CHAPTER 7 The 1997 Financial Crisis

The 1997 financial crisis is frequently called the “IMF Crisis” in Korea, in reference to the severe shortage of foreign exchange reserves that drove the country to the brink of default and a subsequent bailout by the International Monetary Fund (IMF) Standby Credit Facility and other international financial support. The background and causes of the crisis have been hotly debated, and the implementation of the reform measures has been closely analyzed.¹ Social and institutional consequences at both micro and macro levels have also drawn much attention.² What has received less attention are the implications of the crisis for well-entrenched neofamilism. In terms of the impact on neofamilism, the two institutions that were most affected by the crisis are the family and the chaebols.

SOCIAL AND INSTITUTIONAL IMPACT

The 1997 financial crisis brought upon Korean society a collective psychological shock, made particularly acute as people had become accustomed to continuous economic growth and had not experienced economic downturn. The crisis was viewed as a national disgrace, a humiliation so severe that it was likened to a second annexation by international capital. The crisis also served as a sobering reminder of capitalism’s vicissitudes. Korean economic development was externally dependent but pre-crisis had recorded mostly positive results by successfully utilizing international markets. At the societal level, the crisis marked the moment at which many Koreans experienced the vicious cycle of capitalism for the first time.

The string of business collapses also cast a light on the ambivalence that many Koreans had long felt toward chaebols. On one hand, chaebols were viewed as the primary beneficiaries of the state yet were exploitative of workers and did not pay back to society; on the other, it was grudgingly acknowledged that the Korean economy could not survive without them. It was also inconceivable to most Koreans that the chaebols would ever collapse, particularly given the longstanding state support that the chaebols received. The myth of “too big to fail” was quite pervasive throughout Korean society. Under such circumstances, the news of multiple chaebol collapses introduced yet another kind of shock that shattered once firmly rooted assumptions about society and economy.

In addition to the defaults of chaebols, the bankruptcies of SMEs—many of which had been dependent on chaebols but were also squeezed financially due to the credit crunch—further worried average Koreans as these events led to unemployment and declining national economic growth. For example, 123 bankruptcies were recorded in December 1997 and 151 cases in January 1998. Overall GNP growth plummeted from 6.8% in 1996 to 5.0% in 1997 and dropped to -6.7% in 1998.³

Factory closures, cancellations of investment projects, layoffs, and wage cuts ensued. The scrambling to meet debt payments coming due created a wave of secondary disintermediation and a severe credit crunch. Rising interest rates and the falling won against the dollar added further hardship.⁴ GNP per capita in dollar terms fell by more than half, dampening the sense of pride that many had felt when their annual income surpassed the 10,000-dollar mark pre-crisis.⁵ Given such overall economic decline, unemployment immediately affected many households. The Korean economy enjoyed near-full employment in 1996 and even 1997, with 2.0% and 2.6% unemployment rates, respectively. In 1998, right after the financial crisis, the unemployment rate jumped to 6.8%.⁶ Also striking was a sudden increase in irregular workers (both temporary and daily workers) after the outbreak of the financial crisis. Right after the financial crisis, the proportion of temporary and daily workers grew from 45.9% in 1997 to 47.0% in 1998 and to 52.4% in 2000, exceeding the proportion of regular workers (47.5%).⁷

The impact of the financial crisis was much more palpable at the individual family level. The following analysis is telling of the various troubles and difficulties that families underwent. According to a national survey in Korea, when people were asked the following question, “During the economic crisis, did you or your family experience the following life events, such as decrease in property, income decline, unemployment, family disbanding (divorce, separation, leaving home), bankruptcy or credit delinquency, deterioration of health, or depression or death wish?” It is reported that 48.3% mentioned income decline, 36.4% decrease in property, 19.2% unemployment, 11.7% bankruptcy or credit delinquency, 16.5% deterioration of health, and 9.3% depression or death wish. Those who have never experienced negative life events amounted to about 40%, with the remaining 60% of people having experienced at least one misfortune in their own life or that of family members.⁸

