After the Korean summit - Volume 6, Issue 5 - June 2000

 

 

Although political and military issues divide the two Koreas, both sides are hoping that business will bring them together. Economic links, facilitated by South Korean President Kim Dae Jung's 'sunshine' policy toward the North, have been expanding in recent years, despite intractable differences over politics and security. But North Korea will need to guarantee security if any rise in South Korean aid and investment in the North arising from the historic summit this month is to be sustained.

 

In the last two years, well before South Korean President Kim Jong Il greeted his northern counterpart, Kim Dae Jung, in Pyongyang on 13 June, the North's leader had twice met Chung Ju Yung, the northern-born founder of South Korea's largest conglomerate, Hyundai. The conglomerate is already pioneering tourism and other ventures in North Korea, and it is hoping the summit will facilitate its negotiations with the North on the construction of a huge industrial complex in the northern port city of Haeju, close to the demilitarized zone (DMZ). Hyundai also wants to reopen rail links between Haeju and the South and to build another industrial site in Tongchon, on North Korea's east coast.

 

Such schemes will be realised more quickly if the state-to-state links hitherto eschewed by the North allow agreements on investment protection and dual taxation. The South Korean government must also provide the finance for the much-needed upgrade of the North's crumbling infrastructure, which Kim Dae Jung offered to do in Berlin in March. Yet Seoul is unlikely to rebuild road and rail links if these might make it easier for northern troops to repeat their invasion of 50 years ago.

 

Other than a few covert barter deals, inter-Korean economic ties are barely a decade old. Seoul only began allowing trade in 1988. Since then, it has grown to a record $333 million in 1999, less than 0.13% of South Korea's total trade last year of $262 billion, but 18% of North Korea's $1.8bn. This makes the South the North's third-largest partner after China ($370m) and Japan ($350m). Since the volume of trade with both dropped more than 10% in 1999, Seoul looks set to become Pyongyang's main trading partner.

 

There will be greater opportunities if South Korea encourages more investment. Despite Seoul's reticence, small inroads have already been made. Daewoo has a small textile factory at Nampo, currently closed, which among other things made Pierre Cardin shirts. Some South Korean firms engage in 'processing on commission', whereby they send raw materials or components – and sometimes machines, outmoded in the South but still viable in the less developed North – for manufacture in North Korea. Samsung and LG Electronics, the second and third-largest chaebol, or conglomerates, are both selling northern-made TV sets on this basis. More ambitious is the first pan-Korean cigarette, sold on both sides of the DMZ, where the southern partner is the state-owned Korea Tobacco and Ginseng.

 

But the chaebol have greater ambitions. Samsung hopes to invest $500m in North Korea over the next decade. Hyundai is in pole position thanks to its Mount Kumgang tourism venture, for which it is paying almost $1bn over six years in fees alone. It seeks to recoup some profit with its proposed Haeju project, intended eventually to produce exports worth $20bn annually, more than ten times North Korea's current trade total.

 

But the Haeju scheme illustrates the difficulty of dealing with Pyongyang. Kim Jong Il personally approved the project – but suggested a distant site near Sinuiju on the Chinese border, which would vastly increase logistics costs. The equally remote Rajin-Sonbong free economic and trade area in the north-east, the North's only such zone, has attracted little investment since its launch in 1991.

 

Whether North Korea allows Hyundai to develop Haeju will be a test of its willingness to accommodate the South's economic ambitions. But the North Korean military does not want South Koreans operating in a front-line area. If a sea-lane were opened up between Haeju and the nearest major southern port of Inchon, it would cross disputed waters where just a year ago the southern navy sank a northern patrol boat.

 

If even Hyundai, to which Pyongyang owes much, faces obstacles, other southern companies often fare worse. Business dealings with North Korea are not easy. Although all North Korean firms are ultimately controlled by the state (in some cases, the armed forces), formal structures and lines of authority are opaque and liable to sudden change.

 

Neither direct travel nor payments are yet possible, entailing circuitous and costly routes via Beijing or Hong Kong respectively. There is no legal framework for investment protection or relief from dual taxation – something high on South Korean businesses' agenda. North Korea's infrastructure is in tatters. An ageing electricity grid means frequent power brown-outs. Yet Pyongyang charges highly for most services, including labour supply, which it controls carefully. In such circumstances it can be hard to initiate, let alone sustain, business relationships.

