The Financial Times had an important story over the weekend decrying the emergence of a two-tiered economy in Korea, and it is getting some play in Korea. Koreans are loathe to admit this (don’t criticize the team to foreigners), but any outsider can see this almost immediately here, and just about every non-Korean social scientist I know in-country agrees that this is a huge problem.

By two-tiered I mean the enormous concentration of market power and political access concentrated in the largest 200 hundred or so Korean companies, while small and medium enterprises (SMEs) struggle to find credit, and Korean households pile up debt (now at 150% of income). Non-Koreans will recognize such brands as Samsung, Hyundai, or LG, but others include widely visible names in Korea like SK or Posco. Like Japan’s infamous keiretsu, Korean mega-companies often sprawl into many different sectors, building cross-sectoral conglomerates (the Korean word is chaebol). SK, e.g., owns a telecom service, gas station chain, and real estate distributor. The chaebol have become so massive, that they enjoy many distinctly unearned, oligopolistic benefits of size.

1. They are ‘too big to fail.’ Chaebol in trouble can usually go to the government for help, as many did in the Asian Financial Crisis (AFC). In the 1997 IMF bailout of Korea, the big IMF condition was breaking the chaebol into smaller, more competitive, less openly oligopolistic firms. The chaebol have fought this ever since, often using bribery and political connections, to re-scale the commanding heights. Even Korea’s ‘reformist’ administrations – Kim Dae Jung and Roh Moo Hyun (1997-2007) – got tarred with scandal for taking bags of cash from Korea’s biggest companies. By contrast, Korea’s small and medium enterprises have no such informal political safety net. Anyone walking down the same street in Korea for more than a year or two can see the dramatic merry-go-round of small businesses here. Korea is filled with mom-and-pop stores just one or two bad months away from bankruptcy.

2. Size means political influence. It should surprise absolutely no one that the sheer bulk of the chaebol gives them inordinate, collusive political influence. The most obvious mark of this is the pardons extended to top chaebol officials convicted of a crime. More important is the informal pressure of the government on Korean banks to loan to the biggest firms at generous rates. The not only encourages recklessness at the top, it squeezes Korea’s SME’s at the bottom. Perhaps most scandalous of all, the chaebol were able to terrify the Korean state and taxpayer into picking up the bill of the Korean AFC. The Korean AFC was not caused by reckless sovereign or household borrowing. It was the chaebol, who then, mirabile dictu, dumped their debt onto the state, which ultimately forced the government to approach the IMF. Koreans traditionally blame the IMF for the crisis, but it was in fact, because the Korean state, terrified of the consequences, ‘generously’ nationalized the debt of Korea’s corporate sector. In truth, I suspect the Korean government was bullied by the wealthiest corporate heads in 1997 talking about what will happen to Korea if the government doesn’t give them the money immediately – a shakedown.

3. Cross-sectoral holdings allow a firm to leverage success in one sector for success in another. Even within a sector, Korea is often oligopolistic. The telecom industry is dominated by just two providers (SK and KT – a duopoly), resulting in exorbitantly expensive IT/long distance rates. These sorts of oligopolistic effects are well-known. Yet worse is the regular invasion of wholly unrelated sectors, in which the market power of one sector is used to push into other. The best know example of this to westerners is Microsoft. For more than a decade, MS used its power in operating systems (Windows) and office software (MS Office) as leverage to crush rivals in other areas where MS was weaker – browsers (Netscape), instant messaging (ICQ), media players (WinAmp), etc. In Korea, it is vastly more predatory and oligopolistic, as the chaebol often expand into areas wildly unconnected to each other, a practice that can only be explained by extraordinarily weak anti-trust enforcement, regulatory ‘looking away,’ and the political connections to give an unstated veneer of approval. Even Adam Smith rejected excessive concentration (monopolies, duopolies, oligopolies), and I can think of not credible market explanation whereby SK is the country’s biggest telco, real estate holder and gas station chain simultaneously. These outcomes are so blatantly political and ridiculous, that I am amazed Korea sees so little populism.

