The odd couple A special report on the Koreas l September 27th 2008

KKoreasSRep.inddoreasSRep.indd 1 117/9/087/9/08 18:28:3918:28:39 The Economist September 27th 2008 A special report on the Koreas 1

The odd couple Also in this section The Bulldozer Enters stage right; trips head•over•heels. Page 3

The export juggernaut Heavy industry is South Korea’s sweet spot. Page 5

Reformed characters The chaebol have mostly learnt their lesson, but some lapses continue. Page 7

Survival of the †ttest North Korean society is turbulent and in ‡ux. Page 8

Jaw•jaw The international consequences of North Korea, and all the talk about it. Page 11 Koreans want their international standing to match the south’s Contested grounds economic success. They may have to wait until the peninsula is uni†ed, Of history wars and peace parks. Page 12 says Dominic Ziegler

Half•†nished T THE heart of North•East Asia sits a erage are three inches (7cm) taller than What Lee Myung•bak still needs to do. Afailed state with the worst human• their poorer neighbours. Half a century Page 13 rights record on Earth. The regime main• ago South Korea’s economy was on a par tains its grip by putting one in 20 of its pop• with Upper Volta’s. Today its citizens have ulation in military uniform. One in 40 has an average income per person of $20,000. spent time in the gulag. Mobile phones They enjoy the highest penetration of and the internet are forbidden, except for broadband internet on Earth, along with a Acknowledgments the elite, and radio and television sets are popular culture of television shows and The author wants to thank all those who gave made to tune only to government stations. music that has become a highly bankable generously of their time and expertise in the Unauthorised travel within the country is Asian export known as the ŒKorean wave. preparation of this report. In addition to banned, at least in principle. Food short• South Korea’s success is often called the those named in the text, they include Ste• ages are chronic, and a decade ago the re• Œmiracle on the Han, after the river that phen Bosworth, Choi Kang, Yoichi Funabashi, gime’s malign neglect created a famine runs through the 23m•strong capital, Seoul. Jim Hoare, Hur Kyung•wook, Hyun Jung•taik, that killed between 600,000 and 1m peo• Yet a more obvious explanation is the Jung Ku•hyun, Erica Kang, Ki Won•kang, J.R. ple. The famine still casts a long shadow, sweat and the tears of a people with a pas• Kim, Minyoung Kim, Kim Tae•hyo, Kim Young• and not just through malnutrition and sion for work and self•improvement, cou• sun, Catherine Lee, C.S. Lee, Lee Hye•min, stunted growth; recent studies of refugees pled with generally enlightened economic Jay Y. Lee, Park Yong•man, Tomohiko Tani• have pieced together a picture of a popula• policies since the 1960s‹often in the face of guchi, Roland Villinger, David Wol and tion that, in wide swathes, remains trau• what is now known as the ŒWashington Shigeo Yamada. matised‹and there are fears that famine consensus. As well as a modern economy, conditions might be returning. this impassioned people has also fash• A list of sources is at Now fresh uncertainties have arisen ioned a constitutional democracy out of a www.economist.com/specialreports with reports that North Korea’s dictator, military dictatorship, again with sweat Kim Jong Il, may be seriously ill. That has and tears and not a little blood. underlined how little the outside world The regime in the north tries hard to An audio interview with the author is at knows about North Korea. What to do keep its citizens in the dark about the www.economist.com/audiovideo about this failed state, which happens also south’s success, and in South Korea six de• to possess the material for nuclear bombs, cades of separation have done much to More articles about the Koreas are at is likely to be the region’s single biggest weaken the blood ties which, in both www.economist.com/northkorea challenge over the coming years. states’ oˆcial rhetoric, are supposedly un• Slap next to all this sits the epitome of breakable. Reuni†cation of the peninsula www.economist.com/southkorea globalisation’s success, whose men on av• remains a hallowed goal on either side. Yet 1 2 A special report on the Koreas The Economist September 27th 2008

2 for most people in the south, North Korea good reason to start building them up now. is not just another country but another Yet there are also plenty of pressing home• No taste for procreation 1 planet. Some 10,000 North Korean defec• grown reasons for more economic growth. Total fertility rate, % tors now live in the south, but despite ef• The most important of these is a dramatic North Japan Taiwan forts by the government and others they plunge in fertility. Today’s birth rate is ex• Korea South Hong live mostly on the fringes, despised by traordinarily low, and heading lower. This China Korea Kong many South Koreans and ill•quali†ed for is an Asia•wide trend, but South Korea’s 7 decent jobs. ŒThe Crossing, a †lm with a has fallen more than most. The total fertil• 6 star cast released in Seoul this summer, au• ity rate of South Korean women (ie, the av• 5 thentically recreates everyday life in the erage number of births they can expect) 4 north and explores why its citizens are dri• has dropped to just 1.26 (see chart 1), down 3 ven to leave their homeland. Yet it was from 4.5 in 1970 and 1.5 in 2000. That is 2 quickly eased out at the box oˆce. South roughly half the rate at which a population 1 Korea is ill•prepared, psychologically, polit• replaces itself. In other words, the child• 0 ically and economically, for the uni†cation bearing generation 25 years from now will 1955 60 65 70 75 80 85 90 95 2000 05 10 Sources: UN Population Division; national statistics presumed to follow the eventual collapse be roughly half the size of the current one. of the north. Even Japan, famous for its dearth of chil• The cost of such a collapse scarcely dren, has a higher fertility rate, at 1.3. tion: changing fertility patterns mean that bears thinking about‹and South Koreans For South Korean women, as for those Œ2,500 years of East Asian family tradition for the most part are trying their best not to elsewhere in Asia, this appears to be a stand to come to an end with the region’s do so. The task would make West Ger• good thing, o ering them greater security rising generation. What will it do to peo• many’s absorption of East Germany look and more autonomy than ever before ple if many, perhaps most, of them will no like a doddle. South Korea is merely a mid• within a Confucian family structure that longer have brothers, sisters, uncles, aunts dle•income country, with only a minimal has historically been hierarchical and or even cousins? As Mr Eberstadt points social safety net to o er its own people, let male•dominated. Even better, South Ko• out, when family structures atrophy‹even alone abject North Koreans, who are per• rea’s mortality rate has also fallen steeply, in a country such as South Korea where haps 15 times poorer than their southern and people can now expect to live 30 years children are treated as fondly as they are in counterparts (whereas East Germans were longer than they did at the start of the Italy‹sturdy institutional alternatives will two or three times poorer than West Ger• country’s modernisation in 1960. quickly need to be found to take on the role mans at the time of uni†cation). Yet the fall in the fertility rate may re• now played by family networks. So uni†cation, if and when it comes, ‡ect dissatisfactions too: notably, over the As the South Korean population ages, will require South Korea to †eld huge re• diˆculties faced by women who want the country’s high savings rate is almost sources, however much help it might get both to work and to raise a family. Almost bound to decline, which will have an e ect from international institutions. That is a everyone still gets married in South Korea. on both what the economy can invest and In other words, the fertility rate is falling what the government can raise in taxes. As because more women are postponing it is, the country’s national pension marriage to nearer the end of their repro• scheme and a long•term•care scheme for ductive lives. That is partly because the the old are only two decades old, and their burden of raising children still falls heavily funding structure is not geared to South Ko• on women, whereas men are consumed rea’s expected demographic transforma• with work, which in South Korea, as in Ja• tion over the coming quarter•century, pan, entails long hours and drinking ses• which will involve a rapidly ageing society, sions late into the night. a shrinking workforce and a population in Also as in Japan, companies, despite absolute decline. some improvement, still discriminate heavily against women, especially those In search of a miracle with children. Just one•third of South Kore• Until now most of the debate about such an women go back to work after having matters has concentrated on Japan, where children, half the OECD average. The the working•age population has already World Economic Forum’s ranking of sex begun to fall. Yet Japan is a prosperous equality puts South Korea 97th out of 128 place, which will help it deal with the con• countries. This represents a huge eco• sequences. In South Korea the average in• nomic and social waste, and not only be• come per person is only half Japan’s. If the cause South Korean women are better edu• country does not †nd new sources of eco• cated, on average, than their men. nomic growth, it will grow old before it Either way, the profound consequences grows rich. Throw in the prospect of pay• for the economy, the government’s †• ing for the integration of 23m North Kore• nances and the nation’s social structure ans to the mix, and the case for a radical ap• have barely begun to sink in; nor has the proach to growth‹in essence, another impact on families. Nicholas Eberstadt, a miracle on the Han‹starts to press itself demographer at the American Enterprise forward. The only problem is the country’s Institute, puts it with only mild exaggera• dismal politics. 7 The Economist September 27th 2008 A special report on the Koreas 3

