[KS] KSR 2004-09: _The Evolution of Large Corporations in Korea: A New
Stephen Epstein
Stephen.Epstein at vuw.ac.nz
Sun Jun 20 08:36:27 EDT 2004
_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
mattheas at usc.edu
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
_The Evolution of Large Corporations in Korea: A New Institutional
Economics Perspective of the Chaebol_, byJwa Sung-hee (2002)
_Korean Studies Review_ 2004, no. 09
Electronic file: http://koreaweb.ws/ks/ksr/ksr04-09.htm
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