Chaebols in Korea and in China
Port of Posan. Photo: Ju Seok OhThe
chaebols, these veritable behemoths are not a Korean invention. They
are a local version of the Japanese zaibatsu (after World War Two called
keiretsu), immense industrial and financial groups that have dominated
the Japanese economy since the Meiji revolution.
Like Taiwan, at the end of the Second World War, Korea was largely a rural economy, with a very low standard of living, comparable to that of sub-Saharan Africa. The only existing modern factories were the remnants of the Japanese occupation. Due to the war and the continuous confrontation with the Stalinist north, the Korean approach to growth was based more directly on repression: less Confucius more Bonaparte. Labour movement activists were jailed and tortured, yellow unions were set up to counteract the “red” organisations, i.e. the genuine unions. It is worth noting that the role of these yellow unions was very similar to that of the official trade unions in China today. The difference is that in Korea the workers also have real unions, though heavily repressed by the state.
Just like in Taiwan, when the Korean state started to plan the economy, there was not much to plan. As we have already noted for Taiwan, we are not dealing here with the Italian IRI or the British NEB (National Enterprise Board), created to manage an already existing if ailing industry.
The Korean example is particularly important because it did not start with economic planning. Planning was the inevitable plan B after the “market economy” had failed. An Economic Development Council was created right after the end of the Korean War, but it never worked because it was based on the private sector having the the primary role while the state’s role was reduced to providing a general orientation for the private companies. The Korean elite were lulled by the Americans into believing that that was the right track. We have one example from an analysis of the Rand Corporation: “Korea also has a relatively active and experienced private business sector which can be a powerful force in the country’s industrial development”[1]. This strategy, completely out of touch with reality, was imposed by US imperialism on the Chang Myun government. As Korea completely relied on US aid during and after the war against the Stalinist north, no one dared to object. It proved to be a total failure, and a dangerous one at that, because North Korea, with the help of other deformed workers’ states, was rapidly creating its own modern industry. The Korean army grew impatient at the total inability of the national ruling class to stand up to the Americans even though this could have led to a new war with North Korea. After some years, the army had had enough.
In 1961, general Park Chung Hee, that had had a direct experience of the Japanese economy and state, dissolved the government and abandoned its economic strategy and started to industrialise the economy by very different methods. In order to win popular favour, the Park junta used anti-corruption propaganda that verged on anti-capitalist arguments. The army even jailed some big capitalists for corruption, forcing others to retire. Anti-capitalist propaganda was very common on the part of the military elite at that time in many parts of the world. On this topic, Park was following in the steps of Nasser or Nehru and many others nationalist leaders in the former colonial world. The peculiarity here was that he used this rhetoric with the help and as loyal ally of US imperialism. Both had no choice but to support each other. For instance, some years later Park sent hundreds of thousands of soldiers to Vietnam to help US imperialism.
The military government created an Economic Planning Board and five-year plans. The first plan started in 1962. The aims of the different plans were typical of the same export-led economic strategy used also in Taiwan and in Japan: to create the basic heavy industries (setting up large companies) to start exporting and hence amassing resources to finance strong investment and economic growth.
A difference with Taiwan is that Korea did have big companies: the chaebols. However, in the first period after the war, they were not doing what was needed according to the economic interests of the country. Thus, after the Park coup, despite the fact that the army had not formally nationalised the chaebols, these were integrated within the five year plans. The state oriented or, more precisely, pushed the chaebols towards specific economic sectors, financing their investment through state banks. Meanwhile, the more reluctant owners of the chaebols were arrested for corruption. The others got the message and never dared to obstruct the junta again.
