This is the second part of a series on East Asian economic development models and Vietnam. This is the first: Is Vietnam the Next Asian Tiger Economy?
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In September of last year, Tran Dinh Long, Chairman of Hoa Phat Group, Vietnam’s biggest steel maker, told the Government of Vietnam’s Standing Committee that policy support was needed if Vietnam was to grow chaebols the same way South Korea had done.
“If the state wants to have large enterprises like Pohang and Posco of Korea, it needs to have special policies, even non-economic ones, to nurture large enough enterprises,” he told the committee.
Indeed, South Korea’s chaebols–huge, generally family-led, multinational corporations like Samsung and LG–have long been admired in Vietnam and have become a recurring theme in domestic development discourse.
The conditions that provided the impetus for the development of South Korea’s chaebols, however, were unique in both time and place and may be hard to replicate. Moreover, the chaebol model is not universally seen as a beacon of success but in many instances is in fact a cautionary tale.
It’s in this context that this article breaks down how South Korea developed its chaebols, whether or not Vietnam can do the same, and of course, if it can, if it should.
How did South Korea develop its chaebol?
When Park Chung Hee became the President of South Korea after a military coup in 1961 his government took control of South Korea’s banks and by extension the flow of capital in the economy. This gave the new leader considerable power over South Korea’s private sector which he wielded to fulfill an industrialisation plan his government had devised.
Specifically, cheap credit was made available to a handful of big, already relatively well-established firms, on the condition that their industrial endeavours were directed at realising Park’s economic vision. Moreover, firms that were not working toward Park’s vision were often penalised by way of tax investigations and extra taxes and had their access to capital limited.
Furthermore, the South Korean government restricted imports and encouraged exports with discount interest rates for exporting firms. It also gave participating firms monopolies over the manufacture and distribution of certain goods.
On top of that, it helped firms acquire US military contracts during the Vietnam War, encouraging the US military to allow Korean firms to bid on overseas procurement contracts with little or no competition in exchange for putting boots on the ground in Vietnam.
This benefited a number of big chaebols. Hyundai and Hanjin in particular, were awarded huge US government contracts for infrastructure projects in Southeast Asia that helped these firms to develop the skills and experience they needed to expand into bigger projects elsewhere in the world.
On that note, the role of the US in boosting South Korea’s economic development in those early post-war years in order to create a buffer between communists in East Asia and the US, cannot be understated.
The US pumped millions of foreign aid dollars into developing infrastructure in South Korea, its military presence in the country was a key source of foreign income, and manufacturing of US military equipment and supplies facilitated skills and technology transfers.
There is, of course, a bit more to it than that, but broadly speaking, over several decades, these factors are what led to South Korea becoming the home of some of the biggest brands in the world.
So, can Vietnam do the same?
Firstly, the Government of Vietnam does have a pretty good grip over Vietnam’s banks and doesn’t flinch when it comes to directing banks on how to run their operations. Earlier this month, for example, 12 banks cut their deposit interest rates at the request of the Prime Minister.
Moreover, Vietnam offers tax breaks and incentives for firms investing in sectors of the economy it has selected to be key pillars of Vietnam’s economic development. Semiconductor and artificial intelligence projects, for example, have lower capital requirements in order to access direct cash payment support from the government through Vietnam’s Investment Support Fund.
That is to say that it has both the means to steer capital and a plan for where it should be directed. It also has a number of big firms–Hoa Phat, Vingroup, Viettel–that could be vehicles for government-led, chaebol-style economic development.
However, when it comes to protecting local businesses from competition it gets a bit trickier. Vietnam has 17 free trade agreements, many of which prohibit policy that favours domestic firms over their foreign rivals. Notably, a cut to registration fees for locally assembled cars drew the ire of the European Union, last year, on account of a clause to this effect in the European-Vietnam Free Trade Agreement.
Likewise, Vietnam’s manufacturing industry produces a vast array of goods and is largely powered by foreign-invested firms. Pursuing protectionist policies for local manufacturers by restricting imports or giving local firms monopolies over the manufacture and distribution of certain goods would be difficult to do without creating conflicts with said foreign firms.
All of that said, whereas Vietnam is economically wedged between the world’s two biggest economies which often do not see eye to eye–a reality that makes Vietnam a strategic asset–it would be difficult to argue that this reality is on par with South Korea in the 1960s. That’s not to mention that, though Vietnam and the US have a Comprehensive Strategic Partnership this does not make these two states allies–it’s difficult to see Vietnam being awarded US military contracts.
Moreover, though there is an enormous amount of foreign aid funds available to Vietnam for infrastructure development, implementing development projects with those funds has been challenging. Last year, it was reported that the country had forfeited US$2.5 billion in aid over the preceding three years and was set to lose another US$1 billion because projects had not been completed in the allotted time frames.
That is to say that Vietnam’s situation now is very different to that of South Korea in the last half of the last century and therefore if it wants its own chaebols it will need to develop them in a very different way.
Because it can, doesn’t mean it should
That said, some thought needs to be given as to whether or not Vietnam should even pursue this model of development.
What South Korea learned in the 90s was that this strategy had put most of its eggs in just a few baskets. Specifically, by 1996, South Koreas biggest chaebols had accumulated huge amounts of foreign debt. As a result, when the Korea Won devalued in line with the broader Asian Financial Crisis (AFC), many of those debts were no longer serviceable and South Korea had to go hat in hand to the IMF for a bailout.
On that note, the rise of the chaebol has largely come at a cost to small to medium enterprises that have been unable to compete due to both the size of the chaebols and the preferential treatment they received. It’s also been suggested that their size and power have been used to snuff out smaller competitors and subsequently has stifled innovation.
Moreover, it’s been argued that Taiwan, which developed at a similar speed to South Korea, fared much better during the AFC because its economic foundations were rooted in small to medium enterprises rather than just a handful of big firms.
Even today the entire South Korean economy is still hugely dependent on its chaebol. In 2023, the four biggest accounted for 40 percent of South Korea’s GDP. This is in large part because steering an economy so heavily weighted to a few big firms that are very-well politically connected is a phenomenal challenge fraught with risks.
Nonetheless, South Korea is now among the biggest and most developed economies in the world with a standard of living well above many other parts of Asia and all achieved relatively quickly.
With this in mind, it’s easy to see why this model might be so attractive to a country like Vietnam.
That said, building South Korea’s chaebols took a good deal of inputs that Vietnam just does not have access to (READ: US military contracts), moreover, its circumstances may not even allow it (READ: import restrictions vs Vietnam’s FTAs).
That is to say, while there are development lessons to be learned from the South Korean experience for Vietnam, at the end of the day, Vietnam will still need to chart its own path. Moreover, any ideas it does take from the development of the South Korean chaebols should be used with an err of caution.