebol for several reasons. First, the chaebol fit nicely into the "agent-organization-institutions" framework, which adheres to the tenets of new institutional economics. Such a framework attempts to show how government intervention into the market skews patterns of competition and disrupts the incentive structure. Such disturbances have greatly affected the chaebol, exemplified in the text with a pointed look at the failings of Samsung Motor Company. A second reason, however, that Jwa writes so fervently in favor of liberalization of the Korean market can be inferred through his affiliation with a self-stated neoliberal research institute, the Korea Economic Research Institute (KERI). Funded by the Federation of Korean Industries, it is in KERI's (and Jwa's) interest to produce research that supplements the existing Korea-related neoliberal literature. Note that key sources throughout the discussion, Inhak Hwang and Byoung Ki Lee, are similarly affiliated with KERI, hinting at a biased selection of evidence.
Throughout the text, Jwa examines the interaction between the government's industrial policies and the chaebol's responses and shows that the chaebol have relied upon a 30-year policy pattern of entry barriers, support, and exit barriers. Jwa acknowledges that the study does not consider the effects of non-economic institutions upon the relationship. For the sake of parsimony and "positive" economics, therefore, cultural and political institutions have been excluded from the analysis.
Examining industry concentration ratios (via the Herfindahl index) and market concentration ratios, Jwa shows that high levels of concentration by the chaebol are correlated with market inefficiency. Nonetheless, he goes on to say that chaebol ownership and management concentration - distinguishing features of Korea's large corporations - do not necessarily produce detrimental results, in relative terms. What is important, Jwa argues, is that the government establish an institutional framework to correct the distorted incentive structure which may be observed in the chaebol's behavior. In other words, let changes in corporate governance arise from a competitive and unconstrained market. Building upon these conclusions and applying the methods of new-institutional economics, Jwa concludes that chaebol formation, the particular managerial behavior of the chaebol, and excessive diversification of the chaebol resulted from a lack of credibility among Korea's property rights system. This lack of credibility caused chaebol owners to spread the risk of future losses by extensive diversification. Jwa details this phenomenon within the context of theoretical and empirical works by Coase, North, Williamson, and Eggertsson. To validate his hypothesis, Jwa also presents a regression of several nations. While this econometric model does partially account for the determinants of Korean firms' diversification behavior, it does not directly support the neoliberal call for termination of government intervention. A much more salient model, thus, would have analyzed the effects of government reforms upon competitiveness. Since Jwa does not venture into the realm of non-economic institutions, such a model is not possible in the context of the book.
The book concludes with a call for a secure property rights system, transparency in corporate governance, and increased market competition in order to remedy the defects of the Korean economic system. What is lacking from this list of proposals, however, is a call for extensive scrutiny of the chaebol to determine their role in these defects. Jwa does mention the chaebol's moral hazard practices (dishonest behavior in situations in which behavior is not perfectly monitored), but does not attempt an explanation beyond the fact that they are the result of government intervention. What may be necessary is a more specific look at the "two stage decision-making model" presented earlier in the text, moving beyond a superficial look at how the chaebol receive economic allocations through non-market means (i.e., business and political relations) and how such allocations are invested. Such a detailed examination would require Jwa to look specifically at the function of moral hazard in the evolution of the chaebol.
Jwa repeatedly asserts that the recent increase in anti-chaebol sentiment among the Korean populace is unwarranted and misplaced, but this view does not recognize that there is indeed widespread antipathy towards the government, largely due to an increasingly unconstrained media. Rather than frame the chaebol as a victim of interventionist government policies, Jwa should recognize that the public is well aware of the government's failings. Furthermore, had Jwa preferred to test empirically whether anti-chaebol sentiment is unwarranted, he could have examined Korea's Gini coefficient (a measure of income distribution) and unemployment rates. According to available data, income distribution has been relatively equal, but unemployment rates increased following the currency crisis. Given the large number of people negatively affected by the decreasing productivity of chaebol, increases in the unemployment rate should be correlated with increasing antipathy towards the chaebol. The reasons why Jwa avoids this key macroeconomic indicator are not clear.
Although The Evolution of Large Corporations in Korea is a well-packaged and thorough presentation of chaebol development within the context of neo-liberal precepts, the discussion would have been much more effective if it had, within the parameters of new-institutional economics, brought qualitative evidence for economic reforms into play. Anecdotes, interviews, and detailed histories of the chaebol's evolution are much more appropriate for such an elaborate attempt to explain the evolution of these conglomerates. Similarly, analyses of the roles of Korean culture and Confucianism should have been introduced. No matter the success of neo-liberal reforms, testing the effect of personal connections and human relationships on business dealings in Korea will remain difficult.
Citation:
Shapiro, Matthew 2004
Review of The Evolution of Large Corporations in Korea: A New Institutional Economics Perspective of the Chaebol, by Jwa Sung-hee (2002)
Korean Studies Review 2004, no. 09
Electronic file: http://koreanstudies.com/ks/ksr/ksr04-09.htm
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