The Buzz

One of Asia's Most Powerful Countries Has Been Rocked by Scandal After Scandal

South Korea has been rocked by a number of scandals in recent years: the sinking of the Sewol ferry in 2014, the recent banning of Samsung’s Galaxy 7 phones on US commercial airlines, and the bankruptcy of Hanjin Shipping, the world’s seventh-largest container shipping company. And now South Korea’s first female president Park Geun-hye is embroiled in accusations that she relied on a close friend, Choi Soon-sil, for advice on state matters. There are allegations that Park is complicit in extortions carried out by Choi. What has led to South Korea’s current predicaments? An examination of the shift in political power from the state to big business is instructive.

The economic rise of South Korea is a familiar story. Its per capita income has increased fifteenfold since the 1950s, when it was estimated to be lower than India’s. In the OECD’s Program for International Student Assessment (PISA) tests, which evaluate education systems worldwide, South Korea now ranks as one of the highest, well above the US and OECD averages. Nearly 100 per cent of the relevant cohort completed upper secondary education and 63 per cent of 24–35 year olds completed tertiary education. Structurally, South Korea has moved away from low-wage, labor-intensive industries to increasingly complex, capital-and technology-intensive ones. Today the country vies to be a world leader in innovation focusing its energies on knowledge-intensive sectors, including cultural industries such as anime and the K-pop phenomenon.

Politically, it has moved away from authoritarian regimes to a more spirited, people-driven democratic system, even if press freedom remains limited and the state retains considerable control over the media. Socially and culturally, South Koreans, notwithstanding their strong ethnic identity, are also embracing the idea of a multicultural society.

The prosperity of South Korea lies in the hard work of its people and a state-orchestrated industrialization program under the military dictator General Park Chung-hee, the father of President Park Geun-hye. While Park ruled with an iron fist, eliminating any dissent, he managed an impoverished economy with the astuteness of a strategist. He leveraged his Japanese connections to obtain then state-of-the art steel technology to leapfrog into the sector, which incidentally the World Bank discouraged. In doing so, Park helped create one of the world’s largest and most efficient steel companies, the Pohang Iron and Steel Company (POSCO).

An effective industrial policy of subsidizing family-owned big business conglomerates, known as chaebols, fostered the creation of global brands such as Hyundai, Samsung, Korean Air and LG, among others. In exchange for subsidies, in the form of concessional foreign exchange for technology imports and low interest loans, companies had to meet mandated export targets or else face the tax bureaucracy. This implies, of course, that tax evasion was rampant and the abuse of corporate power rife. Still, the export engine kept the economy humming and absorbed millions of unskilled and semi-skilled workers. Over time tight labour markets pushed the economy to move to higher skilled and technology-based production.

Fast forward to President Park and her unwitting governance style. While Park Chung-hee’s government used the threat of taxes to extract corporate performance, Park Geun-hye’s close friend Choi used her connection to the president to threaten business with ‘tax inquiries’ and ‘governmental retaliation’, again suggesting that tax evasion is common. What has changed is the growing financial clout of chaebols and the social and political capital they have spawned.

Since South Korea’s democratization in 1987, a result of ongoing massive student and civil society protests, the political environment is no longer menacing. Furthermore, President Kim Young-sam in 1995 embraced segyehwa, a comprehensive globalization strategy that went beyond mere economic liberalism. The South Korean economy has matured with chaebols needing less state handouts given the deregulated environment and their access to overseas markets and investment outlets. Unfortunately, the political establishment has not kept up with the needs of democratization, especially the checks and balances critical to governing a vastly complex economy and polity.

With regular elections in South Korea, the role of campaign funds has become significant and with it so has political avarice. Chaebols significantly influence, and are influenced by, individuals like Choi who have deep political connections. Political parties and individuals are beholden to corporate donors for their electoral success and personal enrichment. This situation is not unique to South Korea. It is found in different guises in many democracies. The inherent danger of course is the thin line between state responsibilities and private interests; the merger of the two can only mean the much derided but ever present risk of crony capitalism.

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