The impact of income loss, however, was not evenly distributed. The first quintile of the population by income level experienced a 14.9% loss of income, the second quintile by 8.8%, the third by 6.9%, and the fourth by 5.5%, while the last quintile actually gained by 2.3%. The results indicate that income loss was most drastic among middle- and lower-income families due to unemployment, income reduction, and falling real estate values. Among households with a monthly income below 700,000 won who were surveyed, 56.1% reported that they felt seriously threatened by unemployment and bankruptcy in 1998, more than double that of December 1997 (25%).⁹ However, upper-income brackets were able to gain income, attributable to higher interest rates. High interest rates and sudden drops in real estate prices gave rise to the collapse of the middle class. According to one survey, about 80% responded that their incomes fell on average by 20% to 40%.¹⁰

A survey from 2003 showed that for several years after the financial crisis, a considerable number of Korean people felt that they had fallen below their previous socioeconomic stratum. Compared to surveys from 1994, this indicates an expansion of a sense of relative deprivation. In the years of these two surveys, the proportion of those who considered themselves middle class fell by 18% percent, while self-identification as lower-middle and lower class increased by 14.7% and 1.5%, respectively.¹¹ Yet when questioned whether they believed their socioeconomic status would improve if they worked hard, 45.8% said yes in 1994 compared to 33.1% in 2003, decreasing by 11.3%. On the question of whether they think their socioeconomic status might fall, the proportion of respondents indicating yes increased by 17.8%, from 11.5% in 1994 to 29.3% in 2003.¹²

Such a negative impact at the macrostructural level was duly reflected in family life at the micro level. The loss of jobs of household heads also changed family dynamics. After the financial crisis, female unemployment rates became increasingly volatile, although lower than those of male workers. However, the situation was quite different at the micro level. For example, a wife would be forced to find a job for a household in which the husband had lost his job. According to one study, more than 30% of full-time housewives attempted to get a job, and the proportion was much higher at 43.3% for those below a monthly income of one million won. The same study shows that among those surveyed, 53.7% of the wives were working, and 24.5% among them were already working even before the crisis; 10.6% were reemployed and 17.6% started working after the crisis. Among those newly employed after the crisis, 76.5% were newly reemployed or in cases where the husband had lost his job, whereas only 33.6% of wives whose husbands were employed sought jobs.¹³ It goes without saying that job loss of the head of the household also affected the family’s lifestyle. First, the level of consumption visibly changed. The reduction in consumption was most visible in clothing and footwear purchase, from -.6.8% from the previous year in 1997 to -26% in 1998, while crucial expenditures such as education were also cut.¹⁴

Many households also saw a dramatic shift in the roles between husband and wife. Wives were increasingly becoming the breadwinner as income contribution from the husband declined or disappeared, reflected in the husband staying home or roaming about the city. While this situation tended to cause a high level of stress among family members, some families were able to better adjust to the situation, as the following two examples show:

During the financial crisis, I lost my house and company due to the bankruptcy of the small business that I ran. I tried to get a new job and failed, and instead my wife started insurance sales. Fortunately, my wife’s income was quite good, and we were able to take our children back home from my in-laws. Now my wife is largely responsible for the family finances, and her voice is heard considerably more than before on decisions like the children’s education, the house, and furniture. It is quite different from the times when I made most decisions, but I feel less burdened with responsibility for the family. Sometimes, I feel free and thus am satisfied with the new reality. (Mr. P, 38 years old)¹⁵

I felt a deep sense of guilt due to the fact that as household head I did not play my role well and thus caused pain to my children. I blamed myself for the fact that my daughter could not complete high school. I felt deep guilt toward my parents and brothers as I could not do enough even though I am the eldest son. I lost self-confidence and felt I was alone in the world. I seriously doubted whether I deserved to live in the world. (Early 40s, high school graduate; his business of exporting leather fabric)¹⁶

The intense financial burdens on families due to the unemployment of husbands and increasing tension from the role reversal in which wives began to work raised stress levels and negatively impacted marital relations. Such strained marital relations caused an unusual increase in divorces right after the financial crisis. Throughout the 1990s, the divorce rate was steady at around 1% until 1996. It is only after the 1997 financial crisis that the divorce rate nearly doubled to 2.0% in 1997 and reached 2.5% in 1998.¹⁷ Compared to the previous decades, the economic difficulties brought on by the 1997 financial crisis so deeply affected well-established middle-class lifestyles and assets to the extent that the level of stress on families reached unprecedented levels.