The Bulldozer

Enters stage right; trips head•over•heels

HE president since February, Lee My• global slowdown will emphasise this im• vices is a consequence of a skewed em• Tung•bak, swept to oˆce with a simple balance. Since the export sector is already ployment structure. As in Japan, compa• message: he would electrify the economy. highly productive, new sources of growth nies in South Korea tend to reward For the past †ve years South Korea has av• will have to come from these two under• employees less on merit than on seniority, eraged an annual growth rate of about performing areas. and dismissals are rare. So rather than be 4.4% (see chart 2): below potential, most In theory that should not be too hard. burdened with too many expensive older economists reckon, and anaemic by the Productivity in the service sector is only workers, companies impose a low manda• standards of a country that had one of the two•thirds that in manufacturing, the larg• tory retirement age. Employees tend to world’s highest growth rates in the 1970s est gap in the OECD. Turnover per employ• leave †rms at around 50, and three•quar• and 1980s. ee is just one•third of the American aver• ters of them become self•employed, main• South Korea had made extraordinary age in areas such as law and accounting. ly in services. progress immediately after the devastation Low productivity matters, since services Economists agree about other short• of the Asian †nancial crisis of 1997•98 that employ three times more people than does comings too. During decades of military had led to a $57 billion bail•out by the Inter• manufacturing, and SMEs account for dictatorship, growth at all costs took prece• national Monetary Fund‹a humiliation nine•tenths of that employment. dence over the interests of workers. Since for a country that had recently joined the then, successive democratic governments OECD club of developed economies‹and Start here have attempted to strengthen workers’ a brutal drop in output of 15% or so. The The OECD lists the problems succinctly. rights. For instance, the previous president, left•leaning government of President Kim First, industrial and tax policies have long Roh Moo•hyun, attempted to protect tem• Dae•jung turned radical, going well be• favoured manufacturers. Second, barriers porary workers by obliging companies to yond even what the IMF demanded of it. It to entry into service industries remain o er them equal rights to those enjoyed by swiftly took over the banking system be• high, with foreign investment excluded permanent employees after two years. fore selling much of it to foreigners: nine of from nearly every business except †nance. The unfortunate consequence has been the 14 commercial banks are now foreign• Much has been made of a ground•break• an increase in sackings just before the two owned. It forced a number of indebted ing free•trade agreement (FTA) signed last years are up and a big rise in the number of chaebol (the family•owned conglomerates year between South Korea and the United temporary workers, who now make up that have long dominated the South Kore• States, but the deal excludes American one•third of the entire workforce. This an economy) into bankruptcy, and pushed †rms from education and health care. The hurts not only the individuals concerned others to dump loss•making businesses. bene†ts of foreign investment in services but also the economy as a whole: tempo• Exports quickly revived and domestic are clear: when the South Korean banking rary workers are denied the kind of train• demand also surged, thanks to brief sector was opened after the †nancial crisis, ing which in the long run boosts economic booms in housing and consumer credit. By post•tax pro†ts nearly trebled in the four performance. 2003 South Korea was a favourite among years to 2005, and the return on assets Economists also point to a vast accre• international portfolio investors. Yet now grew by almost two•thirds. Foreigners tion of regulations, interventions, subsi• the air seems to be going out of a once brought in know•how and transformed dies, special taxes or special tax exemp• pumped•up model. For instance, South Ko• banks’ risk management. tions, loan guarantees and countless other rean graduates are having trouble †nding Lastly, low labour productivity in ser• measures distorting or ensnaring nearly decent jobs, if they can †nd any at all. And every economic activity in South Korea. it is not just Koreans who feel ‡at. Foreign• This is a legacy of decades when the gov• ers have left the stockmarket in droves. Less miraculous 2 ernment‹central and local‹was directing South Koreans argue over what is South Korea’s GDP, % change on previous year development and economic growth. wrong. One camp blames the owners of It a ects not just business but consum• capital, in particular the chaebol, for keep• 12 ers too. The experience of a former Seoul ing wages low by threatening to send jobs correspondent of The Economist is just one overseas, and for su ocating the nation’s 8 example. Recently her house of over 30 myriad small and medium•sized enter• years was seized by the Seoul metropoli• 4 prises (SMEs). The second camp blames + tan government under a compulsory pur• the unions for illegal strikes and rigid work 0 chase order to make way for a develop• practices. For economists, the problem is a – ment of luxury condominiums. Without lopsided economy that has long given pri• 4 being o ered a choice she was allocated a ority to manufacturing exports over ser• new ‡at elsewhere, which she estimates to vices and domestic demand. The country’s 8 be worth at least a third less than her for• export sector, as the next article will argue, 1970 80 90 2000 07 mer home. To rub salt into the wound, she Source: CEIC is remarkably robust, but an American•led had to complete dozens of separate sets of 1 4 A special report on the Koreas The Economist September 27th 2008

had been Park Geun•hye, daughter of Park Chung•hee, the military dictator who had seized power in 1961 and ruled until his as• sassination in 1979. The contest for the nomination had been a bitter one and no one, least of all Mr Lee, had done much to deal with the rancour that persisted in the rival factions. The opposition took full ad• vantage of the GNP’s in•†ghting. The Na• tional Assembly did not convene until July and got properly down to business only in September. All this underlines the immaturity of the country’s young democracy. With poli• ticians more beholden to local interests than to their parties, discipline along party lines is weak and the level of policy debate Bee†ng about beef is woeful. The parliament too often comes across as a circus for charlatans and third• 2 forms and make 15 visits to various govern• but to elections for the National Assembly raters. A good number of the National As• ment oˆces. Little surprise, perhaps, that in April which the conservatives also won sembly’s members have convictions or are the property market is moribund. convincingly. The public appeared in the under investigation for wrongdoings. With doubts about the economy’s vig• mood for the president’s pro•business Even more damaging for Mr Lee were our widespread, Lee Myung•bak looked to message. Nostalgia for South Korea’s glory street protests that started in Seoul on May many to be a saviour. Presidential cam• days was running high: one television ad• 2nd, just after he had returned from a visit paigns in South Korea are rambunctious af• vertisement showed Hyundai’s late foun• to the United States. At the time the trip fairs where political rallies include raucous der, Chung Ju•yung, describing how in the had seemed a triumphant success. Mr singalongs and crowds perform synchro• early 1960s he had launched Korea’s ship• Lee’s administration had just signed an nised dances. They are also highly compet• building industry, now the world’s biggest, agreement with America to resume im• itive, yet Mr Lee, representing the conser• on a rough †eld. ports of beef that had been suspended vative camp, swept the †eld of ten The new president proposed to sell a since 2003, following a single case of mad• candidates with over 48% of the vote, beat• slew of powerful public entities, such as cow disease in Washington state. Congress ing his Œprogressive opponent, Chung the Korea Land Corporation, that had re• had made it clear that without the resump• Dong•young, by a record 5m votes out of sisted privatisation before; cut through tion of beef imports the FTA between the 24m cast. When he moved into the presi• swathes of regulations constraining the two countries was dead. With the beef is• dential Blue House after his February inau• operation of businesses; reduce corporate sue resolved, Mr Lee had been feted by guration, he ended a ten•year run for the taxes; encourage the family•run chaebol to President George Bush at Camp David. Yet progressives. go on an investment binge by lifting restric• the demonstrators claimed that the beef tions imposed by previous administra• agreement was exposing Koreans to unac• What sort of mandate? tions; ease planning rules on land; deregu• ceptable health risks. The protests became In business, Mr Lee, a trim•looking 66• late capital markets; call for foreign direct a regular event, generally starting as a can• year•old Christian, had won the approving investment; and streamline the govern• dlelit parade and ending in bloody attacks nickname Œthe Bulldozer for getting ment in a way that would make all these on police. things done. Born to a poor family in Japan tasks easier yet still cut the annual budget during the second world war, Mr Lee had by one•tenth. In addition, Mr Lee promised Fall from grace risen to run the giant construction arm of to pursue FTAs around the globe, starting The e ect on Mr Lee’s administration was Hyundai, then the country’s largest and with the one with the United States, which just short of catastrophic. The president’s most powerful chaebol. He promised that though signed has as yet been rati†ed by stellar popularity ratings crashed to earth. growth would be his priority during his neither side. He made the system of higher He was forced to apologise publicly for fail• †ve•year presidential term, whereas his education the target for a shake•up and he ing to take South Koreans’ views into ac• predecessor, Mr Roh, had sought to rein in promoted national construction projects, count. His †rst team of senior advisers in the country’s biggest businesses and including an ambitious if not self•evident• the Blue House was sent packing and his spread prosperity from Seoul to less devel• ly useful ŒGrand Canal linking the coun• cabinet resigned en masse to allow him to oped regions. Practical•minded and mar• try from north to south. make a fresh start. Calls grew for his own ket•friendly, Mr Lee proposed a package of But then things started to go wrong for resignation. The beef deal was hastily re• changes to the economy that would, he the Bulldozer in spectacular and unpre• negotiated and Mr Lee’s idea for a Grand said, deliver annual growth of 7% and dou• dicted fashion. Least surprising, perhaps, Canal was dropped. ble South Koreans’ income per person over was a dismal lack of unity among the con• So has Mr Lee learnt his lesson? On Au• the next ten years. servatives following the National Assem• gust 15th South Korea celebrated the 60th The package was radical‹but then Mr bly elections. For the presidential nomina• anniversary of its founding. In the Confu• Lee appeared to have a popular mandate, tion the previous autumn, Mr Lee’s chief cian world 60 is a revered number, signify• thanks not only to his presidential victory rival in the Grand National Party (GNP) ing a human life coming full circle. Mr Lee 1 The Economist September 27th 2008 A special report on the Koreas 5

