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Grandkids running economy are bound to break it

South Korea’s tycoons were relieved when the pro-business Park Geun Hye was elected last month as the nation’s 11th president.

The main criticism against her predecessor and party mate, Lee Myung Bak, was that he was as beholden to corporations as leaders get. Park’s win was seen as a victory for the economic system that raised Korea from devastation in the 1950s. Yet 60 years on, it’s time to highlight the absurdity of this view. Returning to the past is no way to secure the future for Asia’s fourth-biggest economy.

There’s much to admire about where South Korea is as 2013 begins. The 2.8 percent growth forecast for this year isn’t scorching, but is quite respectable among nations in the Organization for Economic Cooperation and Development. South Korea is a role model for middle-income nations and annual per-capita income is already more than $30,000, placing it among the world’s 30 most-prosperous nations.

Yet that success comes at great cost: a widening income gap, struggling small businesses and the highest suicide rate in the developed world. At the root of this paradox is the very engine that powered the nation. Its celebrated family-run conglomerates, the “chaebol,” have become for South Korea what too-big-to-fail banks are to the United States.

Samsung nation

As love-hate relationships go, few rival the one that South Koreans have with their corporate overlords. No company personifies the success and peril of Korea better than the one Lee Byung Chull founded in 1938. What started as a small grocery-trading firm is now the pride of 50 million Koreans. Today, the gadgets that Samsung Group’s electronics division sells in soaring numbers exemplify the can-do spirit that has Apple Inc. and Japan’s entire economy looking over their shoulders.

Some go so far as to refer to their country as the Republic of Samsung. It’s possible, after all, to live a Samsung-only life. You can work at Samsung, live in one of its apartment buildings in Seoul’s glitzy Gangnam district, pay for your Galaxy phone with a Samsung credit card, invest in your future with its financial-services units, get your health checked at one of its medical centers, blow off steam watching Samsung-owned sports teams, use its travel agencies and even buy a latte at a Starbucks outlet owned by the retailer that is run by the nephew of Samsung Chairman Lee Kun Hee.

When South Koreans gush about the “Miracle on the Han River,” the pivotal role of top corporate names such as Samsung, Daewoo, Hyundai, LG or Lotte is sure to come up. If only there were more recognition given to how these giants also left the nation’s economy dangerously top-heavy.

Every economy has a certain amount of innovative oxygen to sustain its dynamism and prosperity. Too much of South Korea’s is absorbed by the chaebol. Their dominance not only starves young would-be entrepreneurs of air, but also impedes the creation of a vibrant stable of small and mid-size companies.

In 2010, exports by the chaebol accounted for 84 percent of overseas shipments. Today, South Korea’s 10 biggest conglomerates make up more than half the total value of the 1,757 companies on the Korea Stock Exchange. Ever wonder why South Korea can be so prone to cyclical shocks? When the goliaths falter, South Korea does, too. It’s not that different from the U.S. relationship with its financial industry; when Wall Street lays an egg, the rest of the country suffers.

Make or break

These next five years are make-or-break ones for South Korea. China is trying to be a technology leader and has surpassed the United States to become the largest filer of patents. Just as China is honing its skills, Japan’s new prime minister, Shinzo Abe, is unleashing a $116 billion stimulus package and a variety of tax incentives to encourage investments in technology. South Korea must find a new path to compete in Asia. Complacency is no longer an option.

Yet the odds don’t seem great that Park will be the visionary who will embrace a new economic model. It was her father, former dictator Park Chung Hee, who built up the chaebol in the 1960s and ’70s with easy credit, subsidies, tax breaks and protection from foreign markets. Nor is her New Frontier Party famed for its independence from the country’s political-donor class.

Park pledged to move away from a system dominated by “big business groups,” but executives hardly seem cowed. To get their attention, she should break up cross-shareholdings used by the founding families to control conglomerates with minority stakes; take antitrust actions against monopolies; and provide incentives for startups.

Many of the chaebol are into the third generation of familial control. Can this kind of dynastic entrenchment be good for South Korea — an economy dominated by a bunch of grandkids?

Park has some monumental challenges, and grappling with North Korea’s nuclear ambitions must be at the top of any to-do list. Ridding the economy of this dysfunctional family affair is a close second.

Pesek is a Bloomberg View columnist.

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