ISSN 1010-1608 Larry a. Niksch The Journal of EAST ASIAN AFFAIRS EAST of Journal The When North korea Mounts Nuclear Warheads on its Missiles aNdrzej BoBer The last Twenty years of relations betweenthe republic of Poland and the democratic People’s republic of korea-selected aspects iNsoo kiM & MiN yoNg Lee has the Military superseded the Party under kim jong-il’s rule? edWard kWoN Managing a Financial crisis: a comparative Political economic analysis of the United states and south korea Volume 25 Number 2 Fall/Winter 2011 ki-sik hWaNg & hyUN-jUNg kiM an analysis on the Fdi determinant of clean development Mechanism(cdM) yeoNgMi yUN & kicheoL Park an analysis of korean Multiculturalism: Policies and Prospects o. yUL kWoN does culture Matter for economic development in korea? Vol. 25, No.2 2011 No.2 25, Vol.

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ISSN 1010-1608; Printed in December 30, 2011 in Seoul, Korea Copyright by Institute for National Security Strategy Instopia Bldg. 17th Floor, 467-23, Dogok-dong, Kangnam-gu, Seoul, Korea Tel: 82-2-572-7090 extension: 216 E-Mail: [email protected] Website: http://www.inss.re.kr The Journal of EAST ASIAN AFFAIRS Vol.25, No.2 Fall/Winter 2011

THE JOURNAL OF EAST ASIAN AFFAIRS

Vol.25 Fall/Winter 2011 No.2

CONTENTS

When North Korea Mounts Nuclear Warheads on Its Missiles

Larry A. Niksch 1

The Last Twenty Years of Relations betweenthe Republic of Poland and the Democratic People’s Republic of Korea－Selected Aspects

Andrzej Bober 21

Has the Military Superseded the Party under Kim Jong-Il’s Rule?

Insoo Kim & Min Yong Lee 39

Managing a Financial Crisis: A Comparative Political Economic Analysis of the United States and South Korea

Edward Kwon 55

An Analysis on the FDI determinant of Clean Development Mechanism(CDM)

Ki-sik Hwang & Hyun-Jung Kim 85

An Analysis of Korean Multiculturalism: Policies and Prospects

Yeongmi Yun & Kicheol Park 131

Does Culture Matter for Economic Development in Korea?

O. Yul Kwon 163

Contributors ii

CONTRIBUTORS

Mr. Andrzej Bober(M.A., PhD candidate since 2008 at the University of Lodz / Poland) is a Polish free publisher cooperating with many polish magazines (Rzeczpospolita, Newsweek, Tygodnik Powszechny, Angora, Przekroj, Przeglad, Przeglad Sportowy, Polska Zbrojna, Poznaj Swiat) and is also writing for www.azjapacyfik.pl and other Internet portals. He participated in internship programs in Polish Embassies in Bern and Pyongyang. Since 8 years he specializes in Korea-related issues. His research focuses on the issue of unification of North and South Korea, international aspects of the Korean Peninsula problems and the relationship between both Korean states. Languages: Polish (C2), German (C2, Diplom of German Philology), Russian (C1, certificate), English (C1), Korean (A2).

Dr. Ki-Sik Hwang is an assistant professor and department chair, Graduate School of Northeast Asia International Studies, Dong-A University. He received MSc, and MPhil degrees from London School of Economics and his Ph. D. in international political economy from University of London (Goldsmiths College). His recent academic papers are “Japanese and Korean Foreign Direct Investment in Central and Eastern Europe: the strategies and economic activities", Journal of Korea Trade, (November 2008) and “An Analysis of EU Common Policy and Regulation in Information and Communication Technologies: Focus on a Discussion of Net Neutrality", EU Studies, (August 2011).

Dr. Hyun-Jung Kim is a lecturer, department of international relations, Chang-Won National University. She earned Master's degree and her Ph. D. from Graduate School of Northeast Asia International Studies, Dong- A University. Her most recent publication is “The Investment Environment for the CDM and Continuous Development of Host Locations,” National Strategy (Summer 2011).

Dr. Insoo Kim is a South Korean Army Major. Insoo Kim(Ph.D. in Sociology, University of Wisconsin) is an assistant professor at the department of political science in Korea Military Academy, South Korea. He is currently a visiting scholar at University of Maryland at College Park. His areas of specialization include military organizations, civil-military relations, and network analysis. Dr. Edward Kwon is an assistant professor of Political Science at Northern Kentucky University in the United States. He received his Ph.D. at the Department of Political Science of University of Hawaii at Manoa. His research interests include global governance in the international financial system, East Asian security, and international relations of East Asia. His articles have appeared in journals such as Journal of Contemporary Asia, International Relations of the Asia-Pacific, East Asia: An International Quarterly, Pacific Focus, and Journal of Peace Research. He is a reviewer for several publishers and various international relations and area studies journals.

Dr. O. Yul Kwon holds the Korean Foundation Chair in Korean Studies at Griffith University, Australia since 1996. His education includes a Bachelor degree from Seoul National University in Korea, and MA and Ph.D. degrees in economics from McMaster University, Canada. He is also the Director of the Australian Centre for Korean Studies at Griffith University. He also holds adjunct professorship at the Beedie School of Business, Simon Fraser University, Vancouver, Canada. He has published nine books and edited three books. He has published numerous articles in refereed journals and business magazines, chapters of books, and special columns in newspapers. His recent research interests focus on Korean economic and business issues. He published a book in 2008 entitled, The International Business in Korea: the Evolution of the Market in the Globalisation Era which is being translated into Japanese. The latest book professor Kwon published in 2010 is entitled, the Korean Economy in Transition: an Institutional Perspective.

Dr. Min Yong Lee is a visiting professor at Sookmyung Women’s University at Seoul, South Korea. Min Yong Lee (Ph.D. in International Politics, University of Maryland) served as the Dean of Academic Board at the Korea Military Academy. His research area includes North Korea’s military, energy security, and defense policy.

Dr. Larry Niksch(Ph.D Georgetown University) retired from the U.S. Congressional Research Service in February 2010 after more than 43 years as a Specialist in Asian Affairs. At CRS, Dr Niksch provided information and conducted research for Congress on security and political issues related to U.S. relations with the countries of East Asia and the Western Pacific. He authored many papers on these issues and participated in numerous conferences in the United States, East Asia, and Europe. He has taught East Asian History at George Washington University. In 1986, he served as a U.S. presidential election observer in the Philippines during the historical Philippine presidential election of that year. Dr. Niksch is an Adjunct Fellow with the Institute of National Security Strategy in Seoul, Korea, and a Senior Associate with the Center for Strategic and International Studies in Washington, D.C.

Dr. Kicheol Park is an associated professor at Pyeongtaek University, where he has taught Chinese Political Economy, Department of Chinese since 1998. He received his Ph.D. from the National Chengchi University, Taiwan. He has served as a Research Fellow of Association of Korean- Chinese Academy since 2006. He is author and co-author over numerous scholarly articles, and author or co-translator of several books including Insight into Korea (2010): Reform of Chinese Government (1998). His research interests have been focused on issues of Chinese diplomacy and political relations China-Korea.

Dr. Yeongmi Yun(Ph.D. Glasgow University) is an associated professor at Pyeongtaek University, where she has taught diplomacy & security in Northeast Asia, Division of General Education since 2005. She was a research professor at the Institution of Peace Studies, Korea University (2004). She worked as a TV Presenter at KTV. She has served as an Advisory Council Member in the Ministry of National Defense since 2006 and has also worked as a Radio Presenter at KFN since 2009. She is author and co-author over numerous scholarly articles, and author or co- translator of several books including Northeast Asia's Diplomacy & Security(2010); Contemporary Russian Politics and International Relations(2011); Capitalism Revolution of Russia(2010). Her recent publications are “US- Korea Alliance and New Security: focused on the Present and Prospects of the USFK Relocation,” “Russia’ Role and Position under the SCO, and so on. Her research interests have been focused on issues of Russian Politics & foreign policy and security & diplomacy of Northeast Asia.

When north Korea Mounts nuclear Warheads on Its MIssIles 1

When north Korea Mounts nuclear Warheads on Its MIssIles

larry a. niksch Center for Strategic and International Studies (CSIS)1

Abstract

Current talk of new U.S.-North Korean official contacts and possible resumption of six party nuclear negotiations ignore a more likely development over the next two to four years: North Korean success in producing nuclear warheads that it would mount on its short and intermediate range missiles and possibly later on longer range missiles. North Korean success would transform Pyongyang into a genuine nuclear weapons state. It would end the value of denuclearization negotiations; North Korea never will give up such a success. The United States and its allies will need to formulate new strategies to deal with North Korea. These should include stepped up measures of military containment, a strategy to manage nuclear crises with North Korea, and a focus on other issues on which Pyongyang might be more vulnerable to outside influence.

Key Words: Nuclear Warheads, New Strategies

Diplomacy toward North Korea has begun a new cycle of talks and meetings aimed at resuming the six party nuclear negotiations that have proceeded sporadically since 2003. The actual prospects

1 Dr Niksch also is a Senior Associate with the Center for Strategic and International Studies in Washington, D.C. He served from 1966 until February 2010 as a Specialist in Asian Affairs at the U.S. Congressional Research Service. 2 the Journal oF east asIan aFFaIrs

for renewed talks are uncertain for a number of reasons, including different pre-conditions laid down by North Korea and the United States and South Korea. Still, there is pressure to resume negotiations, particularly a view held in the U.S. State Department that a resumption of negotiations will lessen the possibility that North Korea would resort to more singular military provocations against South Korea as it did twice in 2010. China, too, continues to pressure the United States to agree to negotiations. Thus, nuclear talks could start again by the end of 2011 or sooner. Renewed negotiations will spawn optimistic statements from media organs and from some North Korea experts in South Korea and the United States. Even these, however, likely will avoid predictions that the negotiations will produce an agreement or agreements that would set forth a path toward full denuclearization of North Korean nuclear programs and weapons. Anyone will a sense of realism understands that the gap in negotiation positions between North Korea and the United States and South Korea is wide, and North Korea’s hardened negotiating positions since early 2009 have made them wider. Negotiating positions are not the only reason for the low prospects of renewed negotiations. A more fundamental reason, ignored by most pundits, is that North Korea is close to achieving a fundamental military-strategic goal of its nuclear and missile programs: developing nuclear warheads that it would mount on its missiles. Nuclear warheads initially would be mounted on North Korean Nodong and Scud missiles. Later, Pyongyang possibly could mount them on the intermediate range Musudan missile and a longer range missile that it is attempting to develop that could reach U.S. territory, at lease Alaska and Hawaii.

IndIcators of north Korean Progress

There are four such indicators: (1) the technology North Korea received from Pakistan’s A.Q. Khan and his network; (2) the sophistication of North Korea’s uranium enrichment program as When north Korea Mounts nuclear Warheads on Its MIssIles 3

shown to Sigfried Hecker; (3) numerous reports of North Korean- Iranian collaboration in developing uranium enrichment technology and nuclear warheads that could be mounted on Iran’s Shahab- 3 missile, a twin of Pyongyang’s Nodong missile; and (4) statements by U.S. and R.O.K. officials that North Korea is close to production of nuclear warheads. North Korea’s collaboration with Pakistan’s A.Q. Khan has been well documented publicly. Three elements of this collaboration are especially important. Khan supplied North Korea with the designs for a highly enriched uranium program and components for a pilot centrifuge facility. Second, North Korean nuclear and missile scientists reportedly spent considerable time at Khan’s facilities in Pakistan. Third, there is a considerable likelihood that Khan gave North Korea his design for the uranium nuclear warhead that he developed for the intermediate range Ghauri missile. The Ghauri missile, in fact, was jointly developed by Pakistan and North Korea under the original Khan-North Korean deal. Like the Shahab-3, the Ghauri is a twin of the Nodong. North Korean missile technicians in Pakistan were involved in the development of the Ghauri from the beginning. Moreover, the North Korean Government was fully aware that Pakistan, Khan in particular, was developing the Ghauri to carry nuclear warheads. North Korean nuclear experts reportedly attended Pakistan’s multiple nuclear tests in 1998, including at least one device tested that outside experts estimated to be a prototype of a nuclear warhead. Within four years after the nuclear tests, Pakistan had mounted uranium nuclear warheads on its Ghauri missiles. A.Q. Khan no doubt gave North Korea access to the information gained from the 1998 nuclear tests that gave rise to the Ghauri missile warhead. There can be little doubt that in bargaining over the reciprocal benefits in the agreements between North Korea and Pakistan, North Korea pressed A.Q. Khan for the blueprint design of the nuclear warhead mounted on the Ghauri missile. Khan earlier had supplied Libya with the blueprint design of an older atomic bomb. In 2008, it was revealed that blueprints for nuclear warheads were found in Swiss computers possessed by Swiss people linked 4 the Journal oF east asIan aFFaIrs

to A.Q. Khan. U.S. nuclear expert David Albright assessed that the blueprints were similar to Pakistan’s nuclear warhead designs and that the warheads detailed in the blueprints could fit on North Korea’s Nodong missile and Iran’s Shahab-3 missile.2 Relatedly, in September 2011, a report obtained from the International Atomic Energy Agency asserted that an extension of the A.Q. Khan network of nuclear technology exchanges operated by people in the original Khan network “may still be active” in disseminating nuclear weapons technology.3 The Swiss revelation showed that Khan was not restricting such blueprints to secrecy and that there was a fairly wide circulation of them. This increases the likelihood even more that North Korea acquired the blueprints. The Swiss revelations and the IAEA report show that since 1998, North Korea has had ample access to designs for nuclear warheads, including the design for the warhead A.Q. Khan developed for the Ghauri missile. Thus, we have to assume that North Korea has the design to produce a nuclear warhead for its Nodong missile in a reasonably short time once it has produced the highly enriched uranium as the core of a warhead- just as Pakistan did between its nuclear tests in 1998 and the mounting of warheads on the Ghauri missiles in 2001~2002. Sigfried Hecker concluded that North Korea was close to producing highly enriched uranium when he saw the centrifuge complex at Yongbon in November 2010. He described his access to the complex as “stunning.” He described a centrifuge plant of more than a thousand centrifuges as “astonishingly modern.” North Korean scientists told him that the plant contained 2,000 centrifuges. The plant, according to Hecker, “could be readily converted to produce highly enriched uranium bomb fuel.”4 U.S. officials in Washington appeared equally surprised. Hecker’s