2 used the occasion to relaunch his agenda, It should have learnt a lesson about the im• plans, keeping sta running around end• albeit with more humility. Ambitious portance of communication: it should be lessly to produce fresh details for him. quantities of bills are now being intro• running a permanent campaign. If he is too much of an action man to de• duced into the National Assembly, in the The deeper question has to do with the legate to technocrats, Mr Lee also dislikes hope that most of the legislation required character of the president himself. Those doing many of the things political leaders for the proposed reforms will be passed by who deal with him every day say he is re• need to do: schmoozing with local politi• the end of this year. But doubts persist. The markably resilient, and his belief in his cians, stroking egos in the National Assem• government distracted itself with a para• programme is undiminished. But they also bly and keeping up a dialogue with the noid campaign to punish the television sta• point out that he has a habit, carried over public. No technocrat can do that for him, tions and internet sites that broadcast dis• from his business days, of getting too in• and if he does not soon begin to do it him• tortions and plain lies over the beef issue. volved with the minutiae of his reform self, his programme will get nowhere. 7 The export juggernaut

Heavy industry is South Korea’s sweet spot

UST as South Korea, in historical terms, just 1% in 1992 to 27% in 2004, according to highest rates among developed econo• Jsees itself as a little thing among over• the IMF. Now China’s bilateral de†cit is mies. According to the IMF, high•value• bearing powers, so many of its business• narrowing as South Korea imports more added products‹things like cars, consum• men and policymakers now feel that the intermediate goods from there. Yet much er electronics and top•of•the•range ships‹ country’s export machine, the thumping of this is the result of South Korean invest• now make up half of Korea’s exports, up heart of the economy, is being squeezed by ment in China. from a quarter in 1990. two giants. On one side is Japan, whose South Korean manufacturers are still South Korea today is more of a whale high technology and sophisticated pro• improving their own competitiveness. than a shrimp in several global industries. duction give it an edge in exports. On the Partly thanks to modest wage growth, la• In memory chips it is home to the world’s other is China, whose low wages allow it bour productivity in manufacturing has biggest maker of ‡ash memory (Samsung to compete ruthlessly on cost, even as it grown by an average of 10% a year since Electronics) and the two biggest makers of learns to make ever more complex pro• 2002. Indeed, the stronger won appears DRAM chips (Samsung and Hynix). It has ducts. What, South Koreans wonder, is merely to be the ‡ip side of that productivi• the third•largest steelmaker (POSCO), the their economy’s place in Asia’s future? ty growth. Currency strength, certainly, is †fth•largest carmaker (Hyundai Motor), They may be overreacting. Certainly, squeezing pro†ts in some areas, notably and the world’s three biggest shipbuilders China’s rise up the production chain has for small• and medium•sized businesses (Hyundai Heavy Industries, Samsung been swift and, in some cases, ferocious; that are less eˆcient than larger †rms, as Heavy Industries and Daewoo Shipbuild• and the South Korean won has been the well as for the big carmakers. ing & Marine Engineering, or DSME). It is a strongest of the region’s currencies since South Korean exports have not only leading producer of mobile handsets and Asian growth took o earlier this decade, grown but become more sophisticated as of LCD screens for televisions, computers even if it has softened somewhat this year. production has shifted out of low•value• and much more. Yet South Korea has responded admirably added goods such as textiles that rely Heavy industry, as Shaun Cochran of to increased competition and a stronger mainly on cheap labour. Korea’s spending CLSA, a brokerage, puts it, is the country’s currency, notching up double•digit export on research and development is equiva• Œsweet spot. Take shipbuilding. As Hyun• growth for the past †ve years. It is now the lent to nearly 3% of GDP a year, one of the dai’s founder, Chong Ju•yung, was boast• world’s tenth•biggest exporter, and apart ing posthumously in those television ad• from a cyclical slump in Asian export vertisements this summer, there was no growth that appears to be caused by Amer• It stacks up 3 shipbuilding industry in South Korea until ica’s and Europe’s sharply slowing econo• South Korea’s exports to: the 1960s. When the country’s dictator, mies, there is plenty of reason to think that $bn Park Chung•hee, summoned Chong and its success can continue for a while. 400 told him to produce oil tankers, for which To date, China has proved a boon for there was a sudden demand, Chong went China South Korea’s exports. Having overtaken 300 straight to Greece and scooped up two con• America in 2003 to become South Korea’s rest of Asia tracts to build 260,000•tonne tankers, pro• largest trade partner, it runs a bilateral Europe mising his customers delivery within two North America 200 trade de†cit thanks to large imports of cap• rest of world years, sooner than anyone else. He had ne• ital equipment and parts from South Ko• glected to mention that at that moment he rea. This growing bilateral trade re‡ects the 100 lacked even a shipyard. He then waved the knitting•together of production networks order in front of Barclays Bank, which lent all over Asia, centred on China. China’s 0 him enough money to build a modern 1988 2007 share of South Korea’s total exports of un• yard. No one in South Korea knew how to Source: IMF †nished goods‹that is, parts‹rose from do that, so Chong dispatched 60 engineers 1 6 A special report on the Koreas The Economist September 27th 2008

2 to Scotland to learn. The ships were deliv• ered before the deadline. This famous story, concedes Bruce Cumings of the Uni• versity of Chicago in a refreshingly revi• sionist modern history, ŒKorea’s Place in the Sun, may be apocryphal in its details, yet it has a strong whi of truth about it.

