Structural weaknesses of the Korean Chaebol: Moral hazard and the Korean financial crisis

The Korean financial crisis in 1997 must be seen in light of the structural weaknesses of Korean businesses, which developed with the Korean economy for decades. Since the early 1960s, large Korean business conglomerates ( Chaebols) have played an essential role in the process of rapid economic development. Chaebols expanded dramatically, pooling scarce resources such as entrepreneurship, capital and technologies as well as business risk through cross-subsidization among the subsidiaries. However, Chaebol growth occurred on a very shaky base, critically vulnerable to external shocks. The Chaebol's structural weaknesses include high corporate leverage, investment inefficiency and extensive diversification strategy resulting low profitability and productivity.;The moral hazard of the Chaebol resulted from their expectation that the government would not let these large Korean business conglomerates go bankrupt. As a result, large Chaebols were considered ‘too big to fail’. This belief was nurtured through the government's extensive intervention in the financial sector, bailout packages for ailing industries as well as industrial targeting and other promotion policies. Thus this study examines the structural weaknesses of the Chaebols in the context of the moral hazard, which is the core of the Korean financial crisis.