Samsung's Headquarters in Seoul (Photo Credit: Oskar Alexanderson, Flickr Commons) In the last 50 years, the Republic of South Korea has undergone economic and social development at an unprecedented rate. Transitioning from aid-recipient to aid-donor in a mere half-century, the Asian nation has become a role model for developing countries worldwide.

Effectively applying the lessons from the “Korean Miracle” demands a thorough understanding of the forces that catalyzed it. A strong commitment to national development, a focus on centralized leadership, a cultural emphasis on diligence, and the acceptance of authoritarianism have all been critical to Korea’s success. Ultimately, all of these factors have their roots in Korean-Confucian Culture.

Confucian culture is deeply embedded in South Korea’s economic development, particularly in the strong historical relationship between the government and the chaebols. Chaebols are South Korean conglomerates owned and controlled by a minority of elite founding families and characterized by a number of vertically and horizontally integrated affiliate companies.

South Korea’s development began in the early 1960s, when chaebols and the state found themselves with the shared objective of economic growth. Both built vertical government-business relations to rapidly achieve this goal, while simultaneously promoting a government-led development strategy. At least until the 1970s, this synergistic relationship between industrialization and policy ideology perpetuated.

All human resources, economic resources, technology, and administrative support in Korea were ultimately mobilized for and funneled to chaebol growth. These measures were justified under the national motto of modernization and capital accumulation: individual welfare and freedom were restricted, and labor movement that would have otherwise promoted better economic and political conditions was suppressed. Chaebols were generously permitted a market monopoly under the guise of export expansion.

In 1962, the Park Chung-hee administration introduced the government payment guarantee system. Private companies’ international loans would be paid back by the government in order to help finance overseas funds. On August 3, 1972, the Park Chung-hee administration, wanting to relieve the financial charge of the insolvent chaebols, issued a special presidential decree introducing 8.3 measure that forcefully decreased private loan interest held by the many ailing Chaebol-affiliated companies. This obstructed private property rights and the rule of law, but was pursued under the name of national modernization and state interest. The two schemes are representative cases of a government directly intervening in an underdeveloped market at the initial stages of industrialization – effectively creating market conditions that led to the growth of chaebols. Both arrangements would have been impossible without Confucian culture, which promotes submission and hierarchy.

Chaebols are often called the “national champions” of Korea’s economic growth. Samsung and Hyundai Motors, for example, comprise 36.5 percent of the Korean stock market’s aggregate value. Yet the negative impact of chaebols on Korean politics and society cannot be ignored. For example, in 2007, a former high-ranking director of Samsung caused an outrage among the Korean population by whistle blowing. Samsung allegedly gathered astronomically large slush funds, which it used to lobby major figures in politics, academia, the government, and the media. With fury and pressure from Korean civil society, a special prosecutor was introduced to investigate the scandal. The allegation turned out to be true, and Samsung’s Chairman Lee Kun-hee was convicted. Chaebols are also heavily influenced by family dynamics, another aspect of Korean-Confucian culture that has had a hard time adjusting in an age of democratization and globalization. The Korean Air “nut rage” incident reveals how chaebol owner families have been unable to adapt to the changing environment. Additionally, the recent fight over management rights between the father and two sons of Lotte group is an example of backwardness, showing that chaebol management has had difficulties adhering to modern-day rules and regulations.

South Korea’s transition to democracy in 1987 and the 1997 Asian financial crisis were critical junctures that contributed to the changing relationship between Korean-Confucian culture and the chaebol system. The latter was in a position where it needed to show accountability and transparency. The series of reforms following the economic crisis weakened both Confucian cultural norms and the developmental state that had previously supported chaebol growth. The government’s policy, which had allowed for opaque, monopolistic economic activity among the chaebols, shifted toward fostering a competitive environment. Government-chaebol relations were no longer symbiotic.

The chaebols’ patriarchal culture rapidly weakened, with its employment relationship changing from one based on informal norms to one of formal contracts. Korean chaebols could no longer compete using the Confucian organizational culture of the past, nor could they achieve creative technical innovation. In some cases, cultural factors that were previously assets to Korean development before 1997 were now liabilities.

Many of the old chaebol practices still obstruct Korean economic growth. Informal networking, for example, still trumps formal procedures in the management style and corporate governance of chaebols. As such, the interests and rights of minority shareholders can still be easily infringed upon, creating barrier to participation for foreign investors. Moreover, there remains a “Korean discount” (the amount by which investors undervalue Korean stocks) in the international financial market.

Confucian culture has shown a number of faces in each period of Korean development and chaebol growth. It is difficult to bring about fundamental cultural change from only a few institutional reforms. Nonetheless, the pressures of globalization and democratization led Korea’s Confucian culture to experience gradual, but profound change. The rule of law, rather than the “rule of man,” is being strengthened, and a cultural environment where market forces supersede the power of the state continues to develop. Efforts to minimize the weaknesses and restore the strengths of Korean-Confucian culture are a hidden axis of economic reform and institutional change. The success or failure of Korea’s democratic consolidation and sustainable economic growth will greatly depend on the direction of cultural transformation.

However, Confucian culture does not always equate to corruption and opacity. Its economic role and meaning can change depending on the quality of political-economic institutions that are supposed to materialize it: well-designed institutions could make the culture work in a more transparent and globalist direction. As such, even after broad scale reform progressed after 1997, chaebols should work to narrow the gap between the remaining Confucian cultural practices and international norms. Korean chaebols should comply both their form and substance with global standards, resisting the temptation of repeating the practice of mock-compliance. By doing so, chaebols can sustainably grow and contribute toward developing the market economy and democracy of 21st century South Korea.