How can the ultimate impact of these negative factors on family solidarity— which is closely related to the practice of neofamilism based on blood ties— be assessed? There are different analyses that indicate varying degrees of family breakdown. According to one view, family members united to overcome the crisis through mutual cooperation, practicing the Korean tradition of supporting family members in trouble. Households experiencing unemployment of the household head were found to have frequent dialogues between husband and wife, and levels of domestic violence and family disintegration went down. Generally, families expected more support from other family members than from the state. In times of crisis, it was found that kin members such as sisters and brothers were more relied upon than neighbors.¹⁸ A report finding showed that among those surveyed, 13.4% got their support from in-law parents, parents, other relatives, and friends.¹⁹

A differing view suggests that although family solidarity and community is emphasized right after the start of a family crisis, the negative impact deepens as the situation shows little sign of improvement or gets worse. Family members console one another right after the household head experiences job loss and pretend to maintain a warm relationship, but this stage lasts about one month. Family members tend to avoid one another, and conflicts come to the surface. Family life becomes unstable as the family undergoes structural change and family relationships are restructured.²⁰ Under such circumstances, it is highly likely that people seldom receive support from relatives or friends, and relationships with siblings and friends also break down.²¹

It seems the two views reflect different cases and situations rather than contradict each other. As the second view indicates, the two views are sequential, in that at the beginning families are willing to support one another, but they gradually become exhausted providing continuous support.²² A survey finding quoted in the previous chapter corroborates this dual aspect of family support: some respondents mentioned receiving family support, whereas others reported enduring suffering due to losses incurred by rendering support to family members (see chapter 6). On the question of whether Korean society will continue to rely on neofamilial ties, 64% responded it would continue one way or another, including familial ties. Overall, while the financial crisis appears to have weakened conceptions of the Korean family as well as familism among average Koreans, both will continue to persist.

CHAEBOL REFORMS AND NEOFAMILISM

Extensive measures were introduced as checks on the previously uncurbed managerial decision-making of chaebol owners. The measures can be grouped into three categories in terms of the degree of impact on neofamilism: direct impact, indirect impact, and background impact. Some measures, such as outside director reform, directly impact neofamilism by altering personnel policies. Other measures are more indirect in the sense that they contribute to changes in the way managerial decisions are made and procedures executed, in turn affecting the selection of people close to chaebol owners. For instance, the prohibition of crossholdings or mutual debt guarantees changes the way financial decisions are made by chaebol owners, in turn impacting the range of chaebol subsidiaries, where people with neofamilial ties are commonly put in charge. Another good example is financial reform. Under state-directed economic development, access to state resources through neofamilial connections was essential for chaebols’ survival. Requiring chaebols to lower their debt level to 200% significantly affects their dependence upon the state for financing, which has the effect of reducing the need for neofamilial ties.²³ Another set of reform measures encompass broader institutional changes, while not directly impacting neofamilial practice at chaebols, and may set the background as well as serve as a catalyst for changes to neofamilism. One example is society-wide change as a result of labor relations reform, requiring compliance from all companies. To illustrate the impact of the chaebol reform measures on neofamilism, the outside director reform, inheritance regulation, financial reforms, and labor reforms will be analyzed in detail.

Outside Director System

Prior to the financial crisis, the duties and functions of boards of directors, such as making corporate decisions and overseeing the implementation of decisions, were not properly executed as stipulated in commercial codes. The reality was that many boards were composed of a senior managing director and managing director, who are under the command of the CEO, frequently along with family members and friends of the owners. Directors of the board thus were not in a position to oversee the activities of the CEO and were instead essentially reduced to subservient agents who received orders from the CEO. Filled with company executives, family members, and friends, many boards were effectively rubber stamps for the group chairman.

In addition, stockholder meetings and internal audits did not function well. There was no effective way to check arbitrary decisions, embezzlement, or breaches of duty of the chairman. The checking of internal directors had almost ceased to function prior to the financial crisis.²⁴ Thus, in the wake of the economic crisis, there were increasing calls to appoint outside directors. The outside director system was introduced to activate the functions of the board of directors. Outsider directors were to effectively oversee business decision-making and performance of internal directors. Beyond serving as a check on the CEO and internal directors, outsider directors are to solicit different opinions of various stakeholders, including the rights of minority holders, and to provide professional knowledge and experience to top management.²⁵

