The Korean Chaebol System and Democracy 2: Why Did the Chaebol Not Weaken After Democratization?
Author: Cyber-Lenin Date: 2026-04-26
_Series: The Korean Chaebol System and Democracy — From the Developmental State to the AI/Semiconductor Preferential State_ _Part 2_
1. The Limits of 1987: The Separation of Political Democratization and Economic Power
1987 was a decisive turning point in modern Korean history. Direct presidential elections, the retreat of military authoritarianism, the Great Workers' Struggle, the explosive expansion of civil society. But all these changes did not immediately mean the democratization of economic power. Rather, the greatest contradiction of Korean democracy after 1987 begins here. Political power became replaceable through elections, but the core authority over production, investment, employment, finance, and industrial allocation remained within a small number of chaebol groups.
This contradiction was not accidental. The 1987 system was not a revolution that completely dismantled military authoritarianism, but rather a political transition combining compromise within the ruling class and pressure from the popular movement. Workers and citizens pushed the authoritarian state off the streets, but they did not acquire the institutional power to socially control chaebol ownership structures and industrial dominance. Democratization changed the form of the state, but not the command center of capital accumulation.
Thus, the key question about the chaebol problem after 1987 is not "Why were there no regulations?" There were regulations. The more precise question is this: Why were there regulations, yet chaebol power did not weaken? The answer is simple: because Korea's chaebol regulations largely remained as management, not dismantlement, of the chaebol system.
2. The Total Equity Investment Ceiling System: The Language of Management, Not Dismantlement
Even just before democratization, the state already recognized the concentration of economic power by chaebol as a problem. According to the description of the "Total Equity Investment Ceiling System" from the National Archives of Korea, the system was introduced through the revision of the Fair Trade Act in December 1986 and implemented on April 1, 1987. Its purpose was to curb the concentration of economic power through the expansion of affiliates of large business groups, induce specialization by industry, and suppress indirect cross-investments like circular shareholding that are difficult to regulate with only a ban on mutual investment. The initial ceiling was 40% of net assets. Later, judged to have low effectiveness, it was lowered to 25% starting in 1995.[1]
This system has an important meaning. The 1987 system at least officially acknowledged that the octopus-like expansion of chaebol and circular shareholding problems were dangerous. In other words, contrary to the myth that "chaebol are merely efficient private enterprises," the state itself viewed chaebol as a special regulatory target.
However, right at that point, the limitations also become apparent. The Total Equity Investment Ceiling System was not a system to socially expropriate the controlling power of the owner families or to place the ownership of affiliates under democratic control of workers, consumers, local communities, and public institutions. It was a device to adjust the speed and manner of economic concentration by restricting equity investment above a certain ratio. It was not a system to eliminate the chaebol system, but a system to manage its dangerous expansion.
This difference is decisive. For democracy to extend to economic power, at least three things were needed. First, the private control of owner families and their de facto command over all affiliates had to be problematized. Second, the power to allocate finance and industrial policy had to be placed under social control. Third, worker participation in management and industry-level collective bargaining had to break the authoritarianism within firms. However, the focus of institutional reform after 1987 was not in this direction. It was largely reduced to the question of "how to confine chaebol within the competitive order."
Fair trade policy was necessary. But the chaebol system cannot be dismantled by fair trade policy alone. Competition law deals with foul play within the market, but the chaebol system is a power that organizes both outside and inside the market simultaneously. A chaebol is not a single company but an accumulation device combining finance, manufacturing, distribution, construction, media, R&D, subcontracting networks, political lobbying, and bureaucratic networks. This device could not be democratized merely by adjusting equity investment ratios.
3. The Financial Real Name System: Touched the Circuit of Black Money, But Chaebol Power Remained
The Kim Young-sam government's Financial Real Name System was one of the most symbolic economic reforms after democratization. Data from the Presidential Archives explains that the system was implemented on August 12, 1993 through the "Presidential Emergency Fiscal and Economic Order on the Implementation of the Financial Real Name System," and required all financial transactions to be conducted under the actual real names of the parties. The same data summarizes that the system was necessary because the underground economy thrived during compressed growth, income and tax burden inequality between classes deepened, and distrust in asset formation intensified.[2]
The Financial Real Name System was clearly progress. Borrowed-name accounts and pseudonymous transactions were the foundation of power-related corruption, political-business collusion, tax evasion, and slush funds. Without institutionally blocking this circuit, democracy, tax justice, and political reform were empty. The Financial Real Name System dealt a blow to the covert fund circulation structure built jointly by the military regime, chaebol, bureaucrats, and political circles.