The shipping forecast Korea’s three big shipbuilders are thriving. Competing †ercely against each other, though by unwritten agreement not for sta , their order books are nearly full up to 2013. South Korea has two•†fths of the world market in new ships (which account for 8% of its exports), whereas China and Japan have to make do with a quarter• The stu of legends share each. Seen from a helicopter, the vast DSME hunger for resources, so more ships are was started from scratch by the state in the yard at Okpo Kojé island, near the south• needed overall, not just new kinds. Cli• late 1960s, using $120m of war reparations eastern industrial port of Busan, looks im• mate change, Mr Nam says, o ers further paid after Japan and South Korea normal• pressive: great walls of steel rise up from opportunities. The potential viability of ised their relations. Foreign investors and the dry docks as enormous gantries o er Arctic sea routes in future is prompting a development experts in Washington, DC, up bows and other hull sections to assem• demand for vessels strengthened to with• had given warning that a dirt•poor country ble the world’s biggest container ships, li• stand ice. Another growth area is Œwinter• like South Korea should not aim for self• que†ed natural gas (LNG) carriers and ising oil rigs to cope with drilling in cold suˆciency in steel. Yet the company, giant ‡oating depots for storing and pro• climates. Pressure for cleaner transport which was privatised after the 1997 †nan• cessing o shore oil and gas. On the also helps (bunker fuel used by most of the cial crisis, has become a symbol of nation• ground, all notions of human scale are lost. world’s shipping is †lthy). al pride. POSCO fed the country’s industri• DSME’s chief executive, Nam Sang•tae, Okpo is a company town where DSME al beast and is now, by several measures, says that China is not a chief competitor, has its own hospital, cinemas and interna• the world’s most eˆcient steel producer. despite the state aid from which its ship• tional school for the families of overseas South Korea’s industrial structure is un• building industry has bene†ted. It cannot clients who come to keep an eye on their usual, says POSCO’s boss, Lee Ku•taek. Its match South Korea for prompt delivery, ships under construction. There are dormi• steel consumption per person is the and although Chinese shipyards o er low tories for single young men and women re• fourth•highest in the world, yet most of the costs, they turn out relatively low•tech ves• spectively, one on each side of the bay. In• steel eventually goes overseas: nearly sels, such as bulk carriers and run•of•the• ternet forums host thriving dating and 100% in the case of POSCO’s shipbuilding mill oil tankers. South Korean yards are matchmaking services, and newly mar• clients, and 60% in the case of Korean car• more interested in building, say, high•tech ried couples get to move out of the dormi• makers. The steelmaker also serves South LNG carriers, which keep their cargo at tories into their own ‡ats. The town has an Korean construction companies abroad, •163°C. A new type which Daewoo Ship• income per person of over $30,000, the for example in Dubai. Its customers’ eager• building was the †rst to build regasi†es the second•highest in the country. ness to conquer †ercely competitive mar• methane before it is piped ashore. The de• kets overseas may have kept POSCO lean. sign and manufacture of deep•sea rigs, Iron constitution ŒSteel’s competitiveness here has made much in demand now that many oil and Daewoo Shipbuilding was nationalised South Korea what it is, says Mr Lee, Œand gas†elds on the world’s continental when the Daewoo chaebol of which it I’m hugely proud of that. shelves have been exploited, is even more formed a part continued to pile up debts Now that he is hoping to buy DSME he challenging than building advanced ships, even when the †nancial crisis was over, sees the chance to double the shipbuilder’s and o ers higher pro†t margins; indeed entering new businesses with what value, which the stockmarket currently DSME wants to operate as well as build turned out to be criminal insouciance. Kim puts at $6 billion, by concentrating on com• specialised o shore oil rigs because oil Woo•choong, the chaebol’s founder, even• plex products such as oil rigs. In shipbuild• companies pay such lucrative fees. tually admitted to accounting fraud and ing, Mr Lee points out, the less you need to All the South Korean shipbuilders embezzlement worth over $30 billion, and weld, the more you save. POSCO, he says, throw a lot of money at research and de• in 2006 was sentenced to ten years in jail can tailor plates to speci†c ships, making velopment. Each has a large design insti• before being pardoned. Yet the company’s the product much cheaper. tute, and they generously support univer• shipbuilding arm has thrived. After two decades of building up its do• sity engineering faculties. The government has ‡oated a minority mestic market, says Mr Lee, POSCO will Mr Nam is also sanguine about the ef• of DSME’s shares on the stockmarket. Later spend the next two decades establishing a fect of shipping’s notorious boom•and• this year it is due to sell the controlling powerful presence overseas, through bust cycles on his business. Patterns of glo• stake to one of four prospective buyers. green†eld sites and acquisitions, including bal logistics are changing, he says, spurred Among the bidders is POSCO, the ship• in mines that can secure the company’s by a growth in world trade and a China•led builder’s main steel supplier, which itself supply of ore. It will be following the ex•1 The Economist September 27th 2008 A special report on the Koreas 7

2 ample of South Korea’s consumer•elec• sions; Samsung has recently overtaken year brought †ve overseas specialists to tronics companies, which sometimes used Motorola to become the second•biggest form part of the 20•strong top team of exec• almost military methods for their push maker of mobile phones. Samsung’s stock• utives, among them Mr Boden, an Irish• overseas. At LG Electronics (LGE) they tell a market capitalisation, at over $80 billion, man who had earned a reputation for story of a country manager who was has raced past Sony’s and is second only to building consumer•goods brands. dropped into Algeria during the civil war Apple among consumer•electronics com• Branding, says Mr Boden, is what LGE when other multinationals kept away, put panies. Samsung Electronics now makes needs now. The company has superb pro• o by the risk. When he emerged several the televisions on which Sony sticks its ducts and o ers excellent service. (It needs years later, he had built up a multimillion name badge. to in South Korea, where impatient cus• dollar franchise. tomers put down the phone if it is not an• The country’s biggest successes in con• All we need is love swered within ten seconds.) Yet emotional sumer electronics are LGE and Samsung Dermot Boden, LGE’s new chief marketing attachment to LGE’s products, Mr Boden Electronics. Only a decade ago consumers oˆcer, explains that much still needs to be points out, remains low. Products come abroad hardly knew them, and if they did done to realise the company’s global ambi• and go: a new mobile•phone model, for in• it was as makers of cheap knock•o s of tions, but his appointment, as a non•Kore• stance, is typically on sale for only about classier brands, notably Sony. Today they an, indicates the direction in which the six months. It is a brand that encourages have annual sales of $43 billion and $92 best South Korean companies are going. the customer to keep coming back‹and if billion respectively, along with a reputa• South Korean companies, like Japanese he likes LG mobile phones, he might con• tion for making hip and sophisticated mo• ones, tend to recruit managers internally, sider buying, say, an LG television. Sam• bile handsets, MP3 players, televisions, dig• rewarding length of service and often put• sung has already gone down this road, rais• ital cameras and more. LGE, for instance, is ting generalists into positions calling for ing its pro†le by sponsoring the Olympics the world’s largest maker of plasma televi• special expertise. Exceptionally, LGE this and Chelsea football team. 7 Reformed characters

The chaebol have mostly learnt their lesson, but some lapses continue

HE rapid international rise of compa• The previous two progressive adminis• the rat’s nest of cross•shareholdings Tnies such as Samsung Electronics and trations, less enamoured of big business through which the founding families typi• LGE underlines a sea change in South Ko• than the current one, also took aim at the cally exercise control. The KFTC argued rea’s chaebol in just a decade. Before the dominance of the biggest chaebol and their that the complex structures discouraged Asian †nancial crisis the leading 50•odd controlling families. By putting a ceiling on transparency, disadvantaged minority chaebol were heavily indebted. With the shareholdings in other companies held by shareholders and raised the risk that bank• help of cheap credit they had been able to chaebol•related †rms, the Korea Fair Trade ruptcy in an aˆliate might bring down the get into any business that took their‹or the Commission (KFTC) hoped to cut through whole group. government’s‹fancy. After the crisis, In practice the new rules were hardly about half the chaebol went to the wall; at draconian. Exemptions were made for the time, Daewoo’s collapse was the big• chaebol that had good internal monitoring gest corporate bankruptcy in history. The systems or that formed a holding•com• remainder were forced to shed hundreds pany structure. Moreover, no South Kore• of businesses or divisions in order to keep an government appears able to resist the a‡oat and concentrate on what they did temptation to use the chaebol for policy best. Those that learnt the lesson have ends. Some of the biggest ones were ex• done very, very well. empted from the ceilings on outside share• Many of the changes have gone deep. holdings because they were giving sup• After the crisis, foreign investors were wel• port to Roh Moo•hyun’s favourite comed, and now around half of the shares initiatives, such as investing in sectors des• of Samsung Electronics and LGE are for• ignated as Œgrowth engines, promising to eign•owned. South Korea made a vigorous help build the Œenterprise cities that Mr attempt to improve corporate governance, Roh hoped would spread growth to the re• increasing the rights of minority share• gions, or even attempting to do business holders, boosting the role of outside direc• with North Korea. As a result, the founding tors, punishing improper disclosure and families of large business groups, using cir• requiring the chaebol to publish consoli• cular chains of shareholdings, continue to dated †nancial statements. Shareholders exercise control even though, says the may now, at least in theory, pursue class• OECD, they hold an average of only 6% of action suits against the country’s biggest their group’s shares. companies. Now with added transparency In almost any other OECD country this 1 8 A special report on the Koreas The Economist September 27th 2008

