In Korea top chaebol groups achieved a surprisingly fast growth in the 1970s, occupying a larger and larger portion of the national. Perhaps no less surprisingly, this growth accompanied no significant de-concentration of ownership. We should therefore not be surprised to find out that top chaebol groups relied heavily on debt financing for their growth in the 1970s. ##MORE_LAYER_BOX## The graph below can help us to confirm this conjecture though it does not exclude those companies which did not belong to any of top chaebol groups. We shall find out that the issue of new equity accounted for a lot less than one fifth of external financing of Korean companies in the 1970s and later if we roughly estimate the ratio from the figure below. To be exact, the portion of new equity in external financing was 15.2 per cent on average for the years 1966-86. Most external financing took the form of loans or foreign debt, of which the latter normally required a domestic bank’s guarantee of payment. Bonds were also mostly issued with a bank’s guarantee of payment. To sum, Korean companies relied on banks for about two thirds of their external financing in this period.
Note: Loans = Bank loans + Non-bank loans, Bonds = Corporate bonds + CP
Source: Lee, Yoon-Ho (2005), Financial Structure and Financing of Korean Chaebols, Nanam (in Korean). ##MORE_LAYER_BOX_END##
It is in this background that the Korean government devised the so-called Credit Management System in July 1974.
When the Credit Management System was devised in July 1974, it took the form of agreement by which all the financial intermediaries should abide. Yet the Bank Supervisory Board determined both the direction and the details. Although its declared objective was “to promote equity capital replenishment and financial structure improvement of companies through integrated credit management,” suppression of economic power concentration was another apparent objective. In particular, its unit of application was not an individual company but a group of companies under control of a same person, and its target of application included those chaebol groups with combined amount of loans exceeding 5 billion won. ##MORE_LAYER_BOX## The Agreement on Credit Management of Main Banks went through a number of reinforcing revisions before it was replaced with the Detailed Rules for Credit Management of Financial Institutions in July 1984. The Detailed Rules drew legitimacy from Article 30.2 of the Banking Act that had been amended in December 1982. The Credit Management System thus attained a legal ground that the earlier ones had lacked. More importantly, the Detailed Rules focused more on “suppression of disproportionate loans and credit,” one of its two declared objectives. In particular, Article 9 of the Detailed Rules read as follows: “Provided that the Director of the Bank Supervisory Board sees it necessary for correction of disproportionate loans and credit, he or she shall set an upper limit on increase in loans and credit of each financial institution for each group of affiliated companies.”##MORE_LAYER_BOX_END##
Various data could be collected to illustrate accomplishments of the Credit Management System. For instance, the ratio of bank loans to sales has fallen rather rapidly in large companies since 1976 (see Figure 3).
Source: Lee, Yoon-Ho (2005), Financial Structure and Financing of Korean Chaebols, Nanam (in Korean)
In comparison, the ratio rose in small and medium sized companies in the 1970s before it slightly fell in the early 1980s. One can thus conclude that the Credit Management System had the intended effect, insofar as the allocation of bank loans is concerned. However, in Korea, a disproportionate allocation of bank loans stopped being a necessary condition for the concentration of economic power. Despite the reduced share of chaebol groups in bank loans, they have succeeded in increasing their share in the national economy, while sustaining substantial ownership. ##MORE_LAYER_BOX## One of the earliest reports on the issue of aggregate concentration via chaebol groups was released in April 1980. Its author was a researcher at the Korea Development Institute (KDI), an institute established and sponsored by the government. The table below is a partial reconstruction of one of his tables. It shows that the top ten chaebol groups accounted for as much as 23.4 per cent of the manufacturing sector in 1978. This share is 1.68 times as large as that of 1973.
1) Figures in parentheses denote the shares as per cent for each year and their ratio of increase.
Source: Sa Kong, Il (1980), “Economic Growth and Economic Power Concentration,” Korea Development Research, Vol. 2, No. 2, pp. 2-13 (in Korean).
The degree and trend of aggregate concentration seems to have been a subject of continued research at the KDI. A new report was presented with more recent statistics in April 1983. In addition to the share of top chaebol groups in manufacturing in terms of added value, it measured those shares in terms of sales and employment as well. These share statistics were included with more recent ones in another report released in June 1984. Covering the years from 1977 to 1982, the author added up the sales of top chaebol groups to compute their share in the manufacturing sector for each year. The author computed their share in terms of employment as well. The table below is a partial reconstruction of the author’s table which was reproduced in a joint work. Focusing on its columns for shipment, we find that the top ten chaebol groups accounted for as much as 30.2 per cent of the manufacturing sector in 1982. This share is 1.42 times as large as that of 1977.
Source: Lee, Kyu Uck and Lee, Sung-Soon (1985), “Corporate Integration and Economic Power Concentration,” Research Report 85-2, Korea Development Institute (in Korean).