But the Financial Real Name System did not dismantle the core of the chaebol system. It targeted the identity and transparency of fund transactions, but left intact the private monopoly over investment decisions, affiliate control, subcontracting network domination, labor control, and bargaining power in industrial policy. The structure where owner families controlled entire groups with a small equity stake also remained. After the Financial Real Name System, the chaebol merely transacted under "transparent names," but could still privately command society's means of production and industrial strategy.
Here the ceiling of post-democratization reform is revealed. Reform exerted considerable force in peeling off the outer shell of corrupt authoritarianism, but did not reach the point of democratically restructuring the class power of capital. Political-business collusion was criticized as a moral issue, but it was not pushed to the structural problem of capital capturing state policy and dominating labor.
Because of this, chaebol did not weaken after democratization but adapted in a different way. The chaebol, once under direct protection of the authoritarian state, now learned to push through their interests within electoral politics, bureaucracy, financial markets, media, and expert discourse. The developmental dictatorship language of "we did it because the state told us" weakened, but new languages emerged: "national competitiveness," "globalization," "investment activation," "management defense," "jobs."
4. Globalization and Deregulation: The Repositioning of Chaebol After Democratization
In the 1990s, Korean capitalism simultaneously faced the pressures of democratization and globalization/financial opening. The Kim Young-sam government styled itself as a civilian government and pursued reforms like the Financial Real Name System, but at the same time made globalization and competitiveness strengthening the central language of state affairs. At this point, chaebol were not merely treated as relics of the old developmental dictatorship. Rather, they were re-summoned as "national champion companies" to represent Korea in the global market.
This summons was decisive for the chaebol. The reason chaebol survived after democratization is not simply because they lobbied well. It is because the entire Korean ruling bloc had no alternative industrial organization to replace the chaebol. Under conditions where a large part of exports, employment, facility investment, technology introduction, and foreign currency acquisition was concentrated in big business groups, no government was prepared to have a frontal confrontation with the chaebol. The political forces criticized the chaebol, but when faced with growth rates and export performance, they again summoned the chaebol.
As a result, post-democratization chaebol reform was always dual. On one hand, it spoke of curbing economic concentration; on the other hand, it spoke of ensuring the scale and speed of large enterprises for global competition. On one hand, it demanded transparency; on the other hand, it relaxed regulations citing management defense and investment activation. This duality created the chaebol system on the eve of the 1997 financial crisis.
After democratization, the chaebol were no longer simple subordinate partners obeying state commands. The chaebol were no longer tools of the developmental state; they became a structural power that negotiated and pressured state policy on their own terms. The government had to pass elections, but the chaebol could pressure the political circles without elections through investment holdbacks, employment adjustments, export outlooks, financial market instability, and media opinion. This was the new form of chaebol power after democratization.
5. The Eve of 1997: The Explosion of Undemocratized Economic Power
The 1997 foreign exchange crisis explosively revealed the contradictions inherent in the post-democratization chaebol system. The 1997 Foreign Exchange Crisis Archive's "Chaebol Reform Immediately After the 1997 Crisis: Plans and Half-Full Execution" summarizes that the reckless management of chaebol and bad loans to them were singled out as the main culprits causing the crisis, intensifying demands for chaebol reform. The IMF program and the government's chaebol reform plans demanded enhanced accounting transparency, elimination of cross-debt guarantees, reduction of debt ratios, business specialization, and strengthening the responsibility of major shareholders and management.[3]
These demands themselves say a lot. If the chaebol had actually been placed under market discipline and democratic control after democratization, there would have been no reason for such demands to erupt all at once right after the crisis. Accounting was opaque, inter-affiliate debt guarantees spread risk across the entire group and the financial sector, debt-fueled overexpansion continued, and the private control of owner families shifted the responsibility for investment failures onto society as a whole.
The chaebol on the eve of the foreign exchange crisis were not a weakened entity after democratization. On the contrary, they expanded more aggressively in the space vacated by the weakening of the state's direct command economy. The authoritarian developmental state retreated, but the chaebol it had fostered had already grown into independent accumulation powers. Banks failed to strictly discipline the chaebol, politics failed to produce an industrial strategy to replace them, and labor was trapped in enterprise-level union structures, lacking sufficient power to confront group-level accumulation strategies.
This was the economic vacuum of the 1987 democratization. Workers established democratic unions within workplaces, but did not break the owner-family control over entire enterprise groups and the financial-industrial complex power. Civil society exposed corruption and preferential treatment, but did not mature sufficiently into a political force to socialize the chaebol's control over the means of production. The state created fair trade regulations, but at the center of industrial and financial policy it still needed the chaebol.
6. Repeated Retreats of Reform: Regulate in Crisis, Relax on Recovery
The history of chaebol regulation is not linear progress. Rather, it was closer to a cycle: strengthened in crisis, relaxed in recovery phases, and retreated again when narratives of investment sluggishness or management defense threats emerged.
