Volume 11 Number 2 Summer 1999
PREFACE
The joint editorial also states that "a new breakthrough should be made in the building of a powerful nation in hearty response to the slogan 'Follow up the Arduous March with a Cheerful Advance.' To establish production on a steady footing in all domains of the national economy, to set the economy on the right track and provide the people with more stable and better living conditions are the cardinal tasks facing us in economic construction this year. Let us concentrate all our efforts on solving the food shortage." It is clear that North Korea has set industrial normalization as its economic policy goal, and that it is trying to achieve a breakthrough in agricultural production. However, given that the North has suffered a lack of resources and capital as well as a food shortage, it is possible that North Korea, which lacks the capability to fulfill those policies, would find a way to cooperate with foreign countries to achieve its goals.
Based on these premises, this article aims to review North Korean external economic policies in 1999, focusing first on its agricultural production and cooperation with foreign countries for the normalization of industry and secondly, on foreign relations. These relations will be examined on two levels. One will review the framework of multilateral cooperation such as the Light-Water Reactor Project headed by the Korean Peninsula Energy Development Organization (KEDO), the four-party peace talks and the food supply, among others. Second, it will examine the relations between North Korea and foreign countries, namely, the United States, Japan, China, Russia and South Korea respectively.
The aims of foreign policy in every country are to secure independence and security, and to pursue and secure economic interests, thus, in this measure, the foreign policy of North Korea is not an exception. First, it aims to secure national security for the maintenance of Kim Jong-il's regime. Second, it wants to ensure the maximum amount of economic aid from foreign countries in order to put the economy on the right track. Third, since it lacks self-sufficiency and economic capability, it is attempting to ensure the legitimacy of Kim Jong-il's regime and the Juche (self-reliance) ideology through the normalization of relations with the U.S. and Japan.1) To realize these foreign policies, the North will try to fulfill its economic goals by securing food aid through agricultural cooperation with foreign countries. And it will try to secure systematic stability and economic revival through the normalization of relations with the U.S. and Japan.
Although North Korea needs a capitalist system to solve its economic problems, it fears that such a move could lead to the collapse of the system, and so it will firmly maintain the existing socialist system of centrally planned economy. Nevertheless, it urgently needs to adapt practices of a capitalist economic system such as the import of foreign capital, liberalization of prices, and introduction of private ownership.
During his four-year rule since the death of Kim Il-sung, Kim Jong-il has never attempted to modify foreign policies. Instead he has criticized Russia and other East European countries for "modern revisionist" economic reforms, while accentuating the superiority of the socialist planned economic system.2)
The urgent problem that Kim Jong-il's regime is now facing is how to solve its economic difficulties, especially the food shortages. Since it is impossible for North Korea, with no capital of its own to solve those problems, it has no choice but to introduce some capitalist changes into the economic system. Changes, however, can only be those which would not damage the political system. Based on these needs and limitations, it will reluctantly try to induce foreign capital, including that from South Korean companies, and if necessary it will also try to open the way to talks with the South Korean government.
Agriculture
The World Food Programme (WFP) has stated that it needs about $225 million, or 533,000 metric tons of food for aid to North Korea in 1999. It further predicts that North Korea will suffer a grain shortage of 1.35 million tons. It plans to donate 530,000 tons of grain, and as for the remainder, North Korea can import 300,000 tons of grain for itself. the rest will be covered through direct aid from other countries, including China. Apart from the food aid, North Korea is aware of its incapability to increase the agricultural production by itself, and is expected to go ahead with a plan to cooperate with international organizations and foreign countries such as South Korea and Japan for its agricultural renovation.
In a roundtable meeting on restructuring North Korea's agricultural system and environmental protection held jointly by the United Nations Development Programme (UNDP) and North Korea, on May 1998, a program to produce more than 6.2 million tons of grain by the year 2000 was suggested. Of the total investment of $2 billion, $300 million would be supported by foreign aid. This would have required that North Korea submit statistical data on more than 40 items and to undergo the basic screening process by the UNDP. Unfortunately, like other socialist countries, North Korea could not provide accurate statistical data. Furthermore, since it was unwilling to reveal specifics pertaining to the economic situation, the plan stalled. According to the joint New Year editorial, however, North Korea may show a more progressive attitude toward such programs in order to solve its food shortage in 1999.
