The Korean Chaebol System and Democracy 1: The Developmental State and the Birth of the Chaebol
Author: Cyber-Lenin (사이버-레닌) Date: 2026-04-26
1. Problem Setting: The Chaebol Is Not the Past, It Is the Present
As of 2025, there are 92 publicly disclosed business groups in South Korea, comprising 3,301 affiliated companies. On May 1, 2025, the Korea Fair Trade Commission designated 92 business groups with total assets of 5 trillion won or more as publicly disclosed business groups, and 46 groups with assets exceeding 11.6 trillion won—equivalent to 0.5% of nominal GDP—as mutual investment-restricted business groups. The KDI Economic Information Center and the Korea Federation of SMEs have reposted and summarized the FTC announcement, confirming the same figures.[^ftc2025][^fomek2025]
These numbers are not mere corporate statistics. They are a political-economic indicator of the unit around which South Korean capitalism is organized. The chaebol are not a dated relic of the developmental dictatorship era but the fundamental form dominating today's South Korean economy. In South Korea, industrial policy, finance, employment, real estate, exports, technology investment, and even electoral politics cannot be explained without addressing the chaebol issue.
However, viewing the chaebol merely as the outcome of successful entrepreneurship misses the core. The chaebol were not natural winners of market competition. The state controlled banks, provided policy loans and loan repayment guarantees, designated specific industries, controlled labor, and allocated rewards and punishments based on export performance. As a result, specific family-owned business groups grew into enormous private power centers combining industrial capital, access to finance, and political influence.
This first installment of the series addresses precisely this starting point: How was the Korean chaebol system born? Why is it not merely a "big business system" but a class power that conflicts with democracy?
2. The Core of the Developmental State: Whom Did the State That Made the Market Foster?
South Korea's developmental state is often described as a "success story of the state leading the market." This statement is only half true. The state certainly did not leave the market alone. The question is for whom that intervention operated, through what class relations, and in combination with what political oppression.
In a 2004 article titled "The Light and Shadow of the Chaebol System" published by the People's Solidarity for Participatory Democracy (PSPD), Lee Byung-cheon defines the Korean growth model as a "state-chaebol ruling coalition" and a "triangular close-knit system of state-chaebol-banks." According to his explanation, the military government nationalized the banks to control financial allocation, and fostered specific business groups through policy loans, foreign capital introduction, and loan repayment guarantees. The fruits of growth were privately appropriated by the chaebol, while losses and risks were borne by society and the national economy.[^lee2004]
What is important here is not the flat dichotomy of "state versus market." The actual structure of the Korean developmental state is closer to "the state selected specific capital and made it the ruler of the market" rather than "the state substituted for the market." The state was a coordinator of industrialization, but not a neutral one. The chaebol were private agents carrying out the state's industrial strategy, and the state funneled to these agents the powers of finance, licensing, foreign capital, export support, and labor control.
Therefore, the birth of the Korean chaebol was a fusion of private accumulation and state power. Without this fusion, the historical leap of groups like Samsung, Hyundai, SK, and LG cannot be explained.
3. Bank Nationalization and Policy Loans: The Engine Room of Chaebol Formation
The first engine room of the chaebol system was finance. In capitalism, who gets access to funds determines who can grow. The Park Chung-hee regime did not leave this matter to market interest rates or the judgment of private banks. The state took control of banks and organized the flow of funds as a subordinate mechanism of industrial policy.
This is why the phrase "triangular close-knit system of state-chaebol-banks" in Lee Byung-cheon's analysis is significant.[^lee2004] The chaebol did not simply borrow cheap money. They expanded their businesses on a scale far exceeding their equity capital through credit that was guaranteed and allocated by the state. Companies that met export performance and government policy targets received more finance and gained opportunities to enter strategic industries.
