Magnates and Macadamia Nuts: How a Handful of Companies Dominated South Korea’s Economy

This article was featured on the DBJ Instablog on Seeking Alpha.

Three months after the “nut rage” scandal sparked international ridicule and debate over the abuses of family-run Korean conglomerates, a court has convicted and sentenced former Korean Air vice president Cho Hyun-ah on Feb. 12 to a year in prison for illegally forcing a flight to change its route.

Cho, the daughter of Korean Air chairman Cho Yang-ho, forced a taxing plane at Kennedy International Airport to return to the gate in order to remove the chief steward. She was angry because a first-class flight attendant served her macadamia nuts in the original packaging, rather than on a plate.

Passengers in the cabin reported that Cho forced the chief steward to kneel before her and beg for forgiveness. She reportedly threw papers at him, screaming because the flight attendant served macadamia nuts in the “wrong way.”

Since the Dec. 5 scandal, Cho resigned from her post, was arrested for violating aviation safety laws and instigated national debate regarding the perceived arrogance of Korea’s business elite.

This incident, however, is more than an isolated case of “nut” behavior or individual inanity. It provides a glimpse into the larger structural dynamics of power and wealth in South Korea.

Namely, the sense of entitlement and authority that led Cho to turn around a 250-passenger plane illustrates Korea’s chaebol economic structure and the incredible power chaebol families wield. But the overwhelmingly negative reactions to Cho’s actions also demonstrate the growing resistance against the perhaps all-too-powerful chaebol.

The chaebol’s grip

 Chaebol refers to Korea’s largest conglomerates, which are most often controlled by and passed on to family members of the original founder. Internationally known chaebol include Samsung, Hyundai, LG and Hanjin (the holding company of Korean Air), and domestic conglomerates include Lotte, SK, GS and Hanwha. Members of the founding families still largely control these conglomerates, and as a result, their influence in Korea is far and wide.

Samsung, for example, singlehandedly contributes approximately a fifth of South Korea’s gross domestic product, according to a 2011 Economist article. Though known elsewhere in the world for its electronic products, Samsung has a stake in almost all aspects of South Korea’s society and economy. It sells life insurance, builds amusement parks and apartments, produces credit cards and has its own professional baseball team. The company’s subsidiaries build roads, manage oilrigs, operate hotels and hospitals, and even produce chemicals, ships and weapons.

“You can even say the Samsung chairman is more powerful than the South Korean president,” said economist Woo Suk-hoon in 2012.

In fact, Samsung’s influence is so great that the South Korean president pardoned chairman Lee Kun-hee 2009 of his tax evasion and embezzlement convictions. Lee was considered “too important” to the economy to be imprisoned.

Relatives of Lee also wield incredible power. The daughter of Samsung’s founder is the chairwoman of Shinsegae Group, one of the largest department store and discount retailer chains in South Korea. The grandchildren run CJ Corporation, one of the largest food and entertainment companies, known for its movie theaters, pharmaceutics and films.

Similar accounts of incredible power hold true for any of the other dynastic conglomerates in South Korea. Power and wealth are concentrated in a few families, and their personal decisions have the potential to change the daily lives and experiences of South Koreans.

It is not particularly surprising then, that these chaebolfamilies exert such enormous influence. Given the structural dynamics of power and wealth at play, it appears conceivable, that when the Korean Air heiress ordered the plane to turn around, not even the pilot could have overturned her decision.

Growing wealth inequality and resistance

 The chaebol control a significant portion of Korea’s wealth, and income inequality appears to be growing even greater.

South Korea’s GINI coefficient, which measures income inequality, climbed from .306 in 2006 to .315 by 2011. As of 2012, the upper tenth possess 46 percent of wealth, while the bottom half controlled only 9.5 percent.

This growing disparity in wealth has given the chaebol an overwhelming advantage in expanding their economic dominance. These conglomerates often acquire promising start-ups or outcompete mom-and-pops businesses by mobilizing their massive resources. This has stunted entrepreneurship, compelling many of Korea’s most talented to work for these conglomerates their entire careers.