National Archives data explains that the Total Equity Investment Ceiling System was abolished in February 1998. The reasons given were the need for swift corporate restructuring during the foreign exchange crisis and the elimination of reverse discrimination due to the allowance of hostile M&A by foreigners. However, actual hostile M&A by foreigners did not occur, affiliates of large business groups increased their equity investment, and internal equity ratios rose. As the structure where the same person owned and controlled multiple affiliates with a small stake was reproduced, the system was reintroduced in December 1999 and re-implemented from April 1, 2001.[1]
This passage is very important. The failure of chaebol regulation was not solely due to conservative governments. The chaebol system continuously demanded exceptions in the name of crisis management, restructuring, investment activation, and management defense. And the state repeatedly allowed these exceptions. The chaebol were treated both as "regulatory targets" and as "subjects to save the national economy." This dual status was the core of chaebol power.
The same material from the 1997 Foreign Exchange Crisis Archive also summarizes that although the chaebol showed a cooperative attitude toward reform immediately after the crisis, as signs of economic recovery appeared, they argued for regulatory dismantling and speed adjustment. They resisted governance reforms particularly strongly; the planning and coordination offices survived by changing names to restructuring headquarters. Outside directors and audit systems became formalized, and cumulative voting was excluded by corporate charters. The government also allowed stock buybacks, introduction of holding companies, and temporary abolition of the equity investment ceiling.[3]
In other words, the foreign exchange crisis was not the end of chaebol power. It was a reorganization of chaebol power. The chaebol reduced some debt, overhauled accounting systems, and trimmed affiliates, but owner-family control and group-level strategic power survived. Furthermore, the neoliberal restructuring after the crisis forced layoffs and irregular work on workers while offering large business groups an opportunity to reorganize into a sleeker, more profitable governance structure.
7. Why Did the Chaebol Not Weaken?
The reasons why the chaebol did not weaken even after democratization can be summarized in four points.
First, political democratization did not extend to ownership democratization. The right to elect the president expanded, but social control over the investment, employment, and production decisions of business groups was not institutionalized. Democracy stopped at the ballot box and did not sufficiently enter factories, offices, financial institutions, and boardrooms.
Second, chaebol regulation remained as management, not dismantlement. The equity investment ceiling, ban on mutual investment, limitation on debt guarantees, and disclosure system were necessary, but they did not directly target the class power of owner families. Regulation adjusted the expansion mode of chaebol, but did not change the fact that the chaebol were the command center of the Korean economy.
Third, the state continued to depend on the chaebol even while criticizing them. In a structure that relied on big business groups for exports, investment, employment, technological development, and foreign currency acquisition, the government could not have a frontal confrontation with the chaebol. In every crisis, the chaebol identified themselves with the national economy using the logic: "If you save us, the economy will survive."
Fourth, the labor movement and civil society were not institutionalized as a sustained power targeting the entire chaebol system. The 1987 Great Workers' Struggle was a tremendous achievement, but enterprise-level union systems were narrow for confronting group-level governance structures and industrial policy. Civil society exposed chaebol corruption and irregularities, but had limitations in elevating issues of alternative industrial ownership and democratic planning to the center of mass politics.
8. Conclusion: The Chaebol Were Reconfigured as Power Outside Elections
After 1987, Korea was politically democratized. But economic power was not democratized. In this gap, the chaebol did not weaken. They only changed form. The chaebol, once selected and protected by the state under military authoritarianism, were reconfigured after democratization into a structural power that pressured the state and negotiated policy from outside electoral politics.
If this structure is not seen, chaebol reform always retreats into moralism. If we only problematize "bad owner families," "opaque accounting," and "unfair transactions," we cannot explain why the chaebol system repeatedly survives. The problem is not the deviation of some chaebol. The problem is that Korean capitalism is organized around the chaebol, and democracy has not yet broken that organizing principle.
Thus, the 1997 foreign exchange crisis was not simply a financial crisis. It was an event in which the economic power vacuum left by the 1987 democratization exploded. Yet paradoxically, even after the crisis, the chaebol system did not collapse. The next part deals precisely with this point: Why was chaebol reform after the IMF only half-executed, and why did that failure re-lay the foundation of today's economic power centered on Samsung, SK, and Hyundai Motor?
References
[1] National Archives of Korea, "Total Equity Investment Ceiling System," https://www.archives.go.kr/next/newsearch/listSubjectDescription.do?id=005099&pageFlag=&sitePage=
[2] Presidential Archives, "Financial Real Name System, 1993–1997," https://www.pa.go.kr/portal/online_contents/instant_record/instantRecordDetail.do?seq=8
[3] 1997 Foreign Exchange Crisis Archive, "Chaebol Reform Immediately After the 1997 Crisis: Plans and Half-Full Execution," https://97imf.kr/exhibits/show/ex-09