2 Blueprint for nuclear warhead found on smugglers’ computers, The Guardian, June 16, 2008. 3 Fredrik Dahl, North Korea atom drive may rely on smugglers: IAEA, Reuters, September 2, 2011. 4 Scientist: North Korea secretly built new nuclear facility, Associated Press, November 21, 2010. When north Korea Mounts nuclear Warheads on Its MIssIles 5

report led them to conclude that North Korea’s uranium enrichment technology was more advanced than that of Iran and that the plant at Yongbyon could not have been constructed unless there was a sophisticated network of other uranium enrichment sites hidden.5 The tour of the uranium enrichment plant North Korea gave to Dr. Hecker reveals another element about North Korean strategy. Pyongyang conducts its nuclear development activities in considerable secrecy. However, when it attains a major level of accomplishment, it will show this to the outside world, especially to its adversaries. North Korea claims the status of a nuclear weapons power; it knows that, in order to gain international recognition of this status, it has to demonstrate to outsiders that it has nuclear warheads that can be delivered against enemy targets. Thus, if North Korea develops nuclear warheads and mounts them on missiles, it will announce this to the outside world. Dr. Hecker and others likely would receive new invitations to visit and witness this accomplishment. North Korea’s collaboration with Iran also increasingly may be based on the advanced state of North Korea’s uranium enrichment program. The collaboration is an extension of collaboration in the development of Iranian missiles modeled on North Korean missiles or encompassing North Korean missile technology. Missile collaboration accelerated after 1993; since then, North Korean assistance has been vital in the development of several Iranian missiles. A cross- over of collaboration into the development of nuclear warheads that could be mounted on these missiles was a logical extension of cooperation between Iran and North Korea. A key cross-over point was in the early 2000s, triggered by the successful joint development of the Iranian Shahab-3 missile, a model of the North Korean Nodong.6 Subsequent reports, citing German intelligence

5 North Korea’s nuclear program, New York Times (internet), December 14, 2010. 6 Douglas Frantz, Iran closes in on ability to build a nuclear bomb, Los Angeles Times, August 4, 2003, p.A1. Military source: DPRK, Iran planning joint development of nuclear warheads, Sankei Shimbun (internet), August 6, 2003. 6 the Journal oF east asIan aFFaIrs

sources, other western intelligence sources, and Iranian sources, described North Korean nuclear experts in Iran. The National Council of Resistance of Iran, an exiled opposition group that correctly revealed secret Iranian nuclear facilities in 2002, issued a report in February 2008 that detailed North Korean-Iran collaboration in nuclear warhead development, including the location of facilities where this work was ongoing. Since 2007, the International Atomic Energy Agency has presented Iran on several occasions with evidence pointing to an Iranian program to develop nuclear warheads for the Shahab-3 missile. Iranian nuclear experts reportedly have been on-site observers of North Korean nuclear tests. European and Israeli defense and government officials stated in 2007 and 2008 that North Korea and Iran had concluded a new agreement for North Korea to share with Iran data from its October 2006 nuclear test.7 More recently, three new reports have emerged which point to a heightened level of collaboration. In May 2011, the Japanese newspaper, Mainichi Shimbun, reported that more than 200 North Korean technicians are in Iran working on nuclear weapons and missiles. The North Koreans, according to the report, are working in 12 locations, including Natanz, the site of a major Iranian complex of centrifuges used to produce enriched uranium. A second report of deepening North Korean-Iranian collaboration in developing enriched uranium came from the Japanese newspaper, Sankei Shimbun, in February 2011. Correspondent Takashi Arimoto, who followed North Korean-Iranian relations while stationed in Washington until 2009, reported a secret Iran-North Korea agreement under which North Korea would ship to Iran part of its future production of enriched uranium if Iran’s own uranium enrichment production faltered. Arimoto’s report showed a marked

7 Jin Dae-woong, Concerns grow over missile links between N.Korea, Iran, Korea Herald (internet), January 28, 2007. UK press: North Korea aids Iran in nuclear testing, Dow Jones International News, January 24, 2007. Takashi Arimoto, Iranian delegation observed North Korea’s nuclear test, Sankei Shimbun, June 25, 2009. Israel PM to charge NKorea link with Iran, Syria, Agence France Presse, February 26, 2008. When north Korea Mounts nuclear Warheads on Its MIssIles 7

link with the reported conclusions of U.S. officials two months earlier that, given what the North Koreans had shown Hecker, North Korean’s uranium enrichment program probably was more advanced than the Iranian program. Third, the German newspaper, Sueddeutsche Zeitung, cited “western intelligence sources” in reporting on August 24, 2011, that North Korea had supplied Iran with a computer program that could be used to construct nuclear weapons. The computer program, called Monte Carlo N-Particle Extended, has been subject to Western export controls because of its potential use in developing atomic weapons. The reality is that the United States and its allies face a North Korean-Iranian nuclear alliance. If North Korea and Iran jointly produce nuclear warheads for the Nodong twin Shahab-3 missile, a portion of those warheads will be shipped to North Korea for mounting on Nodongs. When one considers how the multifaceted collaboration strengthens Iran’s role in the Middle East, there can be no doubt that the financial benefits to the North Korean Government are huge. Iran finances the joint projects and pays North Korea handsomely for its assistance. I have estimated that the Pyongyang regime earns between $1.5 billion and $2.0 billion annually from its multi- faceted collaboration with Iran (including support for the terrorist groups Hezbollah and Hamas). Takashi Arimoto’s report of a North Korean-Iranian agreement to share North Korean enriched uranium included payments by Iran of about $2 billion to North Korea during the 2008~2010 periods. The Sueddeutsche Zeitung report said Iran may have paid North Korea more than $100 million for the Monte Carlo N-Particle computer program. The reality is that Iranian money is a fundamentally important part of Kim Jong- il’s strategy of subsidizing the North Korean leadership and elite in order to maintain the regime. North Korea’s precise level of progress toward developing a nuclear warhead for its missiles is uncertain, but South Korean and U.S. government statements over the past 18 months have been alarmist. The head of South Korea’s National Intelligence 8 the Journal oF east asIan aFFaIrs

Service reportedly told the Korean National Assembly’s Intelligence Committee on June 27, 2010, that North Korea could develop nuclear warheads within two years.8 Kim Tae-hyo, President Lee Myung-bak’s Secretary for National Security Strategy, stated on October 6, 2010, that North Korea’s nuclear threat has reached an “alarming level” and was “evolving even now at a very fast pace.” He described North Korea has seeking to develop nuclear warheads and deploying them.9 According to the widely read Nelson Report and South Korea’s Yonhap News Agency, both on March 11, 2011, the Director of the U.S. Defense Intelligence Agency (DIA) testified to the Senate Armed Services Committee that the DIA believes that North Korea may have “weaponized” missiles through producing nuclear warheads. He reportedly asserted that North Korea may have several nuclear warheads based on plutonium. One has to assume that these statements, coming together over a short period of time, reflect new intelligence that North Korea has made considerable progress toward producing nuclear warheads. North Korea clearly has a workable design to produce a uranium- based nuclear warhead based on A.Q. Khan’s design for the Ghauri missile warhead. All it needs now is to enrich uranium to a high enough level to produce weapons-grade uranium. Hecker witnessed that the North Koreans are within reach of that achievement. This could come as early as 2012, North Korea’s year of big celebration, or 2013 or 2014.

MIlItary IMPlIcatIons of Warhead caPabIlIty

North Korea immediately would have a nuclear delivery capability that could reach South Korea and most of Japan with Nodong and Scud missiles. It would be within reach of a delivery capability to reach Okinawa and Guam, major U.S. military bastions in the Western Pacific. Until now, the North Korean nuclear threat has

8 Reported in Chosun Ilbo, June 28, 2010. 9 Reported by Joongang Daily, October 6, 2010. When north Korea Mounts nuclear Warheads on Its MIssIles 9

been more hypothetical; possession of nuclear warheads would make the threat real. North Korea would become a genuine nuclear weapons power. North Korea also would gain more proliferation opportunities-with Iran and Syria and possibly other governments that in the future would turn toward development of nuclear weapons.

IMPlIcatIons for north-south Korea relatIons

However, demented the North Korean leadership’s attitude of superiority and legitimacy toward South Korea, the development of nuclear warheads for its missiles pointed southward would reinforce these attitudes. It likely would result in more intimidation tactics in North Korean diplomacy toward South Korea, including pressure for unconditional financial and economic benefits from Seoul. To at least some elements in the North Korean leadership, nuclear warheads would present more opportunities for singular military strikes against South Korea similar to the strikes in 2010, or possibly terrorist attacks against South Korea repetitive of the Rangoon bombing of 1983 and the blowing up of the Korean airliner in 1987. At least some North Korean leaders would view nuclear warheads as providing them with an effective deterrent against South Korean military retaliation for singular military strikes of the kind that Pyongyang actually faced in December 2010. All of this said, one should not extend these conclusions to postulate a much heightened danger of a full-scale North Korean invasion of South Korea. Nuclear warheads will not compensate for the marked deterioration of North Korean conventional military forces that has taken place since 1990 because of the collapse of the Soviet Union, the collapse of North Korean’s economy, and China’s unwillingness to extend large-scale transfer of modern weapons to North Korea. North Korea’s weaponry is obsolete, its oil supplies are marginal and cannot even support regular large- scale military exercises, and food shortages reportedly affect rank 10 the Journal oF east asIan aFFaIrs

and file troops significantly and do not provide the higher level of food consumption that would be needed in the North Korean army in a full-scale war. In short, nuclear warheads would not provide Pyongyang with a realistic opportunity for full-scale invasion of South Korea. Nevertheless, a North Korean nuclear warhead capability likely would have a profound impact on South Korean defense policy and Seoul’s overall policy toward Pyongyang. There would be three elements in the impact on defense policy. First, the South Korean Government could be expected to consider new measures to strengthen its conventional military capabilities as a means of enhancing deterrence. The R.O.K. Government already is considering removing South Korea from the restrictions of the Missile Control Technology Regime (MCTR). The MCTR limits the range of South Korean missiles to 300 kilometers, which leaves much of northern North Korea uncovered. Second, the emerging debate in South Korean over developing nuclear weapons would be expanded. Political and public support for this “nuclear option” could grow in the new situation facing South Korea. Third, the South Korean Government and political leaders no doubt would call on the United States to increase its military capabilities in and near the Korean peninsula. This would include the current proposals of some South Korean political leaders that the United States re-station tactical nuclear weapons into South Korea. These defense policy issues would be within the context of a heightened debate over policy toward North Korea. Proponents of the “sunshine policy” of Kim Dae-jung and No Moo-hyun likely would intensify their argument that South Korea should return to the policy of “buying peace” with North Korea through the extension of unconditional economic and financial aid to Pyongyang. If North Korea unveiled nuclear warheads during its celebration year of 2012, the issue would become central in the South Korean presidential election campaign culminating in the election in December 2012. If the opposition Democratic Party should win the presidential election and North Korea subsequently unveiled nuclear warheads, the new R.O.K. administration would face the difficult When north Korea Mounts nuclear Warheads on Its MIssIles 11

choice between expanding the sunshine policy (its current inclination) or reverting to the harder line policy of the Lee Myung-bak Administration. My guess is that a Democratic Party administration would opt for expanding sunshine offers of benefits to North Korea.

IMPlIcatIons for chIna

Despite the Chinese Government’s official position opposing North Korea possessing nuclear weapons, its actual attitude has been ambivalent. China has advocated that North Korea has a “right” to a peaceful nuclear program. Throughout the six party talks, Chinese officials urged the Bush Administration to downgrade the issue of uranium enrichment; the Bush Administration’s decision in 2008 to omit uranium enrichment from North Korea’s declaration of nuclear programs was taken under heavy Chinese influence. But perhaps the most telling examples of China’s ambivalence－ some would say permissiveness－have been (1) China’s permission to North Korea and Iran to conduct countless air flights across Chinese territory clearly connected to North Korean-Iranian collaboration on nuclear weapons and missiles, and (2) the activities of North Korea’s Nam Chongang Trading Company, operating in the central business district of Beijing under the nose of Chinese authorities since the early 2000s, as Pyongyang’s main arm in facilitating the importation into North Korea of parts and equipment for North Korea’s advanced uranium enrichment program.10 All of this means that China would not weaken its support for the North Korean regime if Pyongyang mounts nuclear warheads on its missiles. There would be greater debate in China and calls for policy changes from influential Chinese. These Chinese, however,

10 The activities of the Nam Chongang (NCG)Trading Company were detailed in the October 2010 report, Taking Stock: North Korea’s Uranium Enrichment Program, issued by the U.S.-based Institute of Science and International Security (ISIS) in October 2010. According to the report, “NCG thrived in China.” 12 the Journal oF east asIan aFFaIrs

are not at the center of government decision-making on North Korea, which is housed in the international division of the Communist Party and no doubt also in the Chinese military. China also likely would continue to disregard North Korea’s proliferation activities with Iran and other countries. China likely would still call for six party talks and press the Obama Administration for concessions in the negotiations. China no doubt would continue its policy of influencing North Korea to institute economic reforms, and it would look for opportunities to increase the Chinese economic role in North Korea. It is this economic side of Chinese policy that contains China’s hope to moderate North Korea’s behavior and eventually reform the internal structure of North Korea. The key question for China (and South Korea and the United States) is: Will North Korea’s possession of nuclear warheads weaken China’s ability to influence North Korea to moderate its behavior toward South Korea. China’s record on this is mixed, but it does contain some successes－the last one being apparent Chinese warnings to Kim Jong-il against launching a second shelling of Yeongpyeong Island on December 20 and 21, 2010. North Korea’s deployment of nuclear warheads would create a danger that an emboldened regime in Pyongyang might be less susceptible to Chinese warnings in the future.