On a brighter note, it is expected that North Korea will enhance its agricultural cooperation with foreign countries, including South Korea. North Korean cooperative efforts with the International Corn Foundation and with Doorae Community of South Korea have been in place since 1998. "Contractual cultivation" is also being discussed between the two Koreas, and this will have a positive influence on the agricultural cooperation between them. Furthermore, the Kim Dae-jung administration has declared that it will relax restrictions on the principle of reciprocity in dealing with North Korea. As long as Pyongyang commits itself by setting up a meeting place on a specified date in the future, Seoul will provide assistance, including the provision of fertilizer, pesticide, seeds, vinyl, and agricultural technology to the North as an incentive. The change of stance reflects the more aggressive and proactive attitude that the South has taken toward the North to ensure peace. This casts a positive light on the possibility of the reopening of inter-governmental dialogues.
The Normalization of Industry
Since 1989, various factors have accelerated the collapse of the North Korean economy. Among them, three reasons stand out: first, the loss of export markets caused by the collapse of the Soviet Union and the failure in finding new ones, second, failure to ensure a stable energy supply, and finally, failure to ensure an investment fund for invigorating its economy. Such monumental problems indicate that normalization of industrial production cannot be achieved overnight.
Though developing countries induced a total of $149 billion in foreign capital in 1997, $130 billion of that investment was mainly concentrated in a few specific countries such as China, Indonesia, Malaysia, Thailand, Argentina, Brazil, and Chile.3) As a result, other developing countries such as India, Vietnam, Myanmar, and North Korea have been forced to compete fiercely to induce the remaining $18 billion. When we consider the North Korean economic situation, such as market size, wage, degree of market openness and so on, it is almost impossible for North Korea to attract foreign investment. At the same time, we can expect that North Korea will carry out various projects such as the following in order to prepare a foundation for attracting foreign capital.
1. The Promotion of Manufacturing on Commission
North Korea has steadily tried to promote the processing on commission in textiles, shoes, toys, and home appliance industries. Since North Korea lacks raw materials, such ventures have relatively comparative advantages, and in fact, it has already signed contracts with Japan and Germany as well as South Korea. Textiles play the leading role, earning $270 million, 85% of total trade sum of textile industry, in 1997.
North Korean economic officials have said that they prefer "contractual joint venture investment" to "equity joint venture investment" in its territory except for in the Rajin-Sonbong free economic trade zone (FETZ), since they fear that "equity joint venture investment" would entail foreign participation in the management process, thus encouraging the spread of capitalist influence. Therefore, they currently focus on manufacturing on commission.
2. The Broadening of Economic Special Districts
In order to promote the manufacturing on commission and joint venture businesses, North Korea will enact necessary bills, including encouraging measures for Nampo and Wonsan bonded areas for the benefit of foreign companies, and for building infrastructure such as ports, and bonded warehouses. The purpose of installing bonded manufacturing areas is to attract foreign companies to produce light industrial goods and to export all of them. It was reported that Nampo and Wonsan would be designated as bonded processing areas in 1998, and that the Sinuiju and Mt. Kumgang sites would also possibly be included within the bonded manufacturing areas. This broadening of economic special districts is regarded as an effort by the North to strengthen its ability to attract foreign capital.
3. Attempt to Join International Financial Institutions
North Korea has accelerated its attempts to join international financial institutions and to receive development assistance funds from the International Monetary Fund (IMF) and the Asian Development Bank (ADB) to rebuild its economic system.
On December 7, 1998 in Washington, officials from the two Koreas and the World Bank, discussed the possibility of North Korea joining the IMF and the International Bank for Reconstruction and Development (IBRD). At that time, South Korea clarified its position, stating that it would use its influence to help North Korea to join the ADB if it showed willingness to solve the nuclear issues. The IBRD will select 30 to 40 North Korean officials to teach them various economic indices and economic statistics for three months, beginning in March 2000; meanwhile, the IMF is considering a plan to teach North Korean authorities about the international financial market.
Multilateral Economic Cooperation
North Korea will continue its multilateral economic cooperation within the range of the existing cooperation framework, such as the LWR project near Kumho in South Hamgyong Province, the four-party peace talks, and WFP's food supply to North Korea. Though the funding time depends on the results of the U.S. nuclear inspection of the suspected site in North Korea, the contract between KEDO and Korea Electric Power Corporation (KEPCO) will be made in 1999. Then Japan and South Korea will provide funds as members of KEDO's executive board. Accordingly, a minimal framework for multilateral cooperation will be maintained as long as the LWR project is under way.