But corruption, scale, and political influence can’t be the only reason. Korea could elect genuine progressives to push through deconcentration. Even the Reagan administration broke up AT&T, right? And here is perhaps the most insidious element of the chaebol – they have convinced Koreans, a) that they are the flag-bearer toward the rest of the world, and b) that if they went through bankruptcy that Korea’s economy would implode.

a) Corporatized nationalism. Korea is a small place, bullied often by its neighbors, with a language no one learns, a culture that’s not easily distinguishable from China or Japan, and a nuclear lunatic running half the country. But as anyone living here for about 5 minutes can tell you, they are intensely nationalistic and absolutely determined that the rest of the world know who they are. That is why Yuna Kim is a legend here – not because she is a good skater, but because she brings the world’s attention to Korea. The chaebol have masterfully exploited that absolutely desperate craving for attention.

When the EU FTA was up for debate, the government ran commercials on TV showing smiling white people in European locales using Korean goods – helpfully pointed out as from Samsung, LG, etc. In trains, airports, bus terminals, on the government TV networks, etc, one sees an endless stream of government promotional commercials and videos showing dynamic-looking Korean businessmen talking up this or that Korean export product to someone who looks like a foreigner (i.e., a white guy in a suit). The Korean news gives you a regular diet of chaebol agit-prop, as the ups-and-downs of Samsung, SK, LG, Kia, etc are reported religiously. And the dream job of just about every Korean student I’ve ever had is to be a jet-setting corporate executive for Samsung. Koreans have routed their nationalism through their MNCs, and the chaebol take advantage of this to blackmail the state when necessary – particularly soft loans from the government.

b) Korea is Korea, Inc. is chaebol-land. Almost as bad is the widespread belief in Korea that if the chaebol are threatened, then somehow Korea will collapse. I see this all the time in conversations here. Despite all the above arguments for anti-trust action, my interlocutors inevitably retrench to fear – what would Korea look like if Posco went bankrupt? That Korean demand for the products Posco used to make would persist and therefore encourage new market entrants seems to arcane. That start-ups are often more efficient and more innovative (Facebook vs Microsoft) suggests even more unnerving change. That shaking up markets usually reduces consumer prices by forcing established winners to work harder is irrelevant: Koreans are ready to pay higher prices at home if that it what is required for Korea, Inc. to carry the Korean flag abroad. In the end, Korea must have national champions – not because they are champions, but because they are national. If Korea is a divided country of minor global importance (ie, no one cares about us politically), then we must have, economically, megacompanies to broadcast our national awesomeness. In the end, if Korea must be Korea, Inc. in order to get globally noticed, then its ok to be chaebol-land.

If this is depressing, there are obvious answers that do not require the government to forcibly to delimit some areas for the SMEs and some for chaebol, nor to beg the chaebol to be nice. And these would bring Korea into greater compliance with OECD norms and best practices on corporate governance:

1. Halt easy credit for the chaebol, while creating a pool of such capital for small business, modeled on the US Small Business Administration. The Korean SME sector is the most dynamic economic force in the country, taking huge risks to build neighborhood-enriching corner shops. This is far gutsier than mega-companies with lots of government buddies producing variants on the same product every year. The Korean Jeff Bezos or Mark Zuckerberg is out there, but I guarantee he is not a mid-level salary-man at Samsung. The government needs to unleash the ‘animal spirits’ of Koreans; access to bank credit on an equal playing field is the obvious place to start.

2. Enforce anti-trust law. Oligopolies create so many negative effects that even the conservative Reagan administration broke up AT&T and achieved a 70% reduction in long-distance rates. There is no possible economic justification for consumer-punishing cross-sectoral conglomerates. Western regulators would long ago have forced chaebol spin-offs. More firms means more competition, more innovation, and lower prices.

3. Stop sterilizing the won’s appreciation. ‘Fine-tuning’ is a laughable euphemism for forcing depreciation at the behest of chaebol exporters. It creates obvious costs – 5000 won for an import beer at HomePlus – for consumers. Korea’s inflation rate is now 4.2%; an easy way to return purchasing power to Korean consumers would be for the currency to rise.