IMPlIcatIons for JaPan

The shock effect of North Korean nuclear warheads on Nodong missiles would be felt greatest in Japan. For the first time since World War II, the Japanese Government and people would know that Japan is targeted specifically for potential nuclear attack by an adversary nation. Japan currently is unprepared for such a shock. It has been preoccupied by recovery from the earthquake and tsunami from earlier in 2011. Its government, now led by the Democratic Party, is a weak administration with three prime ministers in the last two years. It has no coherent foreign policy, When north Korea Mounts nuclear Warheads on Its MIssIles 13

including no apparent strategy toward North Korea. Even before the Democratic Party took power, Japanese policy toward North Korea was dominated by the issue of Japanese citizens kidnapped by North Korea. The new Prime Minister, Noda Yoshihiko, is a strong supporter of Japan’s alliance with the United States. Nevertheless, the Japanese Government and public are unprepared for a day when North Korea would unveil nuclear warheads and make clear that a substantial portion of them are targeted at Japan. The Japanese Government no doubt immediately would seek additional assurances from the United States that the U.S. defense commitment to Japan under the Japan-U.S. Security Treaty remains firm. Beyond that, however, one could expect a national debate in Japan over its own defense preparedness. It seems to me that the main line of the debate would not be over whether Japan should develop nuclear weapons. The main line of the defense debate likely would be over whether Japan should develop long range conventional military strike capabilities－missiles, longer range fighters, and bombers－that could reach targets in North Korea. Such proposals have arisen before, and the Bush Administration encouraged them. However, these proposals also have encountered resistance because they would stretch the limits on Japanese military operations and capabilities imposed by Article 9 of the Japanese constitution. Japanese opponents of these proposals also have cited opposition from South Korea and China to Japan developing long range strike weaponry. So far, the opponents of these proposals have prevailed in the policy debate. However, the shock of North Korean nuclear warheads targeted at Japan could alter this balance. A new round of U.S. encouragement could also move Japan toward a more substantive rearmament. Japan’s reactions could prove to be one of the most decisive results of North Korean nuclear warheads. South Korea, in particular, needs to recognize the potential impact on Japan. 14 the Journal oF east asIan aFFaIrs

IMPlIcatIons for the unIted states

The first implication for the United States would be the end of denuclearization diplomacy. Any realistic assessment would have to conclude that there would be no prospect of negotiating an end to North Korean’s nuclear programs or even a measured reduction in them once the North Korean leadership has accomplished this fundamental strategic-military goal of mounting nuclear warheads on missiles. Simply, North Korean leaders never will give up such an achievement. Granted, some U.S. officials, especially in the State Department, and continue to argue for nuclear negotiations; but their arguments increasingly take on a tone of futility. The United States need to develop a new strategy toward North Korea that gives greater priority to other issues in an attempt to influence North Korea to turn its policies in a more positive direction. Economic reform issues and human rights issues－almost completely ignored by three successive U.S. administrations－have this kind of potential. It seems to me that a new American strategy should condition any economic and financial aid to North Korea－ including food aid－to North Korean commitments to carry out economic reforms along the lines instituted by Deng Xiao-ping in China in the 1980s. This should start with agricultural reforms. There are good rationales for developing an economic reform agenda in future dealings with North Korea. One is that the economy is North Korea’s most vulnerable weakness, as currently shown by the North Korean Government’s “full court press” for food aid from South Korea, the United States, and a host of other countries. The regime might well be more susceptible to pressure on its economy than on its nuclear weapons. A second rationale is that China escalated pressure on North Korea in 2009 and 2010 for economic reforms. China reportedly has denied North Koreasts for increased food aid. Thus, there may be greater potential for U.S.-Chinese cooperation on economic reform－ at least agricn denuclearization. A U.S.-South Korean-Japanese economic reform agenda－calling for “Chinese-style” economic When north Korea Mounts nuclear Warheads on Its MIssIles 15

reforms－would create a policy line in parallel to China’s and could establish a line of cooperation with China. At a minimum, it would influence favorably the strata of Chinese officials and scholars who believe that China should reduce its support of North Korea. A third rationale is that an economic reform agenda and conditionality for aid would give the South Korean Government a strong argument to resist domestic pressure and pressure from North Korea to resume unconditional financial and food aid to North Korea. In November 2010, President Lee Myung-bak stated that future international economic aid to North Korea should be conditioned on economic reforms. President Lee and other R.O.K. officials have called on North Korea to adopt “Chinese-style reforms and open its markets.” A fifth rationale Kim Jong-il’s rationale for his nuclear programs: the place of nuclear programs in Kim’s multi-faceted strategy for regime survival. His strategy begins with his unwillingness to adopt Chinese-style economic reforms. With a succession regime in North Korea likely in the near future, there may be an opportunity to turn North Korean leaders toward economic reforms. The timing is right for such a strategy. If North Korea’s quest for nuclear warheads cannot be turned back, the best alternative is to develop policies aimed at changing Kim Jong-il’s internal system. Internal reforms, it seems to me, are the key to ultimately solving the nuclear question. Another part of the shift away from have to be the development of diplomatic mechanisms to manage nuclear crises with North Korea. The U.S. Government would need better means of communicating quickly with the Pyongyang regime when North Korea threatens to use nuclear weapons. Infrequent visits by prominent Americans to Pyongyang and the so-called New York channel of contact with North Korea’s United Nations mission would be inadequate to this task once North Korea has nuclear warheads on its missiles. The real U.S. strategy to manage crises with North Korea is to rely on China. Washington calls on Beijing to convey U.S. messages to Pyongyang. It urges the Chinese Government to voice 16 the Journal oF east asIan aFFaIrs

its own concerns and warnings to North Korea. The weakness of this strategy always has been the reliability of China. China apparently issued a strong warning to North Korea during the crisis of December 20~21, 2010; but China has been less effective in several past crises and/or less willing to pressure North Korea. With nuclear warheads on North Korean missiles, a potential weakness would be the extent that China could influence a North Korean regime emboldened with this nuclear capability. A direct U.S. voice to North Korea would be stronger and certain. A permanent U.S. diplomatic mission in Pyongyang may be the best and perhaps the only answer to creating a diplomatic mechanism for dealing with nuclear crises through establishing a means of direct, immediate U.S. communication with the North Korean leadership. Granted, Kim Jong-il would boast that U.S. “recognition” signifies recognition of North Korea as a nuclear weapons power. Americans would have to “swallow hard” and let Kim have his two months of propaganda boastfulness. However, he soon would face the reality that mounting nuclear warheads on missiles would gain him no material benefits from the United States; in fact, the U.S. reaction, especially in Congress, would more likely be to tighten sanctions against North Korea. The United States also would have to respond to pressures from South Korea and Japan for greater assurances of military support and U.S. military measures to back up those assurances. The Obama Administration had agreed in 2009 to discuss with South Korea and Japan ways to enhance deterrence. This would require an examination of the adequacy of U.S. instruments of military deterrence. Deterrence, to be effective in the new situation of North Korean nuclear warheads, would have to combine concrete military measures and pointed verbal warnings to North Korea. It seems to me that there are several possible U.S. military responses that would enhance the deterrence message to North Korea: －A more direct U.S. role in possible North Korean military provocations against South Korea. This already is happening with the Obama Administration’s sending of U.S. Marine observers to South Korean military exercises in the Yellow Sea islands and When north Korea Mounts nuclear Warheads on Its MIssIles 17

U.S. giving targeting information to the R.O.K. Air Force during the crisis of December 20~21 2010. －A buildup of U.S. air power, including rotation of advanced aircraft into South Korea and the permanent deployment of U.S. heavy bombers to Guam. Nothing impressed North Korea more about U.S. military power in the 1970s and 1980s than the B-52 bombers based on Guam and their frequent exercises near the Korean peninsula. (The B-52s were withdrawn from Guam in 1991, and frequent heavy bomber exercises related to Korea ceased.) －Visible U.S. military exercises with South Korea related to provocation-retaliation scenarios. －Regular, public warnings by U.S. officials of U.S. intent to destroy North Korea if North Korea uses nuclear weapons against U.S. allies. North Korean nuclear warheads would make appropriate an invocation of the Eisenhower Administration’s doctrine of “massive retaliation” against communist states that used nuclear weapons against the United States or its allies. －U.S. support for an R.O.K. decision to remove South Korea from the restrictions on its missile ranges imposed by the MCTR. This perhaps could be done if North Korea rejected an offer to place its missiles under the MCTR, made either by South Korea or jointly at renewed six party talks. A key objective of enhanced deterrence must be to create certainty in the minds of North Korean leaders that South Korea will retaliate against singular North Korean military assaults against South Korea and clear acts of North Korean terrorism against South Korea with the full backing of the United States. Creating this certainty in the minds of Chinese leaders would be almost equally important.

IMPlIcatIons for sIx Party talKs

The shadow of North Korean nuclear warheads hangs over any near term resumption of six party talks. The fundamental impact is this: the closer North Korea gets to producing nuclear warheads 18 the Journal oF east asIan aFFaIrs

for its missiles, it will be less likely to make serious concessions in nuclear talks. The United States, South Korea, and Japan could make short term gains, but these would be relative to the plutonium program, which Pyongyang already has put aside in favor of uranium enrichment. These gains could include a completion of the disabling of the plutonium installations at Yongbon, probably linked to the completion of heavy fuel oil deliveries to North Korea. South Korea has demanded that Pyongyang allow the International Atomic Energy Agency to return to Yongbyon; North Korea might allow this; but it likely would negotiate much tougher over whether the IAEA should have access to the uranium enrichment facility shown to Dr. Hecker. That access, however, should be a firm demand from the United States and South Korea. State Department officials have broached the idea of seeking a North Korean moratorium on nuclear testing. A moratorium could delay the development of a uranium warhead. However, U.S. officials should know that North Korea would demand big U.S. concessions to agree to and continue any moratorium. Moreover, a moratorium would not necessarily prevent North Korea from manufacturing nuclear warheads based on enriched uranium. Pyongyang’s undoubted possession of the data from Pakistan’s 1998 nuclear tests and their application to the development of nuclear warheads for the Ghauri missile already gives North Korea testing information to proceed with warhead production. A related idea, another North Korean missile moratorium, would have limited usefulness. Pyongyang’s 1999~2006 moratorium meant little, as North Korea found surrogates like Pakistan, Iran, and Syria to test its missiles. Iran and Syria still are available. It seems to me that the test for the United States and its allies is whether they would give immediate priority to two issues: verification-inspections and proliferation. The U.S. past record on priority to these issues has been inadequate. If the allies give priority to verification-inspections, will China and Russia give support? Several of their recent statements suggest that they might support a stronger verification system. A first step might be to review the draft proposals on verification that the Bush When north Korea Mounts nuclear Warheads on Its MIssIles 19

Administration offered in July 2008 and China offered at the December 2008 six party meeting. The United States, South Korea, Japan, and Russia endorsed the Chinese proposal. North Korea rejected it. The question now is whether these proposals are strong enough to deal with the new situation of a revealed uranium enrichment program based on likely hidden sites in North Korea. Verification is the key test of North Korea’s intentions and sincerity. Intrusive inspections appear to be the only mechanism that would prevent North Korea from manufacturing nuclear warheads and mounting them on missiles. If Pyongyang continues to reject intrusive verification, six party talks would accomplish only minimal goals and not prevent the inevitable. The Obama Administration needs to reverse the Bush Administration’s decision in 2008 to keep North Korea’s proliferation activities out of the agreement it negotiated with Pyongyang, which was unveiled in June 2008. The Obama Administration needs to go even further and order the State Department to end its refusal to acknowledge the North Korean-Iranian nuclear alliance and start dealing with it in any new round of nuclear negotiations. State Department evasions go back to 2007 when I wrote my first major report on North Korean-Iranian collaboration at the Congressional Research Service. Since then, State Department officials have responded to queries about this by either denying any knowledge, saying they cannot comment on intelligence information, or speaking of North Korean activities like arms shipments in “the Middle East.” This policy came into the 2008 U.S.-North Korean nuclear negotiations when the Bush Administration did not acknowledge Iran’s involvement in the Syrian nuclear reactor assisted by North Korea－and bombed by Israel in 2007. The Bush Administration agreed to delete from North Korea’s declaration of nuclear programs any admission of nuclear proliferation in the Middle East. All of this belies repeated statements by U.S. officials that the United States has a deep concern over North Korean proliferation of weapons of mass destruction. The State Department may believe that raising North Korean- Iranian nuclear collaboration in six party talks would make reaching 20 the Journal oF east asIan aFFaIrs

a denuclearization agreement too difficult. One can make that argument, but State Department officials cannot talk about ending the North Korean nuclear program without ending the Pyongyang- Tehran nuclear alliance. Moreover, there is another target to deal with on this issue: China. The Obama Administration could condition acceding to Chinese entreaties to resume six party talks by insisting that China negotiate with the United States over shutting down the transporting links between Pyongyang and Tehran. We know from Wikileaks that the Bush Administration made attempts to secure action from the Chinese, but these attempts were sporadic and were not brought into six party talks. New six party talks probably are too late to halt North Korea’s march toward nuclear warheads. However, if they are resumed, the United States should make the strongest case possible for the record on both verification and proliferation. The best result that could come out of new six party talks appears to be that the United States, South Korea, and Japan could “buy time” and delay North Korea’s goal of mounting nuclear warheads on missiles. But the time bought would not be indefinite and would be limited in scope. But if time is bought, the United States, South Korea, Japan－and even China－should use the time to begin preparing new policies for the coming day when North Korea unveils nuclear warheads. The LasT TwenTy years of reLaTions beTween The repubLic of poLand and The democraTic peopLe’s repubLic of Korea-seLecTed aspecTs 21

The LasT TwenTy years of reLaTions beTween The repubLic of poLand and The democraTic peopLe’s repubLic of Korea - seLecTed aspecTs(1989~2009)

andrzej bober (University of Lodz / Poland)

Abstract

The last Twenty Years of Relations between the Republic of Poland and the Democratic People’s Republic of Korea - Selected Aspects The relations between Poland and the Democratic People’s Republic of Korea have been considered “good” for years. Today, the Republic of Poland has diplomatic representation in Pyongyang as well as in Seoul, but this was not always the case. The author of this article tries to focus his attention only on a few of the many aspects of cooperation between Warsaw - Pyongyang on the basis of well known and being wide in access of press information, but also hold talks with Polish diplomats and experts on North Korea. Many Polish people, when asked whether Poland should maintain diplomatic relations with North Korea, resent the relations and call it scandalous to keep ties with the country which is commonly regarded as the oppressor of many thousands of its citizens. This article also tries to answer short this question about the reason of the Polish-North Korean relations.