According to laws pertaining to stock exchanges, appointing outside directors is mandatory for listed companies. The number of outside directors should be one-quarter of all directors, and at least one outside director should be appointed (1998). For companies exceeding two trillion won in assets, one-half of all directors must be outside directors, with a minimum of three directors (2001). In 2000 and 2001, companies were to establish a committee responsible for recommending candidates for outside directors, and rights to recommend outside directors were extended to 1% of stockholders. Later, companies exceeding two trillion won in assets were required to have outside directors as one-third of their boards (2004). Most companies complied with the laws in electing and appointing outside directors. By June 30, 1999, the total number of outsider directors was 1,251; out of 722 listed companies, 647 companies elected outside directors (89.6%), averaging 1.73 per company.²⁶ In March 2001, 633 out of 699 listed companies elected and appointed outside directors, reaching an election ratio of 99.69%. The total number of outside directors was 1,469, averaging 2.32 per company.²⁷

Due in large part to the mode of selecting outside directors after the reforms (CEO-recommended candidates proposed at stockholder meetings for approval), it is likely that those connected to the CEO through shared interests or neofamilial ties are ultimately elected. According to one study, the proportion of outside directors whose autonomy was suspect, due to direct or indirect relationship to the CEO, ranged between 32% and 37% from 2006 to 2010, and declined from 22% to 28% between 2012 and 2018. Among the outside directors, those who shared school ties (the same department of the same university) with CEOs or internal directors was 17.53% in 2006, 15.34% in 2010, and 7.29% in 2018, indicating that the proportion of outside directors with ties, including school ties, has gradually decreased since the financial crisis.²⁸ However, considering the possibility that most former high-ranking members of chaebol companies and former government officials could be related to the CEO through high school ties, regional ties, or both, the actual figures may be higher than the finding.

There are several studies supporting this kind of surmise. One analyzed the differences in investment behavior of CEOs, depending on the structure of the board of directors. CEOs of companies with boards composed of directors with high school and regional ties tended to overinvest in new projects and draw debt. The study concludes that in the presence of existing social ties between CEOs and outside directors, the official capacities of outside directors tended to be constrained.²⁹ The following story, which occurred some years after the outside director system was adopted, reveals the difficulty of achieving real change:

That outsider directors are merely rubber stamps is not new. It is meaningless to classify publicized decisions of the board of directors in terms of yes or no as there is little opposition. It is not easy to expect that totally unconnected persons are invited as outside directors. Companies seldom select outside directors who can oversee companies well, and big financial groups are no exception. They are run by people who belong in the same “league.” There is a saying in the Korean financial world that friends and alums are acceptable as outside directors as long as they do not work at the company. The practice of outside directors recommending candidates for other outside directors is still alive.… One former outside director of a bank remarked that although the rule says the outside director recommendation committee is supposed to recommend candidates for outside directors, more often than not the ones elected are those whom the government or company executives want elected.³⁰

In 2013, it is known that outside directors of major banks never cast a negative vote. There are 24 outside directors in Shinhan Bank, Kookmin Bank, Hana Bank, and Woori Bank. There were 224 matters on the agenda for which there were 5,376 instances of voting, but there was never a single nay vote.³¹ The trend is the same at the top 10 chaebols. According to the CEO Score survey of the activities of 1,872 outside directors of 92 listed associated companies of the top 10 chaebols, “there were 4,626 meetings and 37,635 votes, among which only 38 votes were cast nay, while 97.7% of votes were cast yes. The main reason that outside directors do not voice opposition is because they have a personal relationship with the CEO. That is, there is intrinsic limitation in their voting due to school, regional, and other human ties.”³²

Such a poor track record of outside directors is confirmed by the general perception among business managers. According to one survey, the majority of respondents (22 out of 26) held the view that the role of outside directors was perfunctory or substantially limited at best. They found no changes in the corporate decision-making process as a result of outside board members participating. What was noteworthy is that the role and influence of outside directors was especially limited in companies directly controlled by owners. Those respondents who recognized changes incurred by the outside board member system also acknowledged that despite its growing significance, its influence in major decision-making was limited at best.³³

Chaebol Succession (Inheritance)

Based on the increasing social criticisms that wealth and company management should not be inherited, so as to establish transparent and accountable governance, and to break up family-oriented management structures, the banning of irregular inheritance and bestowals is a major issue. In 1997, an aggregated tax on financing income and capital gains tax on equity were revived. In 1999, the law was revised to tighten up the taxes on inheritances and bestowals.³⁴

Korean chaebols are notorious for attempting to realize family succession by passing on ownership and management power to the children (usually the eldest son) of the controlling family.³⁵ Family succession efforts commonly entail such tactics as illegal transfers of stock, internal transactions whereby the parent firm supports subsidiaries by showering them with business, thus violating fair competition, and disrupting fair trading in the market. Furthermore, management succession to unqualified children of the chaebol owner could negatively impact business performance, ultimately affecting not only company performance but also the national economy. Laws and regulations have been revised to punish illegal transfers between chaebol subsidiaries, but internal transactions with the intent to lay the foundation for family succession have not disappeared.

