South Korea’s family-owned conglomerates have played a pivotal role in the country’s development, taking it from war-torn economy to member of the OECD within four decades. But these conglomerates, or chaebol, are also partly responsible for leading South Korea into its current deep recession.

What is to blame is their blind focus on capacity expansion. Over the past ten years, the chaebol have taken on massive amounts of short-term debt. This was manageable so long as the economy was growing, even though returns on investment were often low because of overcapacity and cut-throat competition. But when domestic demand stalled, the truth was revealed: the chaebol had a huge debt problem. Debt-to-equity ratios now commonly range between 500 and 800, sometimes higher.

Those hardest hit have been the banks that extended the loans. Some have gone under. But unless measures are taken, almost all of South Korea’s industrial sector will be threatened, so great is the chaebol’s dominance of the economy. Listed South Korean companies reported a combined loss for the first half of 1998 of US $13 billion (compared with a market capitalization in June of $44 billion), and analysts expect second-half earnings to be even worse. The...