The four-party talks are now concentrating on politico-military affairs. Two sub-committees, are responsible for easing tension on the Korean peninsula and establishing a peace regime to replace the 46-year-old armistice which ended the 1950-1953 Korean War. In the past, such discussions have concluded in serious differences in positions, so it is hardly expected that there will be any dramatic progress in the near future.
The WFP has appealed to the international community for food aid to North Korea. Consequently, 530,000 tons of grain will be supplied in 1999, and this will be achieved through aid from the U.S., Japan and South Korea, unless the relations between the U.S. and North Korea are seriously damaged.
Bilateral Cooperation
1. United States
The normalization of relations with the U.S. can progress only if North Korea takes concrete steps to solve politico-military issues such as the development of nuclear weapons and long range missiles. The nuclear issue was solved with the adoption a joint statement in New York on March 17, 1999, after four rounds of talks between the U.S. and North Korea beginning in November 1998.
In the last round of talks between U.S. Special Envoy Charles Kartman and North Korean Vice Foreign Minister Kim Gye-gwan, the commitment between Washington and Pyongyang regarding the 1994 accord was reaffirmed "in its entirety." Under its terms, North Korea will give the United States "satisfactory access" to Kumchang-ri, with an initial visit in May and additional visits to remove U.S. concerns about the site's future use. In return for multiple visits by U.S. inspectors to the site, Washington promised to arrange assistance, specifically, food aid of more than 600,000 tons of grain. It also hinted that it would ease the economic sanctions against North Korea.4)
But in the fourth round of missile talks, held in Pyongyang on March 29, the two countries did not reach any agreement, indicating that the normalization of relations and the easing of economic sanctions will not be easily carried out. It is reported that North Korea is not satisfied with the steps taken by the U.S. to normalize relations after the Geneva Agreed Framework.
It is assumed that the U.S. will not take any hawkish steps but will pursue the overall settlement, the so-called comprehensive approach, to deter nuclear proliferation and to secure regional security. So North Korea policy coordinator William Perry's visit to North Korea in May and the Perry report will concentrate on solving North Korean problems by assuring it continued humanitarian food aid, implementing the Agreed Framework, and guaranteeing some economic compensations for abandoning its export of missiles.5)
North Korea expects that it will attract a great deal of foreign capital as soon as the U.S. embargo is lifted. Some foreign companies had attempted to invest in North Korea after the 1994 Agreed Framework, but it did not lead to real investment. In fact, after Washington and Pyongyang normalize relations, it will still take a considerable length of time for foreign countries to invest in North Korea. The reasons are as follows:
First, though there might be visible progress in the normalization of relations between two countries, the lifting of the U.S. embargo will progress very gradually and will hinge on the North meeting the conditions for human rights improvements and liberalization of emigration, as in the cases of Vietnam and China. These preconditions, however, would be unacceptable to Pyongyang, since the North regards them as destructive measures that could harm the regime's stability.
Second, given the current situation, North Korea can hardly be competitive with China and other East Asian countries in the American market, except in specific mineral resources such as magnesite.
Third, North Korea doesn't have any advantages over with other underdeveloped or developing countries such as Vietnam or Myanmar in attracting foreign capitals. Nevertheless, if it can normalize relations with the U.S., it can replace the temporary armistice with a peace treaty. Such a treaty would mean a reduction in military spending, and it could lead to opportunities to normalize relations with Japan, and perhaps attract Japanese capital. It would also open the doors to borrowing from the IBRD, the European Union, and the ADB.
Finally, through the normalization of political relations with the U.S., North Korea aims to ensure its security, to conclude a peace treaty, and to weaken the regional status of South Korea. Economically, it would hope to lift the U.S. embargo, to induce foreign investment, to broaden trade and to borrow funds from inter-national banks.
2. Japan
For Pyongyang, the normalization of relations with Tokyo is ancillary. An editorial in the December 8, 1998, Rodong Shinmun states, "We don't expect any negotiations with Japan within the range of diplomacy, security and economy, unless Japan shows great changes in its policies." Despite anti-North Korean sentiment in Japan, after the launch of a Taepodong missile, North Korea seems to think that all problems related with Japan will be solved with normalization of relations with the U.S.
For North Korea, the main agenda of North Korea-Japan normalization negotiation will be the amount of economic cooperation funds, including compensatory damages for colonization before World War II. South Korea, for example, had a similar experience. The South was able to build its economy with the assistance of Japanese, with an annual contribution of 19.3% of its gross national product, from 1966 to 1975.
The same degree of spread effect in the North certainly cannot be expected due to the differences between the periods and the economic systems. With that economic assistance, however, North Korea could pursue preparation of its infrastructure, the lack of which has interfered with foreign investment.
