The Political Economy of Inter-Korean Relations:
Prospects and Tasks for the year 2000

Bae Chong-ryel

INTRODUCTION

     The United States's September 17, 1999 announcement that it would lift economic sanctions on North Korea, and the subsequent meeting between the North Korean Leader Kim Jong-il and Chung Ju-young, Hyundai Group founder, on October 1, 1999, signify a new trend in economic exchanges between the two Koreas. The former has created the potential for greater influx of foreign capital into North Korea, and the latter indicates that inter-Korean relations are entering a new phase. The question is whether South-North economic exchanges in the year 2000 will be an extension of those in 1999, or whether they will be affected by new variables and thus undergo qualitative changes.
     A number of factors have created a very complex environment for inter-Korean economic exchanges. They include: Kim Jong-il's resolve to build "Kangsong Taekuk," a military-based powerful nation; the Kim Dae-jung administration's engagement policy; and the interests of the powers surrounding the Korean peninsula. The U.S.-North Korea missile agreement reached in Berlin, September 1999, tied a knot which resulted from this complex mix of different stances. The prospect of the economic exchanges between the two Koreas in the year 2000 and the tasks that lie ahead should be examined by first analyzing the nature and implication of the framework established in Berlin.

KIM JONG-IL'S "EQUIDISTANT" FOREIGN POLICY TOWARD THE UNITED STATES AND CHINA

     Pyongyang has explored a number of ways to rescue its economy, on a rapid decline since Kim Il-sung's death. One of these has been to increase its dependence on foreign aid. North Korea's quandary is that although its dependence on the U.S. has grown since the signing of the Geneva Agreed Framework in October 1994 and its economic difficulties have eased somewhat as a result, aid has notbeen sufficient for the North to gain full recovery. An important factor here is that the "new Cold War tension" that began developing between the U.S. an China in the wake of a financial crisis in East Asia provided the perfect scenario in which Kim Jong-il could hatch his plan. He sought to survive on his own by distributing North Korea's dependence among the superpowers, i.e., following in the footsteps of his father, Kim Il-sung, who espoused the "equidistant" diplomacy towards China and Russia.
     The Berlin Framework signaled the emergence of Kim Jong-il's equidistant policy toward the U.S. and China. Moreover, it will work as a basic framework within which South-North economic exchanges be guided in 2000. What, then, will implications of the Berlin agreement be? We can find the answer to this question by comparing the disparate conditions that prevailed during the signing of theBerlin missile agreement and the Geneva Agreed Framework.
Firstly, in Geneva, the bid to make inroads into North Korean markets by American business firms was accelerated only after a clear framework had been established to resolve the thorny issues on North Korea's nuclear facilities. In contrast, even though the Berlin Framework is essentially a modus vivendi1) devoid of a clear framework, there have been visible signs of American companies making inroads into the North.2) Furthermore, the Japan-North Korea talks for normalization of bilateral relations have resumed as well.
     Secondly, when the Geneva Framework was in the making, the economic relations between China and North Korea grew weaker as they had become more commercial in nature, and the U.S. and international organizations were increasingly making entry into Pyongyang. In the case of the Berlin Framework, however, Washington's easing of economic restrictions came at a time when Beijing's economic relations with Pyongyang were strengthening on a non-commercial base.3) In other words, while Washington's position was on the offensive in the establishment of the Geneva Agreement, its stance in the Berlin Agreement was more of a defense against China's approach to the North.
     Thirdly, the North Korean economy was on a severe decline at the time the Geneva Agreed Framework was signed, and it continue to shrink-North Korea admittedly called it "persistent suffering"-even after the establishment of the Framework. However, during the talks in Berlin, although it was premature to speak of economic recovery, there had been a number of signs that the economy had bottomed out. Thus, there was an increasing possibility that Pyongyang's slogan to build a "Kangsong Taeguk" could prove to be more than a mere PR tool.4)
     As a result, the Berlin agreement of September 1999 was firstly, Washington's response to the change in economic and political dynamics surrounding the Korean peninsula, which moved from the one plus two (the U.S. and two Koreas) to two plus two ("the U.S. and China" and "the two Koreas" arrangement due to Chinaㄳ intervention. Secondly, the central issue surrounding the agreement was economy, i.e., an attempt to check China's entry into North Korean markets. And thirdly, the Framework was a result of Kim Jong-il's greater confidence in maintaining the stability of his regime, thanks to the signs of North Korea moving away from its chronic negative economic growth. All these signify the successful launch of Kim Jong-il's equidistant policy towards the U.S. and China. Indeed, the easing of economic sanctions by the U.S. and Japan's move to offer food aid are some of the fruits of Kim's equidistant policy.