2 would be a scandal. In South Korea such chairman, 66•year•old Lee Gun•hee. Sam• thrived after the Korean war in the early foibles are too easily tolerated. Moreover, sung has long been accused of corrupt 1950s, thanks to vast amounts of American the chaebol’s ruling class displays an ex• practices: Mr Lee was convicted of political aid and military spending, and to the poli• traordinary degree of delinquent behav• bribery in the 1990s, though escaped with• cies of import substitution favoured by iour, and only rarely does it su er the con• out penalties. In April he was charged with South Korea’s strongman, Syngman Rhee. sequences, as it did in the case of Kim tax evasion and breach of trust. But more When Park Chung•hee seized power in Woo•choong and Daewoo’s collapse. serious allegations of bribery were 1961, the junta marched many of the racke• dropped‹even though he had been †n• teers through Seoul wearing dunce caps Still behaving badly gered by Samsung’s former chief lawyer, and placards with slogans such as ŒI am a A roster of recent misdemeanours illus• who spoke of a huge slush fund. corrupt swine. As Mr Cumings recounts, trates the point. Last year Kim Seung•youn, Mr Lee has also been charged with it was Lee Gun•hee’s father, Lee Byung• the chairman of Hanwha, an explosives, transferring control to his 40•year•old son chol, who proposed to Park that the swine construction and insurance group, con• and heir, Jay Y. Lee, by arranging for Sam• seek foreign capital and equipment to fessed to going to a bar and, helped by his sung aˆliates to sell shares to the younger launch the South Korean economy. Park goons, beating up the sta . He said it was in Mr Lee at arti†cially low prices. After the called in ten of the leading businessmen retaliation for his own son having been charges he resigned, on live television, Œto and agreed not to jail them if they invested hurt in a scu‰e. Last year, too, the chair• take legal and moral responsibility. Yet their Œ†nes in new industries that would man of Hyundai Motor (and son of Hyun• though Mr Lee technically faces a life sen• sell to foreign markets. dai’s founder), the world’s †fth•biggest car• tence, few believe he will spend much, if The rest is history. To this day chaebol maker, was convicted of embezzling $90m any, time in jail. Nine other Samsung oˆ• families are more admired for their eco• from his company. In 2003 the head of SK cials have been charged, but none has nomic contribution than reviled for their Group, a telecoms, oil•re†ning and con• been detained‹partly, the government criminal propensities, which are often struction conglomerate, was convicted of says, out of concern that the economy viewed as the foibles of a ruling aristocra• illegal share swaps designed to keep the might be harmed. Although Mr Lee is no cy. The chaebol families are the closest group in family control. All three men were longer chairman, Samsung executives in thing South Koreans have to royalty. The pardoned by President Lee Myung•bak on private talk as though he were still running clans intermarry and their shenanigans †ll South Korea’s national day in August. Only the group. the gossip pages, as well as providing Mr Kim served any time in jail. How do the chaebol families get away much of the inspiration for the television The biggest case concerns the Samsung with it? Many of them grew from black soap operas of the ŒKorean wave‹yet an• Group, South Korea’s largest, and its recent markets, smuggling and other rackets that other South Korean export hit. 7 Survival of the †ttest

North Korean society is turbulent and in ‡ux

HAT with North Korea being a cold• †lm director whom Mr Kim, a †lm bu , So a visit to North Korea‹which usual• Wwar state and a nuclear one to boot, kidnapped and held with his actress wife, ly means only to Pyongyang, with its emp• the †xation on its missiles is perhaps not hoping to improve the North’s †lm indus• ty boulevards, its traˆc policewomen in surprising. Around the world that †xation try. ŒAll our movies are †lled with crying skirts and boots, pirouetting with †xed has spawned a veritable industry of think• and sobbing, an indignant Mr Kim told smiles, and its old•fashioned communist tankers, journalists and oˆcials past and the pair, hauled out of prison to attend a propaganda‹leads many to the conclu• present, many with an axe to grind, who cocktail party in their honour. ŒI didn’t or• sion that the North is set in amber. A recon• make a living from parsing the intentions der them to portray that kind of thing. sideration of this view is overdue. For a of the regime and second•guessing the A †xation on North Korea’s missiles can new picture is emerging that shows a pro• leader’s health and even thoughts. Yet Œend up obscuring a great deal of other tean society in ‡ux, one that in the face of much Pyongyangology is futile, because things worth knowing, as Christian Ca• harsh realities is adopting an improvisa• no outsider has a line into the ruling elite. ryl, a journalist based in Asia, put it in the tory approach to survival, and some peo• Almost certainly the upper levels of the re• New York Review of Books. Most worth• ple are thriving. gime have never been in†ltrated by West• while of all is knowing just how the mass ern or South Korean spy agencies. The of ordinary North Koreans act, think and The uses of famine most recent high•level North Korean defec• feel. It is still too widely assumed that such The roots of this change lie with the famine tion was in 1997. things are unknowable. After all, foreign• of 1995•98 that killed up to 1m people, or The keenest insights into Kim Jong Il ers, and especially reporters, have always over 4% of the population, and brought and his court have come from more surreal found it hard to get into North Korea, and outsiders‹aid agencies and non•govern• angles. For instance, a well•known Italian those who do are assigned minders. Only mental organisations (NGOs)‹to North chef, brought in to pamper the dictator, lat• the minders o er the chance to learn about Korea. The regime made it hard for these er wrote about the experience. And there is life and leaders‹which is why they are of• groups to get aid to those who needed it, Shin Sang•ok, a legendary South Korean ten supplied in pairs, to mind each other. and kicked some of them out after the fam•1 The Economist September 27th 2008 A special report on the Koreas 9

2 ine was over, notably the UN’s World Food manitarian programme was supposedly Programme (WFP). Other NGOs, however, feeding more than a third of the popula• continue to work there in inconspicuous tion, yet a large minority of those inter• ways. Aid groups have †lled big gaps in viewed had never heard of the pro• outsiders’ knowledge about life and death gramme. Of the majority who had, 96% in the provinces. Good Friends, a South Ko• believed they had not bene†ted from it; rean Buddhist out†t, publishes regular re• they assumed that the armed forces had ports on food supplies across North Korea, appropriated the aid. This group, the au• the latest government campaigns and evi• thors †nd, was Œprofoundly embittered. dence of popular discontent. Not every de• Modelling conservatively, they estimate tail can be substantiated. But the latest bul• that 35% of the North Korean population letin reports some dozens of deaths from were in a famine area, knew of the aid but hunger and the ill•e ects of eating grass thought they were not receiving any of it. among farming families in the southern Cucumbers get on•the•spot guidance That makes it hard to argue that Mr Kim, part of the country. Earlier this year Good even as his public appearances are greeted Friends reported the public execution in tion (about a tenth of the survey sample), with mass displays of emotion, still com• North Hamgyong province of 15 North Ko• 90% witnessed forced starvation, 60% saw mands the people’s loyalty. It seems that reans, mainly women, for having attempt• deaths due to beating or torture and 27% the regime itself does not think so: it has ed to cross into China. said they had witnessed executions. long classi†ed more than half the popula• The risks of crossing the border illegally The †ndings underscore earlier clinical tion as hostile or at best wavering in their are high, but during the famine the rewards reports of psychological distress akin to loyalties. Possibly this assessment is no easily outweighed them. That was particu• post•traumatic stress disorder: doctors longer paranoid. larly so for those from the north•eastern working with North Korean refugees put provinces near China where food short• rates of distress at 30•45%. Clearly, some of Holding up more than half the sky ages were most severe because of a break• the stress is associated simply with getting Border surveys also cast light on life in down in the public food•distribution sys• to China. But beyond that, the IIE authors North Korea since the famine, with a prolif• tem in industrial areas: uniquely, North †nd that certain groups of refugees are par• eration of informal markets and an in• Korea’s was as much an urban famine as a ticularly disturbed. These include those crease in unoˆcial movements subverting rural one. imprisoned by the regime, and those who people’s relationship with the state. The Thus for the †rst time the famine lost family members to hunger or illness. factories of the command economy have brought North Koreans to the outside Strikingly, the psychological e ect is as ground to a halt: fuel and other inputs are world. At the peak, perhaps 80,000 North great or greater among the group of inter• too expensive to run them, and workers of• Koreans were hiding in north•east China viewees who were aware of international ten go unpaid. Frequently, it is not just a fac• looking for food, work or a clandestine aid programmes for the starving but who tory’s output that its managers have sold route to South Korea. These crossings bred did not believe that they themselves had on the black market but all its plant and a habit: whereas leaving North Korea was been bene†ciaries. At its peak, the hu• equipment too, leaving a shell. unthinkable before, since the mid•1990s Yet most men in the state system still more than 500,000 North Koreans have sign on each day, even if they sit about. In crossed into China, legally or illegally. Most Non-identical twins 4 the countryside the men have the back• have eventually returned (indeed, many The two Koreas, latest figures available breaking work of farming without mecha• make multiple trips), with startling evi• nisation: again, fuel is dear, and many dence of a very di erent world outside. North South North as powered irrigation systems have broken Surveys among these North Koreans in Korea Korea % of south down. In the main, it is women who have China’s border provinces o er the best in• Population, m 22.9 48.5 47.2 been responsible for the explosion of mar• sights to date about ordinary life in North GDP, $bn 25.6 957.1 2.7 kets and other entrepreneurial activity. Korea. Ground•breaking work by three GDP per person, $ 1,118 19,751 5.7 The degree of marketisation of this so• scholars, Yoonok Chang, Stephan Haggard Trade, $bn cialist paradise, although noted by foreign and Marcus Noland, published this year total 5.2 719.9 0.7 observers, seems to have been underesti• by the Peterson Institute for International imports 1.7 363.2 0.5 mated. One young defector recently dis• Economics (IIE), o ers a psychological as exports 3.5 356.7 1.0 paraged Seoul’s famous street market of much as a material portrait of North Korea. Power generation, 225 3,646 6.2 Dongdaemun, sniˆng that it was not a It is clear that the famine and the govern• kWh, 100m patch on markets up north. (As for the feral ment’s brutal mismanagement of it (both Production, tonnes, m orphans, or kotjebi‹literally, Œ‡ower swal• in denying food to those who most needed steel 1.2 47.7 2.5 lows‹who were a post•war feature of it and in criminalising people’s response to grains 4.5 5.5 81.8 Dongdaemun, they now ‡itter around hunger) cast a long shadow. fertiliser 0.5 1.5 33.3 North Korea’s black markets, scavenging or In their survey of 1,300 North Koreans, Life expectancy, years 67.3 78.6 85.6 stealing what they can.) the authors draw a harrowing picture. Total fertility rate, % 1.85 1.26 146.8 In the IIE survey four•†fths of inter• Some 23% of men and 37% of women say Average male 165.6 172.5 96.0 viewees agreed that anything in North Ko• family members died of hunger. More height, cm rea can be bought for money, something than a quarter report being arrested, and they say has been true since at least the Sources: Ministry of Unification; OECD; IMF; UN Population Division of those who were held in political deten• mid•1990s. This corrects another widely 1 10 A special report on the Koreas The Economist September 27th 2008