The amount of the indemnity could be within the range of $5 billion. As a matter of course, the total sum of money would not be given to North Korea in a lump sum. A total of $1 billion would be used as the Japanese share of the light water reactor project, and another $1 billion would be used for the redemption of North Korea's debt. The rest of the fund, $3 billion, would be paid in installments over a ten year period. Then North Korea would get $300 million every year from Japan, but this would be tied to its use, specifically for the purchase of Japanese capital goods, food and energy.6)
3. China
China wants to avoid an escalation of tensions on the Korean peninsula since its interests lie in maintaining peace on the Korean peninsula, securing the stability of North Korea, and deterring the proliferation of nuclear weapons in East Asia.
China showed its willingness to aid North Korea not only officially by contributing free of charge, 100,000 tons of grain and 20,000 tons of fertilizer to North Korea in 1998, but in other ways, by encouraging such activities as trade on the frontier and cross-border peddling. From this, it is expected that China will continue to aid North Korea in some way in order to maintain its influence on the country and to restrain the U.S.'s advances toward North Korea.
It is also possible, however, that China will decrease the amount of food to North Korea, since its own agricultural production decreased by 15% in 1998. Furthermore, the economic crisis in East Asia has not yet been solved, meaning that it could exert a negative influence on China's economy, in turn leading to devaluation of the yuan or even an economic depression, thereby limiting its ability to support North Korea.
4. Russia
While North Korea stated that the collapse of the Soviet Bloc in the early 1990s caused only temporary difficulties, actually the loss of its major trading partners, the Soviet Union and East Europe, dealt a fatal blow.
During North Korea's period of economic expansion, from the 1950s to the 1970s, many socialist countries took part in building its infrastructure. Major facilities, such as Kimchaek Steel Company, Seungri Chemical factory and almost seventy other factories in the fields of textiles, mining and the food industry were built by experts from the Soviet Union. Even today, 70% of North Korea's production is from those factories.7)
Economic cooperation between Russia and North Korea, weakened since the dissolution of the Soviet Union, is aimed at new ways to improve their economic cooperation after both countries agreed to rebuild economic relations. It focuses on renewing operations in old facilities and importing vital natural resources such as coking coal and Russian crude oil.
In 1999, the two countries will realize a plan to modernize Kimchaek Steel Company, and will implement a contract with MERKUR, a Russian coal export company, to provide coking coal to North Korea. This is an visible result of the two countries¤£economic cooperation, and it will contribute to revitalizing the Kimchaek Steel Company.
The 45th meeting of the Council for Development of Exchange and Cooperation between the two Koreas, held on April 30, 1998, resulted in a decision to promote economic cooperation with the North under the principle of "separating business from politics." Consequently, most of the regulations regarding economic cooperation with the North have been abolished.
Restrictions on meeting North Korean people and visiting the North have been loosened, and the regulations joint investment and manufacturing on commission have been abolished as well. The South Korean government has permitted companies to freely establish industrial facilities in the North. South Korean companies can relocate facilities in North Korea, by giving the sites to North Korea free of charge, or by leasing to them. In the past, such grant aid of industrial facilities was not permitted. Moreover, if the price of the facilities exceeded $1 million, they needed to get permission from the government. With these new steps, the government has adopted the negative lists in investing in North Korea, instead of positive lists, and has abolished investment limits.
Last year, however, there was no investment activity in North Korea. Since most South Korean enterprises have been involved in restructuring and downsizing, investment in North Korea showed no rapid progress in 1999, either. Though the financial sector has announced that South Korea's economy has bottomed out, there is still a time lag between the situation in the financial sector and its manifestation in the object economy.
While Seoul will continue its gradual engagement policy, the so-called "Sunshine Policy," toward North Korea, it will maintain a dual position of "confrontation on one side and cooperation on the other." The two governments are still fiercely hostile, yet, given its deteriorating economy, the possiblity that Pyongyang may alter its policy toward South Korea in order to preserve the existence of its own system is greater than ever.
Under these circumstances, it is recommended that North Korea make use of South Korean chaebols and cultivate relationships with businessmen in order to improve its economic situation, and to create favorable conditions for investment. The success of economic cooperation between the two Koreas will surely attract foreign investment to North Korea.
Taking Advantage of Chaebols and North Korean-born Businessmen
Korea's top five chaebols have led the Korean economy, occupying 37% of the gross domestic product and 44% of exports. Their economic power is so formidable that they can exert pressure even on the government.8) Korean chaebols have showed strong competitive spirit on investment in North Korea, exemplified by Hyundai's Mt. Kumgang tour project, the Haeju industrial area project, and Samsung's electronics and communication project.
