Contemporary Korean Capitalism: Toward a New Model?

Korea is often treated as an example of rapid growth and escaping from the middle-income trap—one of the relatively rare group of developing countries whose income has converged with that of advanced industrial states. But less attention has been paid to how we understand the nature of Korean capitalism at this point in time when the country is sitting at the technological frontier. In a new book with Djun Kil Kim, Capitalism in South Korea, 1945–2025, we argue that the Korean economy has exited from East Asian miracle capitalism and showed some signs of convergence toward the Anglo-American model of liberal capitalism. That model is characterized by slower growth than Korea saw in earlier phases and rising inequality. Yet it retains some distinctive features that pose particular challenges and make it a hybrid—one we call “diverging convergence.” These distinctive features can be seen in three areas: the country’s wider political-economic model, its politics, and the role technology is playing in the next stage of its growth.

How did this convergence to an advanced industrial state happen despite the persistent differences between underlying institutions, including a financial system under strong government influence and a significant role for large family-owned big businesses (chaebols)? On the one hand, Korea’s level of democracy and control of corruption are broadly in line with the United States, although lower than Nordic Europe. Korea has also joined what we call the “safe capitalism” group alongside Italy, Spain, and Japan, countries with the lowest crime rates and longest life expectancy. On the other hand, Korea is an outlier on other dimensions. Korea has the longest working hours and a substantial gender wage gap in the Organisation for Economic Co-operation and Development. Nonetheless, in terms of active labor market policies and protections against terminations, Korea more closely resembles Europe than the United States. Thus, the book concludes Korea shows no conclusive signs of convergence toward any single type of capitalism: it is a combination of a “free, not so clean democracy” and safe capitalism but with distinctive labor market policies and outcomes.

The subtitle of the book, “Compressed Growth, Decompression, and Diverging Convergence,” summarizes the turbulent 80-year history of Korea’s postwar development and also captures its political characteristics. Compressed development is a form of late development led by developmental states that lack political democracy and open markets; this was the Korean model in the 1960s–1980s. Decompression is the process of democratization and economic liberalization, which also started there in the 1980s. The decisive period of decompression began with the 1987 pro-democracy struggle and got further momentum from the 1997 financial crisis. The crisis paved the way for a radical liberalization and implanted new economic institutions pursuant to International Monetary Fund-imposed reforms. These reforms appeared to set the country on a trajectory of convergence with Anglo-American capitalism.

The period of decompression ended in the mid-2000s, with the center-left Democratic Labor Party first gaining seats in the National Assembly and Korea eventually concluding several free trade agreements, including with the United States, China, the European Union, and India. Since then, democracy in Korea has made substantial progress on measures of political democracy, reaching parity with the United States: The Economist Intelligence Unit’s Democracy Index 2024 scored the United States 7.85 and South Korea 7.75. Korea elected a woman as president and has managed two presidential impeachments in a peaceful and orderly fashion. The first impeachment involved Park Geun-hye, the first woman president and daughter of former president Park Chung-hee, who faced nationwide “candlelight protests” over a corruption scandal. The second impeachment involved Yoon Suk-yeol, who took office in 2022 but declared martial law in December 2024. The swift progression from martial law to impeachment and the election of a new president within a four-month period indicates the stability and resilience of Korea’s democracy.

But the case also revealed the immaturity of Korea’s political and legal institutions as the system failed to effectively resolve political tensions between the incumbent and opposition parties. Thus, just as in the economic sphere, Korea is a case of “diverging convergence”: like the European cases, fundamentally democratic but with pronounced political polarization.

Korea is now one of the most innovative economies, with R&D levels above 4 percent— of GDP and a U.S. patent count that ranks in the top three after Japan and China, ahead of Germany. But, its national innovation system (NIS) is still different from those of other advanced economies. Its NIS is quite imbalanced with dominance of several chaebols and is disproportionately specialized in what we call short-cycle technologies. Short-cycle technology sectors, including chips and other IT products, involve rapid rounds of Schumpeterian “creative destruction”—where an existing product is displaced by a new one—and thus provide more windows of opportunity for latecomer firms. But, facing increasing competition from China, Korean industries would like to move to long-cycle technologies, such as biopharma and machine tools, where some European firms have been stable incumbents and which—at least until recently—showed greater stability. An example is Samsung Biologics, a new affiliate of Samsung, which has been doing well in developing new products and doing contract manufacturing of medicines.

The chaebols’ family ownership is another distinctive feature of the Korean model. Family ownership still persists and performs well in driving innovation, although it was once criticized as a feudalistic system and one of the causes of the 1997 financial crisis. Although family ownership is prone to opaque corporate governance, it benefits from quick decision-making and risk-taking with long-term horizons compared to the myopia of hired management in the United States. Chaebols have devised a unique two-tier governance system consisting of family owners and hired professional CEOs. For instance, the decision of Samsung to enter semiconductors was made by Samsung’s founder, Lee Byung-chul, but its eventual success and rapid growth, after the first seven years of losses, were possible owing to the management acumen of former CEOs like Yun Jong-yong and Kwon Oh-hyun, who were offered substantial autonomy and financial incentives after they were selected through tough intra-firm competition. LG’s rise in electric batteries would have been impossible without the owner and former chair, Koo Bon-Moo, sticking to the long-run goal of developing batteries for twenty years from the early 1990s, despite accumulating losses until the late 2000s. But it was similarly pushed forward by professional managers into the current era. The large Korean firms will continue to face the challenge of balancing personal control and rapid decision-making and risk-taking with improved corporate governance and management.

However, the chaebols’ dominance in performance and profits has led to polarization in the labor market. Workers in big businesses are well-paid and protected, whereas the secondary and flexible labor markets involve workers in small- and medium-enterprises (SMEs) who are underpaid and under-protected. This fragmentation has led to high youth unemployment as college graduates want to be hired by big firms that do not post many vacancies; they shun work in SMEs where vacancies are often filled by foreign immigrant workers. The labor market in Korea is a hybrid of rigidity, as in continental Europe, and flexibility like the United States. Overcoming this fragmentation is difficult because strong labor unions in big businesses will not accept any discussion of reforms to make their labor markets more flexible, while the less protected labor force argues for more social safety nets. The expenditure for social welfare has been rapidly increasing over the last decades, which has burdened government finances. Korea could face the so-called fiscal trilemma: whether it should go for the Swedish model of high welfare, high taxation, and low national debt or the Japanese model of high welfare, low taxation, and high national debt. Due to a high level of resistance to taxes, it looks like increasing welfare expenditure has resulted in higher debt but that balance is another one to be managed.

Given the multifaceted interplay between demands for growth and equity across the advanced industrial states, Korea is not alone in struggling to find an optimal path. Korea has not yet established a clear socioeconomic system that can effectively ensure economic growth, social safety, and employment. Moreover, these challenges have been compounded by geopolitical developments including the tariffs imposed by the Donald Trump administration and risks of de-industrialization coming from the rise of China as a manufacturing powerhouse. Nonetheless, it is possible to identify some of the key challenges Korea faces. These include finding an overall model that enjoys political support, addressing political polarization, and addressing the challenges of continued innovation that come from the power of the chaebol, fragmented labor markets, and demands for social welfare.

Keun Lee received his PhD at the University of California, Berkeley and is professor emeritus at Seoul National University. His research has focused on the political economy of innovation, industrial policy, science and technology policy, and the dynamics of economic catch-up with a focus on East Asian and developing nations.

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