Key words: Poland - DPRK Rrelations, economic relations, cultural relations, diplomatic relations, Warsaw, Pyongyang, North Korean Wworkers in Poland 22 The JournaL of easT asian affairs

inTroducTion

The relations between Poland and the Democratic People’s Republic of Korea have been considered “good” for years. Today, the Republic of Poland has diplomatic representation in Pyongyang as well as in Seoul, but this was not always the case. The former People’s Republic of Poland was, on October 16, 19481, one of the first states in the world to have diplomatic ties with the DPRK (North Korea); diplomatic relations with the Republic of Korea (Seoul) would be opened forty years later. During the period of the Cold War it was common to deal with only one or the other. Owing to the fact that the People’s Republic of Poland (PRL2) was then a part of the Eastern Bloc, the choice in diplomatic relations was clear and, in fact, automatic. If the former PRL had attempted to establish diplomatic relations with South Korea, then it would inevitably have faced strong opposition from both North Korea and the USSR. The response of the Eastern Bloc states at that time would have been completely understandable, owing to the common view held in the Bloc that the administration of South Korea was a puppet of the government of the United States. East of the Iron Curtain, the DPRK appeared to be the only representative of the Korean people on the political stage. This situation remained unchanged until November 1, 1989, when Poland opened official diplomatic channels with South Korea. Amongst other things, on this day a treaty between the Republic of Poland and the Republic of Korea was signed regarding aid and mutual investment protection. Owing to the treaty, the relations between Warsaw and Pyongyang were strongly affected. Indeed, the government in Pyongyang recalled its ambassador as well as ordered North Korean students living and studying in Poland to return home. Therefore, the relations between Poland and the DPRK were significantly damaged. The author of this article tries to focus his attention only on a few of the many aspects of cooperation between Warsaw -

1 http://www.msz.gov.pl/Koreanska,Republika,Ludowo-Demokratyczna,20995.html 2 The Polish abbreviation of Polska Rzeczpospolita Ludowa. The LasT TwenTy years of reLaTions beTween The repubLic of poLand and The democraTic peopLe’s repubLic of Korea-seLecTed aspecTs 23

Pyongyang on the basis of well known and being wide in access of press information, but also hold talks with Polish diplomats and experts on North Korea.

The reLaTions beTween poLand and norTh Korea afTer 1989

Diplomatic Relations

After the fall of Communism in Poland there was a discernible cooling of relations on both sides between Poland and North Korea. The new democratic Poland lost its position as a ‘friend’ and preferential partner of North Korea. One of the consequences of the changes occurring on the global political stage was the withdrawal of polish soldiers from the Neutral Nations Supervisory Commission.3 North Korea was able to tell that Poland’s mission in Panmunjom had come to an end; in 1995 the Polish army contingent led by General Andrzej Owczarek left Panmunjom.4 The next diplomatic crisis followed shortly after this incident. This time Poland recalled its ambassador, Ryszard Baturo. Poland then reduced its diplomatic representation to the level of charge d’affaires. The decision to withdraw the polish military delegation from the Demilitarized Zone was the consequence of improving the relations between Poland and South Korea. Even so, while the so-called annual ‘consultations’ between the Polish and North Korean undersecretaries stalled, the mutual relations between Poland and

3 The Polish name is “Komisja Nadzorcza Pan´stw Neutralnych” (KNPN). Developed in 1953, the last ‘consultations’ of the ‘KNPN’ happened in Bern in 2005. Aside from this, Poland is a member of the Korean Peninsula Energy Development Organization (KEDO). More about ‘KNPN’ read in: Birchmeier Christian, Burdelski Marceli, Jendraszczak Eugeniusz, 50-lecie Komisji Nadzorczej Pan´stw Neutralnych w Korei, Adam Marszałek, Torun´2003. 4 As a consequence of the requirements of the DPRK, Poland had to withdraw its forces from the Neutral Nations Supervisory Commission by February 28, 1995. Following this the DPRK dismissed the provisions of the Arbitration Agreement of July 27, 1953. 24 The JournaL of easT asian affairs

North Korea did not disintegrate. It was after Kim Il-Sung’s death on July 7, 1994 and until 1996 that relations between Poland and North Korea stabilized. It was then that the representative of the Polish Foreign Office met his North Korean counterpart in Warsaw. Thanks to consensus between both parties, a new ambassador, Pak Sang-am, was sent to Warsaw, although he was recalled to Pyongyang two years later.5 His Excellence Ambassador Kim Pyong-il has occupied this position since 1998.6 The Republic of

5 At this time there also occurred two North Korean provocations on account of Poland, which resulted in the recalling of the North Korean diplomats. In 1997 in Warsaw there was a meeting of the members of various terrorist organizations, including the IRA (with the legendary IRA pioneer Sean Garland), Hezbollah, Hamas and the North Korean secret service. The North Korean embassy in Warsaw had sponsored this meeting. Everything in relation to this meeting was monitored closely by the Polish secret service, the CIA and the US Secret Service. See: Kittel Bertold, Marszałek Anna, Warszawski s´lad, http;//new-arch.rp.pl/artykul/355482_Warszawski_slad.html. 6 Kim Pyong-il is the younger stepbrother of the current leader of North Korea, Kim Jong-il (alongside Kim Jong-il’s younger biological sister Kim Kyung-hee, brother Kim Yong-il who died in Germany in 2000, and a half- sister Kim Kyong-jin, who is married to the North Korean ambassador in Vienna, Kim Kwang-sop). Kim Pyong-il was born on August 10th 1954 in Pyongyang as Kim Il-sung’s fourth eldest child and his second eldest son, from his second wife, Kim Song-ae. Since November 17, 1998 he has officially been the ambassador of the DPRK in Poland (Warsaw, 1A Bobrowiecka Street). Kim Il Sung loved all three children from the second marriage more than his son from the first marriage, Kim Jong-il. For this reason Kim Jong-il was very jealous of the favour shown by Kim Il-sung to Kim Pyong-il. This provided the foundation for the young Kim Jong-il’s hatred toward his stepmother. The sister of Kim Pyong-il lives in Vienna as the wife of the North Korean ambassador. Kim Pyong-il lives with her when he is in Vienna receiving treatment for his heart arrhythmia. His younger brother lived for many years in the former GDR. The mother of Kim Pyong-il lived for a few years under arrest after the death of Kim Il-sung in 1994. Kim Pyong-il has very similar hair to his father; his cheerful disposition is also very similar to that of his father. Kim Pyong-il graduated Kim Il-sung University (Political Economy) and also Kim Il-sung Military Academy (Strategy Department). Before he went to Poland, he moved around Europe. At age 25 he began his studies in Moscow, then he went on to be a part of a military attache´in Belgrade (former Yugoslavia). When he was 30, in 1984, he worked as ambassador of the DPRK in Hungary but was recalled to the DPRK to protest The LasT TwenTy years of reLaTions beTween The repubLic of poLand and The democraTic peopLe’s repubLic of Korea-seLecTed aspecTs 25

Poland sent its highest-ranking representative, His Excellence Ambassador Wojciech Kału·a, to North Korea in October 2001. From 2005 until the middle of 2009 His Excellence Ambassador Roman Iwasziewicz represented the Republic of Poland in North Korea.7 Since October 2009 His Excellence Edward Petrzyk has been the ambassador to the DPRK.8 The relationship between Poland, one of seven European states (including Bulgaria, Germany, UK, Romania, Sweden and the Czech Republic) that has diplomatic representatives in Pyongyang, and North Korea has gradually warmed up. In 2001 the vice-foreign ministers of both states took part in consultations; Poland was represented by current Vice- Foreign Minister Radosław Sikorski, and North Korea, Vice- Foreign Minister Choe Su-hon. Soon after this meeting the representatives of the North Korean parliamentary group “North Korea-Poland”, headed by Mr Kyon Ryo-jin, came to Poland.9 One year later a Polish parliamentary delegation revisited Pjongjang; however, even before that visit there was a meeting in Warsaw between the directors of the Foreign Ministries of Poland and the

Hungary which established diplomatic relations with South Korea in 1988. After that he moved 1989 to Bulgaria (Ambassador), then in March 1994 to Finland (Ambassador), where he lived until 1998 (he had to move to Poland at that time owing to the retrenchment of North Korean diplomatic personnel in Helsinki). From January 15, 1998 he lived in Warsaw with his wife Kim Sun-kum and two adult children (daughter Kim Ung-song and a son Kim In-kang) who both graduated from the University of Warsaw. Kim Pyong-il speaks fluent English and understands much of Polish, although he hides this fact. For more about Kim Pyong-il, see: Pietkiewicz Małgorzata, Syn korean´skiego dyktatora z´yje w Polsce, http://www.dziennik.pl/wydarzenia/article262365/Syn_koreanskiego_dyktatora_zyje_w_Polsce .html. 7 Dr. Roman Iwaszkiewicz is Foreign Division General in the Polish Army. 8 Since 2001 Edward Pietrzyk has been a Colonel General in the Polish Army. From April 2007 he was the Polish ambassador in Iraq. On October 3, 2007 he was badly injured in a bomb attack on his convoy in Bagdad. After his recuperation he went back to Bagdad where he was ambassador until August 31, 2008. Recalled from Iraq by President Lech Kaczyn´ski, he was recommended on September 25, 2009 as Polish ambassador to North Korea. 9 Hyon Ryo-jin - former president of the North Korean High Peoples Assembly, vice-minister of the Ministry of Energy. 26 The JournaL of easT asian affairs

DPRK. In 2003 Kim Jong-il’s regime withdrew from the Treaty on the Non-Proliferation of Nuclear Weapons. As a result, the meeting planned for 2003 between the representatives of Poland and North Korea never took place; this was also the case in 2005. In 2004 and 2006 the meetings did take place. Accordingly, in 2004 then Polish vice-foreign minister Mr Boguslaw Zaleski was a guest in Pjongjang, followed by Warsaw being host to his then counterpart Mr Kung Sok-ung in 2006. The result of this meeting was that, on February 1, 2007, a new protocol between both governments was signed between the aforementioned Kung Sok- ung and the Polish ambassador in the DPRK, Mr Roman Iwaszkiewicz.10 Following this the legal and contractual basis of the relations between Poland and North Korea were examined and attested; this was a necessary measure in connection with Poland’s entry to the EU three years previously. In 2008 mutual visits took place between Poland and North Korea. The vice-foreign minister of the DPRK, Mr Kung Sok- ung, came to Poland once more, and in October 2008 then vice- foreign minister of the Republic of Poland11, Mr Ryszard Schnepf12, and Director of the Asia-Pacific Department in the Foreign Office, Mr Tadeusz Chomicki13, visited Pjongjang. Especially important during Schnepf’s visit in Pyongyang was his meeting with the foreign minister of the DPRK, Mr Pak Ui-chun (foreign minister since 2007, he had been the ambassador of the DPRK to Russia between 1998 and 2006) as well as the meeting with Mr Kung Sok-ung. The meeting was particularly significant inasmuch as

10 Protocol between the Government of the Republic of Poland and the Government of the Democratic People’s Republic of Korea on validity of bilateral international agreements in relations between the Republic of Poland and the Democratic People’s Republic of Korea, siehe: http://www.msz.gov.pl/bpt/documents/13548.pdf. 11 Ryszard Schnepf was the vice-foreign minister of the Republic of Poland in the government of Donal Tusk. Since December 2, 2008 he has been the Polish ambassador to Spain. 12 On the mission of the polish vice-foreign minister, see: Pawlicki Jacek, Misja polskiego wiceministra w Korei Po´łnocnej, “Gazeta Wyborcza” 17.09.2008. 13 Tadeusz Chomicki has been the Polish ambassador to China since 2009. The LasT TwenTy years of reLaTions beTween The repubLic of poLand and The democraTic peopLe’s repubLic of Korea-seLecTed aspecTs 27

Minister Schnepf was the first ‘western’ diplomat of such a high rank to visit Pjongjang since the sudden seclusion of the North Korean leader (after August 12, 2008). Shortly before this meeting the Polish press was aflame with various conjectures as to the theme of the talks and the purpose of the mission headed by Ryszard Schnepf. The official basis of the meetings was the jubilee festivities celebrating the 60th anniversary of Polish-North Korea diplomatic relations. Unofficially, shortly before and after the meeting, there were speculations that the actual nature of the talks between ministers Schnepf and Pak was related to the future of the Six Party Talks. As is generally known, the previous negotiation rounds, which had taken place since August 2003, gave no guarantee that the DPRK would pull out of the Nuclear Weapons Program. On January 10, 2003 North Korea signalled that it would pull out of the Nuclear Non-Proliferation Treaty, and from this period onward (even though it was struck of the list of ‘rogue states’ on October 11, 2008) no compromise was obtained. In the last few years there arose another problem between Poland and North Korea. It related to the curtailing of freedom of movement by the North Korean authorities of Polish diplomats in the DPRK in 2007. In response to this, Poland adopted similar measures against the North Korean ambassador Kim Pyong-il. The ambassador was forbidden to leave Warsaw without the expressed permission of the Polish Foreign Ministry; however, this problem was resolved in 2008 and since then relations have once again normalized. It is also important to note that from the middle to the end of 2007 Poland represented the interests of the entire EU in North Korea, and coordinated the activities of the EU member states in the territory of the DPRK. It also specifically represented Portugal, which has no diplomatic representation in North Korea.