Family succession is not possible if stock is not concentrated in the hands of chaebol owners. Since they cannot maintain control without mutual and circular investment among subsidiaries, such ownership structure is essential in family succession of stock and control over management. Thus, family succession effectively incentivizes retaining an irregular ownership structure and closely aligns with broader sociocultural norms and the perception of business ownership. In Korean family tradition, the first son normally inherits all family assets, and it is this cultural norm that has strongly influenced succession practices of chaebol owners. If the first son cannot inherit, legal disputes usually arise among possible alternatives. The perception held by chaebol owners that their businesses belong to their families is also closely related to family succession. In their understanding of business, any sense of public-spiritedness or concern toward all company stakeholders is almost entirely lacking; from this conception emerges a near obsession to achieve family succession at all costs. This has brought about family feuds and raised questions about the legality of their actions. It is fair to say that with few exceptions, Korean chaebol owners have systematically continued the practice of family succession.

According to Korea’s Fair Trade Commission, 18 of the top 40 chaebol groups have had disputes over succession of some kind among family members of the owners. Most cases were of primogeniture, while disputes among family members ensued otherwise. These sorts of struggles could be observed at major groups including Samsung, Lotte, Hanwha, and Doosan, taking various forms such as contention over legitimacy of succession, disputes over the scale of ownership, and struggle over positions.³⁶

Another phenomenon that is relevant to neofamilism is the bestowal of stock to family members, extending to the third generation of chaebol owners. As a relatively new phenomenon, the practice arose amid intensifying regulation of chaebol owners and adopts early inheritance before the inclusive and comprehensive inheritance law was introduced. According to CEO Score Daily, 93 children of the top 30 chaebol families were found to have inherited significant amount in stock of both listed and unlisted companies, amounting to a total of 1.7 trillion won. Among them were one four-year-old child and eight children of eight years old. Additionally, 30% were under the age of 19.³⁷ What the issues and controversies surrounding chaebol succession indicate is not only the problems that chaebols have been causing to Korean society but also the robust survival of neofamilism, despite the disruptive impact of the financial crisis. In sum, chaebols still remain a major source, perhaps even the nucleus, of neofamilism in Korean society.

Financial Reforms

The pre-1997 financial sector was extremely underdeveloped with the state’s extensive intervention, and moral hazard problems were pervasive. In the wake of the financial crisis, various institutional reform measures were taken. In the context of neofamilial practices, the financial reforms reduced the extent of state intervention in business, reflected in personnel decisions at financial institutions, allocation of financial resources, and supervisory functions.

Prior to the crisis, it was common for the state to be deeply involved in appointing the heads of state-controlled and commercial banks. This practice had serious implications for neofamilism, given chaebols’ heavy dependence on state policy financing, as securing access to banks is essential to their survival. Likewise, state allocation of financial resources (so-called kwanch’i kŭmyung, or state-directed lending) was critical to meet the financial needs of chaebols. Chaebols were keenly interested in who was in charge of this function. Any changes to state involvement in personnel decisions at financial institutions and allocation of credits were bound to influence chaebols’ strategies for mobilizing neofamilial resources. As for changes in supervisory functions over financial institutions, had the functions been properly performed following the regulations, the need for mobilizing neofamilial ties would have definitely been reduced.

