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Volume 12 Number 2 Summer 2000 A Win-Win Game: Lee Sang-man
Introduction
After over a half century of separation, President Kim Dae-jung and the North's chairman of the National Defense Commission, Kim Jong-il held historic talks in Pyongyang which culminated in the signing of "the Joint Declaration" on June 14, 2000. Even though there have been many agreements between the two Koreas, those were signed by the delegates of both sides. However, this time, the two heads-of-state signed for the first time since the division of the Korean peninsula, making the joint declaration a great historic achievement. Among the main points, the most plausible and practical cooperation will begin in the economic field. It is in the economic field that the South can provide immediate aid to the North, impoverished and desperate for economic aid. The Kim Dae-jung government has consistently implemented an engagement policy, placing priority on the principle of separating business from politics, and inter-Korean economic cooperation has resulted in positive outcomes, in spite of the recent political and military instability between the two Koreas. In the same vein, North Korea has endeavored to overcome its economic crisis by means of various diplomatic measures and to normalize its relationship with Western countries. The inter-Korean summit provided the momentum for expansion of the inter-Korean economic cooperation which ranged from private talks to large-scale exchanges on the governmental level, and included further discussion about possible support of social infrastructure projects in North Korea. With the high evaluation of the inter-Korean summit, it is projected that market integration between the two Koreas may be realized as inter-Korean economic cooperation develops into an economic community. To make it possible, it is vital to consider impending issues regarding inter-Korean economic cooperation, as well as to review the past economic cooperation between the two Koreas.
Achievements and Obstacles
Achievements
Inter-Korean economic cooperation has been constantly expanding, both in size and in quality, since "the 7. 7 Special Declaration" signed by the South's former president Roh Tae-woo on July 7 1988, and enacted in 1989. In particular, Western countries, including the U.S. and Japan, wholeheartedly supported inter-Korean economic cooperation, highly praising Seoul's consistent implementation of the engagement policy and its principle of separating business from politics. In 1999, for example, the volume of inter-Korean trade amounted to a record 121.6 million dollars for imports and 211.8 million dollars for exports, despite a temporary decrease in the trade due to the South's currency crisis. Notably, the volume of trade until April 2000 recorded 105.2 million dollars, an 11 percent increase compared to that of the previous year. The Mt. Kumgang project supported by Hyundai, a South Korean conglomerate, has enabled 200 thousand South Korean visits in North Korea to bring about positive outcomes: South Korean people are changing their attitudes toward North Korea and unification. Moreover, the project is believed to have contributed to enhancing inter-Korean economic cooperation. Whereas, before it consisted of simple processing of imported materials or trade of primary products, now it includes direct investment. Currently, South Korea's inter-Korean economic cooperation consists of trade such as material exchanges and processing-on-commission trade, and cooperation, including direct investment in North Korea. Goods have been exchanged between the two Koreas in forms of direct as well as indirect trade. In fact, more than 85 percent of the exchanges have been in the form of indirect trade through brokers from a third country. In the inter-Korean economic cooperation, processing-on-commission trade means that North Korea imports raw or subsidiary materials from South Korea, processes them into finished or semi-manufactured products, and exports them to the South again. The most developed form of inter-Korean economic cooperation involves through establishing South Korean investment corporations in North Korea. The cooperation consists of joint management, joint ventures, and independent investment businesses. The Minjok Sanup Chonghoesa (National Industry General Corporation) established by Daewoo, a South Korean conglomerate, is a model of joint management. An example of a joint venture is the scallop-cultivation industry of LG & Taeyoung Fishery Corporation, being run by the North Korean people. The Mt. Kumgang project, the first example of independent investment and operated solely by the South, is currently being operated successfully by Hyundai. Other South Korean conglomerates have kept a close eye on the project. As a matter of fact, North Korea has insisted that the investment be done by both sides but the North manage it solely. However, such a joint venture is hardly expected to realize profitability, because the North Korean management style would not be conducive to improving productivity and making profits.