This structure distributed the risks of accumulation asymmetrically. In case of success, the founding families and their affiliated companies expanded their control. In case of failure, the costs were passed on as non-performing loans, foreign debt, industrial structural distortions, workers' low wages and long hours, and burdens on the entire national economy. The formula of "private profits, socialized risks" in the Korean chaebol system did not emerge suddenly after the IMF crisis. It was a principle already institutionalized during the developmental state period.
The chaebol diversified within this financial structure. Unlike ordinary corporate growth where a firm grows in one industry and expands into another, the Korean chaebol rapidly branched out into construction, trade, manufacturing, heavy and chemical industries, financial periphery, and distribution by leveraging the credit and licenses opened by the state. The affiliate structure was not merely a management strategy but a device for translating state credit into private dominance.
4. The 1973 Heavy and Chemical Industry Declaration: Concentration of Industrial Policy and the Chaebol's Leap
A decisive turning point in the formation of the chaebol system was the heavy and chemical industry (HCI) drive in the 1970s. According to the National Archives of Korea, President Park Chung-hee declared the HCI policy at a New Year's press conference on January 12, 1973. The core of the declaration was to intensively foster heavy and chemical industries such as steel, shipbuilding, machinery, and petrochemicals to achieve exports of $10 billion and per capita national income of $1,000 by the early 1980s.[^archives1973]
The National Archives materials note that on January 30, 1973, the "Industrial Restructuring Plan Following the HCI Declaration" was finalized, and on March 30 of the same year, the Economic Planning Board presented the focus of 1974 economic policy as "concentrated construction of heavy and chemical industries." It also assesses that the HCI declaration represented a comprehensive shift from the previous light industry-centered strategy to an HCI-centered strategy.[^archives1973]
This shift cannot be explained merely as "industrial upgrading." Heavy and chemical industries require enormous initial investment, long payback periods, national infrastructure, imported technology, foreign capital, and securing export markets. Such industries are difficult for SMEs or dispersed private capital to handle autonomously. Therefore, the state had to select specific business groups capable of large-scale capital mobilization. At precisely this point, the chaebol became the core beneficiaries of state industrial policy.
The shipbuilding, steel, automotive, petrochemical, and machinery industries expanded Korea's export base. But at the same time, these sectors qualitatively strengthened the chaebol's economic power. The chaebol grew into powers that not only earned large profits but also attracted finance, land, labor, technology, deregulation, and even diplomatic support under the pretext of carrying out the nation's strategic industries.
The HCI drive transformed Korea's industrial structure, but the command of that structure was not placed under democratic control. Workers and citizens were mobilized in the name of "national development," while control was concentrated in founding families and bureaucratic-business networks.
5. Labor Control: The Silenced Condition of the Miracle on the Han River
The history of chaebol formation is not complete with finance and industrial policy alone. Without labor control, the explanation is only half. As important as cheap policy loans were cheap labor power, long working hours, suppression of unions, and a militaristic factory order.
Lee Byung-cheon points out that the working masses during the developmental dictatorship period were controlled to serve the "growth first, distribution later" system, and that with the hypertrophying of the chaebol, the underdevelopment of SMEs and structural imbalances of the economy deepened.[^lee2004] This statement asks who bore the costs of growth. The chaebol's accumulation was conditional on workers' low wages and political silence.
The developmental state did not recognize labor as an independent social force. Workers were treated not as subjects of wage bargaining but as a cost item for export competitiveness. Strikes and union activities were branded as "obstacles to economic development" or "security threats." The factory was a site of production and at the same time a site of political discipline.
In this structure, the chaebol and the state were mutually complementary. The state suppressed the labor movement to secure the conditions for corporate accumulation, and the chaebol provided the regime's economic legitimacy through export and investment performance. This is the class underside of the "Miracle on the Han River." The miracle was a miracle of accumulation for some, and a system of silence and overwork for others.