Economic Relations

The trade relations between Poland and North Korea have always been marginal, or at the very least symbolic. This has been the 28 The JournaL of easT asian affairs

case especially since 1991 when Poland phased-in the new currency in place of the barter transactions and Transfer Rubel in trade dealings with North Korea. The trade agreement between the Polish and North Korean governments14 was renewed on May 12, 1992 and consisted of most-favoured-nation treatment for the DPRK in the form of customs duties, levies and other fees relating to goods turnover.15 The co-operation between Poland and North Korea was limited mostly (although not exclusively) to shipping. The North Korean-Polish shipping venture, “Chopol”16, has been active since 1967 in Pyongyang, all the while being allotted only one ship. The head of “Chopol” in North Korea, Mr. Andrzej Weber, has received many North Korean state accolades for his work. In terms of trade relations, Poland exports, above all else, pork and poultry to North Korea, followed by precision instruments, synthetics, mechanical and electrical equipment, and textiles. In recent times Poland has also exported rubber, second-hand clothing, animal feed, furniture, ventilators and medical supplies. Poland imports, in contrast, some commodities for the chemical industry, as well as mechanical and electrical equipment. By and large, 19 Polish firms imported goods into North Korea (no change from 2007) while 193 North Korean firms imported goods into Poland (29 less than in 2007). In the general trade balance with North Korea, small as it is, Poland has a deficit. In 2007 Poland imported goods worth ca. 10.7 million Euros from North Korea, while exporting goods worth 370,000 Euros. The trade between Poland and North Korea was particularly large for 2008 - the gross balance was 68.29 million Euros. Poland exported goods to North Korea with a net worth of 3.04 million Euro and imported goods worth 65.25 million Euros. Imports into Poland rose about 617% relative to

14 Szerzej na temat umo´w Polski z Korea˛ Po´łnocna˛ po 1948 roku moz·esz znalez´c´po wpisaniu w polu “Strona umowy” hasła “North Korea” na stronie http://www.traktaty.msz.gov.pl/SearchTreaties.aspx?t=DW 15 According to the information that the author received from the Polish Ministry of Economics on 23.11.2009. 16 http://www.kcckp.net/en/periodic/f_trade/index.php?contents+1256+2009- 01+37+12 The LasT TwenTy years of reLaTions beTween The repubLic of poLand and The democraTic peopLe’s repubLic of Korea-seLecTed aspecTs 29

2007, that is, about 57.22 million Euros (from 11.07 to 68.29 million Euros). This sharp rise was attributable to the goods imported into Poland from the Special Economic Zone in Kaesong.17 It is no wonder that North Korea, for 2007, ranked first out of 96 (according to the data of the Polish Ministry of Economics) in terms of imports into Poland.18 Poland has a passive trade balance with North Korea for various reasons, the most important of which is North Korea’s insolvency. Relative to other EU States, however, Poland’s trade balance with the DPRK appears very large.19 Two of the important economic events in which Poland took part were the 11th Pyongyang Spring Trade Fair (12-15 May, 2008) and the 4th Pyongyang Autumn Trade Fair. 12 states took part in the Spring Trade Fair where motor, transport, mechanical, food, chemical, pharmaceutical and electronic products were presented. In the Autumn Trade Fair a mixture of 79 companies and company proxies were presented. At both events the Polish Embassy in the DPRK as well as the abovementioned shipping firm “Chopol” took part. The economic relations between Poland and North Korea have been overshadowed to some extent by the outstanding debts owed to Poland that the DPRK has accrued during recent years. To date, Poland awaits repayment of monies owed. According to information from the Polish Ministry of Finance, the DPRK has debts owing to Poland in the amount US$ 4.18 million. The Polish government has wanted to reduce this amount by half, but, owing to the new Resolution 1874 of June 12, 2009,20 has been bound and foot. North Korea has similar repayment issues with, amongst other states, Russia, Germany and Vietnam. So far all recommendations

17 According to the information that the author received from the Polish Ministry of Economics on 23.11.2009. 18 http://www.msz.gov.pl/KOREANSKA,REPUBLIKA,LUDOWO-DEMOKRATYCZNA, (KOREA,POLNOCNA),20995.html 19 Schmidt, Joachim-Hans, Peace on the Korean Peninsula. What can the EU con tribute to the Six-party process?, Peace Research Institute, Frankfurt 2006, pp.10~11. 20 See: http://www.un.org/News/Press/docs/2009/sc9679.doc.htm. 30 The JournaL of easT asian affairs

from Poland concerning the repayment debts have been in vain; Pyongyang’s response has been unchanging - financial weakness21. As a result, one can see quite clearly the loss of financial credibility of North Korea in the eyes of potential Polish investors. After the appearance of a series of articles on the “slave labour”22 of North Koreans in Poland (amongst others, those working at the shipyards in Danzig)23, the number of residence permits issued to North Korean citizens in Poland was reduced. In the articles, the Polish government was accused of having permitted the so- called “slave labour” of North Korean workers in Poland. One needs to be aware that North Koreans are working as labourers in at least four EU states - Poland, Czech Republic, Bulgaria and Romania. With this in mind it needs to be noted that they receive the legally stipulated wages. It is also to be noted, however, that the labourers only receive 5~10% of the entire sum, with the remainder (90~95%) being paid into the Party account. The author conversed with one such person in Pyongyang. He wanted to come

21 It was on 1 June 2011when both sides established the conditions of repayment of debt by Korea. The DPRK owed Poland 4,318,356 USD. According to the new agreement, the sides stated that the DPRK shall transfer USD 1,500,000.00 (one million five hundred thousand US dollars) in cash to the “Chopol” Korean-Polish Shipping Co., Ltd., for purchasing a vessel, hereby increasing the capital of “Chopol” Korean-Polish Shipping Co., Ltd., by the amount of USD 750,000.00 (say: seven hundred and fifty thousand US dollars) for each Party. Also, DPRK shall pay into the account of the Embassy of the Republic of Poland in Pyongyang the amount of USD 200,000.00 (two hundred thousand US dollars) to cover expenses of the renovation of the Embassy of the Republic of Poland building in Pyongyang, according to the needs and in line with the rules established by the representatives of the Ministers of Foreign Affairs of the Contracting Parties and the outstanding debt in the amount of USD 2,618,355.87 (say: two million six hundred and eighteen thousand three hundred and fifty-five US dollars and eighty-seven cents) shall be cancelled by the Polish Side. For more, read: http://www.traktaty.msz.gov.pl/fd.aspx?f=P0000018234.pdf (English) or http://www.traktaty.msz.gov.pl/fd.aspx?f=P0000018233.pdf (Korean) 22 See: Kruczkowska Maria, Chrzan Mikołaj, Korea ma gułagi w Unii Europejskiej, hhttp://wyborcza.pl/1,76842,3870733.html 23 www.hrwf.net/north_korea/nkpdf/nk_mar29_2006.pdf ; w www.hrwf.net/ north_korea/nkpdf/nk_mar24_2006.pdf. The LasT TwenTy years of reLaTions beTween The repubLic of poLand and The democraTic peopLe’s repubLic of Korea-seLecTed aspecTs 31

to Europe to work and said that for North Koreans this 5~10% of earnings was very significant as well as being an invaluable help; in the DPRK most people receive no remuneration for their work. In Poland, North Korean labourers receive about 50~70 Euro for themselves. This amount is almost to nothing, but as already stated, the labourers will likely earn nothing in the DPRK. On account of this information, invective articles concerning “slave labour” (not only in Poland) appeared not to be completely on target. This is especially so when considering the wages in the Economic Zone in Kaesong24, where North Koreans earn 20 times less than their South Korean counterparts working the same jobs (57.5 - 73 USD)25, this not in foreign currency, but in North Korean Won in accordance with the official currency calculator26 and based on a 48-hour work week. If workers have foreign currency in North Korea, then life is much easier; almost all goods are available for purchase. One should also consider the issue from this point of view, and not argue that the North Korean labourers earn too little and that all their earnings go directly into the accounts of the North Korean regime, rather than into their own pockets. The latest data from August 19, 2008 showed that, at that time, there were only 33 North Korean citizens in Poland for work or “for other reasons”. Since then there has been a strong influx of North Koreans. In the whole of 2008 the Polish Embassy in the DPRK issued around 200 entry permits to Poland for North Korean nationals.

Cultural Relations

Since the beginning of mutual cultural relations between Poland

24 See: Salmon Andrew, Kaesong Zone: A Troubled Korean Jewel, http://www.atimes.com/atimes/Korea/HD06Dg01.html. 25 http://www.globalsecurity.org/wmd/library/news/rok/2004/rok-040420- rok-mou01.htm 26 At the time the author was in Pyongyang (January thru February, 2009) one Euro would buy, officially, 186 Won; however, on the “black” market it would fetch almost 25 time more, around 4500 Won. 32 The JournaL of easT asian affairs

and North Korea, Poland has had ample room to showcase its achievements. Although the movement of people between both states is very low, the activities and events in which Poland takes part there are both numerous and highly successful. Amongst the activities of a cultural and educational nature one should include, amongst others, the Spring Friendship Festival, the Pyongyang International Film Festival and the International Exhibition of Science and Engineering Books. The first of the abovementioned events is organized once every two years and has an international flavour owing to the fact that artists (amongst them vocalists, dance groups, circus groups, as well as singers and musicians) from some ten countries arrive in Pyongyang to perform. Poland is well represented in these festivities, in recent years boasting circus artists, singers from the Frederic Chopin Music Academy in Warsaw and students of the Music Academy in Wrocław. In many instances Polish artists win the highest accolades and prizes, and in doing so promote Polish culture. During the 25th Spring Friendship Festival in April 2007 the Polish singer Danuta Stankiewicz27 won the Silver Cup for her guest performance. For 22 years the Pyongyang International Film Festival has been organized in the capital city under the banner of independence, peace and friendship. In this festival Poland has won many awards, including the prize for Best Film in the year 2000 for the film “U Pana Boga za piecem”. Other well-received Polish films include, amongst others, “Ogniem i mieczem”, “Człowiek wo´zko´w”, “Quo vadis” and the short film “Wspomnienie filmowe o Idze C” (which received an award for best music score at the 8th festival). In recent years the Grand Study Hall in Pyongyang has played host to the Exhibition of Science and Engineering Books; the Polish Embassy has a kiosk there every year. At the end of the event all Polish books as well as textbooks and audio- visual materials are given to the North Korean educational

27 Stankiewicz Danuta, Kowalik Katarzyna, Festiwal Przyjaz´ni w Phenianie, [in:] Spotkania polsko-korean´skie, Joanna Marszalek-Kawa, Adam Marszałek Verlag, Torun´ 2008, pp.57~64. The LasT TwenTy years of reLaTions beTween The repubLic of poLand and The democraTic peopLe’s repubLic of Korea-seLecTed aspecTs 33

institutions as gifts. In particular in 2008, seeing as this was the 60th anniversary of the establishment of diplomatic relations between North Korea and Poland, many Polish-North Korean initiatives took place. During the Jubilee festivities exhibitions Polish sport placards were held in Pyongyang as well as in other cities (during the 11th International Film Festival from 17-26 September 2008, the Polish Embassy presented the film “Stara Basn”). Poland gave out six scholarships to students enrolled in the Pyongyang Foreign Language University (Polish Studies Department) in order to undertake practical language studies at Jagiellonen University, Krakau (Poland). Some North Korean students are also showing good results at the Warsaw Music Academy. The North Korean administration representation is also visiting Poland. The Polish Embassy plans, in the foreseeable future, to release a brochure about Poland (“Polska w pigulce” - lexically translated as “Poland in a Pill”) written in Korean. Interestingly, students in Pyongyang University of Foreign Studies learn Polish thanks to Mr Jo Song Mu who is not only a Polish language lecturer at the Polish Department but also is a member of the Management of Polish - Korean Friendship Association. Jo Song Mu was awarded a diploma by Mr Radosław Sikorski, Polish Foreign Affairs Minister in recognition of his outstanding services to promoting Poland in the world.

Material Assistance for the DPRK

The special position of Poland in terms of its relations with the DPRK has bolstered its aid to North Korea through the embassy in Pyongyang.28 This aid is administered through the system “Small Grants”, whose value starts from between 10,000 - 15,000 Euros.29 This aid does not represent financial assistance, but rather support

28 Frank Ruediger, EU - North Korean Relations: No Effort Without Reason, Korea Institute of National Unification, Seoul 11/2, 2002, p.90. 29 According to information from the Polish Asia-Pacific Department, in 2007-2009 this sum was about 44,600 Euro. 34 The JournaL of easT asian affairs

in the form of goods such as agrarian, medical or educational equipment. In 2008 the Polish Embassy in Pyongyang carried out five such projects. Amongst other things, a set of mini tractors was given to the Agrarian Collective, the Pyongyang “Friendship Hospital” was outfitted with a new dentist chair, and the computer room in the Polish-North Korean Friendship School was supplied with new computers. In addition to this, Poland has provided, via the WHO, financial aid in the amount of USD 50,000 for hospitals that, in the summer of 2008, were flooded. After the Ryongchon explosion on April 22, 2004, in which about 40% of the city was destroyed, Poland quickly sent relief to help with the aftermath of the catastrophe.30

biLaTeraL reLaTions in 2009

Following the precedents set in previous years, the Polish Embassy, in the context of the “Small Grants” programme, in 2009 sent the previously mentioned production collectives eight mini tractors and eight machine units for the cleaning and threshing of rice. Aside from this, the hospitals in the regions of these co- operatives received 85 children’s beds. This will enable the improvement of health care provision. From May 11 - 14 Poland took part, as it had before, in the 12th annual Pyongyang Spring Trade Fair, as well as the 5th annual Pyongyang Autumn Trade Fair (from August 21 - 24, 2009). 120 firms from 14 states (above all from China and the DPRK) had exhibits at these fairs. The Polish Embassy also organized the exhibition “1939-1989: From War to Victory” in the rooms of the embassy building on September 16, much to the interest of diplomats of other embassies as well as the general public. Further to this, the Polish Embassy, of its own initiative, put on a display of one of the most beautiful and

30 For more on the disaster see: http://www.globalsecurity.org/military/world/ dprk/ryongchon-imagery.htm, http://www.nytimes.com/2004/04/23/world/3000- casualties-reported-in-north-korean-rail-blast.html , http://www.spiegel.de/ jahreschronik/0,1518,druck-331383,00.html The LasT TwenTy years of reLaTions beTween The repubLic of poLand and The democraTic peopLe’s repubLic of Korea-seLecTed aspecTs 35

oldest Polish cities, Krako´w, in place among notorieties such as Wonsan, Pyongyang and Nampho. Lastly, from August 3 - 5, the Polish Embassy (alongside the German31, Russian and Chinese representation) took part in the International Exhibition of Architecture Publishers; Cho Thae-bok, the President of the North Korean High People’s Assembly, took part in the opening festivities. Customarily, Poland gifted all books to the People’s Library in Pyongyang. As happens every year, in 2009 (this time in Warsaw) the director of the Asia-Pacific Department of the Polish Foreign Ministry met with the director of the European Department of the North Korean Foreign Ministry. As already mentioned, the economic relations between Poland and the DPRK had stagnated for years. In the first 9 months of 2009 Poland imported goods to the total value of 24.74 million Euros and, by contrast, exported only goods to the value of 150,000 Euros. The negative balance of trade between Poland and North Korea averages -24.57 million Euros for Poland.32 This pattern in bilateral trade between the two states has existed for years.33

czy poTrzebne sa˛ nam sTosunKi z Korea˛ po´łnocna˛?