Obstacles
In the last ten years, inter-Korean economic cooperation has contributed to full-scale inter-Korean exchanges and understanding, even while the Korean peninsula has remained the sole vestige of the Cold-War era. Moreover, cooperation has prevented the deteriorated North Korea from collapsing, ameliorated the North Korean people's suffering, and has helped adapt the North Korean economy to capitalism. Such contacts and exchanges led by inter-Korean economic cooperation, will greatly contribute to the formation of a future inter-Korean economic community, as well as give North Korea a considerable amount of economic benefits resolve current economic difficulties, and eventually reduce the cost of unification. In spite of those contributions, inter-Korean economic cooperation still has many problems that must be resolved sooner or later. For instance, because of the lack of inter-governmental dialogues, cooperation has been improvised case by case on the private level, since no legal or institutional framework exists for it. Before the summit, there were several obstacles blocking inter-Korean economic cooperation: First, a major obstacle was the fact that the inter-Korean economic cooperation had not been institutionalized. There existed no inter-governmental agreement on the most important issues relating to trade and investment, such as investment protection, tax imposition, conflict adjustment or resolution, and payment. This obstacle had been considered a major risk to South Korean investors, along with the political uncertainty caused by the recent inter-Korean military confrontations. Second, inter-Korean economic cooperation had not been based on long-term economic considerations. In fact, it had been implemented only for publicity, focusing on one-time transactions. Thus, existing uncertainty in future inter-Korean economic cooperation had blocked the establishment of long-term plans that would have taken into account comparative advantages and balanced development between the two Koreas. One-time business transactions, lacking long-term vision, hindered all facets of inter-Korean economic cooperation to stabilize inter-Korean relations and to provide mutual benefits to both. Moreover, any positive spill-over effects in the North Korean economy, following the inter-Korean economic cooperation, were considerably restricted, since the one-time efforts hardly bring about any linked outcomes. Third, an acute shortage of social overhead capital facilities in North Korea had resulted in profit shortfalls. Most inter-Korean trade had been in cheap primary materials trade or processing-on-commission trade, based on low production costs in North Korea. However, high distribution costs as well as insufficient electricity and fuel resulting from the North's weak social infrastructure, had offset the advantage of North Korean low labor costs, and had impeded further inter-Korean economic cooperation. For example, North Korea's labor costs in the electronics-parts processing industry were 20~25 percent of the South's, but its total costs were 80~90 percent, because of high distribution costs in the North. Directions for Inter-Korean
The June 13-15 summit meeting was aimed at building confidence between the two Koreas and at establishing a critical base for future inter-Korean economic cooperation, not to mention that from a historical perspective, it was first meeting between two Korean leaders in fifty years. In the past, inter-Korean economic cooperation was a North Korean propaganda tool. Moreover, inter-Korean economic cooperation had been interrupted by periodic tensions created by North Korea and by its failure to recognize the advantage of a market economy. However, with the summit, carried by newsmedia worldwide, the North Korean leader Kim Jong-il's welcoming President Kim and signing the joint declaration will lead to long-lasting and full-fledged inter-Korean economic exchanges. Moreover, the leaders agreed on further discussions on most impending issues, such as institutionalization of economic cooperation, and reconstruction of social infrastructure in North Korea.
Agricultural Cooperation
North Korea announced in a joint editorial of the New Year early in the year 2000, that it would give top priority to resolving the food issue. Yet, without public data on North Korean agriculture, the South Korean Ministry of Unification can only estimate that North Korea produced 4.0бн4.1 million tons of crops in 1999. Compared to the 2.8 million tons in the mid-1990s, when North Korea faced a severe food crisis, 1999 figures show a marked increase. However, it is still far less than the projected needed (6.3 million tons) in 2000. Even if the international community and South Korea provide the same amount of food as in 1999, there would still be a shortage of 500~600 thousand tons of food for North Korea. The June 13-15 summit was a turning point in a fundamental resolution of the North Korean food crisis. The South Korean government announced that it would immediately send 200 thousand tons of fertilizer to the North, ahead of the coming rice-planting season. With that fertilizer, crop production is expected to increase by more than 400 thousand tons. Taking into account domestic production and fertilizer consumption in the South, 600 thousand tons of fertilizer per year appear to be available for North Korean aid. Moreover, thanks to the summit, various other cooperative projects and aid that have been planned in the last two years could be implemented with the consolidation of the Kim administration's engagement policy. Such aid includes supplying agricultural management materials such as agricultural chemicals, farming machinery, and greenhouse vinyl, as well as human resources to establish agricultural infrastructure such as farming skills and irrigation systems.