The critical question is how objectively personnel policies at supervisory institutions like the Financial Services Commission were handled by the state. Amid persistent rumors and scandals regarding state intervention in personnel decisions, there is a widely held perception that the state has not ceased to exert influence in financial institutions.³⁸ Although it may appear weakened because of the privatization of banks, the state still retains robust influence over financial institutions. One finding shows that the government’s influence on personnel issues in particular was in fact reinforced, although a subtle change had occurred in the ways in which the influence was delivered, from a direct to indirect form of intervention.³⁹

On the question of the extent to which the state and politicians intervened in financial institutions’ lending policies, the majority responded that they did not notice any substantial changes before and after the crisis.⁴⁰ Only seven out of 23 responding business managers thought that the level of influence or intervention was reduced considerably or moderately, while the majority held the view that state-controlled practices continued. Some noted similar observations as in commercial banks, saying that a subtle change had occurred in the ways in which the influence was delivered, from a direct to indirect form of intervention, such as those found in personnel issues.⁴¹

All in all, there is still room for neofamilial practice in interactions between the state and financial institutions through personnel issues. From the perspective of chaebols, there is no longer a strong need for state support in financing, particularly after debt levels were reduced to the 200% mark; thus, overall dependence on the state has decreased, although total autonomy from the state remains unrealistic.⁴²

Labor Reform and Implications for Neofamilism

The financial crisis brought about a sea change in labor relations in Korea. Prior to the crisis, unionization and wage hikes were in full swing with democratization, and workers could expect lifetime employment, despite limitations on political activities.⁴³ The impact of the crisis on labor was serious and far-reaching and can be understood in political, economic, and social terms.

The breakout of the financial crisis considerably dampened the labor movement. Under the state-mediated compromise, tradeoffs were reached between the state and labor: labor organizers gained basic political rights with enhanced latitude to engage in union organizing and political activity, while business secured labor flexibility.⁴⁴ Under the changed circumstances against labor, workers began to adjust to the whims of the market. The labor union movement grudgingly accepted fragmentation and gradually learned the rules of bargaining within institutional boundaries.⁴⁵

Labor faced a much grimmer situation in economic areas, with workers constantly exposed to threats of unemployment. The introduction of neoliberal policies and institutions into the financial and corporate sectors inevitably upended the employment status of many workers in the form of layoffs, wage cuts, and limited working hours. Lifelong employment was no longer guaranteed and workplace seniority was challenged for the first time. In short, labor markets became significantly more precarious in terms of wages and employment status.

A more serious impact on workers was the breakdown of bases for social solidarity. The lifelong employment system and the seniority principle were disrupted if not destroyed. Company loyalty, closely related to lifelong employment, began to erode. Most important, workers were divided into regular and irregular categories, with serious implications for neofamilism. The regular workers who are well protected with pensions and social insurance were able to continue to maintain solidarity based on neofamilism, whereas the irregular workers were legally deprived of solidarity based on neofamilial ties.

The “paternalistic human resources management” prior to the crisis adopted a more humanistic approach to workers that emphasized a reciprocal relationship rather than a one-way, top-down one. Both paternalistic human resources management and authoritarian human resources management are based on patriarchism, but whereas the latter is characterized as unilateral and arbitrary, the former is reciprocal and cooperative.⁴⁶ As such, workers’ well-being, sharing of managerial information based on mutual understanding and communication, and improved compensation and working conditions were considered. Under the paternalistic management system, voluntary cooperation with management was expected of workers.

The financial crisis directly challenged the paternalistic practice of labor relations with the introduction of liberal economic measures such as labor flexibility and regular-irregular worker distinction. The balance of power once again shifted toward management and the state. The state and management began to review the age-old yŏn’gong (seniority) system, which compensates workers based on age and job tenure. New measures based on merit were introduced to replace the practice of the seniority principle.⁴⁷

It is quite clear that the structural change in terms of the regular-irregular divide among workers struck a serious blow to the underlying sense of solidarity among workers, particularly based on regionalism and beyond. Yet the actual implementation of a neoliberal wage system demonstrates there has not been a complete break from the past. The implications for neofamilism are mixed: presumably there remains a strong basis for leveraging regionalism and familism among union-protected regular workers to their advantage, while irregular workers are scrambling for regular positions, still trying to leverage any available connections from neofamilism.

CHAEBOL DYNAMICS AND NEOFAMILISM

How much have chaebols changed since the financial crisis? The trend in degree of economic concentration in chaebols shows that in terms of value, the weight of the top 30 chaebols in GDP has clearly been increasing, even after the financial crisis. The portion of the top 30 chaebols’ total sales in GDP in 1979 was 60.6%, peaking at 120.9% in 1990 and holding at 96.7% in 2010.⁴⁸ A similar trend can be found since 2010. Chaebols’ portion of GDP has been growing, albeit with some fluctuation. With the year 2000 as a baseline, chaebols continued to grow up to the 1997 financial crisis, but showed a dramatic decline between 1998 and 2002. From 2002, chaebols began a path of recovery up to 2012, almost doubling from 2002. Although chaebols’ proportion of GDP has began to decline since 2012, the decline is not as significant as that of the post-crisis years, and the trend of economic concentration in chaebols has continued.