Many Polish people, asked whether Poland should maintain diplomatic relations with North Korea, resent the relations and call it scandalous to keep ties with the country which is commonly regarded as the oppressor of many thousands of its citizens. The purpose of these relations was questioned and brought up again after closing a few diplomatic posts by Poland and abandoning Pyongyang’s mission. Having completed his training in Polish

31 The German publishers that presented during the exhibition were: the Nuremberg Academy of Architecture and Design, and DOM Publishers - Architecture and Design. 32 According to information that the author received from the Finance Ministry on November 25, 2009. 33 Ibid. 36 The JournaL of easT asian affairs

Embassy in DPRK, the author of this article has been asked about the point of keeping such a huge post (with the area more than 1.5 hectares) in the country which has hardly any economic bonds with Poland and losing any significant political relations as well. There is only one and surprisingly simple answer: Poland wants to be recognized in the Korean Peninsula, seeking some benefit there, following carefully the course of changes which take place in relations to both Koreas. Possible reuniting of Korea will become a chance for lucrative contracts, commissions, orders or maybe even extending Polish - Korean Exchange, along with improving trade balance on the Polish side. Everyone who investigates the Korean problem is aware of Korean potential and Goldman Sachs’ report which got around the world in September 2009. The forecasts by Goohoon Kwon included in the report are not unreasonable to indicate the situation in which the united Korea could surpass France, Germany and even Great Britain or Japan as regards GDP in 30-40 years after initiating the process of integration. According to Kwon’s calculation, the economy of reunited Koreas could be placed as the eighth, following China, the USA, India, Brazil, Russia, Indonesia and Mexico.34 Polish presence in the DPRK is not only an economic interest but Poland, keeping real diplomatic relations with both Koreas unlike the most of states in the world (which doesn’t have any diplomatic representation in DPRK), could bridge the gap between both Koreas and act as a translator in the inter-Korean dialogue. Polish diplomats clearly understand mentality and political reality of both sides as they have experienced a dramatically changing political system themselves, getting to know rules of two extremely different political and economic systems. Polish people are not unfamiliar with what happens to the citizens of the DPRK. Polish people often follow news of current situation of the citizens governed by North Korean regimes, receiving information with excitement and confusion, asking aloud: How is it possible for the regime to last for such

34 Goohoon Kwon, A United Korea? Reassessing North Korea Risks (Part 1), [w:] Global Economics Paper, No. 188, September 21st, 2009, p.1-23. The LasT TwenTy years of reLaTions beTween The repubLic of poLand and The democraTic peopLe’s repubLic of Korea-seLecTed aspecTs 37

a long time? The majority of Polish people wish the unfavourable situation changed. However, it is not because of the wishes that Poland keeps its diplomatic post in the DPRK. Aiding North Korean citizens or potential profitable investments after reuniting Koreas are not the only advantages of keeping diplomatic relations with the DPRK. North Korea has become a place where the diplomats there deal and exchange information over extraordinarily difficult issues. Information regarding the DPRK can evidently become a precious matter of exchange between the countries. Also it has been known that a significant part of North Korean GDP consists of illegal financial transactions and various forms of frauds.35 Therefore it is good to know what is happening and how to protect oneself against the threat. Other reasons for keeping Polish diplomatic presence in Pyongyang are not unlike those of six other European and other countries remaining there, all of which are written about and commonly known.

concLusion

What can Poland do further, or improve, in the relations between itself and the Democratic People’s Republic of Korea? Above all else it should drive further its activities in the area of “relief items”. It also appears sensible, together with other EU states, to support the economic stability of North Korea, even if such a task is somewhat complicated (owing to the fact that economic support would further the North Korean regime). It is better, however, that the international public knows who possesses atomic weapons, rather than if such weapons were stolen by terrorist groups during an upheaval. Kim Jong-il is, in all his “craziness”, actually completely predictable and rational, and his “unpredictability” and “madness” merely serve to further the aims of the North Korean establishment. From this foundation there has been no new war on the Korean Peninsula. Were the North Korean regime to fall, the ensuing problems would be manifold. One of the chief aims of Poland and the EU must be the steadfast encouragement 38 The JournaL of easT asian affairs

of dialog between Pyongyang and Seoul. Poland, in accordance with all European states, should also put pressure on the DPRK to uphold human rights. It is also highly important that the European parties are steadfast in their commitment to both nuclear disarmament as well as the abrogation of chemical and biological weapons in the DPRK. Finally, it is necessary that goods produced in North Korea (among others, those manufactured in Rajin- Sonbong, Sinuiju and, above all else, Kaesong) have wide access to Polish and, following on from this, other European markets. Poland is too poor to support infrastructural investment in the DPRK or to build “green” structures that would derive energy from natural sources (such as water, wind, and geothermal sources). With the collective powers of all EU states, as well as those taking part in the 6-Party Talks, such an aim may in fact be achievable. This can only come to fruition, however, if the first positive impulse comes from Pyongyang. Polish activity in relations with the DPRK has for a long time been clearly visible. Polish diplomacy carries out its duties very well and furthers Poland’s standing in North Korea effectively. The work undertaken by Polish diplomats in Pyongyang is particularly difficult given the many restrictions, prohibitions and commands, and for this reason earns praises. It is to be hoped that the coming years see successful, mutual Polish-North Korean initiatives, and also the furtherance of understanding and trust between both peoples. The basis of improvements in relations between the North Korean government and the international community rests upon dialogue founded in such a way.

35 About the last one of many North Korerans smuggling, read: Дипломаты из КНДР под видом диппочты пытались вывезти из Украины 20 тысяч пачек сигарет, http://korrespondent.net/ ukraine/events/1220684-diplomaty-iz-kndr-pod-vidom-dippochty-pytalis- vyvezti-iz-ukrainy-20-tysyach-pachek-sigaret Has tHe Military superseded tHe party under KiM Jong-il’s rule? 39

Has tHe Military superseded tHe party under KiM Jong-il’s rule?

in-soo Kim & Min-yong lee Department of Political Science Korea Military Academy and Sookmyung Women’s University

Abstract

This study aims at explicating the nature of North Korea’s party- military relations by investigating high-level officials who are involved in Kim Jong-Il’s field inspection visit to the military. Apart from previous studies, we have distinguished Kim Jong-Il’s field inspection into two different types comprising of both inspections of combat unit and art performance. We have built a hypothesis that Kim Jong-Il is more likely to employ party cadre to seize control over the military, based upon his grown-up and early career backgrounds tied with party cadres. A survival analysis model is adapted to test the hypothesis. The results of the test prove that party cadres are more likely to accompany Kim Jong-Il’s field inspection to combat units while top military leaders are more visible in his inspection to military art performance. This finding brings a suggestion for other research attempts to reevaluate the party-military relations in North Korea, the nature of “military-first politics” and the purpose of Kim Jong-Il’s public appearances in the military.

Key words: |On-the-Sspot Gguidance, Party-Mmilitary Rrelations, Military-Ffirst Ppolitics, Field Iinspection, CCox Rregression Mmodel 40 tHe Journal oF east asian aFFairs

introduction

North Korea is disapproving people’s revolutionary power to change political regimes. The unexpected stability of the North Korean regime during the last decade has attracted much scholarly attention.1 Experts have long shared a viewpoint that North Korea’s dictator Kim Jong-Il has consolidated his power by depending on the military since his proclamation of the “military-first politics” at the early stage of his regime launched officially in 1998.2 In this view, as long as North Korea’s military pledges allegiance to the Kim Jong- Il regime, revolutionary movements from any conceivable groups or the people will not likely occur.3 The key point here, consequently, falls on the question as to how the cooperative relationship between the Kim Jong-Il’s regime and the military has been maintained. Such an acute dictatorship, like the North Korea political regimes, usually extend their span of life relying on strong upholds from dictators’ close inner circles.4 From this point of view, we first

1 The earlier version of this article was presented at the Conference on Military Art and Science, held on September 17, 2010 at Korea Military Academy. Yun-Jo Cho, “The Source of Regime Stability in North Korea: Insight from Democratization Theory,” Stanford Journal of East Asia Affairs 5 (2005): 90- 99; Yung-Hwan Jo, “Succession Politics in North Korea: Implications for Policy and Political Stability,” Asian Survey 26(10) (October, 1986): 1097; Scott Snyder, “North Korea’s Challenge of Regime Survival: Internal Problems and Implications for the Future,” Pacific Affairs 73(4) (Winter, 2000-2001): 517- 33. 2 Jinwook Choi, “Changing Relations between Party, Military, and Government in North Korea and Their Impact on Policy Direction,” Working Paper for Shorenstein APARC, July 1999, p. 10, http://www.standford.edu/ group/APARC; accessed April 5, 2011; Yoel Sano, “Military Holds the Key,” Asia Times Online, Feb 18, 2005, http://www.atimes.com/atimes/printN.html; accessed April 5, 2011; Ken E. Gause, North Korean Civil-Military Trends: Military-First Politics to a Point (PA: Strategic Studies Institute, 2006), p.9. 3 Catharine Chorley, Armies and the Art of Revolution (London: Bacon Press, 1943), p.x. 4 Jeff Goodwin, “Revolutions and Revolutionary Movement,” in Thomas Has tHe Military superseded tHe party under KiM Jong-il’s rule? 41

pay attention to the factional tie fatefully shaped between the former dictator Kim Il-Sung and his partisan colleagues. The relationship had excavated its root in the prosecution of combats against anti-Japanese imperialism before the first launch of North Korea’s regime in 1948. Contrary to his father, Kim Jong-Il had started his careers in the communist party and has recruited his inner circle from Kim Il-Sung University graduates who have been brought up as party technocrats.5 These connections also involve his career ties to the core elites of the Organization & Guidance Department and Propaganda & Agitation Department in the party. When considering Kim’s personal background it becomes clear who would become the core elites close to Kim Jong-Il. Kim Jong-Il’s relatively deficient military career implies that Kim Jong- Il and his inner circle cannot be an integrated part of his father’s personal network of committed elites. Under these circumstances, the sudden death of Kim Il-Sung in 1994 might have led to a change in power relations between Kim Il-Sung’s military colleagues and Kim Jong-Il’s party cadres. This perspective is unanimous with Michael Mann’s standpoint arguing that “an authoritarian state power is transmitted through its directives and so such groups compete for direct control of the state.”6 Most studies examining Kim Jong-Il’s public appearances have made it an established fact that the military has superseded the party under Kim Jong-Il’s rule. To prove this, they show

Janoski, Robert Alford, Alexander Hicks, and Mildred A. Schwartz. eds., The Handbook of Political Sociology (NY: Cambridge University Press, 2005), p. 421. 5 Yung-Hwan Jo, “Succession Politics in North Korea: Implications for Policy and Political Stability,” Asian Survey 26(10) (October, 1986): 1097; Jinwook Choi, “Changing Relations between Party, Military, and Government in North Korea and Their Impact on Policy Direction,” Working Paper. Shorenstein APARC (July, 1999). 6 Mann, Michael. “The Autonomous Power of the State: Its Origins, Mechanisms, and Results,” in John A. Hall, ed., States in History (NY: Oxford University Press, 1986), p.116; also see Michael Bratton and Nicholas van de Walle, Neopatrimonial Regimes and Political Transitions in Africa,” World Politics 46(1994): 464. 42 tHe Journal oF east asian aFFairs

military leader’s frequent involvement in his entourage after the adoption of “military-first politics”. Regardless of their contribution, scholars have rarely asked or answered a crucial question as to what role Kim Jong-Il’s party colleagues has undertaken under Kim Jong-Il’s rule. This article thus seeks to extend prior studies by statistically analyzing Kim Jong-Il’s on-the-spot guidance to military installations. To this end, we first distinguish Kim Jong-Il’s on- the-spot guidance to military installations into two different types: substantial and symbolic guidance. For example, substantial guidance refers to his visit to combat units while symbolic guidance includes Kim’s public activities such as watching military performance of arts. It is true that Kim Jong-Il’s visit to combat units represents the most important task but his visit to military art performance is frequent enough. It cannot be ignored that he has also emphasized the importance of arts in military culture. Second, it is demonstrated that power is unevenly distributed between the military and the party. By testing the hypothesis that as for Kim’s entourage, party circle would participate in his substantial guidance while military circle would participate in his symbolic guidance. After reviewing prior literature, we analyzed data on Kim Jong- Il’s field inspection (1994-2008) on the basis of a survival analysis. Our findings confirm the dominant position of Kim’s party colleagues over military leaders. This result provides a meaningful implication for the party-military relations in North Korea, reaffirming a long-standing proposition suggesting the primacy of the party over the military. This article contributes to unveiling the riddle of how Kim Jong-Il has relied on his party colleagues to seize control over the military.

literature review

In North Korean terms, on-the-spot guidance is defined as policy guidance performed by a supreme leader like Kim Il-Sung Has tHe Military superseded tHe party under KiM Jong-il’s rule? 43

or Kim Jong-Il.7 North Korea’s political context carries with this term two meaningful aspects. First, one relies on organizing Kim Jong-Il’s entourage in his on-the-spot guidance. When considering the importance of his public appearances, it could be stated that his entourage is organized as planned deliberately corresponding to his purpose of guidance.8 The other aspect is related to the way Kim Jong-Il conducts policy discussions with his colleagues including entourage members.9 This speculation urges us to investigate the figures of high-level officials joining Kim Jong- Il’s guidance to the military in order to peek into North Korea’s political system. Numerous studies have dealt with subjects concerning Kim Jong- Il’s on-the-spot guidance. Most of them aim at identifying a core power group on the basis of the frequency joining his entourage; however, they reveal shortcomings in some respects. For example, it has been a widely shared opinion that Kim Jong-Il cannot help allowing for primacy to the military to consolidate his political power. In fact, the number of his visits to the military and the number of military officers in his entourage members have increased simultaneously since the death of Kim Il-Sung.10 This fact provides important evidence to support his reliance on the military. It seems true at first sight, but it gives little attention to the fact that the increased number of military officers in Kim Jong-Il’s entourage does not necessarily result in the decreased number of party cadres joining his entourage, as shown in the following Figure 1.

