hankyoreh

By Kwack Jung-soo, business correspondent

Since the beginning of 2014, a fierce debate has been raging about the “economic tilt” caused by the country’s biggest chaebol Samsung, which controls an excessively large portion of the South Korean economy. Ironically, speculation about a crisis at Samsung - triggered by the slowdown in profits at Samsung Electronics in the fourth quarter of 2013 - prompted concerns about the risk that the concentration of economic power at Samsung has for the economy as a whole. In response, the conservative establishment referred to these claims as wild conjecture based on sloppy statistics.

Responding to a presentation made by an economic research institute showing how Samsung accounted for 23% of South Korea’s gross domestic product (GDP) as of 2012, the conservative press and academics argued that it is unfair to compare GDP and a company’s revenue because they are different concepts in different contexts. Samsung’s Future Strategy Office weighed in as well, arguing that “the controversy over figures needs to be cleared up first.” To calculate a company’s added value, the value of intermediate inputs, such as the cost of parts and materials, must be subtracted from revenues. Consequently, it is not inaccurate to say that added value is lower than revenue.

Nevertheless, in regard to the concentration of the country’s economic power in chaebol, it is common to treat GDP (which reflects a country’s economic scale) as a standard for indirect comparison. Data prepared by Justice Party lawmaker Park Won-seok compares the assets and revenue of Korea’s top 10 chaebol with GDP, showing how severely economic power is concentrated in these conglomerates.

The assets of the top ten chaebol were equal to 48% of GDP in 2003, which increased to 84% in 2012. The revenue of the top ten chaebol increased 50% to 85% in that time. From this, it can be seen that the share of the economy controlled by the leading chaebol is incredibly high, along with the rate at which that share is increasing.

While it cannot represent the entire Samsung group, added value at Samsung Electronics represents a massive portion of GDP. The added value of Samsung Electronics was 21.7 trillion won (US$20.5 billion) in 2009, or 2.04% of GDP. In 2011, this increased to 30.5 trillion won, bringing the ratio of the company’s added value to GDP up to 2.86%. Other evidence of the economic tilt is the fact that the ratio of Samsung’s operating profits and market capitalization were recorded at 16% and 26%, respectively.

Arguing that the economy’s increasing tilt toward Samsung poses a greater danger, analysts point in general to three main risks. First, there is the risk of economic growth being hampered. In the past, good performance at Samsung had a trickledown effect, with benefits being evenly distributed across the economy, but now this has almost disappeared.

But nowadays, Samsung has been slammed by numerous critics for taking advantage of its unrivalled position as the biggest predator in the industrial ecosystem to engage in all sorts of unfair practices targeting SMEs and competing firms. This interferes with dynamic economic growth and blocks the appearance of companies that can serve as engines for new growth.

Second, there is the risk of undermining economic stability. According to experts, if revenue and profits at Samsung Electronics suddenly fall, it could drag down stock prices, which could threaten the stability of the financial market as a whole. A good example of this is how stock prices plunged when operating profits at Samsung Electronics in the fourth quarter of 2013 fell 18% quarter-on-quarter, despite the fact that company had its highest profits on record that year, topping 36 trillion won ($US33.87 billion).

“Even if revenue at Samsung Electronics only drops by 10-20%, stock prices could be cut in half,” said Kim Sang-jo, director of Solidarity for Economic Reform. “If this happened, Samsung Life Insurance, which holds a 7.5% share in Samsung Electronics, would see its risk-based capital rate [336% at the end of Sept. 2013] fall below the figure recommended by the regulatory authorities (250%), not only precipitating a crisis at Samsung but also creating a systemic risk for the financial market.”

Third, there is the risk of endangering democracy and the rule of law. Hanyang University lecturer Kim Jeong-ju said, “Samsung wields an immense influence throughout the government in promoting national policies and legislation that correspond to its own interests. The company is regarded as an uncontrollable force that can skirt or flout the law without being punished. An excellent example of this is Samsung’s no-union policy, which defies the three basic rights of workers.”

The government’s chaebol-friendly policies have also played a major role in the concentration of economic power at Samsung. During the administration of Lee Myung-bak, who instituted numerous policies favoring chaebol such as deregulation and tax breaks, the growth rate of assets and revenue at chaebols was much higher than in the administration of Roh Moo-hyun (2003-2008).

Experts also say that solving the Samsung issue must begin with changing government policies. First, the risk of hindering growth should be addressed through economic democratization, focusing on the establishment of fair markets. Second, the risk of undermining stability of the national economy should be addressed through policies for diversifying the economic structure and the industrial ecosystem. Third, there should be improvement of the ownership structure at chaebol in order to prevent chairmen from abusing their authority in the pursuit of their own gains.

Despite this, the administration of President Park Geun-hye seems bent on further aggravating the risk of the economic tilt toward Samsung. She is backpedaling on economic democratization in order to revitalize the economy and taking a lukewarm stance toward revising the commercial legal code and strengthening regulations that separate finance and industry.

Please direct questions or comments to [english@hani.co.kr]