INCREASE IN NON-COMMERCIAL AND POLITICALLY-MOTIVATED ECONOMIC TRANSACTIONS

     The changes in political and economic dynamics surrounding the Korean peninsula occurring before and after the signing of the Berlin agreement seem to have a number of positive implications for the economic exchanges between the two Koreas. Firstly, Hyundai Group founder Chung Ju-young and the North Korean Leader Kim Jong-il met for the second time to conclude the much talked-about the Mt. Kumgang tourism project,5) as well as to talk in detail about inter-Korean Projects such as the construction of a large industrial park on the North Korean West Coast.
     Secondly, the talks among South Korea, Japan, and the U.S. on the financial contribution for the Korean Peninsula Energy Development Organization (KEDO) project-which had been in a deadlock in the wake of North Korea's missile launch-were effectively concluded. Consequently, it is possible to begin the main construction of light water reactor in 2000 if all goes as scheduled.6)
     Thirdly, the tension created between the U.S. and North Korea due to Pyongyang's missile launch on August 31, 1998, is being resolved with the establishment the Berlin Framework. Against this backdrop, the mood is becoming favorable for South Korean President Kim Dae-jung's engagement policy7) to be developed one step further.
     Such changes in the environment along with the policy of "separation of business from politics" consistently pursued by South Korea since the launch of its new government are bringing about a rise in the volume of inter-Korean exchanges. The economic exchanges that had been in doldrums since South Korea's financial crisis, dubbed as the "IMF crisis," are growing again. The South-North trade in 1999 stood at $333,437,000, which is higher than the peak of $308,339,000 reached in 1997. Both the successful Mt. Kumgang tourism project and an upsurge in social and cultural cooperative projects are adding new momentum to the inter-Korean economic cooperation that had been at a standstill.
     If the current trend continues, the inter-Korean economic exchanges in the year 2000 will mirror those of 1999. The question is whether such this favorable environment, created after the launch of the new government, can continue in the year 2000. We can see that North Korea's New Year message in the form of an joint editorial on January 1, 2000, does not mention any change made in Pyongyang's economic policy. Moreover, given the fact that the South Korean economy, as well as that of the North, are on the path to recovery, the inter-Korean economic exchanges in 2000 are likely to rise above the level of those in 1999.
     However, we should not overlook the possibility that the inter-Korean economic exchanges may be affected by a number of other factors and could be headed towards a different direction in 2000. To be sure, the final result will be a product of interaction of various elements. However, it is highly likely that the inter-Korean economic exchanges in the start of a new century will differ from those in the 20th century. Hence, while exchanges may be an extension of those of 1999, there will be developments that would lead to substantial change.
     The first and foremost element is how the upcoming elections in South Korea, the U.S., and Japan will affect the conditions of the negotiations with Pyongyang, which have been settled with the establishment of the Berlin Framework. We should first pay attention to what kind of impact South Korea's general election will have on President Kim's engagement policy and the South Korean economy. And how much the issues of weapons of mass destruction, including the North Korea missile threat, will hinge on the U.S. presidential campaign would be a noticeable factor of future U.S. policy-making. The elections in the three countries may not lead directly to the revision of the three countries' policies toward the North. However, they may create considerable obstacles in negotiations with Pyongyang, which then would set the conditions for the inter-Korean economic exchanges in 2000.
     The second key variable is Kim Jong-il's choice with relation to the elections in the three countries. Kim made clear in the New Year message, Pyongyang will focus its efforts on achieving economic recovery.8)
     To that end, Pyongyang has moved quickly to attract foreign economic resources that are deemed vital to keeping the regime in tact. The fact that Pyongyang is concentrating its efforts on the talks with Japan tells us that it will, for the time being, steer clear of implementing foreign policies that disturb Washington, e.g., a missile launch. Nevertheless, if serious obstacles arise in the North-Japan talks, Kim Jong-il may revert to its confrontational policies toward the U.S. again.
     The third important element in assessing the prospect of the inter-Korean economic exchanges is the critical impact that could be made by the interactions among the surrounding powers with regard to Kim Jong-il's equidistant policy toward the U.S. and China. For instance, a visit to the U.S. by a North Korean envoy in response to former U.S. Defense Secretary William Perry's visit to the North is yet to be made. China's reciprocal visit to the chairman of the Presidium of the Supreme People's Assembly Kim Young-nam's visit to China is also pending. Given that Stephen Bosworth, U.S. ambassador to Korea, hopes for a visit by a North Korean emissary, such a visit could serve as a litmus test for the prospect of economic exchanges between the two Koreas in the year 2000.9) A North Korean envoy's visit to the U.S. would help create favorable conditions for the ongoing North-Japan talks and even pave the way for a visit to the North by an American investment mission.
     At this point in time, it would be, in fact, impossible to predict the specific impact each of these variables will have on South-North economic exchanges in 2000, even more so considering the un-predictable nature of issues surrounding the Korean peninsula. However, as previously mentioned, the Berlin Framework signals the start of Kim Jong-il's equidistant policy, and it will serve as the basic framework in which the inter-Korean economic exchanges will be regulated. Hence it appears to be the critical element that will shape the prospect of the economic exchanges in the year 2000.
If Kim sticks to his equidistant policy in the year 2000, what will inter-Korean economic exchanges be like? Simply put, the equidistant policy will increase the volume of politically-motivated economic transactions that are of a non-commercial nature. Let us examine the specific mechanism of this argument.
     As mentioned before, the new Cold War tension between the U.S. and China led Kim Jong-il to implement the equidistant policy, which in turn will spur on the two countries' bid to make inroads into North Korean markets.
      The United States' move to send an investment mission and Japan's holding normalization talks with the North are being undertaken in this context. In addition, the competition between Beijing and Washington to make entry into the North will certainly give Kim Jong-il leverage at the negotiating table. This will translate into increased support by China and the U.S. in the areas that Kim wants the most. They are areas that are directly tied to the stability of the regime, and infrastructure. In other words, transactions that are motivated by political reasons rather than economic ones, and of non-commercial than commercial nature are likely to grow in number. More specifically, the "KEDO-type or Hyundai-type" development projects will be favored.10)
     Since the Kim Dae-jung administration began to implement the policy of separation of business from politics, the trade volume between the two Koreas has been growing again. What is noteworthy here is that the volume of non-commercial transactions-such as those of food and other aid as well as materials for the development of the Mt. Kumgang tourism project-have been rising rapidly. Although the number of companies and trade items has been increasing, the share of non-commercial transactions still exceeds commercial ones.11) The recent growth in consignment processing and importation of agricultural products have, in fact, led to expansion of commercial transactions. Nonetheless, they fall far short of reversing the trend of non-commercial and politically motivated transactions accounting for a large share of economic exchanges between the two Koreas. In particular, when the main construction for the KEDO project starts in earnest, the upsurge of non-commercial economic transactions will be even greater.