In the beginning, chaebols, no more than a handful, were created copying the model of the Japanese conglomerates. Often it was the case that they had been set up by Japanese themselves during the military occupation. Park did not wait for the small and medium sized companies to grow until they could reach the levels of western and Japanese competitors, because this would never have happened on a “free market” basis. On the contrary, the Korean state applied the law of combined development, starting off from where the advanced capitalist countries had arrived: they set up giant monopolies. Although the chaebols were not formally expropriated, the government nationalised or created from scratch entire economic sectors: steel production, public utilities, chemical industry, telecommunications, to provide the chaebols with cheap raw materials and infrastructure – all paid by the state. The history of the steel industry is a typical example. In the 1960s, Park decided that Korea was to become a major steel producer. The “market” was not the solution; economic planning was:
“In the 1960s, the Park government concluded that self sufficiency in steel and the construction of an integrated steelworks were essential to economic development. Because South Korea had not had a modern steel plant before 1968, many foreign and domestic businesses were sceptical of Seoul’s decision to invest heavily in constructing a steel plant. Despite the scepticism, however, POSCO began production in 1972, just four years after the company’s inauguration in April 1968 with only thirty-nine employees.”[2]
Japan provided part of the financial and technical assistance. POSCO started production in 1972 for the domestic market. The success of the company was immense:
“By the late 1980s, POSCO was the fifth biggest steel company in the non-communist world, with an annual production approaching 12 million tons... In terms of productivity, POSCO was rated the world’s best steel manufacturer throughout the late 1980s and also was rated at the top in terms of facilities.” (cit.).
That’s how Korea became a major competitor in the steel industry.
In steel as in the other sectors, the companies (public firms and chaebols) were given production targets. Also thanks to political repression, wages were kept low so that Korea could export much of its production. Moreover, in 1961 Park nationalised the banks in order to have control over the levers of investment, while creating rural cooperative banks to help the modernisation of the primary sector. From 1961 to 1987, the government also set interest rates. Control of the financial sector was a basic pillar of the junta’s strategy:
“The government’s direct control over all institutional credit further extended Park’s command over the business community. The Economic Planning Board was created in 1961 and became the nerve center of Park’s plan to promote economic development.” (cit.)
In this strategy, the relationship between the chaebols and the Korean state was an organic one. The US army summarised it as follows:
“Government-chaebol cooperation was essential to the subsequent economic growth and astounding successes that began in the early 1960s. Driven by the urgent need to turn the economy away from consumer goods and light industries toward heavy, chemical, and import-substitution industries, political leaders and government planners relied on the ideas and cooperation of the chaebol leaders. The government provided the blueprints for industrial expansion; the chaebol realised the plans. However, the chaebol-led industrialisation accelerated the monopolistic and oligopolistic concentration of capital and economically profitable activities in the hands of a limited number of conglomerates.” (cit.)
Correctly, the strategists of the US army underline the main consequence of this relationship: Korea became the most concentrated economy in the world. Chaebols grew more rapidly than the economy as a whole, in a period when Korea was experiencing decades of explosive development. In the 1980s an increase of 20-30% in their assets and turnover each year became the norm. In 1997, the five biggest chaebols were 20 times their size of 1985. Consequently, their weight in industrial production jumped from 16 to 40%. At the end of the 1980s, the first four chaebols had a dimension comparable to two thirds of the country’s GDP. Besides their size, the chaebols had experienced a transformation in their composition, becoming active in the most dynamic economic sectors. In fact, they passed trough the different stages of technological revolution – from textiles to heavy industries, to high techs – in a matter of a few decades instead of centuries. Economic planning via the chaebols was a success and these giant conglomerates grew to world dimensions. Nowadays, everyone has heard of Hyundai cars and Samsung electronics products, brands that not so lonmg ago were completely unknown outside Korea.
The quantitative growth of the chaebols transformed qualitatively their political nature. In the 1960s the chaebols, although formally private, were completely subdued to the government, having no choice but to follow Park directives. However, in the 1980s, chaebols became less and less junior partners of the government. As in Taiwan, the more the country developed, the more the big capitalists grew wary of economic planning. In that period, the EPB was becoming marginal and in 1994 it was merged with the Ministry of Finance, i.e. it was liquidated. After 1983, the government started large scale privatisations and liberalisations. In line with the new policy, in 1987 Seoul announced that it was going to transform POSCO into a private company.