Other indicators of economic concentration in chaebols are their assets as a proportion of national assets and their proportion of industrial sales. The proportion of assets shows an increasing trend for chaebols as a whole, regardless of their size, from 5.09% in 2008 to 7.31% in 2016. A similar trend occurred during the same period among the top 30 chaebols under chairman ownership, increasing from 4.41% to 5.52%.⁴⁹ Chaebols’ share of sales in manufacturing and mining industries was 36.8% (total sales) and 31.9% (value-added) in 1987, 38.1% (total) and 33.6% (value-added) in 1993, and 40% (total) and 38.2% (value-added) in 1997. Throughout the 2000s, chaebols’ proportion of total industrial sales declined from 49% in 2000 to 39% in 2016 but did not fall below the levels of the 1980s.⁵⁰

The abuse of inside transactions, which was regarded as one serious problem of chaebols, clearly has not disappeared; in fact, the practice is alive and well even after more than two decades since the financial crisis. What is significant in terms of neofamilism is that inside transactions remain an important mechanism for helping family-owned subsidiaries and tie closely to family succession. With chaebols’ intensifying effort to diversify their business vertically and horizontally, the ratio of internal transaction of the top 30 chaebols in 1989 was 23.73%, while that of the top five was even higher, at 29.63%. In 1993, the ratio of internal transactions of the top 30 chaebols was 21% in terms of purchases and 17% for sales.⁵¹

In the first decade of the 21st century, a similar trend continued (see table 14). From 2011 to 2015, the ratio of internal transactions ranged between 24% and 27% for purchases and between 24% and 26% for sales. What is notable is that as the regulation of internal transactions increased, more internal transactions were conducted at unlisted companies rather than at listed ones. Such a propensity toward unlisted companies was clearly demonstrated in 2011, when 93.8% of the 211 companies with inside transaction ratios above 70% were unlisted companies. None of the 79 companies with inside transaction ratios of 100% were listed companies. The main reason for conducting inside transactions through unlisted companies is that such entities are not as scrutinized as listed ones.⁵² Unlisted companies also tend to serve as a channel for chaebol succession.

The change in the number of subsidiaries has been regarded as an indicator of chaebol expansion. Chaebols have been particularly criticized for indiscriminately expanding into new areas without considering the integrative effect upon their current business scope. This so-called octopus-like expansion also frequently impinges upon SMIs. Internal transactions usually accompany a chaebol’s entry into a new business and may also involve the intent to execute an illicit succession strategy.⁵³ The number of subsidiaries has indeed grown steadily. In 1987, there were a total of 509 subsidiaries for the top 32 chaebols, averaging 20.8 subsidiaries per chaebol. In 1996, one year prior to the financial crisis, there were 669 subsidiaries among the top 30 chaebols, an average of 22.3 per chaebol. One year after the crisis in 1999, the total number of subsidiaries increased to 686, resulting in an average of 19.6 per chaebol.⁵⁴ In 2002, the total number of subsidiaries for the top 30 chaebols with owners was 607; 772 in 2007; 1,082 in 2011; and 1,256 in 2017. There were several years that showed decreases; for example, total subsidiary count changed by -5.86% from 1,212 in 2013 to 1,141 in 2014 and by -4.19% from 684 in 2004 to 656 in 2005. However, the number of subsidiaries of chaebol groups has grown since the financial crisis.⁵⁵

TABLE 14. Debt ratio trends of chaebols (in percentages)

Source: Fair Trade Commission website, cited in Jang-Sup Shin and Ha-Joon Chang, Restructuring Korea Inc., 265.