2 held misconception. Marketisation was not a consequence of a set of economic lib• eralisations trumpeted by the regime in 2002, leading some to wonder whether North Korea would at last go down the Chinese path of reform. Rather, these poli• cies were the state’s belated acknowledg• ment of an unstoppable force set o by the famine, described by Messrs Haggard and Noland (in a separate work, ŒFamine in North Korea) as Œcoping mechanisms: foraging, barter and petty trade. In North Korea, then, everything, as the Korean expression goes, is for sale except cats’ horns: household belongings, vegeta• bles from private plots, grain that is sup• posed to be distributed by the state, con• The daily grind sumer electronics, designer brands, Mercedes cars and any kind of oˆcial pa• price, so South Korean households quickly so that more of them can get a share of the perwork you care to name (a passport is dumped their old VCRs in favour of the spoils. The border with China is, as Peter $60; what is known as a ŒVIP defection to new players. Smugglers picked up the old Beck, a scholar of North Korea, describes it, South Korea, with every detail taken care units for next to nothing and sold them in both the regime’s safety valve, providing of, costs $1,500 and can be arranged within North Korea for $40 or so apiece‹a price an alternative living to the dysfunctional a month). North Korea’s elite has always that plenty of urban North Korean families state economy, and its Achilles heel. been relatively well o , and some of its could a ord if they saved up. In daily life, the regime appears to be re• members have dived into business. And The consequence was what Mr Lankov establishing its grip in some areas but los• people are making money on the Chinese calls a Œvideo revolution: a ‡ood of South ing it more often in others. Since 2005, after border, where both oˆcial trade and Korean soap operas, melodramas and mu• a decent enough harvest, the regime smuggling have boomed. sic videos entering North Korea by the sought to take control of burgeoning mar• As well as humans for work or sex (an• same route and delighting new audiences. kets, redirect grain supplies through the other area of competitive advantage for The impact of the astounding a‰uence on public distribution system and get people women entrepreneurs), the Chinese pay display‹the stars’ clothes and cars, Seoul’s back to their work units. First men were for medicinal herbs foraged in North Ko• glittering skyline‹exposes the central lie banned from selling in the markets, and rea’s hills, furs and drugs (methamphet• on which the regime bases its claim to rule: more recently women under 50 too. The amines). In addition, Chinese businesses that South Korea is backward, impover• attempt at control has been only partly are investing in the northern part of the ished and exploited. Korean•language pro• successful. country, buying underworked mines and gramming from abroad on radio sets im• The state manufacturing economy has factories on the cheap. They are hated for ported from China (and thus not tuned oˆcially stayed aloof from the new mar• it, but their money is now starting to splash permanently to state radio) reinforces this ket economy, though parts of the regime around the North Korean economy. discovery. Thus, disillusion and anger with have proved opportunistic. For instance, North Korean traders returning from the regime only mounts. In the IIE surveys railways are the major conduits for the China stock up on clothes, secondhand nine•tenths of the interviewees disagreed new trade, and railway stations often serve sewing machines and consumer goods. that either the regime or the economy as lively markets. Rather than clamp down Paradoxically, those social groups that in were getting better. on them, railway sta and police take a cut. the past have borne the brunt of the re• The armed forces, too, have leapt into the gime’s persecution have gained most from On the border black market: after all, they have the trans• this growth in private trade. Japanese•Ko• In the face of what Mr Caryl, the journalist, port, the personnel and the weaponry to reans have used remittances from relatives calls the Œprofound epistemological enforce a protection racket. This may be overseas as start•up capital for new trading shock of North Koreans who have pro†table for the state’s agents, but it hard• businesses. North Koreans of Chinese ori• glimpsed another world, the regime has ly reinforces their moral authority. A West• gin and those with Korean•Chinese rela• adopted an ambivalent attitude. Although ern diplomat recounts seeing a group tak• tives across the border take advantage of those caught crossing the border can face ing a sofa up a subway escalator in their relative freedom to travel. harsh punishments, the regime, if it was Pyongyang to sell on the street. Guards As much as the economic impact, the minded to, could be much more brutal. were bawling at them to get out of the way, cultural e ect of this cross•border ex• The penal code was revised in 2004 to dif• but nobody paid the slightest attention. change is already huge and still unfolding. ferentiate between Œeconomic refugees It all adds up, reckons Mr Lankov Andrei Lankov of the Australian National and Œpolitical ones (though refugees say (whose life in the former Soviet Union in• University, an astute observer of North Ko• judicial proceedings under the new code forms his view of changes in North Korea), rea, describes how a relatively minor tech• are often skipped and torture is still used). to something of consequence: North Korea nological revolution in China changed the Border•crossers can buy a degree of protec• is no longer the ruthless Stalinist state it lives of many North Koreans. Earlier this tion by bribing local authorities; border was, but a shoddy, corrupt little tyranny. decade DVD players fell dramatically in guards are even rotated every six months And now the people know it. 7 The Economist September 27th 2008 A special report on the Koreas 11