The chaebols were the main beneficiaries of the privatisations, to the point that in 1997 the government was forced to pass a law to prevent them from acquiring controlling interests in newly privatised firms. However, at that time, the economic priorities of the country had changed. Korea was heavily struck by the crisis that hit the “Asian tigers” and the chaebols were the most hit. Eleven of the thirty biggest chaebols collapsed. Korean banks ceased to lend them money to avoid being dragged into the abyss and the state had to intervene to save them. The nature of this intervention revealed that the economic development mechanism in Korea had completely turned around. Now the chaebols called the shots and their puppets in the government obsequiously complied.
What the chaebols tell us about China
As in Taiwan, economic planning in Korea was a success. The annual industrial production growth rate was about 25 percent; there was a fivefold increase in GNP between 1965 and 1978. In the mid-1970s, exports increased by an average of 45 percent a year. Also the rate of profit was exceptional, especially for the chaebols. The development of chaebols was such a success that they were used as an example even in Portugal when in 1975 minister Cravinho was looking for a model to nationalise the banks.
Capital strategists define these kinds of economy “guided capitalism”. The final benefits of economic growth went to the capitalist class but only after many decades of state-led economic planning. In the beginning the chaebols could not have stood up to international competition, just as a lion cub cannot hunt alone in the savannah. The Korean state nurtured the chaebols for decades, financing them, defending them with protectionist measures and exchange rate controls. When they were ready to take on other multinationals, liberalisation policies were used to help them grow on a world scale.
It is not difficult to see a similar strategy under way in China today. That the Chinese government had strived to created national champions for at least a decade is nothing new; neither is it a surprise that they have been copying the chaebols since the 1990s. For instance, in the very well documented book by professor Nolan China and the Global Economy: National Champions, Industrial Policy and the Big Business Revolution (published just a decade ago), the author, analysing thoroughly the policy of creating national champions, points out that the big Chinese firms were not yet ready for a confrontation with the biggest competitors and they had to wait for at least five to eight years. In the banking sector, this expected time span proved to be correct. Chinese banks are now the biggest in the world and growing many times faster than their biggest competitors. In other sectors an open confrontation with multinational corporations on the world market is premature. In any case, the crisis has helped China’s big companies to face up to competitors around the world.
Of course there are differences between China and Korea. First of all, the bureaucracy of the CCP is hostile to a pure keiretsu or chaebol style trend of development, i.e. the creation of immense conglomerates producing everything. They would be too powerful to control. National champions have to be big and strong but more specialised and focused firms. In this sense China is following the US multinationals more than the Japanese ones. Secondly, the creation of big Chinese multinationals is taking place in an economic environment by far more liberal than that in Korea or Taiwan or even Japan at the same stage of development. For instance, China is hardly protectionist and even in very sensitive economic sectors, such as banking, state control is more relaxed than it was in Korea or Taiwan in the 1960s and 1970s. Thirdly, the Chinese internal market is huge and growing fast, providing the Chinese national champions with another lever by which to grow, and not just the export-led strategy that was the only choice for the Korean chaebols. We could mention other differences as well, but the core strategy is absolutely the same, only carried on in a different period and different environment.
The CCP bureaucracy is aware that, for now, the Chinese champions are not able, in general, to defeat competitors from the imperialist countries. They have resisted the crazy advice of the IMF and other globalisation enthusiasts that they should rapidly privatise their best companies. This would have made the country once more totally dependent on foreign capital. The bureaucrats are doing business with imperialism but with the aim of creating their own chaebols, i.e. their own multinational companies, the backbone of any developed capitalist country, the heavy artillery of any serious imperialist contender. They are following in the steps of other Asian elites towards becoming a fully fledged capitalist class. However, while Japan, Taiwan and Korea developed during the biggest boom capitalism has ever experienced, China is growing just when capitalism has entered an epoch of stagnation and slump. Therefore, the goal of the Chinese bureaucracy will not be easy to attain, especially once the Chinese working class starts to move.