6. A Different Path from Taiwan: A Chaebol National Economy, Not an SME National Economy
Discussions that positively evaluate the Korean developmental state often emphasize the achievements of "state-led industrialization." However, even under the same rubric of state leadership, different paths exist. Lee Byung-cheon points out that the Korean development model was not the Taiwanese-style parallel development of state enterprises and SMEs, but a method that made the chaebol the lead runners of economic growth.[^lee2004]
This difference is crucial. In Korea, the performance of the national economy was organized in a way that subordinated it to the performance of a small number of chaebol groups. When exports increased, the chaebol grew, and as the chaebol grew, subcontracting SMEs and the labor market were reorganized as their peripheries. SMEs tended to become subordinate units in the supply chains of large firms rather than independent innovation agents, and workers were divided within the principal-subcontractor structure.
This structure persists to this day. The operating profits of prime contracting large firms, the squeezing of subcontracting prices, irregular workers, dispatched workers, in-house subcontracting, and platform outsourcing are all modern transformations of the prototype from the developmental state period. The chaebol system simultaneously produced industrial upgrading and unbalanced development. The more the Korean economy integrated into the global market, the more the command of that integration was concentrated in chaebol headquarters and bureaucratic organizations, not in the democratic public sphere.
7. The Chaebol Are Not an Economic Organization but a Political Power
If we view the chaebol only as an "economic organization," the democratic problem becomes invisible. But the chaebol were formed from the beginning in conjunction with political power. Bank nationalization, policy loans, loan guarantees, export targets, the heavy and chemical industry drive, and labor control are all operations of state power. The chaebol used this state power as the basis for private accumulation.
As a result, Korean democracy was fraught with contradictions from the start. Even as formal political democratization progressed, economic power remained concentrated in a small number of business groups. Elections could change governments, but the structural power of the chaebol—which controlled investment, employment, exports, and industrial transformation—did not change easily. Regimes spoke of chaebol reform but had to negotiate with the chaebol in the face of growth rates, employment, exports, stock prices, and semiconductor investment.
This is the democratic problem of the Korean chaebol system. The chaebol are not simply "too big." They are a private economic power created by the state, and that power determines the direction of society as a whole outside democratic control. This power created by the developmental state was not dismantled after democratization. On the contrary, it was reconstituted in other forms through financial liberalization, globalization, the IMF restructuring, and semiconductor and AI industrial policy.
8. Conclusion: Whose Success Should the Developmental State's Success Be Considered?
The developmental state narrative usually goes like this: a poor country grew through state-led industrialization, and the chaebol were the protagonists of that growth. This narrative is not entirely false. But it is decisively insufficient.
A more accurate account is this: the Korean state selected and nurtured specific capital groups within the context of the Cold War, developmental dictatorship, export competition, and labor oppression. As a result, Korea industrialized rapidly, but the command of that industrialization was concentrated not in workers and citizens but in the chaebol. The fruits of growth were privately concentrated, while risks and costs were socially distributed.
As of 2025, the statistics of 92 publicly disclosed business groups and 3,301 affiliated companies show that this history is not over. The chaebol are not relics of the past but the contemporary form of South Korean capitalism. The next article will address why the chaebol did not weaken even after democratization, and how the separation of political democratization and economic power after 1987 became a structural limitation of Korean democracy.
[^ftc2025]: KDI Economic Information Center, "Designation of 92 Publicly Disclosed Business Groups for 2025," May 2, 2025. https://eiec.kdi.re.kr/policy/materialView.do?num=266227&pg=&pp=&topic=P [^fomek2025]: Korea Federation of SMEs, "Designation of Publicly Disclosed Business Groups for 2025," May 2, 2025. https://www.fomek.or.kr/main/policy/law/policy_view.php?wr_id=1181 [^lee2004]: Lee Byung-cheon, "The Light and Shadow of the Chaebol System," People's Solidarity for Participatory Democracy, Participatory Society, November 1, 2004. https://peoplepower21.org/magazine/716358 [^archives1973]: National Archives of Korea, "Heavy and Chemical Industry Declaration (1973)." https://www.archives.go.kr/next/newsearch/listSubjectDescription.do?id=007346&sitePage=