 

Despite such obstacles, the power of sentiment drives business forward. Confucian tradition accords great importance to hometown and clan. Chung Ju Yung is not the only South Korean tycoon born north of the DMZ. Others include the founders of the Kohap and Jinro groups. For them, profit is not the prime motive. The elderly Chung above all wants to use his personal fortune of some $5bn – almost half North Korea's annual gross national product (GNP) – to make his mark before he dies. Hyundai, despite recent financial troubles and the Chung family's nominal retirement, is the only chaebol keen to invest in the major infrastructural projects that North Korea needs. Chung defied World Bank advice to build South Korea's first motorway – from Seoul to Pusan – and is keen to extend it northwards to Pyongyang.

 

For most South Korean firms, chastened by the 1997–98 financial crisis, profits remain important. The two Koreas are economically complementary in a similar way to China and Taiwan. The North has two assets: its workers, who are cheap, educated and diligent; and most of the peninsula's raw materials, including coal, iron ore, non-ferrous and precious metals. Its 22m people could also become consumers of southern goods if the economy improves.

 

With the South's capital, market knowledge and management expertise, the two countries could prove a winning combination. Small South Korean textile and shoe firms that have moved to China or South-east Asia for cheaper labour could instead go north and enjoy a shared language and culture, if not political outlook. Reconnecting road and rail links across the DMZ and beyond could potentially create a north-east Asian economic region, with trucks and trains running from Pusan to Beijing, Vladivostok, or even Europe. President Vladimir Putin will undoubtedly stress Russia's keenness for this when he becomes the first-ever Russian or Soviet leader to visit Pyongyang in July.

 

Any expansion of North–South economic links would clearly be expensive for the South. But it would cost more to resuscitate the North in the event of sudden German-style reunification brought about by an economic, political and military collapse in Pyongyang. The aim of Kim Dae Jung's sunshine policy is to prevent such a collapse by bolstering the North's economy. The question remains, however, whether Seoul can afford to do this. The South may be far richer than the North, yet its private and public sectors have well-publicised debts, the latter from bailing out the former.

 

Had the recent warming of North–South relations occurred 20 years ago, the South Korean government would simply have ordered the chaebol north. But Seoul is urging businesses to scale back and focus on profit, and cannot force firms to commit vast sums to North Korea for uncertain returns. Likewise, expecting multilateral aid from such sources as the Asian Development Bank, the International Monetary Fund or the World Bank overlooks the obstacle of Pyongyang's non-membership of these bodies. Joining would require North Korea to publish economic data hitherto kept secret, and could take several years.

 

The South Korean taxpayer will ultimately bear the brunt. The opposition Grand National Party, which has the highest number of seats in the newly elected National Assembly, has vowed to oppose excessive or unreciprocated aid to Pyongyang. Fiscal policy must also ensure that the burden of new taxes to fund the North does not hinder southern growth. An alternative is to make the process voluntary by issuing bonds, although in a depressed market these may not prove competitive.

 

Funding dilemmas have already arisen over the new light water reactors that the Korean Peninsula Energy Development Organisation (KEDO) consortium is building at Kumho on North Korea's east coast, under the 1994 Agreed Framework between Pyongyang and Washington. Seoul is shouldering most of the $6bn costs, and the state-owned Korea Electric Power Corporation (KEPCO) of South Korea is the chief contractor. KEPCO initially intended to raise money by surcharging southern electricity bills, but after protests it now plans to issue bonds.

 

KEDO is the first relatively successful case of practical inter-Korean economic cooperation. Hundreds of South Korean engineers are working at Kumho and Pyongyang has granted them quasi-diplomatic protection, although it, as ever, proved a tough negotiator. While this may simply reflect KEDO's status as an instrument of Western diplomacy, numerous other minor agreements, most of which have been implemented smoothly, suggest that when North Korea so chooses it will behave sincerely. If private-sector North–South cooperation takes off, South Koreans should feel no more at risk in heading north than millions of Taiwanese now feel in travelling to China. In East Asia, the formal rule of law can count for less than a pragmatic growth in trust.

 

Pyongyang's nervousness about expanding economic ties with the capitalist world has exacerbated its current difficulties, and it must fear the effects of a major southern business presence on its mostly closed economy, polity and society. But in Beijing in May, Kim Jong Il praised Chinese economic policies, raising hopes that heavy-handed central planning – on the ground largely supplanted by unofficial markets – might ease.

 

Yet moving towards a market economy poses huge risks. Kim Jong Il will choose to follow this road only if he is certain that North Korean citizens will praise him for seeing the light, rather than curse him for only doing so after famine killed hundreds of thousands of his subjects. Increased economic ties with the South could also give Seoul greater political leverage. North Korea's GNP has been shrinking for a decade. It is now less than 3% of the South's (or 6% on a per capita basis, South Korea having twice as many people). Cooperation, therefore, could easily lead to dependency and, unless he has been misunderstood, Kim Jong Il would be reluctant to see his country turn into a de facto subsidiary of the South.