Reforming Korea's Industrial Conglomerates.

Author:Leightner, Jonathan E.
Position:Book Review

by Edward M. Graham. Washington, D.C.: Institute for International Economics. 2003. Paper, ISBN 0881323373, $ 22.40. 198 pages.

An institutionalist finding Edward M. Graham's book, Reforming Korea's Industrial Conglomerates, feels like a prospector discovering a rich vein of gold. Like a newly discovered vein of gold that has not yet been dug up, refined, and formed into bars, the institutional implications, insights, and applications of Graham's book are not explicitly stated. However, the prospector still rejoices for he has hit a good one and the riches will flow. Graham does not discuss institutionalist theory; he never mentions the classic institutionalists; he never even uses the word institutionalism." However, the story he tells illustrates (1) institutions can sometimes become so powerful that they can overwhelm the market, (2) some institutions have a natural drive for survival that makes it hard to dismantle them once they have been created, and (3) some institutions can be extremely creative in finding ways to survive. These are conclusions that Graham never states, but they naturally follow from the story that Graham tells.

At its most basic level, Graham's book is a well-told history of South Korea's largest conglomerates from 1970 to 2001. However, Graham wanted his book to be much more than just a history. Indeed, in the middle of the book, perhaps with a hint of frustration, Graham states, "This book is not really meant to be an economic history of Korea." Graham's primary focus is on how the government of South Korea created large conglomerates (called chaebols) by pushing them to expand into new markets. Even when pushed in directions that they did not want to go, these conglomerates usually acquiesced to the government's wishes. The "true" profit gained from cooperating with the government came in the form of economic and political benefits that flowed to those that cooperated, since many of these expansions never showed even an accounting profit. Graham's theory is that allocating funds via government directives, instead of through an efficient capital market, led to (1) huge firms with dangerously high debt-to-equity ratios, (2) South Korea's financial crisis, and (3) a very real risk of another crisis in the near future. Compounding these problems is the fact that Korea's largest conglomerates found institutional ways (subsidiary loan guarantees) to place most of the risks associated with new investment on minority...

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