South Korea's industrial conglomerates, the chaebol, were once seen as a driving force behind that country's high rates of economic growth. At the beginning of the 1997 economic crisis, optimists saw them as the engine that would pull South Korea out of its doldrums. Indeed, about 40 chaebol still account for about 80 percent of GDP and 50 percent of exports, even though most of them face difficult financial straits.
It is ironic that leaders in Beijing once considered the "Korean model" to resolve China's restructuring problems. However, the chaebol are the product of institutional arrangements that led to South Korea's economic crisis. As such, they are the problem, not the solution. They are part of the past, not the future.
Government involvement in directing economic development encouraged the concentration of industrial production. Favored treatment from the government caused the chaebol to overexpand, including into areas where they had no experience or comparative advantage. In particular, encouraging the establishment of and support for the chaebol led to increased inefficiency through the cartelization of the domestic economy. In turn, these conglomerates began destroying shareholder value with impunity as they focused on market share and expansion instead of profits.
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