THE RESURGENT OF "PARK CHUNG-HEE-TYPE" DEVELOPMENT MODEL?

     A more significant factor is whether the efforts by American companies to make inroads into North Korea, which have become increasingly visible since the signing of the Berlin agreement, will actually materialize or die out as they did in the aftermath of the Geneva Agreed Framework.12) If these companies actually set foot on the North Korean soil in 2000, inter-Korean economic exchanges will enter into a new realm with a significant change in quality.
     Even if these companies fail to make a significant entry to the North in 2000, their future behavior will likely follow a different pattern than that in the past, because the centerpiece of the Berlin framework was not about the U.S.-North missile talks. It was Washington's response to the change in economic and political dynamics surrounding the Korean peninsula the two plus two ("the U.S. and China" and "the two Koreas" situation. The activities of U.S. business firms in the future will not merely be conducted on the results of feasibility tests. Firstly, they will be at least an upgraded version of those taken after the establishment of the Geneva
     Agreement. Secondly, they will, regardless of the success of their projects, try to check the presence of Chinese companies in the North. Thirdly, they will respond to Japan's compensation fund to the North13) with specific plans to enter into the North Korean market prior to Japanese companies.
     A crucial point is the impact of the two plus two situation on Kim Jong-il's domestic and foreign economic policy. We can find a clue in the actions taken by Kim since 1998 when the establishment of "Kangsong Taeguk" emerged as the nation's ultimate goal. To begin with, "The Second Grand Chollima March," a nation-wide campaign aimed at building a prosperous and powerful country, and giving priority to the development of heavy industries, has begun against the backdrop of temporary retreat in reform and opening. Secondly, since the missile launch, the hawkish voices that insist on "military-first politics" in the Workers' Party are gaining firm ground. Since his implementation of the equidistant policy toward the U.S. and China, Kim Jong-il's solution to the economic hardship was to revive Kim Il-sung's way, which had been successfully introduced since 1950. In other words, the hermit kingdom's dictator seems to have opted for the third way, similar neither to American-style reform and opening up, nor to the Chinese-style.
     It would be interesting to see how Kim's survival method of co-existing with capitalism, rather than whole-heartedly accepting it, will unfold in the context of the North Korean economy's increasing dependence on foreign capital. What choices will Kim make if American companies effectively establish their presence in the North and Japan provides the compensation funds? While sticking to the equidistant policy, Kim's is likely to opt for a third way, which may be the 21st century version of the economic development model championed by the late South Korean President Park Chung-hee.14) There seems to be no alternative economic model which Kim Jong-il can comfortably choose.

