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in K</title></head><body>
<div><font color="#000000">_The Evolution of Large Corporations in
Korea: A New Institutional Economics Perspective of the<i>
Chaebol</i>_, by Jwa Sung-hee. Cheltenham, UK: Edward Elgar. 256pp.
(ISBN: 1-8406-4883-X).<br>
<br>
reviewed by Matthew Shapiro<br>
University of Southern California<br>
mattheas@usc.edu<br>
<br>
<br>
<i><x-tab> </x-tab>The Evolution of Large
Corporations in Korea</i> was written to show why all current
government intervention into the market, specifically that which
affects the functioning of Korea's<i> chaebol</i>, 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.<br>
<br>
<x-tab> </x-tab>Author Sung-Hee Jwa focuses upon the<i>
chaebol</i> for several reasons. First, the<i> chaebol</i> 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<i> chaebol</i>, 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.<br>
<br>
<x-tab> </x-tab>Throughout the text, Jwa examines the interaction
between the government's industrial policies and the<i> chaebol</i>'s
responses and shows that the<i> chaebol</i> 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.<br>
<br>
<x-tab> </x-tab>Examining industry
concentration ratios (via the Herfindahl index) and market
concentration ratios, Jwa shows that high levels of concentration by
the<i> chaebol</i> are correlated with market inefficiency.
Nonetheless, he goes on to say that<i> chaebol</i> 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<i> chaebol</i>'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<i> chaebol</i> formation, the particular managerial
behavior of the<i> chaebol</i>, and excessive diversification of
the<i> chaebol</i> resulted from a lack of credibility among Korea's
property rights system. This lack of credibility caused<i> chaebol</i>
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.</font></div>
<div><font color="#000000"><br>
<x-tab> </x-tab>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<i> chaebol</i> to determine their role in these
defects. Jwa does mention the<i> chaebol</i>'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<i> chaebol</i> 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<i> chaebol</i>.<br>
<br>
<x-tab> </x-tab>Jwa repeatedly asserts that the
recent increase in anti-<i>chaebol</i> 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<i> chaebol</i> 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-<i>chaebol</i> 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<i>
chaebol</i>, increases in the unemployment rate should be correlated
with increasing antipathy towards the<i> chaebol</i>. The reasons why
Jwa avoids this key macroeconomic indicator are not clear.<br>
<br>
<x-tab> </x-tab>Although<i> The Evolution of Large Corporations
in Korea</i> is a well-packaged and thorough presentation of<i>
chaebol</i> 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<i> chaebol</i>'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.<br>
<br>
<br>
Citation:<br>
Shapiro, Matthew 2004<br>
_The Evolution of Large Corporations in Korea: A New Institutional
Economics Perspective of the<i> Chaebol</i>_, byJwa Sung-hee
(2002)<br>
_Korean Studies Review_ 2004, no. 09<br>
Electronic file: http://koreaweb.ws/ks/ksr/ksr04-09.htm</font></div>
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