Jaw•jaw

The international consequences of North Korea, and all the talk about it

HE divided peninsula is the biggest and part, has made clear it no longer feels reasserted South Korea’s alliance with Tnearly the last manifestation of a cold bound to come to its defence. Though the America as the cornerstone of its foreign war that ended almost two decades ago. north’s armed forces are huge, swallowing and defence policy, and his country has The division, with huge armies facing each up a third of the national budget, they are American nuclear guarantees. The United other across the border, was not entirely or also backward. By way of compensation, States is racing to equip South Korea (as even mainly of Koreans’ own making. Un• North Korea has amassed stockpiles of well as Japan) with destroyer•based mis• til the modern era Korea, the Hermit King• chemical and biological weapons as well sile•defence systems to counter the nuclear dom, had kept to itself, its isolation under• as a handful of plutonium bombs, and its threat. South Korea’s military spending has written by the ruggedness of its coast and missile technology to deliver its warheads risen by more than 70% since 1999, and its land border with China. But starting in is improving. At least rhetorically, the re• though troop numbers are to be cut, the the late 19th century Korea became the con• gime of Kim Jong Il keeps the country on a savings will be spent on ship•to•air mis• testing ground of great powers. The Japa• near•permanent war footing, forever giv• siles, unmanned spy planes and new †ght• nese fought to deny in‡uence †rst to China ing warning of imminent imperialist at• er planes. North Korea is hopelessly out• and then to Russia, annexing the country tack by America or, on occasion, Japan. classed, and any war would result in its outright in 1910. Japan’s colonisation until It does so mainly to boost its own legiti• utter destruction. That is why more than defeat in 1945 was a brutal one, even if it macy at home, yet there is little doubt that anything its regime wants security guaran• helped lay an industrial base. Hundreds of North Korea feels beleaguered, even if its tees from America‹especially after thousands of Koreans were forcibly con• own behaviour is chie‡y to blame. About George Bush named North Korea as part of scripted into the Japanese army or sent to 30,000 American forces are stationed in his Œaxis of evil in 2002. work as slave labour in Japanese mines. the south, many of them in a huge base in Before the end of the second world war, downtown Seoul. Until 2012 the United Knocking heads together the United States and the Soviet Union States will remain in overall command in Though the chief burden of making the had, without troubling to consult Koreans, case of a war or the collapse of the north. peninsula whole will fall to South Korea, agreed to partition Korea into respective Those numbers will fall (and the base will historical responsibility and strategic ne• spheres of in‡uence and military occupa• be closed) as part of plans both to recon†• cessity have brought together China, tion. In 1945, on the day of Japan’s surren• gure America’s military presence in the Pa• America, Russia, Japan and the two Koreas der, the line was drawn along the 38th par• ci†c and to hand back command of South in the so•called Œsix•party process, which allel. The Republic of Korea (that is, South Korean forces. since 2003 has been aiming, step by recip• Korea) declared independence on August Even so, President Lee Myung•bak has rocal step, to persuade Mr Kim to abandon 15th 1948, with the approval of its Ameri• his nuclear weapons and programmes in can godfather. On September 9th the return for material aid, security guarantees Democratic People’s Republic of Korea and American diplomatic recognition. (North Korea) emerged out of the Soviet oc• American hawks condemn the exercise cupation. Both states have just celebrated for allowing a monster regime to black• their 60th anniversary. mail the outside world. The talks’ defend• In June 1950 North Korea invaded and ers, none of whom has illusions, point to overran much of the southern part of the progress, however glacial‹for North Korea peninsula. An American•led United Na• never passes up the chance to miss a dead• tions force pushed it back across the bor• line. Alexander Vershbow, America’s out• der, making gains deep inside North Korea. going ambassador to South Korea, says That led Mao Zedong to order China into that the latest round of talks, which began the war. By 1953, after immense physical in March 2007, has produced few unpleas• destruction and the deaths of 3m soldiers ant surprises. The north has allowed inter• and civilians, the two sides had fought national inspectors into the Yongbyon nuc• themselves to a standstill along the origi• lear facility and shut down the main, nal border. An armistice was signed and a Soviet•era reactor there. This summer it bu er established: today the Œdemilita• blew up the cooling tower that is the most rised zone (DMZ) is the most heavily mil• visible mark of its nuclear•weapons pro• itarised border in the world. gramme. America sent the †rst instalment Technically the combatants remain at of 500,000 promised tonnes of grain. Oth• war, but the north has lost nearly all out• ers have provided oil. side military help. When the Soviet Union Now the sticking•point is North Korea’s collapsed in 1991, Russia dropped its mate• promise to produce a full list of its nuclear rial support for North Korea. China, for its Token of good intent programmes. America has complained 1 12 A special report on the Koreas The Economist September 27th 2008

2 that the means of verifying what North Ko• to join multilateral institutions such as the weapons and coming out of his shell are rea has declared to date fall short of what is World Bank and embark on reforms. compatible with the survival of Mr Kim’s required‹not least because the declara• The hawks will scream. But Yu Myung• regime. Mr Vershbow says coyly that the tion makes no mention of existing nuclear hwan, South Korea’s foreign minister, says collapse of North Korea’s regime is not his bombs, a suspected programme for enrich• veri†cation is the key issue, and without government’s policy. China dreads such a ing uranium or proliferation in the Middle agreement Œthe six•party talks will col• collapse, which would risk releasing a East. Piqued, the north threatened in late lapse. That, he worries, will deprive the ‡ood of refugees and causing chaos along August to suspend the dismantling of the world of the best means for Œcoaxing its border. South Korea’s Œsunshine policy Yongbyon facility. As The Economist went North Korea into our sphere. vis•à•vis the north, launched by Kim Dae• to press, the two sides appeared to be Even if agreement is reached, the next jung a decade ago and continued by Roh stalled. But any deal would probably entail phase of the talks‹persuading North Ko• Moo•hyun, aimed for engagement not in Mr Bush accepting less than cast•iron as• rea to give up its existing weapons‹will be order to hasten collapse but rather to post• surances on veri†cation if he wants the far harder. Mr Vershbow argues that what• pone it for as long as possible, using money prize of a commitment to freeze North Ko• ever the doubts about Mr Kim’s intention and material aid‹$500m in bribes alone, it rea’s plutonium programme before the to give up his weapons, the six•party pro• turned out, for Mr Kim’s historic summit in end of his term. In return, America would, cess o ers the only means of Œgetting him 2000 with Kim Jong Il, and unconditional at long last, remove North Korea from its to change his cost•bene†t analysis. food aid under Mr Roh. blacklist of state sponsors of terrorism. So the question•mark over the six•party Mr Lee’s line is tougher. He came to of• That would pave the way for the country process is whether giving up nuclear †ce saying that aid should depend on pro•1

Contested grounds Of history wars and peace parks

ISPLAYED in nearly every govern• project claiming that Koguryo’s ancestry South Korea now stumble around wind• Dment oˆce in South Korea is one of and culture was Chinese, not Korean. Chi• swept Dokdo. The government has even two stunning landscapes, sometimes na wants to hold the 2018 winter Olympic planted trees, because the law on mari• both of them. One is a volcanic mountain, games on Paektu and list it as a UNESCO time claims suggests that trees di eren• with a turquoise lake in the caldera and world heritage site. Koreans think China is tiate an island from a mere islet. forests on its ‡anks. The other is a pair of stealing their mountain and may one day Another heavily contested piece of rocky islets, black•tailed gulls wheeling even claim parts of North Korea. ground could set a conservation example. around the crags. These are the front lines History wars are bad news for wildlife. The demilitarised zone (DMZ) between of South Korea’s history wars. China’s notion of conservation is to build North and South Korea, 4km wide on av• Emotions ran high this summer over golf courses and theme parks. Hordes of erage, is all that keeps two awesome lines the rocks, known as Dokdo in South Korea politicians, soldiers and tourists from of †repower and hair•trigger soldiery and Takeshima in Japan, when the Japa• apart. But for any lover of wilderness the nese education ministry reminded text• view through binoculars from the Seungri book writers that they were formally in• mountain observatory is breathtaking. corporated into Japan in 1905, when Korea Far below are willow ‡ats and watermea• was forced to cede the conduct of its for• dows, and the meanders of a stream that eign policy to Japan. Outraged Koreans has not seen a rod in 60 years. claim historical rights to the islets going In the DMZ, the wilderness has smoth• back more than a millennium. ered the human past. Below the observa• The South Koreans are not laying claim tory, a town and rail terminus that was to the volcano, Mount Paektu, which is di• thriving under Japanese occupation is vided in two by China’s border with now a dense wood. The zone is rich with a North Korea, as is the lake. This was the fauna that has disappeared from most of area of one of Korea’s three founding king• the rest of north•east Asia: the black•faced doms, Koguryo, which ‡ourished be• spoonbill, of which a total population of tween 37BC and 668AD. Koreans have an only about 2,000 remains; the solitary unshakable belief in their bloodlines, and Manchurian goral (a goat•antelope); and most insist that holy Mount Paektu is the the eagle•owl. An admirable out†t, the fount of their culture and myth. Tangun, DMZ Peace Forum, wants to keep the wil• Korea’s mythical founder, was born on its derness from voracious developers when slopes, and Kim Jong Il, in his oˆcial bio• north and south are reconciled. If only the graphy, made sure he followed suit. nationalists left all contested ground to The problem is a Chinese state history Good for gorals those species with the oldest claims. The Economist September 27th 2008 A special report on the Koreas 13