POLICY TASKS

     Economic exchanges between the two Koreas in 2000 will be somewhere along the same line as those in 1999, however the proportion of non-commercial and politically motivated economic transactions are likely to rise. Nevertheless, the 21st century version of the economic development model favored by Park Chung-hee may be introduced and the inter-Korean economic exchanges may undergo a fundamental change as a result. Even if such a new economic development model is not instituted, the quest for a new development model will continue and is likely to be found. Whereas making a preparation for the former scenario is an urgent policy task, preparing for the latter should be a short-to-mid-term task that needs to be completed.
     First of all, the growing proportion of non-commercial and politically motivated economic transactions will hamper ordinary, commercial economic transactions, raising the cost of inter-Korean economic exchanges. This would be particularly true given North Korea's limited ability to absorb, i.e., caps on foreign trade volume. As a result, considerations for business virtues, including profitability, efficiency, and economics, will be put on the back burner.
     North Korea's inability to attract foreign capital inflow, China and the United States' competitive efforts to enter North Korean markets, and Kim Jong-il's moves to retreat from reform and market-opening, may all lead to bigger trouble in that the cost of integrating the South and North Korean economies may rise, and South Korea could have less control. In sum, the inter-Korean economic exchanges and the neighboring countries' entry to the North may conflict with, rather than complement, each other.
     Another interesting point of discussion is that the political dynamics surrounding the Korean peninsula seems to be unfolding in a way that expands the scope of activities for Kim Jong-il in his "prior cooperation with the West approach" to the South. The two Koreas will see their economic exchanges grow in volume in the near future, however, if they are not managed properly, the nature of the inter-Korean industrial exchanges will developing into exchange through neighboring countries, i.e., through Washington, Beijing or Tokyo, with possible negative results. In particular, Pyongyang's decision to pursue its own version of economic development model similar to that championed by former President Park could be an indicator that these types of exchanges will take place. This is a significant challenge to the Kim Dae-jung administration, which espouses engagement policy toward the North: how to coordinate the inter-Korean exchanges with the neighboring countries' competitive bids to enter North Korean markets. For the reunification of the Korean peninsula and efficient integration of the two economies, it would be desirable for the U.S. and Japan to try to improve their relations with the North in tandem with the progress made in inter-Korean relations. The Kim Dae-jung administration ought to support other countries' bids to restore their relations with North Korea. But at the same time, it should also urge them to adjust their speed, so that their impact on the improvement of the South-North relations is positive.
     In addition, Seoul needs to contemplate the changed environ-ment in order to draw up specific action plans for the "separation" policy and should pay keen attention to improving the quality of the inter-Korean exchanges. A favorable environment should be created for the success of the ongoing cooperative projects, including the Mt. Kumgang project and Daewoo's Nampo industrial complex con-struction project. The planned construction of industrial parks on the West Coast or Tongchon should be executed in a way that will ensure international competitiveness. In addition, the project to build an industrial complex needs to be carried out with due consideration for the political and economic dynamics surrounding the Korean peninsula.

CONCLUSION

     The political development surrounding the Korean peninsula that has been unfolding since the signing of the Berlin agreement will certainly pose a serious challenge to the Korean economy, as it continues to recover from the Asian financial crisis. Not only Korea, but also East Asia may be under the threat of weapons of mass destruction, including North Korea's missiles and nuclear arms. Under these circumstances, the Kim Dae-jung administration's engagement policy must overcome many obstacles to be fully effective. To be sure, consistent implementation of the engagement policy is very important, but a flexible application in response to the changes in the political and economic environment is also critical.
     The expansion of inter-Korean economic exchanges could play a significant role in the thawing of the South-Korean relations and establishment of a lasting peace regime. In order for the exchanges to continue to flourish in 2000, constructive contributions by neighboring countries are sorely needed. In this regard, close cooperation between China and the U.S. is in order, and Seoul, Tokyo, and Washington should define their appropriate roles.

