Why a deal with Kim Jong-un could blow up chaebol reform

Seoul’s efforts to reform its large family-owned conglomerates face challenges as the government taps their economic prowess as it seeks stronger ties with North Korea.

South Korea is facing a tricky balancing act as it weighs powerful diplomatic relationships against its domestic political goals.

The country was the centre of global attention last week as it entered into agreements with North Korea over progress on denuclearisation during a summit in Pyongyang.

Kim Jong-un, leader of the family-run socialist North, has pledged to close a missile launch site and allow international inspectors to confirm the closure.

South Korea is enjoying perhaps the best diplomatic relationship with the north since the Korean War broke out more than six decades ago. Since the beginning of the year, the two Koreans have already completed three rounds of high-level talks as diplomatic relationships becomes significantly warmer.

However, the improved diplomatic relationship with the north will likely come at the expense of efforts by the left-leaning government in Seoul to reform large family-owned conglomerates, or chaebols.


Incumbent President Moon Jae-in has since his election last year taken a strong stance on reducing the chaebols’ dominance in the Korean economy through measures such as levying higher taxes on bigger companies and increasing public sector employment.

The Seoul administration believes the dominance of companies such as Samsung, LG, Hyundai and more across various sectors is dragging on the country’s effort to foster an innovative economy powered by small businesses.

Moon, a former human rights lawyer, has also promised to block families from keeping a firm grip on their businesses through complicated cross-shareholding structures. These opaque governance structures undermine the power of minority shareholders and employees to influence a company’s management and strategy.

And most importantly, Moon has pledged to tackle fraud and corruption among these mighty chaebols and reduce their complicated connections with government officials and politicians.

Since taking office in May last year, Moon has been quick to address these issues.

Lee Jae-yong, the de facto leader of the Samsung Group, was sentenced to five years in August last year after being found guilty corruption and embezzlement in a scandal that led to the removal of former president Park Geun-hye. Lee, commonly known as Jay Lee, was released earlier this year after a South Korea court suspended his sentence.

Chey Tae-won, chairman of telecommunications-to-energy conglomerate SK Group, was also being investigated in relation to the scandal.


Intriguingly, these two business magnates were part of the entourage Moon took with him to Pyongyang last week. Kim Yong-hwan, vice-president of Hyundai Motor Group, and LG Group chairman Koo Kwang-mo were also part of the group.

The star-studded entourage somehow underlines Seoul’s reliance on chaebols to improve its diplomatic relations with the north.

Chaebol leaders from Samsung, LG and SK visit North Korea

In particular, these chaebols play an important role financially since they are set to be the first group of private enterprises doing business in North Korea if the socialist state opens itself for foreign investment.

While many economic observers believe such a scenario is highly unlikely in the foreseeable future, chaebols have not ruled out such a possibility.

Hyundai Group said in May it was setting up a task force to prepare for a potential restart of economic projects in North Korea. The group had operated a factory in the Kaesong complex – a joint industrial park just north of the Korean Demilitarized Zone – where it hired North Korean workers to make goods before the complex was shut down in 2016.

CJ Group chairman Sohn Kyung-shik, who was also part of the entourage traveling to North Korea, said earlier this month he is looking at potential investment opportunities there, particularly in the food and logistics sectors.

Samsung and LG have not explicitly declared they are interested in doing business with the north, but their opportunities there are clear.  

Sejong Institute, a South Korean think tank, revealed that Samsung and LG are the most popular smartphone brands among North Koreans. Pyongyang imposes a strict ban on South Korean smartphones, but it does not stop smugglers from savvy North Korean buyers from getting them through the black market.

These potential investments are crucial to Pyongyang’s economic reforms not only because of the huge foreign capital involved, but also the technical know-how the secluded nation can obtain from South Korean companies.

That also suggests South Korean chaebols will likely use their work in the North as bargaining chips against government initiatives that are unfavourable to them. More broadly speaking, Seoul will find it hard to contain these chaebols because their likely sizable financial investments in North Korea cannot be replaced by other private enterprises.

The dramatic turn of Jay Lee – from a prisoner last year to a representative in a top-level diplomatic entourage – is perhaps the best reflection of a complicated connection between the chaebols and the government that is unlikely to change anytime soon. 

¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media