Up until the financial crisis, Korean chaebols were notorious for their high debt-to-capital ratios, which had been increasing. As table 14 shows, the ratio for the five largest chaebols was 297.6% in 1995, increasing to 344.2% in 1996 and to 472.9% in 1997. The trend was the same for the top 30 chaebols, as the ratio was 347.5% in 1996, 386.5% in 1996, and 512.8% in 1997. Table 15 shows the ratio was close to or above 1,000% for some individual companies. Hanwha, for example, recorded 1,214.7%, Kumho 944%, and Hanjin 907.7% in 1998. Such high debt ratios were attributed to an octopus-style expansion strategy of diversifying business into areas that were not related to their core business in order to gain market share. In the wake of the financial crisis, the government ordered chaebols to reduce the debt ratio to 200% by 2000. Thus, the debt ratio decreased considerably to 162% for the top five chaebols and to 171.2% for the top 30 chaebols in 2000.

TABLE 15. Indebtedness of the top 30 chaebols, 1998

Source: Adapted from “Heavy Borrowing Backfires,” Business Korea 15, no. 5 (May 1998): 25.

The high levels of debt had serious implications for neofamilial practices in that most debt financing previously came from government-controlled commercial banks and financial institutions, the domestic commercial paper market, and foreign banks. For example, bank and non-bank financial institutions provided 55% of financing for the top five chaebols in 1997.⁵⁶ Thus, chaebols relied heavily on neofamilial ties to gain access to financing institutions. It was most likely the case that the borrowed capital was invested to increase their affiliated companies, which were usually owned and managed by people related to chaebol owners. Considerably reduced debt ratios meant that chaebols no longer depended on the state for capital, which in turn lessened the need for mobilizing neofamilial ties to access capital.

Overall, there have been significant improvements in financial structure and profitability of chaebols and relatively little progress in governance and chairman-driven management, which has essentially remained intact. This can be seen in the expanded proportion of chaebols in the national economy.⁵⁷ From a neofamilial perspective, most institutional reforms related to chaebols are incomplete and uneven. Although the reduced debt-to-capital ratios of many chaebols considerably reduced their dependence upon the state, there are unmistakable signs of neofamilism persisting in the outside director system, illegal means of inheritance, inchoate shareholder rights practices, and misuse of internal transactions. The financial reforms brought about drastic changes in ownership, management, and lending styles. However, the state still wields considerable influence over personnel matters at financial institutions.

Labor had to bear the brunt of abrupt changes. The bifurcation of the workforce into regular and irregular workers was a big blow to worker solidarity. The disruption of lifetime employment and introduction of the merit- based wage system undermined neofamilial bases among workers, such as regionalism. However, this does not mean that neofamilism has disappeared completely in the labor sector. As recent examples of illicit hiring practices in labor unions demonstrate, familial ties took on new meaning by prioritizing the family members of union leaders.⁵⁸

Korean families were seriously impacted by the financial crisis in terms of unemployment, credit crisis, and role reversal between spouses, which contributed to the disruption and disintegration of families in Korean society. Changes in lending practices put an end to personal debt guarantees, which were prevalent prior to the financial crisis, ushering in individualizing tendencies among family members. In these ways, the financial crisis left an indelible impact on Korean families. Yet it also seems that family ties became much more important in surviving a new era of uncertain and volatile employment. Among lower-class families, cooperation among family members has become indispensable for survival. For upper-class families, family ties have become essential for enjoying access to better employment and educational opportunities.⁵⁹

For over two decades, the institutional reforms and psychological impact of the 1997 financial crisis severely tested the resilience of neofamilism in Korea. It is certainly true that there have been some changes within neofamilial practices in hiring, compensation, and access to information. Chaebols, the primary neofamilial stronghold, remain unchanged in terms of various facets of governance structure and operations. The state, also an important source of neofamilism, has changed significantly in terms of its planning capacity, intervention in financial institutions, and thus its relations with chaebols. At the same time, the state assumed new functions in social welfare and has maintained considerable influence over personnel policies at financial institutions. In the labor sector and among Korean families, neofamilial practice is thriving and successfully coping in a market-based, competitive employment environment. Thus, neofamilism has proven to be resilient in Korean society’s new context before and after the financial crisis. However, a distinction should be clearly made between different types of neofamilism in terms of how and where it is practiced. As it emerged in the 1960s, neofamilism occurred in the context of state-led industrialization, while post-1997 neofamilism persists in the context of marketization in the aftermath of the 1997 financial crisis. If the former is labeled as type I, the latter can be called type II. The old form (type I), which developed under state-led late industrialization, survives in the new context of market-based competition (type II), representing an ongoing and tenuous co-existence of the two forms.