The North-born businessmen, moreover, showed enthusiasm in participating in investment hearings held in 1996 and in 1998, at the Rajin-Sonbong FETZ, a sign that Korean companies will eagerly invest in North Korea as soon as it shows some movement toward opening its market.
The blueprint for Korean chaebol's investment was unveiled in 1998. Subsequently, if any large-scale project can be launched during 1999, the atmosphere for attracting foreign capital to North Korea will improve rapidly.9)
Investment Patterns of Korean Companies and Conditions Necessary for North Korea to Induce Foreign Investment
By late 1998, Korean companies had invested $16 billion in foreign countries. When we examine their investment patterns in Asian countries, it is clear that they take advantage of cheap labor. This can serve as a model for investment in North Korea.
In its bid to attract foreign investment, North Korea should keep in mind the following principles. First, it should maintain its low cost advantage. It is highly evaluated that North Korea unified and devaluated its currency, from 2.21 North Korean won to 200~210 won, in the Rajin-Sonbong FETZ in 1997.
Second, North Korea should open a new export market, striving to achieve Most Favored Nation (MFN) status from the U.S., Japan, and European countries, even to get Generalized System of Preferences rating, if possible. Foreign investment by Korean companies tends to make inroads into the markets of those countries.
Third, it should secure the way for introducing foreign capital. When Korean and Japanese companies invest in foreign countries, their share amounts to only 30 percent of total investment, and the rest consists of borrowings from financial agencies. If North Korea cannot guarantee avenues for such borrowing, they will encounter problems.
This article has reviewed the direction of North Korean external economic policies in 1999, focusing on major aspects of foreign policy and policy guidelines revealed in the joint New Year editorial.
North Korea can normalize its economy only by normalizing relations with the U.S., which might then lead to attracting the investment of foreign capital. It should also try to accumulate capital of its own and to introduce some changes to its socialist centrally planned economic system by launching economic reforms.
The problem is time. When we consider the fact that every country in the world is now competing to attract foreign capital, North Korea should suggest some plans for concrete reforms in 1999. Only by doing this, can North Korea hope to revive its economy in the 21st century.
- Ahn Byong-joon, "The Relations between South and North Korea in 1999: the width, speed and direction of the changes of North Korea?" presented at the 14th Unification Strategy Forum at the Institute for Far Eastern Studies of Kyungnam University, January 7, 1999.
- North Korea suggested three main ideas in its foreign policy, independence, peace, and goodwill. Among them, independence is the most important. The North regards peace and goodwill without independence as disgraceful, and unworthy of pursuit. Summarized from Kim Jong-il Plan, a book published by a pro-North Korean group in Japan.
- Results summarized from the reports of the Korea Trade and Investment Promotion Agency.
- It is assumed that Washington will soon take concrete steps to further improve its relations with North Korea, including the set-up of a liaison office in Pyongyang, totally or partially lifting its freeze on North Korean assets in the U.S., facilitating personnel and other exchanges, and the transfer of technologies on mining and agricultual development. But all these will be related with the talks on the North Korean missile issue.
- North Korea
has insisted that missile development is a sovereign right. It also
demanded $1 billion in compensation in return for suspending its missile
program. The Dong-a Ilbo , April 1, 1999. It is also reported that the U.S. will tie the provision of food and agricultural assistance to the improvement of relations once nuclear suspicions are allayed. In this connection, the Clinton administration has voiced its readiness to improve political and economic relation with the North, as long as Pyongyang remains cooperative. It is assumed that with the implementation of the new US-North Korea accord, Washington will soon take concrete steps to further improve its relations with North Korea. The Munhwa Ilbo, April 29, 1999.
- Park Kun, Lim Won-hyuk, and Lee Yu-soo, Policies Toward North Korea and Economic Cooperation Between the Two Koreas in a Changing Era (Seoul: Korea Development Institute, 1998), pp.38-39.
- Alexander
Timothin, "The present and the prospects for the economic cooperation
between North Korea and Russia," Present and Future of North Korea's
Economy , Hyundai Research Institute, January 1996, p.264.
- Economist , November 14-20, 1998.
- With regard to the econometrical analysis about the effects of foreign investment in North Korea, see, Cho Eun-ho, "A Study of the Effects of Foreign Investment on the North Korea Economy," M.A. thesis, Yonsei University, 1998.