Construction of Social Infrastructure in
North Korea
The reconnection of traffic networks between the two Koreas is a precondition to inter-Korean human and material exchanges. With the summit, it is expected that the exchanges will increase tremendously. However, the issue of transportation costs in North Korea has been raised since the outset of inter-Korean economic exchanges. North Korea suffers from an acute shortage of social infrastructure, including railroads, roads, ports, and power-generation facilities. In a speech after returning from his landmark visit to Pyongyang, President Kim Dae-jung announced plans for construction of 'the Iron Silk Road,' saying that around 30 percent of the transportation costs could be cut if the Kyong-ui (Seoul-Shinuiju) Railroad Line, connecting Korea to Europe, is reopened. Thus, it is possible that both Koreas could reconnect the 20 kilometers of track from Munsan in the South to Changdan and Bongdong in the North, a project estimated at about 160 million U.S. dollars. The Korea Transport Institute (KOTI) of South Korea expects that 24~53 million dollars in transportation costs will be reduced by using the Trans-Siberian Railway (TSR) following the reconnection of the the Kyong-ui Railroad Line, and that the revitalized tourism resulting from the railway reconnection will increase the GDP by 5 billion dollars. Moreover, after the Kyong-ui Railroad Line connection, re-linking of the Kyong-won (Seoul-Wonsan) Railroad Line as well as the Mt. Kumgang railway will follow. The South Korean government is almost ready for the reconnection, having procured lands for the railway. As for roadways, South and North Korea are discussing the reconstruction of six disconnected sections, which would cost around 180 million dollars, including the section between Panmunjom and Kaesong on National Road 1. Regarding inter-Korean cooperation, the issue of electricity shortage must be resolved before anything else, because it has severely deterred North Korean economic restoration. Thus, Seoul has proposed several suggestions to resolve the shortage in North Korea in the form of the inter-Korean electricity cooperation: First, the South would provide electricity by means of a cable from the demilitarized zone (DMZ), connecting to a nearby point in the North such as the Haeju industrial complex. Second, the South would construct power plants in the North free of charge. A third option is that the South would only provide fuel to the North, using the North's existing power plants. In other efforts to encourage better inter-Korean economic cooperation, both Koreas are working to expand North Korean port facilities and to open new inter-Korean sea routes. For example, the South Korean Ministry of Maritime Affairs and Fisheries is planning to support the refurbishment of Rajin, Nampo, Chongjin, and Wonsan ports in North Korea, the main gateways for distribution between the two Koreas. The social infrastructure reconstruction of the North is a long-term project, requiring the continuous infusion of huge amounts of money. Korea Institute for Industrial Economics and Trade (KIET) estimated that a 66 billion-dollar investment would be necessary over the next ten years to raise the level of the North's social infrastructure to that of the South's in the 1990s, considering that current social infrastructure in the North is inferior to the 1975 level in the South. Since South Korean government funds, such as the South and North Korea Cooperation Fund (SNKCF), the special fiscal loans, and national bonds, are not sufficient to rebuild the infrastructure of the North, the government should allow the sole participation of the private sector or the joint participation of government-private organizations in the inter-Korean economic cooperation. In addition, in order to raise foreign funds, the South Korean government should help North Korea to join international financial institutions such as the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (IBRD), and the Asian Development Bank (ADB).
