Kyle Ferrier

As the Choi Soon-sil scandal has unfolded over the past several months the Korean public’s dissatisfaction with major Korean conglomerates known as chaebols has become second only to Park Geun-hye herself. Allegations of Park leveraging her political position to exchange favors with chaebols, particularly Samsung, are at the core of the public backlash. A recent poll showed about two thirds of Koreans not only view chaebols unfavorably, but as a drag on the economy, many citing growing inequality and corruption to back their response. While these criticisms may seem antithetical to Korean national pride in brands that have helped make the country a major global player, they are emblematic of a complicated love-hate dynamic in an economy many argue is too dependent on chaebols.

Socio-economic issues linked to the dominance of chaebols have prompted numerous attempts to systematically reform their rules, most recently by President Park in 2013, but have produced little change. Although the current scandal is hardly the first caused by blurred lines between business interests and politicians, mounting public scrutiny is unprecedented. Yet, is it enough to cause a major structural transition in the Korean economy?

The clearest example of the Korean draw to chaebols is a culture of striving to work for these companies. Working for a chaebol carries an almost unparalleled air of success and stability. The larger the chaebol, the greater the prestige for being in its employ. Samsung’s entrance exam is unsurprisingly quite popular with about 100,000 test takers in 2011 doubling to 200,000 by 2014, though only one in ten would secure a job that year. In 2015, Samsung had to switch to a new test to cut down on the overwhelming volume of exams by introducing separate screening assessments beforehand. This heightened competition for Samsung is indicative of a larger issue now in Korea: high youth unemployment.

Youth unemployment in Korea, defined for people aged 15 to 29, reached its highest point ever last year at 9.8 percent. For those 25 to 29, the unemployment rate was 8.2 percent, the highest point since 1999. Korean students consistently score among the highest achieving in the world—though not without high social costs which exacerbate the hardships of unemployment—yet there are not nearly enough new high skill jobs to meet demand. Chaebols are simply creating too few positions and the combination of their huge market share as well as the culture of working for these groups has made SME growth difficult. Young Koreans are keenly aware of this, as the recent poll revealing two thirds of Koreans do not view chaebols favorably also showed 75 percent of those in their 20s and 30s share the same sentiment.

Widespread perceptions of rising inequality stemming from a chaebol-centric economy are also not unfounded. A recent IMF report found the top 10 percent of Koreans earn as much as 45 percent of total income, earning Korea the unenviable title of most economically unequal country in the Asia-Pacific. Nepotism in chaebols is a highly visible contributor to this issue: leadership in most chaebols is passed down within the family and it is not uncommon for scarce entry-level openings to be filled by relatives of current employees. Parallels to the current scandal are hard to ignore. Also at play in the growing income polarization are a number of other factors, including an outdated labor regime consisting of regular and non-regular workers—who receive less pay and enjoy practically no job security.

The income disparity between regular and non-regular workers is greatly amplified when comparing chaebols to SMEs. According to the Korean Ministry of Employment and Labor, in 2015, compared to regular workers in chaebols, non-regular chaebol workers were compensated 65 percent as much, regular SME employees 50 percent as much, and non-regular SME workers 35 percent as much. It also worth noting that chaebols only employ around 10 percent of the population. Attempts to reform the labor system, much like those intended to directly govern chaebols, continue to be unsuccessful.

As several compelling op-eds have highlighted, even if the Constitutional Court upholds Park’s impeachment these problems will still remain, a notion many Koreans would find hard to disagree with. Among the potential presidential candidates Lee Jae-myung has been the most outspoken against the likes of Hyundai and Samsung, but Park and her predecessors’ record of actualizing campaign promises on chaebol reform is not promising. Rather, it suggests the weight of their influence may be too much to move with state-led reforms alone. Although policies are unlikely to change, the massive public response indicates the strength of a cultural shift that can gradually change the Korean economy from the bottom up.

While there are numerous similarities between past scandals and the current one, a key difference to account for the recent protests may be that many Koreans have reached their breaking point. It would be misguided to expect less applicants for Samsung vacancies, but working for a chaebol is starting to no longer be viewed as the end-all and be-all of success in Korea.

Recently innovative startups have been growing in number and in size, drawing from the scores of talented unemployed youth. These companies and other SMEs have greatly benefitted from a government infrastructure to incubate their growth, including billions of dollars in grants, overseas matchmaking, and mentoring. In the past decade, such initiatives to foster innovation and SME growth have been criticized for limited output. However, in many ways the problem has not been the programs themselves but rather a lack of demand, an altogether more difficult issue to tackle and a trend that seems to be reversing on its own.

As SMEs become more attractive places to work it looks as if the best policies to manage the economic dominance of chaebols is to continue to empower entrepreneurship. A stronger base of non-chaebol-dependent SMEs should also make pushing through chaebol regulations and labor reforms more politically feasible. While there is still a long way to go for Korea to build a more diverse economy and a healthier relationship with chaebols, momentum may be moving in the right direction.

Kyle Ferrier is the Director of Academic Affairs and Research at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from v15ben’s photostream on flickr Creative Commons.