IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

Chaebol and Catastrophe: A New View of the Korean Business Groups and Their Role in the Financial Crisis

Listed author(s):
  • Robert C. Feenstra

    (Department of Economics One Shields Avenue University of California Davis, CA 95616)

  • Gary G. Hamilton

    (Department of Sociology Box 353340 University of Washington Seattle, WA 98195)

  • Eun Mie Lim

    (Department of Sociology Box 353340 University of Washington Seattle, WA 98195)

We present a model of industrial organization that has multiple stable equilibria and argue that the high-concentration equilibrium describes Korea's economy and the low-concentration equilibrium describes Taiwan's economy. Past industrial policy of the state may have put Korea's economy in the high-concentration equilibrium, but discontinuation of the policy did not cause the industrial organization to change because this is an economically viable equilibrium.The high-concentration equilibrium produces a narrower range of final goods than the low-concentration equilibrium, which explains why the 1996 collapse in semiconductor prices caused the less diversified Korean economy to contract more than the more diversified Taiwanese economy. More importantly, this collapse in demand caused Korea's economy to move to a new equilibrium that has a smaller number of business groups, as evidenced by the collapse of the second-tier chaebol and their absorption into the first-tier chaebol. This wave of bankruptcies, combined with the financially precarious state of the merchant banks, created an investor panic that precipitated the crisis, which began with the 17 November 1997 devaluation of the won. This is why economic fundamentals could explain the chaebol bankruptcies before that date and not those after that date. The logic of our model suggests that public policy should focus on reducing the vertical linkages within business groups and not on reducing their horizontal linkages as the current "Big Deal" program of the government is doing. Copyright (c) 2002 Center for International Development at Harvard University and Massachusetts Institute of Technology.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
File Function: link to full text
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by MIT Press in its journal Asian Economic Papers.

Volume (Year): 1 (2002)
Issue (Month): 2 ()
Pages: 1-45

in new window

Handle: RePEc:tpr:asiaec:v:1:y:2002:i:2:p:1-45
Contact details of provider: Web page:

Order Information: Web:

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:tpr:asiaec:v:1:y:2002:i:2:p:1-45. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kristin Waites)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.