Establishment of an Industrial Complex for Small and Medium-Sized Corporations
The summit opened the way for South Korean small and medium-sized enterprises to participate more actively in inter-Korean economic cooperation. In particular, raw material-processing industries can pave the way to better economic cooperation, since North Korea is in a position to boost light industries. In a speech after returning from his landmark three-day visit to Pyongyang, President Kim Dae-jung said, "Our (South Korean) small and medium enterprises whose competitiveness in the South is low can secure a strong competitive advantage in the North. Both will benefit from this." If the South Korean government develops a raw material-processing industrial complex adjacent to newly-connected railroads or roads in North Korea, the South Korean small and medium enterprises would regain competitive power that could then benefit the export industries, thanks to low labor and distribution costs in North Korean. Moreover, facilities for South Korean marginal industries would be relocated to the North, where they are need. Therefore, to boost participation of small and medium-sized corporations in inter-Korean economic cooperation, the government needs to expand its administrative support, preventing dual taxation and protecting investments, as well as limiting competition between conglomerates and small and medium-sized corporations.
Tasks after the Summit
The imminent tasks of the South Korean government include raising funds required for social infrastructure investment projects in North Korea, boosting inter-Korean economic cooperation through the resumption of the South-North Joint Commissions for Exchanges and Cooperation, and consistently implementing the engagement policy toward the North.
Raising Funds
A large-scale joint effort to rebuild social infrastructure in North Korea will bring about, albeit slowly, a close and consistent cooperative relationship between the two Koreas and will create various other secondary inter-Korean businesses. However, most reconstruction of social infrastructure, especially the construction of power generation plants and railroads, requires a huge amount of money, and the South Korean government hardly has enough for its own country. Currently, the South Korean government has 640 million dollars in the Economic Development Cooperation Fund (EDCF) and 200 million dollars of the South and North Korea Cooperation Fund (SNKC). Tapping funds from the SNKCF for the reconstruction of infrastructure in North Korea, poses a dilemma because those monies should be extended first to South Korean small and medium-sized corporations who are participating in inter-Korean economic cooperation and who are experiencing financial difficulties. An additional reality, there are many restrictions governing the use of the EDCF. Thus, the remaining option is for the South to actively raise foreign funds for the reconstruction of infrastructure in North Korea by forming a consortium with foreign companies or by helping North Korea to join international financial institutions. That option poses problems as well, first, because the South Korean government must persuade the citizens through public campaigns of its necessity, and second, it usually takes from five to seven years for a country to obtain a loan from an international financial institution. Nevertheless, investments by foreign companies for social infrastructure reconstruction in the North, as well as Japan's commitment to supply aid following improved North Korea-Japan relations will greatly contribute to the social infrastructure projects in North Korea. Consequently, the success of the infrastructure projects in North Korea depends greatly on the South Korean government's ability to plan and coordinate. The South Korean government must induce domestic as well as international support for the projects and that will require setting priorities regarding investment in infrastructure projects, and implementing several pilot projects, all the while watchful of the remaining budget and of other possible resources.
Establishment of Proper Mechanisms for Inter-Korean Economic Cooperation: Resumption of the South-North Economic Committee The South-North Exchange and Cooperation Law established in 1990, regulating inter-Korean exchanges, trade, cooperation, and communication, must be sooner or later updated or revised, according to the expected changes in inter-Korean relations. In particular, the legal obstacles to inter-Korean cooperation should immediately be abolished, and certain legal mechanisms established to resolve political and legal issues arising. Thus, the issues proposed in 'South-North Exchanges and Cooperation' of the Basic Agreement, such as investment protection, prevention of dual taxation, conflict resolution procedure, liquidation, and protection of industrial property rights, should be resolved beforehand. The resumption of the South-North Joint Commissions for Exchanges and Cooperation is expected to resolve various institutional issues and to help streamline future agreements. In addition, the establishment of a standing committee or working-level committees could enable the two Koreas to discuss concretely further inter-Korean economic cooperation on an ongoing basis, including the trade principle of "country of origin." The government should revise its current domestic laws in line with changing inter-Korean relations, in light enhanced inter-Korean exchanges and cooperation. For instance, temporary or special laws should be established, since the current South-North Exchange and Cooperation Law regulates only the issues related to approval of inter-Korean businesses, and does not address capital transaction issues, including transmission of returns and re-investment. In this way, the law promoting foreigner's investment will deal with capital transaction issues as well.