his eldest son was caught entering Japan on a false passport in the hope of visiting Tokyo Disneyland; he later moved to Ma• cau, China’s casino enclave. Of the two younger sons, still in their 20s, all that is known is that one is obsessed by Eric Clap• ton. Perhaps Mr Kim, an ardent family man, does not want a family successor. After all, the consequences of giving up power are certainly not a comfortable re• tirement in Monte Carlo. The North Kore• an gulag and the regime’s willingness to let Six•part dance 1m people die of hunger rather than loosen its grip on power amount to crimes against 2 gress in the six•party talks and even on hu• rich irony, most closely resembled Japan’s humanity. man rights. That caused North Korea to emperor system between the wars: he be• Speculation has its bounds. Yet if col• throw a hissy †t and cut all communica• came a neo•Confucian sun king, the na• lapse came, it could come quickly, posing a tion with the south. Matters worsened in tion’s moral as well as political father. huge challenge for the region’s powers. It is July, when a North Korean soldier shot In predicting that Kim Jong Il could not assumed that South Korean troops would dead a South Korean tourist at the Mount pull o the dynastic succession, the ex• rush in to provide humanitarian help and Kumgang resort, where the north earns perts were wrong not just because the state restore law and order, but it is not clear much•needed hard currency. Still, govern• retained its grip on all the instruments of how they would deal with factional †ght• ment oˆcials in the south expect North repression to keep the masses in line; they ing, or with ‡oods of North Koreans head• Korea to come back to the negotiating ta• also underestimated the moral authority ing south. American special forces would ble. They too stress a policy of engagement of the Kim family among the ruling elite. presumably be dropped in to secure weap• and even predict that Mr Lee will hold a The band of Manchurian guerrillas who ons of mass destruction, but where would summit with Kim Jong Il before his term is had attended the state’s birth appeared they look for them? Meanwhile, faced with out. Mr Lee is just as wary as his predeces• bound by almost chivalric oaths of fealty, refugees pouring over its own border, Chi• sors of a sudden implosion of the north. trust and reciprocal obligation. These na might send in its own army. As Bill Em• oaths passed to a second generation, and mott, a former editor of The Economist, Nightmare scenarios the families of that early band of brothers puts it in his latest book, ŒRivals: ŒThere Forecasting collapse of the north has been now occupy nearly every signi†cant posi• would be little time to think, to discuss, to unfashionable ever since a ‡ood of false tion in the state. calculate. It is at such moments that a move predictions after the death in 1994 of Kim Il No one can claim to know whether the by one country can be misinterpreted, or Sung, the country’s political and spiritual regime is capable of surviving succession that a country might decide that it has to father since 1948. At the time most Western to a third generation, but the odds are move quickly if it is to move at all and by experts argued that Kim Jong Il utterly surely longer. Though the state retains its doing so could miscalculate and bring the lacked his father’s legitimacy and could monopoly of force, people at the bottom great powers into con‡ict. It is all an ex• not last. Loyalty to Kim Il Sung had been are now less frightened. At the top, chival• tremely risky thought. Particularly so forged by a guerrilla war against Japanese ric ties are presumably getting weaker. since, as Chinese, American and South Ko• imperialists waged in Manchuria. In creat• If Mr Kim has a succession plan, he has rean oˆcials admit in private, so far they ing a state cult around himself, Kim blend• not announced it. His children do not ap• have drawn up only the sketchiest contin• ed communism with something that, with pear to be the stu of leadership. In 2001 gency plans among themselves. 7 Half•†nished

What Lee Myung•bak still needs to do

OUTH KOREA’S story to date has in big nancial crisis. By then, the economy and after the beef †asco, his supporters argue Spart been the story of what is some• the way it was †nanced had become far that Mr Lee is just the man for the job. Un• times called a Œdevelopmental state‹that too complex for traditional guidance, and der him, says Sakong Il, chairman of the is, one that uses formidable powers to di• the state’s sense of omnipotence had president’s National Competitiveness rect and regulate the economy to achieve blinded it to the need for structural reform. Council, restrictions will be lifted to aug• growth above all else. The †rst ŒMiracle on The recovery from crisis accomplished ment the country’s low stock of foreign in• the Han worked because the develop• only half the structural reforms South Ko• vestment. Small businesses will be boost• mental state, after 1961, mostly got things rea needs. There will be no second miracle ed when the government cuts through red right. Or, rather, it got them right until it got unless Mr Lee accomplishes the other half. tape and lowers the minimum capital re• them very wrong, resulting in the 1997 †• Now that he has recovered his poise quirement for start•ups to just 100 won, 1 14 A special report on the Koreas The Economist September 27th 2008

2 from 50m won now. And rules for invest• South Korea’s labour disputes can also ment will be eased in the Seoul metropol• be ascribed to an immature democracy. itan area, which businesses much prefer to Workers’ rights were suppressed during the investment zones in the middle of no• years of military dictatorship. Unions have where promoted by Roh Moo•hyun, the since made up for lost time, and even ille• previous president. The council plans to gal strikes are tolerated at some of the big submit 147 laws to the National Assembly chaebol. Yet the strikes do not re‡ect an un• this autumn, with the aim, Mr Sakong says, bridgeable divide between capital and la• of raising South Korea’s standing in the bour: rather, nearly all South Koreans are World Bank’s comparisons of national capitalists, and many of the strikers had competitiveness from 30th to 15th. voted for Mr Lee. Clear leadership from All this is welcome, but it is not enough. him could do much to put the country’s la• Mr Lee, as a former chaebol executive, will bour relations on a more stable footing. need to prove that he is friendly to markets, The sense of something half•†nished not simply to business. ŒWhen critics say colours South Korea’s diplomacy too. Mr the chaebol are too big, I don’t know what Lee has reiterated that foreign policy rests they mean, says Mr Sakong. ŒBigness it• on his country’s military alliance with the self is not badness; what matters more is United States, which he now calls a Œstrate• whether the actions companies take are le• gic alliance. South Korea has already sent gitimate or not. That is †ne as far as it goes. President Lee says he’s back on track troops to Iraq and Afghanistan in support One test for Mr Lee will be whether he and of American•led reconstruction, and Mr the courts continue to treat the misdemea• trammelled is a chance wasted. Two•†fths Lee says that in future it will spend more nours of chaebol bosses lightly. An even of the country’s rich mud‡ats, or about on aid and contribute more to peacekeep• more telling one will be whether minority 1,600 square kilometres, mainly on the ing and antiterrorism operations. This rein• shareholders will be able to seek redress peninsula’s west coast, have been Œre• vigorated alliance, the president’s foreign• against chaebol trampling on their rights. claimed. That has dire consequences not policy advisers explain, will not only only for †shermen but for seabirds and boost South Korea’s global standing but Old habits die hard rare waders too. Almost invariably the gov• also provide leverage with tricky neigh• Traces of the developmental state persist. ernment and the construction companies bours, notably Japan and China, where re• Although Kang Man•soo, the †nance min• trump environmental interests. lations are bedevilled by land and history. ister, blames heavy taxes, subsidies and Just as South Korea’s economy is some• That is probably wishful thinking. For regulation for a decline in South Korea’s in• thing of a half•way house, so is its democ• no matter what e orts South Korea makes vestment rate, he also promises Œa very racy. The beef protests seemed to re‡ect on the global stage, it is still a shrimp ambitious plan of subsidies and incen• this. Only a short time after Mr Lee had among whales in its own region, and even tives for boosting internet businesses such been voted into oˆce, the protesters bring• there the power of its American godfather as computer gaming. Known as Œe•sports, ing downtown Seoul to a halt argued that may decline in relative terms. Only the this has emerged out of nowhere and be• theirs was a more representative kind of uni†cation of a divided peninsula might come a huge spectator sport, employing politics. That was clearly nonsense. Yet the bring South Korea the standing it craves. 25,000 people in Seoul and spawning nation’s political establishment hardly And given the fearsome problems North nearly 100 game•engineering Œacade• helped its case when the National Assem• Korea would carry with it, even that is far mies. It is an example of Korean entrepre• bly was incapable of convening. from guaranteed. 7 neurial energies let loose. The govern• ment’s proposals seem to represent an O er to readers Future special reports old•fashioned instinct to back winners. Reprints of this special report are available at a Countries and regions Both the country’s patterns of energy price of £3.50 plus postage and packing. Spain November 8th use and its attitude towards the environ• A minimum order of †ve copies is required. Russia November 29th ment point more towards the past than the India December 13th Corporate o er future. Randall Jones, an economist at the Customisation options on corporate orders of 100 Business, †nance, economics and ideas OECD , notes that South Korea uses 1.5 or more are available. Please contact us to discuss The world economy October 11th times as much energy for every unit of your requirements. Corporate IT October 25th GDP as does Japan. For a country that im• Cars in the developing world November 15th Send all orders to: ports all its hydrocarbons, energy eˆcien• cy will, the government says, be pushed to The Rights and Syndication Department the top of the agenda. As well as promot• 26 Red Lion Square WC1R 4HQ ing a more eˆcient industry, that will London Tel +44 (0)20 7576 8148 mean weaning Koreans o their gas•guz• Fax +44 (0)20 7576 8492 zlers and improving mass transit. e•mail: [email protected] Seoul’s air, once famously noxious, is much improved, but South Korea lags at For more information and to order special reports Previous special reports and a list of conservation. The developmental state is and reprints online, please visit our website forthcoming ones can be found online also a construction state, and too often the www.economist.com/rights www.economist.com/specialreports government seems to feel that nature un•