SPEAKING FREELY
Goodbye chaebol, hello small business
By Van Jackson

Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click here if you are interested in contributing.

Earlier this week, the pro-business South Korean president-elect, Lee Myung-bak, announced a plan to make good on his ''747'' campaign promise to revitalize the Korean economy. How? By targeting small businesses. Lee’s plan for the economy calls for massive governmental support of small and medium-sized enterprises (SMEs) in Korea.

In a thoughtful but risky move, Lee has put himself at historic odds with Korea’s own development experience. At the same time, Lee’s pledge to support SMEs also reflects a long-standing


Korean tradition of economic dirigisme. If his plan succeeds in delivering the economic growth promised, then he and his conservative Grand National Party may have a permanent political ally in the Korea Federation of Small and Medium Business. If this strategy fails, Lee gains nothing and runs the risk of alienating the major conglomerates, or chaebol, for which Korea is so famous.

The plan
Lee aims to turn Korea’s SMEs into an engine of economic growth. By lavishing them with government support, he hopes that they will grow more competitive both nationally and internationally. Though he claims he wants these companies to grow ''autonomously'', his plan would involve giving generous targeted tax cuts, credit guarantees, and a support fund worth 20 trillion won (US$21 billion) to 30 trillion won.

In terms of indirect support for SMEs, Lee noted that he intends to limit the expansion of nearly ubiquitous discount retail chains, which are generally wholly or partially owned subsidiaries of chaebols such as Samsung and Hyundai. He also promised to address the practice of chaebols exploiting small businesses through the use of financial clout to obtain favorable contracts.

On the face of it, it may seem like Lee is simply ingratiating himself with a special interest group; this may or may not be the case. What is certainly true is that small businesses with fewer than 250 employees provide more than 80% of the jobs in Korea. A policy solution that adequately addresses such a large swath of the Korean public should help invigorate the economy, assuming both Korean and global demand do not become depressed in the near term.

Breaking from tradition
For better or worse, Lee’s new strategy for SMEs signals a marked shift away from Korea’s development experience.

Historically, Korea has relied almost entirely upon the chaebols to increase economic growth. The intimate relationship between big business and government, referred to as ''bipartite corporatism'', is well documented and an often noted peculiarity of Korean development. Although it was a major cause of corruption in Korea, it was also integral to the country’s rapid industrialization as the government helped increase profit margins for companies and industries deemed crucial to national economic health.

Now, it seems that Lee is altering the chaebol-government symbiosis in favor of a new paradigm that treats SMEs as the cornerstone of the Korean economy. At the very least, such a move will diffuse the historic concentration of wealth and production in a few family-owned conglomerates; this may make Korea’s economy more stable as the fate of the economy will no longer be tied to the fates of a mere handful of firms.

Despite Lee being a businessman, friend of the chaebol and an avowed pro-business politician, his pro-SME plan appears to necessarily come at the expense of big business. The chaebols will almost certainly have to relinquish some of the government-bequeathed advantages they have historically enjoyed in order for the SMEs to strengthen in the manner Lee describes. The Lee administration may not describe it in such zero sum terms, but a promise to make chaebol-SME business contracts more fair necessarily means that one party must gain at the expense of the other, as does Lee’s pledge to limit the expansion of the chaebols’ discount retail businesses.

History repeats Itself?
Paradoxical though it may seem, Lee’s plan indicates that he is embracing some aspects of the Korean development tradition while rejecting others. The future president of Korea may be moving away from the close government-chaebol relationship that was Korea’s past, but he is suggesting a policy in many ways reminiscent of the bipartite corporatism that characterized Korea’s rise from an agrarian society to an industrialized one; the key difference appears to be the replacement of the chaebol with the SME as the central focus of the economy.

Previous administrations utilized a combination of fiscal policy and government stewardship for organizations like the Korea Trade Promotion Corporation and the Economic Planning Board to direct substantial support to major companies in key industries. This included conventional support, such as tax incentives and import trade barriers, as well as more indirect support in the form of subsidized marketing research, trade promotion, and controls on capital flows.

Lee’s proposals for change vis-a-vis the SMEs sound wholly consistent with the Korean government’s history of controlling and guiding the economy. It is in this respect that Lee bears a great resemblance to his predecessors.

Where chaebols were once the recipients of generous tax incentives, now small businesses will be the beneficiary. Where the Korea Trade Promotion Corporation once performed market research on behalf of Korea’s behemoth corporations, now the Korean Small Business Innovation Research Program will help increase the competitiveness of SMEs. Inexpensive bank loans once guaranteed for the LGs, Daewoos, and Hyundais will now be guaranteed for mom and pop small businesses.

To state that such a shift is epochal may be premature but, given the arc of contemporary Korean history, Lee’s plan is certainly significant.

With its rejection of traditions deemed unsuitable and its acceptance of traditions thought of as successful, the plan is innovative and exactly what the Korean people should expect of a candidate they elected largely on the strength of his business experience. Whether the plan will be successful, or even successfully implemented, remains to be seen.

What can be seen is that Lee intends to attempt exactly what he was elected to do - reform the government and revitalize the economy. Businessmen in any country tend to be far less cautious and far more accepting of change than their bureaucratic counterparts. This can be a good or bad thing because it invites risk. When it comes to risk in any profession, one truism always holds: great reward usually only comes with great risk. Only time will tell if Lee’s risk pays off.

Van Jackson, PMP, is a senior strategy consultant with a major global consulting firm and an adjunct professor of East Asian History at the University of Maryland, University College. He holds a Master of Science in International Relations with a concentration in Asian Affairs from Troy State University. The views expressed are his own. jacksonvan@hotmail.com

Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click here if you are interested in contributing.

(Copyright 2008 Asia Times Online Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)