Consistent Implementation of the Principle of Separating Business from Politics
During the last half century, military confrontation between the two Koreas has been the greatest obstacle to credible and plausible inter-Korean exchanges. With a constant threat of war, inter-Korean economic cooperation has been meaningless. In this context, for the last two years, the Kim Dae-jung government has implemented an engagement policy toward the North, in spite of North Korea's political and military provocations, including the test-launch of missiles, the naval confrontation in the West Sea, and the detention of a South Korean tourist at Mt. Kumgang. At long last, his steadfast commitment resulted in the Joint Declaration, opening a new dimension for inter-Korean economic cooperation. Maintaining the principle, refusal to tolerate any armed provocation by the North, and the Kim Dae-jung government refused to tolerate any armed provocation by the North, brought about a historic and remarkable outcome. Various confidence-building measures (CBM) following the summit will contribute to military tension reduction in the Korean peninsula, and induce further aid from South Korea and more active participation of the international community in the economic cooperation with the North. The summit is a remarkable start for that confidence-building. From now on, the South Korean government should implement the engagement policy even more positively, inducing wholehearted support from its citizens, and working to preclude any type of political or military obstructions to inter-Korean economic cooperation.
Conclusion
The historic inter-Korean summit on June 13-15 was a gift to the entire world, bold and surprising at the same time. If all of the points covered in the joint declaration are realized, the political and economic map on the Korean peninsula as well as on the Northeast Asia will be totally changed, because each point holds immense implications. Before leaving for the Pyongyang meeting, President Kim cautioned, "Let's be hot-hearted (passionate), and at the same time cool-headed." The time is ripe for the two Koreas to be cool-headed in working toward the "balanced development of national economy" proposed in the Joint Declaration. Even though the declaration briefly mentions the basic principles for inter-Korean economic cooperation, it implies the will to pursue "the South-North Economic Community," which is to elevate inter-Korean economic cooperation currently at the private level to that of inter-governmental cooperation. Now, it is time for the two Koreas to set up a concrete master plan, and to implement it rationally. In particular, in order to establish the South-North Economic Community, North Korea should work to create a friendly environment for its own change. However, impatient inducement of North Korea's openness and reform could trigger suspicions in the North and interfere with cooperation efforts. As mentioned before, the two Koreas will gain much through boosting inter-Korean economic cooperation to their mutual benefit. When South Korea transfers its labor-intensive industries (such as textiles, shoes, and bags) to the North, and uses North Korea' skilled labor force, South Korean sunset industries could regain a competitive advantage. At the same time, North Korea can accomplish its economic take-off, taking advantage of foreign investment in the reconstruction of social infrastructure (i.e., power generation facilities, roads, and ports) of the North. In consequence, such a complementary system on the Korean peninsula, will create mutual benefits, and consequently, the economic gap between the two Koreas will be narrowed and the cost of unification lessened. Only with national consent and support, will the South Korean government's negotiation powers with the North and its economic aid bear fruit. Many South Korean people who watched the summit meeting expressed surprise at the contrast between their long-time Cold-War era perspectives and the images of North Korea showed on and voiced renewed expectations for unification. To reach a national consensus by means of a public campaign, the South Korean government must emphasize to the citizens the necessity of the inter-Korean economic cooperation and the desirability for a South-North Economic Community, and the importance of avoiding propaganda about past achievements. The public campaign should be focused on the fact that inter-Korean economic cooperation is not unilateral aid to the North but rather an economic activity mutually beneficial to both Koreas. Moreover, the economic structures of both should be reorganized to form the South-North Economic Community. According to a recent public opinion poll in South Korea, a majority of the people considers the inter-Korean economic cooperation, not as unilateral aid to the North, but as a preliminary investment toward future unification. In a word, the survey result promises a bright future for inter-Korean economic cooperation. |