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The Kukje Jaebol of South Korea

The Case of the Kukje (kook jay) jaebol illustrates the dangers of government involvement in the industrial, economic and financial affairs of a country. In 1985 Kukje was the seventeenth largest jaebol. It had 38 thousand employees and an annual revenue of $1.5 billion. It had like the other jaebol borrowed from the state banks. It had little choice in that the South Korean government had nationalized the Korean banks in the 1960's. There was private financing available from an informal financial sector at high interest rates.

Although Kukje probably had, as had the other jaebol, made economic and financial mistakes, but in 1985 it was dismembered and closed up as a result of political mistakes. Specifically these political mistakes were not contributing enough to so-called public interest organizations.

Saemaul Undong (The New Village Movement) had been created by Park Chung Hee in the 1960's for rural improvement. It did not accomplish a whole lot. Its most notable achievement for the farmers was getting them to replace the thatch roofs of their houses with corrugated metal. By 1984 Saemaul Undong was run by the younger brother of the president of South Korea, Chun Doo Hwan, served merely as a conduit to the ruling class. The president of Kukje, Yang Chang Mo, made the mistake of contributing only $400,000 per year to Saemaul Undong whereas the other jaebol each contributed well over a $1 million a year.

A foundation had been set up to do research on Korean unification. This foundation was called the Ihae Foundation, Ihae being a name associated with Chun Doo Hwan. When the Ihae Foundation conducted a fund-raising drive to raise $40 million, Yang Chang Mo of Kukje had the audacity to refuse to contribute.

In December of 1984 the Korea First Bank stopped honoring checks written by Kukje. This led to creditors of Kukje refusing to extend loans. Quickly Kukje was insolvent. It was declared bankrupt and its subsidiary companies split off and given to other jaebols who were still in favor with the government.

The lesson of Kukje is that not only can a close involvement of government and business lead to bribes and other corruption, but also corrupt governments can significantly affect the way business operates.

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