7 Kyo-duk Lee, Kim Jong-Il Hyunjijido Teukjing (Characteristics of Kim Jong-Il’s Field Inspection) (Seoul: Korea Institute for National Unification, 2002), pp.1-2. 8 Jin-kye Kim, Bukjosun Inminyi Suki (An Essay of a North Korean People: Mother Country II) (Seoul: Hyunjang Munhaksa, 1990), p.16. 9 Young-ja Park, “Bukhan Jipkwonelitewa Post Kim Jong-Il Sidae” (North Korea’s Centralized Power Elites and Post Kim Jong-Il Era,” Tongil Jeongchaek Yeongu 18(2) (2009), p.37. 10 Kong Dan Oh and Ralph C. Hassig, North Korea through the Looking Glass (Washington, D.C.: Brookings Institution Press, 2000), p.121. 44 tHe Journal oF east asian aFFairs

Kim Jong-Il’s entourage members in his public appearance

350

300 Party cadres Military officers

250

200

150

100

50

0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Korea Institute for National Unification.

In addition, the observation referring only to the frequency and countable numbers risks inherent problems, failing to read Kim Jong-Il’s real intention or his method of political manipulation. This is due to two reasons. First, North Korea’s political organizations have their own rules of conduct apart from ordinary socialist countries. As compared to the military, for example, the party agencies are more exclusively organized and steered. The Organization and Guidance Department is the most powerful core agency in the Workers’ Party; it is exclusive to the public and acts in seclusion. Working members in the agency do not appear in Kim Jong-Il’s public appearances.11 Second, the increasing number of military officers in Kim Jong-Il’s entourage is attributed to a few military leading figures. Only five military leaders in Table 1 have attended Kim Jong-Il’s visit to military sector 1,333 times which is about 48% of total attendance by 156 other entourage members. This case in point indicates that the increasing number of military officers in Kim Jong-Il’s entourage simply reflects political power of Kim Jong-Il’s five military prote′ge′s rather than the political power of the military.

11 Myong-kook, Kim and Jeong Seong Jang, “Nuga bookhaneul Umjikineunga (Who rules North Korea)” Sisajournal 992 (2009) http://www.atimes.com/atimes/printN.html; accessed July 10, 2010. Has tHe Military superseded tHe party under KiM Jong-il’s rule? 45

Kim Jong-Il’s major entourage members in his visit to military sector

Name On-the-spot guidance to military sector

Hyun Chul Hae 402 (14.50)

Park Jae Kyung 336 (12.12) Leading Ri Myong Su 277 (9.99) military Kim Young Chun 170 (6.13) figures Ri Yong Chul 148 (5.34)

Subtotal 1,333 (48.07)

Other entourage members 1,440 (51.93)

Total 2,773 (100)

Source: Korea Institute for National Unification. Note: English name follows after the way that the ROK Ministry of Unification shows it in its Internet homepage as of August 2011.

One way to overcome this shortcoming is to distinguish Kim’s guidance into a few different types according to its relative importance. A representative study fitting this demand is Gye- Sung Lee’s thesis published in 2009.12 He employs two categories to distinguish Kim Jong-Il’s guidance. The one category is based upon his official status producing ‘the guidance as a state leader’ and ‘the guidance as a supreme commander’. The other one is to divide the guidance according to the nature of guidance suggesting substantial and symbolic guidance. This study comes to the conclusion that right after the death of his father Kim Jong-Il had focused on the symbolic type of guidance to the military. He has concentrated on the substantial type since he was inaugurated as Chairman of the National Defense Commission in 1998. This study however does not concern the changing pattern of his

12 Kye-Seong Lee, “Bukhan Mediabodo Bunseokul tonghan Kim Jong-Il Hyujijido Yeongu,” Kyonggi University Ph.D. Dissertation (2008), pp.14-8. 46 tHe Journal oF east asian aFFairs

entourage in his different types of guidance. This article thus asks how Kim Jong-Il’s entourage appears in the substantial and symbolic guidance respectively when he visits the military as a status of the supreme commander. From this standpoint on it becomes important to ask who is supposed to join his substantial guidance. This question helps grip the nature of the party-military relations. First of all, the party-military relations in North Korea are generally considered inseparable.13 It seems correct but it does not indicate that high-level officials in the two agencies are committed to an indispensible task. In other words, the military and the party together can be an axis of political foundation for their dictator; they are supposed to perform different tasks respectively. From this expectation we can build a hypothesis explaining the relationship between the type of guidance and its entourage. More specifically, it can be hypothesized that military leaders would be more likely to join the substantial guide rather than the symbolic guidance because they are more specialized in military task. To the contrary party leaders would be more likely to join the symbolic type of guidance because they lack military expertise. The strength of this article is to challenge this line of thought by highlighting North Korea’s power structure representing Kim’s Jong-Il’s personal networks. Based upon the suggestions drawn from existing studies, we attempt to prove the following two hypotheses. First, party cadres are more likely than military leaders to join Kim Jong-Il’s substantial type guidance to the military because he lets his close party prote′ge′s control the military. Second, military leaders are more likely than party cadres to join Kim Jong-Il’s symbolic type of guidance to the military because Kim Jong-Il has to provide them with at least honorable treatment.

13 Moon Chung-in and Hideshi Takesada. “North Korea: Institutionalized Military Intervention,” in Muthiah Alagappa, ed., Coercion and Governance (CA: Stanford University Press, 2001), p.359. Has tHe Military superseded tHe party under KiM Jong-il’s rule? 47

data and MeasureMent

The basic data we make use of is “the Recent Movement of Kim Jong-Il’s on-the-spot Guidance to the Military: 1994-2008” published by the Korea Institute for National Unification. With this, we have investigated the names and appointed positions of Kim Jong-Il’s entourage and the dates and places of his guidance to the military. The total number of Kim Jong-Il’s on-the-spot guidance accounts for 1,021 times from July 1994 to December 2008. Of 1,021 on-the-spot guidance, his guidance to the military reaches 533 times, sharing 52.2%. The total number of entourage joining Kim’s guidance in the same period amounts to 161 personnel.

Dependent Outcome: Hazard of Joining Kim Jong-Il’s Entourage

We categorize Kim Jong-Il’s on-the-spot guidance to the military into the categories of either military troops or arts performance. The guidance to military troops indicates Kim Jong-Il’s visits to military posts including armed forces or command and control systems which are related to combat purposes. By contrast, the guidance to military art performance involves his visit to the places in which soldiers of artists play musicals, ensembles, orchestra and so forth. Kim Jong-Il has been widely known to possess artistic talent and to stress upon military arts in building communist ideology and culture. Consequently, he has urged the creative performance of military arts and its diffusion into society by continuing his attendance regularly to military art performance. According to the data we collected, Kim Jong-Il’s guidance to military troops accounts for 369 times out of the total 533 visits to the military. In comparison, his guidance to military art performance reaches 106 times, and remaining 58 times are not easily distinguished in either categories. Because Kim Jong-Il’s on-the-spot guidance continues to occur for the given time interval [t, t+dt] rather than occur simultaneously at given time (t), the event-history analysis is a useful method by which one can compare the probability that party cadres and 48 tHe Journal oF east asian aFFairs

military leaders attend Kim Jong-Il’s visit to military sectors. As data collected here provides the day of Kim Jong-Il’s on-the- spot guidance one can analyze the number of days between on- the-spot guidance. Observation begins July 14, 1994 and ends December 29, 2008 (the first and last date of Kim Jon-Il’s on- the-spot guidance in data set). In this analysis, the dependent variable is coded 1 on the day of the respondent’s joining Kim Jong-Il’s entourage and the respondents who do not attend Kim Jong-Il’s visit to military sector are censored.

Independent Variables

We used the following five independent variables to test two hypotheses presented earlier: MILITARY, PARTY, MRA, CC, and CMC. First, we have identified the status of entourage involving total 161 personnel with two types of military leaders (MILITARY) and party cadres (PARTY). We have found 32 party cadres and 48 military leaders. The criteria for identifying target personnel was the current position which appeared in “the movement of Kim Jong-Il’s on-the-spot guidance from 1994-2008” as referred above. The Third variable―MRA―indicates the Mankyoungdae Revolutionary Academy graduates. Of 161 entourages analyzed in this article we have identified 17 Revolutionary Academy graduates on the basis of data collected from “the 2003 Annual Report on North Korea” published by Yonhap News and consider them the Kim Jong-Il’s inner circle. In addition to this, the model that we have built for analysis involves two more variables: the Central Committee members (CC) and Central Military Committee members (CMC) of the WPK (Workers’ Party of Korea). This is due to two reasons. First, as in most Soviet-style party states, the CC of the WPK has played a role in directing all party and government policies. Second, the CMC of the WPK is considered the supreme military policy- making body. Data are collected from positions presented in “the movement of Kim Jong-Il’s on-the-spot guidance from 1994- 2008”. Finally, it is worth noting that even though the CMC of Has tHe Military superseded tHe party under KiM Jong-il’s rule? 49

the WPK has been in decay after the rise of the National Defense Commission, we cannot consider the NDC membership an independent variable because it does not meet the proportional-hazards assumption for event-history analysis. The result of a graphic test executed before a main analysis proves that other independent variables employed in our analysis has satisfied proportional- hazards assumption.

Findings Descriptive statistics of variables are presented in Table 2. Starting with the dependent variables, Kim Jong-Il’s visit to military sectors was slightly biased toward substantial type of guidance (24.1%) from symbolic type of guidance (13.3%). For the independent variables, military leaders (32.2%) outnumber party cadres (19.8%). The Revolutionary Academy graduates were the smallest group at only 10.5%. Nearly half the sample (45.3%) was a member of the CC of the WPK, but only a party of the sample came from a member of CMC of the WPK (23.4%). Correlation coefficients between independent variables are presented in Appendix 1.

Descriptive Statistics

Variables Number Mean Std. Dev. Min Max

Dependent Substantial guidance .241 .427 0 1

variables Symbolic guidance .133 .340 0 1

MILITARY .322 .469 0 1

Independent PARTY .198 .400 0 1

variables MRA .105 .308 0 1

CC .453 .499 0 1

CMC .234 1.518 0 1 50 tHe Journal oF east asian aFFairs

Table 3 begins the multivariate analysis. We first look over the model 1 that examines the effect of independent variables on the probability of attending Kim Jong-Il’s visit to all military sectors. The results of the hazard models are presented as the odds ratios. A coefficient greater than 1 represents a positive effect that accelerates joining Kim Jong-Il’s entourage, while a coefficient less than 1 indicates a negative effect that delays joining Kim Jong-Il’s entourage. In model 1, there is a strong positive effect of being a military leader, a member of the CC of the WPK, and a member of the CMC of the WPK. As expected in the prior literature, military leaders join Kim Jong-Il’s visit to all military sectors at rates that are more than two times that of other individuals in Kim Jong-Il’s entourage. Individuals who are a member of the CC and the CMC also joined Kim Jong-Il’s entourage at rates significantly higher than that of other individuals.

Cox regression model of Kim Jong-Il’s entourage in his visit to military sector

All military sectors Substantial guidance Symbolic guidance Variables (std. dev.) (std. dev.) (std. dev.)

MILITARY 2.005 (.462)*** 5.285 (1.64)*** 2.016 (.545)***

PARTY 1.236 (.322)*** 3.494 (1.09)*** 1.330 (.385)***

MRA 1.211 (.390)*** 2.190 (.883)*** 1.572 (.549)***

CC 2.712 (.623)*** 1.798 (.595)*** 1.973 (.510)***

MC 2.920 (.977)*** 1.862 (.807)*** 1.973 (.738)***

Log-likelihood -437.890 -234.586 -354.811

N of subjects 161 161 161

Reference: * p<.10; ** p<.05; *** p<.01

Model 2 supports the first hypothesis of this article of party cadres more likely than military leaders to join Kim Jong-Il’s substantial type guidance to the military. As predicted, party Has tHe Military superseded tHe party under KiM Jong-il’s rule? 51

cadres who graduated from the Revolutionary Academy join Kim Jong-Il’s visit to combat units (substantial guidance) at rates that are more than 1.4 times that of military leaders (3.494×2.190/ 5.285 = 1.47). It is also worth mentioning that the CMC membership does not have statistically meaningful effect on the rates that individuals join Kim Jong-Il’s visit to combat units. In model 3, we test the second hypothesis of this article that military leaders are more likely than party cadres to join Kim Jong-Il’s symbolic type guidance to the military. As predicted, military leaders join Kim Jong-Il’s watching art performance (symbolic guidance) at rates significantly higher than that of party cadres. Contrary to substantial guidance, the covariate PARTY and MRA do not have statistically significant effect on symbolic guidance. However, individuals who are a member of the CC and the CMC joined Kim Jong-Il’s entourage at rates that are more than 1.9 times that of other individuals. Two points in our findings help prove Kim Jong-Il’s control over the military, giving primacy to the party. First, most previous studies have touched upon only the frequency of Kim Jong-Il’s guidance or major figures’ accompaniment of his entourage. However, we have found a significantly different result by manipulating the statistics in a more refined design. This is to imply that a more prudent and deliberate design is essential in handling the statistics of Kim Jong-Il’s guidance to the military. Second, we have found a different result from the previous studies by distinguishing Kim’s guidance to the military into two different types of guidance: combat unit and art performance. Once we accept that Kim Jong-Il’s on-the-spot guidance at combat units is relatively more important than his on-the-spot guidance at art performance results demonstrate that the military has not superseded the party under Kim Jong-Il’s rule. Combining our findings together, we support the statement that the party-military relations in North Korea has confirmed a dominant position of the party over the military, despite the emergence of new political slogan like the “military-first politics”. 52 tHe Journal oF east asian aFFairs

conclusion

The findings of our analysis are expected to provide a few implications for the method of analysis studying North Korea’s political system. In the first place, there should be a reappraisal of the widely accepted view seeing the party-military relationship as a compound entity. It is not surprising to see party cadres joining Kim Jong-Il’s on-the-spot guidance to the military, at the sight of the organic bound shaped between the party and the military. A significant aspect found in this study is the changing pattern of party cadres in joining Kim Jong-Il’s guidance. They are more likely to join a substantial type of guidance than a symbolic type. This difference may indicate valuable guidelines in understanding the maintenance of the party-military relations in Korea, but we are still away from explicating what they really mean. All we can support at this point is the argument that the dominance of the party over the military has been maintained, which might be generated from Kim Jong-Il’s intention. Progressively, an argument may be presented to confirm Kim Jong-Il’s allowance of primacy to the military on the basis of the accompaniment of party cadres in his visit to the military. By doing that, he would show the loyalty and supremacy of the military to party cadres as a way of realizing “the military-first politics”. He could however expect the brainwashing effect for party cadres. In fact, Kim Jong-Il has repeatedly emphasized the diffusion of military loyalty into society since his departure of regime. Obviously, this progressive position is yet undeniable, and other numerous instances can be presented to prove it. However, we have rather a tilt to the opposite position, on the ground that the progressive view is captivated with superficial and symbolic aspects. It is no doubt that Kim Jong-Il has repeated his full confidence to the military, but it does not mean to discredit the party. Additionally, it should not be underestimated that Kim Jong-Il’s career and grown-up backgrounds are closely bound to the party. Another implication of this study is addressed to the method Has tHe Military superseded tHe party under KiM Jong-il’s rule? 53

of analysis in investigating the statistical data of Kim Jong-Il’s guidance to the military. We have gained an interesting outcome from the analysis of distinguishing Kim Jong-Il’s guidance to the military into two different types involving combat unit and art performance. Our objective is to make it clear only partially that the heads of military have been more visible in joining Kim Jong- Il’s entourage, because it is confirmed only in the guidance to art performance. Consequently, any further analysis needs to be conducted in efforts to make typology specifying Kim Jong-Il’s on-spot guidance according to such variables as time, purpose, and so forth. This study is not free from shortcomings. For example the exclusion of a comparative analysis of Kim Il-Sung and Kim Jong-Il period concerning their public appearances like the guidance to the military. Consequently, it is not able to answer the question of what caused party cadres’ frequent joining in Kim Jong-Il’s guidance to the military. It might be an evidence for Kim Il-Sung’s dealings of power politics or Kim Jong-Il’s allowance of primacy to the party. Clear answers need to be sought out in other studies. Another shortfall appears in controlling variables within our capacity. There might be more countable variables, presumably working in real activities concerning Kim Jong-Il’s guidance. An inability to effectively control variables may bring a different result from what has actually happened. It is also true that other shortcomings are inescapable because we meet the problem of decreasing cases for statistical analysis. As a result there are missing values when we attempt to control more variables beyond our capacity due to the limited condition of collecting adequate data on North Korea’s power elites. To avoid this problem, it is necessary to acquire more information on North Korea’s leaders. 54 tHe Journal oF east asian aFFairs