1. On September 12, 1999, after the Berlin agreement was signed, Japanese Prime Minister Keizo Obuchi said, "I see it as a step towards North Korea freezing a missile launch, but I don't think of the agreement as a sign that the North has abandoned a launch completely." "NAPSNet Daily Report," The Nautilus Institute, September 13, 1999. (http://www.nautilus.org)
2. American companies's move to enter North Korean markets is being led by the American Chamber of Commerce (AMCHAM) in Korea. In his interview with Chosun Ilbo on December 8, 1999, AMCHAM President Jeffrey D. Jones mentioned the plan to send an investment mission consisting of 12 companies, including Motorola (Communications), Ralston Purina (pet products), P&G (consumer goods), Allied Signal, Goldman Sachs, GE Capital, Siemens Westinghouse Power Corp., BBMS (textile exporter), and four other companies, in January 2000. However this is yet to be realized as of mid-February, 2000.
3. The mention of unofficial exchanges between China and North Korea can be found in the works of Scot Snyder and Kwon Oh-hong. Scot Snyder of the United States Institute of Peace estimated North Korea's imports of crop and crude oil from China in 1997. North Korea received at least 1.2 million tons of crop (naval customs base) up to 1.5 million tons including the unofficial count and more than 1 million tons of cruel oil. Scott Snyder, "Challenges of Building a Korean Peace Process: Political and Economic Transition on the Korean peninsula," Special Report, United States Institute of Peace, June 1998, p. 9; According to Kwon Oh-hong, "Kim Jong-il was able to finish the "arch of Suffering" and directly handle the economic problems, owing to the restoration of the China-North relations in 1998. This should be viewed in terms of China's unofficial aid, including food, crude oil, and cokes." Kwon Oh-hong, "North Korean Economy, Is It on the Path of Recovery?" Tongil Kyongjae (the United Korea Economy), Hyundai Research Institute, October, 1999.
4. Bae Chong-ryel "Task for Inter-Korean Economic Exchanges in A Changing Environment: Small- and Medium-Sized Enterprises as Leaders," Studies of Korea Unification Affairs, Baikchon Institute for Korea Unification, No. 3, December 1999, pp.114-134.
5. Chung Mong-hun, Hyundai Group Chairman, said in a press interview on October 29, 1999, "Hyudai was given a document that guarantees a 30-year exclusive use of facilities with regard to the Mt. Kumgang tourism project." Korea Economic Daily, October 10, 1999.
6. The loan agreements between the KEDO and The Export-Import Bank of Korea, and between KEDO and Japan Bank for International Cooperation were signed on December 15, 1999, and January 15, 2000, respectively. Thus, one of the major problems related to the main construction of the light water reactor is being resolved.
7. For example, the South Korean government enacted "The Guidelines for Providing the South-North Korea Cooperation Fund to Inter-Korean Economic Exchanges and Cooperation Projects" on October 21, 1999. In accordance with the new guidelines, small- and medium-sized enterprises are now entitled to borrow money from the Fund.
8. For example, the title of the joint editorial is "Glorify this year by marking the 55th anniversary of the party foundation as a year of proud victory in the flame of great Chollima upsurge."
9. Stephen Bosworth, "Special Interview: The ROK-U.S. Relations in the New Millennium" Views of the U.S. Ambassador to Korea," Shindonga, The Dong-a Ilbo, February 2000.
10. It can be defined as "a long-term package-type project" or "large-scale project" that are similar to aid and strategic nature.
11. The ratios of commercial trade between North Korea and its major trade partners, namely China and Japan, have continued to fall as well.
12. On October 4, 1999, former U.S. Ambassador to Korea, Donald Dreg, said at the Korea-America Economic Association that "American companies' interests in North Korea are far greater than what has been known." He added, "Many companies are keen on the fact that North Korea may serve as a link to East Asian economies." The Maeil Business Newspaper, October 6, 1999; Meanwhile U.S. Ambassador Steven Bosworth said in his interview with a monthly magazine, Shindonga, "Some American companies have an interest in making a visit to the North to explore potential business opportunities that may be created as a result of the North Korean economy undergoing a drastic change. But at this point in time, you should not expect to see any direct investment in the North." Shindonga, The Dong-a Ilbo, February 2000.
13. We should consider the possibility that North-Japan negotiations could end with "compensation before normalization" rather than "normalization and then compensation." If the "compensation before normalization" is put on the negotiating table, the missile talks between Washington and Pyongyang may be concluded earlier than expected. In this case, companies will move quickly.
14. On October 1, 1999, during a luncheon with Hyundai founder Chung Ju-young, Kim Jong-il said, "I saw in the movies that Seoul is a world-class metropolitan city, and better than Tokyo, I think the rapid development of South Korea owes its success to the 'Saemaul Movement' directed by former President Park Chung-hee." His abrupt mention of Park Chung-hee has led to discussions about the economic developement model championed by Park. Nam Moon-hee, "Is North Korea Raising the Flag of Park-style Development?," Sisa Journal, November 11,1999.

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