Yet, there appears to be a growing resistance among Koreans against the vacuum-like power and perceived high-handedness of the chaebol. The “nut rage” incident has sparked contentious dialogue and debate for the past few months in South Korea.

“Cho Hyun-ah’s ‘nut rage’ could have resulted in no jail time. But public sentiment seemed to influence the court’s ruling, and they gave her an actual prison sentence,” South Korean lawyer Kim Kwang-sam told Arirang News that “The public’s hostile view of chaebol families – privileged, with an easy life coming from wealthy parents – was loud and clear this time.”

In the days following the incident, South Koreans flooded social media and other websites with content ridiculing Cho and denouncing the abuses of other chaebol. Many called for a boycott of Korean Air, and analysts have speculated that the 6.6 percent drop in passengers in Dec. 2014 from the holiday season a year earlier can be attributed to the “nut rage” incident. During that same period, Asiana Airlines, Korean Air’s primary rival, experienced a 13.2 percent increase in passengers.

A bill called the “Conglomerates Ethical Management Law,” commonly referred to as the Cho Hyun-ah law, is to be introduced February 2015. It will detail punishments for “high-handed conduct” and crimes such as embezzlement committed by chaebol.

While anti-chaebol sentiment has been present in South Korea for quite some time, the “nut rage” incident might signify the first spark that mobilized the government and South Koreans to change the chaebol structure.

Why the chaebol can’t be touched

South Korea, however, has been historically reliant on the entrepreneurial capabilities of the chaebol.

Any account of South Korea’s meteoric economic rise following the Korean War must acknowledge the chaebol’s role. Park Chung-hee, the military ruler who seized power in the 1960s, devoted scarce capital to the chaebol under the condition that they expand Korea’s export economy.

This concentration of economic power had dramatic effects on Korea’s market system. The chaebol spearheaded the industrialization of Korea, converting the country’s agrarian economy into an export powerhouse within a few decades. Between 1960 and 2000, the chaebol were responsible for creating a 13-fold increase in output per capita, enabling the country to be the 10th largest exporter by volume.

Today, the chaebol are even more vital to the Korean economy than they were in the past. As of now, these conglomerates are the only realistic outlets through which Korean manufacturers can export products to the outside world. To hastily decentralize the oligopolistic power of the chaebol is analogous to potentially dismantling South Korea’s export economy, a decision that would undoubtedly be catastrophic to many South Koreans. The collectivization of wealth in so few companies means that any regulation must be approached with extreme caution.

In addition, while many South Koreans harbor misgivings about the chaebol, they also revere the business superstars who carry South Korea’s economy. Some 70 percent of household expenditures, according (incidentally) to the Samsung Economic Research Institute, are used towards private education, often in the pursuit of helping children perform well on tests, gain acceptance to the country’s top universities and then obtain a job in one of the conglomerates.

This is because, realistically, working for a chaebol is one of the few ways Korean youth can secure a stable occupation, accumulate some wealth and climb South Korea’s social ladder. Being hired by a chaebol is considered to be a major life accomplishment, and the prestige of working for a chaebol carries a similar weight as a job at a Wall Street firm does for American students.

“Many Koreans right now have dual minds about chaebols,” lobbyist Lee Cheol-haeng told the Washington Post in 2012. “They say, ‘I hate chaebols, but I want my son to work for one.’”

In an economic environment that is dominated by a few dozen families, many South Koreans resent, ridicule and revere the chaebol all at the same time. As much as people want to weaken the chaebol structure, they simply do not possess the money or resources to compete with the chaebol. Since the chaebol also hold a position of reverence and deep regard, they are viewed as untouchable and their words are absolute.

The result of South Korea’s initial collectivization of wealth has been a self-perpetuating vicious cycle. The larger structures of power and inequality place South Koreans in a position where they must all compete for a spot within a chaebol, rather than compete against the chaebol. But with its endless supply of Korea’s brightest minds who have devoted their adolescence to South Korea’s spartan education system, the chaebol only become stronger, causing even further distrust and dissent among South Koreans.

But the “nut rage” incident has brought to surface the long-suppressed grievances of South Koreans. A scuttle over a bag of macadamia nuts might represent a precursor to change.