Korea

Heir-apparent in gaol: is it the end of the ‘Samsung Republic’?

BY

Controversy over corruption continues in South Korea months after the impeachment and gaoling of former President, Park Geun-hye, writes Hyung-A Kim

The billionaire heir-apparent to South Korea’s largest family-owned conglomerate or chaebŏl, Samsung Electronics, has been gaoled for five years for bribery and embezzlement, among other charges. Lee Jae-yong, aged 49, also known as Jay Y. Lee, is alleged to have offered or pledged $US 36 million in bribes to Choi Soon-sil, a confidante of Park for over forty years, in return for political favours.

The court, however, confirmed only South Korean Won (KRW) 7.2 billion ($US 6.8 million) as a bribe designed to win the government’s approval of a controversial merger of two Samsung units so as to increase Lee’s control over the entire Samsung empire. It would have cemented a power transfer from his father, Lee Kun-hee, who has been in a coma since 2014.

According to Korean criminal law, those found guilty of offering bribes are subject to a prison term of up to five years, and those convicted of receiving bribes are subject to at least five years in prison. A life sentence is handed down when the amount is more than 100 million won ($US 8,873).

South Korea’s first trial court saw the Samsung corruption scandal as typifying the immoral collusion between political power and chaebŏl. Korean society was left wondering whether Lee’s verdict meant the end of the so-called ‘Republic of Samsung’ which has dominated not only the Korean economy, but also society itself for decades.

A winner-take-all political economy with minimal trickle-down effect

Given that Samsung, with 70-plus companies, accounts for some 25 per cent of the national gross domestic product of the fourth-largest economy in Asia, Lee’s conviction seems to symbolise a turning point in the country’s historically cosy government-chaebŏl relationship.

But the extent to which this will convert into reality needs to be observed with caution. The Korean government-chaebŏl coalition has degenerated into a winner-take-all political economy in which chaebŏls have accumulated an exorbitant pile of cash reserves as they have monopolised the country’s gains from economic growth, with minimal trickle-down effect.

Mass protest against Park Geun-hye in Cheonggye Plaza, Seoul, 29 October 2016 Photo: Teddy Cross: Source: Wikimedia Commons

The size of internal reserves of the thirty largest chaebŏls increased from KRW 330.1 trillion in 2010, to KRW 500.2 trillion in 2014. A 51.5 per cent increase during this five-year period. Yet, investment by these thirty chaebŏls increased by a total of just KRW 2.2 trillion or 3.5 per cent.

The size of chaebŏls in the Korean economy is so huge that their failure would be devastating for the stability of Korean economy.

Yet, chaebŏl reform, especially by shaking-up the chaebŏls ‘accumulated evils’—including anti-market practices and illicit favours—was one of the key election promises of President Moon Jae-in. So far, Moon’s declaration of what he termed ‘J-nomics,’ a new paradigm for job-led growth departing from his predecessors’ chaebŏl-oriented growth, has effected little change, other than a flood of new policies and personnel appointments, including that of Kim Sang-jo, former university professor with the nickname, ‘chaebol sniper,’ to head the Korea Fair Trade Commission.

Government and business are much too inter-dependent

In this context, Lee’s gaoling is a bold move on the part of the criminal court. However, there is a long way to go before one can expect any major reform of chaebŏl or of the relationship between government and business because the two are much too inter-dependent.

For this obvious reason, Kim openly urges the chaebŏls to voluntarily reform their cobweb-like family-run governance structure to meet market expectations and restore fair competition. At the same time, he has drawn an initial deadline of December before he will take ‘appropriate action’, especially regarding the four top-ranking business groups: Samsung, Hyundai Motors, SK and LG.

Although Lee has already filed an appeal, the impact of his verdict on Korean business has become apparent, not only on the four top-ranking business groups, but also on Korean business as a whole. All are struggling to cope with an avalanche of internal and external challenges.

Leadership vacuum

In the case of Samsung Electronics, Yoon Boo-keun, President and CEO of the consumer electronics division, openly admitted that his company had recently lost a business opportunity to acquire an artificial intelligence technology firm. At the same time, he feels like he is ‘sailing without a captain’.

Similarly, Korean business feels suffocated by a stream of ‘unfavourable factors’. These include Lee’s jailing, China’s on-going economic revenge for Korea’s agreement to install the US THAAD anti-missile system, the Trump Administration’s threat to scrap the Korea-US free trade agreement, and the KFTC fair trade pressure, among other anti-business factors.

Security risk led by North Korea’s latest nuclear test might turn into a ‘mega-size economic blow’

Korean business fears, in particular,  the security risk led by North Korea’s sixth nuclear test last week which might turn into a ‘mega-size economic blow’ by affecting the two largest global markets: China and the US. Instead of reducing these internal and external risks, the conservative Chosun Ilbo editorial argues that the Moon government has become an ‘epicentre of amplifying these risks by itself’.

Although Lee’s verdict has aroused much heated debate and controversy, not to mention public expectations of chaebŏl reform, his verdict may not necessarily embolden the Moon administration’s attempt at chaebŏl reform, let alone a paradigm shift towards strengthening corporate governance, as Moon’s J-nomics planned.

On the other hand, the unprecedented leadership vacuum, with Lee being in jail, may have already signalled inevitable change in corporate governance structures.

But whether that change will lead to the end of the so-called ‘Samsung Republic’ is an entirely different matter. Unravelling the indissoluble winner-take-all corporate culture that has shaped and ruled the lives of the Korean people and their ‘Corporate Country’ or ‘Korea Inc’ is likely to take much longer than the liberal Moon Administration expects.

This article is a longer version of the piece by Hyung-A Kim published last week in East Asia Forum.

Featured image: Samsung Electronics is now world number one IT company by revenue, 2016  Source: Wikimedia Commons

About Hyung-A Kim

Hyung-A Kim is Associate Professor, School of Culture, History and Language, College of Asia and the Pacific, Australian National University.

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