Correlation coefficients between independent variables

MILITARY Party MRA CC MC

MILITARY 1

-0.6555 PARTY 1 (0.00)

0.097 0.0716 MRA 1 (0.00) (0.00)

-0.1381 0.1888 0.3431 CC 1 (0.00) (0.00) (0.00)

0.3116 -0.1293 -0.2032 0.2752 MC 1 (0.00) (0.00) (0.00) (0.00) Managing a Financial crisis: a coMparative political econoMic analysis oF the United states and soUth Korea 55

Managing a Financial crisis: a coMparative political econoMic analysis oF the United states and soUth Korea

edward Kwon Northern Kentucky University

Abstract

This paper analyzes how financial crises were managed by the governments of two countries: the United States and South Korea. The financial crises in the United States triggered by sub-prime mortgage lending and a series of bankruptcies of large financial firms have been disastrous for the global economy. Given that global trade and financial markets are highly interdependent with the U.S. economy, every decision by the incumbent Obama administration has influenced the future of the global economy. The U.S. government’s stalwart support and intervention in its market, as reflected in the $787 billion stimulus legislation, is in direct contrast to what obtained during the post-financial crisis in South Korea. Under the structural adjustment program of the IMF and the guideline of neo-liberalism, the Kim Dae Jung government took drastic steps to market reform which overhauled a fragile financial system in order to resuscitate the economy. Using a comparative political economic analysis of post-crisis reforms of these states, we are in a position to reevaluate the promise and result of neo-liberalism, and explore the relationship between states and markets. We can trace the origins and development of the two financial crises and compare and contrast the role of government in financial restructuring.

Key Words: Korea, the United States, Financial Crisis, Financial Reform, Governance 56 the JoUrnal oF east asian aFFairs

introdUction

Approximately a decade after the Asian financial crisis of 1997, the United States economy plunged into a panic and credit crunch in the wake of the subprime mortgage crisis in the summer of 2007. Given that global trade and financial markets are highly interdependent with the U.S. economy, a number of countries also have been forced to confront a serious liquidity and financial problem. Each of the Obama administration’s responses to its financial system thus has greatly influenced the future of the global economy. The United States’ attempts to resuscitate its economy also require support by international financial institutions, industrialized countries, as well as the G-20. From the beginning, the U.S. government has vehemently supported the bailout of ailing Wall Street firms. The U.S. government’s financial support of its market, as reflected in the $787 billion stimulus, is unmatched since the Great Depression. The 2009 U.S. budget deficit reached $1.3 trillion, accounting for 9.2 percent of its GDP. The U.S. government response to its financial crisis is in direct contrast to what obtained during the post-financial crisis in South Korea. Under the structural adjustment program of the IMF and the guideline of neo-liberalism, the Kim Dae Jung government took drastic steps of market reform, overhauling its fragile financial system in order to resuscitate its economy. Through a comparative political economic analysis of post-crisis reforms of these two states, this paper will investigate the origins and development of the two financial crises and compare and contrast the role of the governments in financial restructuring. This paper also will reevaluate the promise and result of neo- liberalism, and the relationship between states and markets in the financial system. This paper is organized into six sections. Beginning with an introduction, section two describes the cause of the U.S. financial crisis. Section three introduces the U.S. governments’ series of responses to the crisis. Section four examines the background of the Korean developmental states and its financial crisis. Section five focuses on the Korean government’s role in Managing a Financial crisis: a coMparative political econoMic analysis oF the United states and soUth Korea 57

managing ailing big business groups after the crisis. The paper concludes with a comparison of the two governments’ role within the relationship between state and market.

the caUses oF the Unitedstates Financial crisis

When the U.S. housing market bubble burst, American homeowners’ foreclosure rates reached a record high. Since many financial institutions invested heavily in mortgage-backed securities, the private loan default sent ripples throughout the economy. From early 2007, U.S. mortgage delinquencies led to bankruptcies of subprime mortgage lenders, such as New Century Financial, DR Horton, and Countrywide Financial. On April 2, 2007, the largest U.S. subprime lender, New Century Financial, filed for Chapter 11 bankruptcy.1 In March 2008, Bear Stearns, one of the largest investment banks, faced bankruptcy, but it was acquired by JPMorgan Chase with support by the Federal Reserve.2 On September 7, 2008 the U.S. government nationalized Fannie Mae and Freddie Mac. September 14 saw the bankruptcy of Lehman Brothers and the sale of Merrill Lynch to Bank of America. A few days later (September 17), the Federal Reserve loaned $85 billion to the American International Group (AIG), the world’s largest insurance company, to save it from bankruptcy. A series of bankruptcies of major financial firms worsened the economic crisis in the United States, rivaling that of the Great Depression of the 1920s. In addition, the U.S. financial crisis spread to the entire world. Following is an exploration of the underlying causes of the U.S. financial collapse. First, we should consider the negative effects of neoliberal economic reform in the

1 “New Century files for Chapter 11 bankruptcy,” Reuters, 2 April 2007, 2 April 2007. 2 James Freeman, “Bear Stearns: The Fed’s Original ‘Systemic Risk’ Sin,” The Wall Street Journal, 16 March 2009. 17 March 2009. 58 the JoUrnal oF east asian aFFairs

United States.3 A principle of neo-liberalism is deregulations of transnational financial transactions (free capital movement), which encourages liberalization in financial markets. The tradition of the Glass-Steagall Act of 1933 had required the U.S. financial system to separate investment and commercial banking. Yet, the U.S. banking industry’s lobby persuaded policymakers to repeal a portion of the Glass-Steagall Act. Finally, this act was repealed in 1999 under the Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act. This act allowed any firm to consolidate commercial banks, investment banks, insurance companies, and securities firms. Thus, a commercial bank holding company like Citicorp could merge with insurance and securities companies and form the conglomerate Citigroup. In addition, the Securities and Exchange Commission’s relaxation of debt-to- capital ratio from 12:1 to 30:1 for investment banks allowed these banks to pursue more risky investments in the mortgage-related securities business.4 In the long run, several U.S. financial firms adopted more risky business ventures for higher returns on investment using new investment instruments such as mortgage- backed securities (MBS), collateralized debt obligations (CDOs), and credit default swap (CDSs) which subsequently were a major cause of the U.S. financial crisis. Second, the Federal Reserve’s mismanagement of monetary policy led to the crisis.5 In response to the economic downturn between 1998 and 2003, the Federal Reserve kept the interest rates low in order to maintain enough liquidity in financial markets, known

3 See David M. Kotz, “The Financial and Economic Crisis of 2008: A Systemic Crisis of Neoliberal Capitalism,” Review of radical Political Economics 41, no. 3 (Summer 2009): 305-317. 4 Joseph E. Stigltiz, “The Economic Crisis: Capitalist Fools,” Vanity Fair, January 2009, ; Stephen Labaton, “Agency’s ’04 Rule let Banks Pile Up New Debt,” New York Times, 2 October 2008, . 5 Jeffrey A. Miron, “Bailout or Bankruptcy?” Cato Journal 29, no. 1 (Winter 2009): 1-17; Allan H. Meltzer, “Reflections on the Financial Crisis,” Cato Journal 29, no. 1 (Winter 2009): 28. Managing a Financial crisis: a coMparative political econoMic analysis oF the United states and soUth Korea 59

as the “Greenspan put.” As shown in Figure 1, the low effective federal funds rate from early 2000 and 2004 and negative real interest rates facilitated the housing and stock market boom. Investors subsequently were somewhat misguided because, whenever the financial market situation would turn bad, the Federal Reserve would intervene and inject liquidity until the market turned for better. The lower interest rates served to extend the economic boom and provided the banks and financial firms with ample liquidity. However, the misguided policy led to a speculative bubble in the housing and stock markets and further encouraged subprime lending, heightening the housing bubble.

Federal Funds Effective Rate 1998-2010

7.00

6.00

5.00

4.00

3.00

2.00

1.00

0.00 Jul-05 Jul-00 Jan-08 Jan-03 Jan-98 Jun-08 Jun-03 Jun-98 Oct-06 Oct-01 Sep-09 Sep-04 Feb-05 Sep-99 Feb-00 Apr-09 Apr-04 Apr-99 Dec-05 Dec-00 Mar-07 Mar-02 Aug-07 Nov-08 Aug-02 Nov-03 Nov-98 May-06 May-01 Source: Board of Governors of the Federal Reserve System, 2 February 2010, .

Third, the asset price bubble of the housing price boom and the risky mortgage lending contributed to the crisis. In the process of the federal government’s decades long pursuit of an increase in homeownership, the government sponsored financing agencies encouraged low-income households with bad credit to access sub- prime mortgage. For example, the Community Reinvestment Act of 1977 encourages depository institutions to ease mortgage loans 60 the JoUrnal oF east asian aFFairs

for the low and moderate income people. In the 1990s, the Department of Housing and Urban Development (HUD) kept pressure on mortgage lenders to support reasonably priced housing. In 1995, the agency allowed financial institutions to extend their credits by purchasing mortgage-backed securities, which could lend to the low income borrower with poor credit. The government sponsored Fannie Mae and Freddie Mac became major players of HUD’s affordable housing plan.6 Declining housing prices and growing foreclosures pushed Fannie Mae and Freddie Mac to the verge of bankruptcy. When the federal government took over the companies, they owned or guaranteed more than half of all Americans’ $12 trillion in mortgages. The two companies also keep more than $1.5 trillion of the mortgages as securities.7 The failure of Fannie Mae and Freddie Mac led to capitalization problems and drops in the stock portfolios of a number of financial institutions with investments in the two companies, triggering the U.S. and worldwide financial crisis. Fourth, risky profit maximizing behavior on Wall Street in adopting innovational investment aggravated the crisis. The Wall Street investors and credit agencies seemed oblivious to the flaws of new investment instruments such as securitization, derivatives, and auction-rate securities. Banks and investment banks loaned their financial capital to the mortgage brokers and also packed mortgages in the form of MBS to secure their repayment. In addition, they hedged the funds to minimize the risk through credit default swap. Since these investment tools became so complex and difficult to valuate, no one seemed to understand the risks. The credit rating agencies tended to overvalue the ratings, apparently by a lack of this knowledge.8 When the delinquency rate on Fannie

6 See Helen Thompson, “The Political Origins of the Financial Crisis: The Domestic and International Politics of Fannie Mae and Freddie Mac,” The Political Quarterly 80, no. 1 (January-March 2009): 17-24; Meltzer, 28. 7 Stephen Labaton and Steven R. Weisman, “U.S. Weights Takeover of Two Mortgage Giants,” The New York Times, 11 July 2008, . 8 Anna J. Schwartz, “Origins of the Financial Market Crisis of 2008,” Cato Journal 29, no. 1 (Winter 2009): 20. Managing a Financial crisis: a coMparative political econoMic analysis oF the United states and soUth Korea 61

Mae and Freddie Mac’s mortgages were rising, the effect spread to all other institutions and spilled over into the entire economy.

the U.s. governMent’s responses

The U.S. government’s response to the financial crisis has been focused on massive financial support to ailing financial institutions on Wall Street and to the Big Three auto industry (General Motors, Ford, and Chrysler) while strengthening prudential regulatory reform of its financial system. In order to avert more bankruptcy and credit crunch, the Federal Reserve has committed massive bailouts or spent trillions of dollars (totaled $11 trillion spent as of November 16, 2009) through asset purchases, direct spending, loans, and guarantees.9 In March 2008, the Federal Reserve committed financial support to JPMorgan Chase for acquiring nearly bankrupt Bear Stearns. On September 7, 2008 the U.S. government nationalized Fannie Mae and Freddie Mac. On September 17, the Federal Reserve loaned $85 billion to the American International Group (AIG). In December 2008, the government underwrote the bailout of $2.23 billion to the CITI Group. The federal government also prepared for other huge bailout plans. On September 18, 2008, former Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke proposed a $700 billion emergency bailout to purchase toxic assets from the nation’s ailing banks. The U.S. House of Representative at first rejected the proposal, but the Senate passed a revised version by a vote of 74 to 25 on October 1, 2008. The House passed the Emergency Economic Stabilization Act by a vote of 263 to 171 on October 3. In early October, the Federal Reserve announced that it would provide short-term cash loans of $900 billion to banks and lend about $1.3 trillion to companies in the non-financial sector. By mid-October, government had prepared the $700 billion

9 CNN, “CNNMoney.com’s Bailout Tracker,” CNN, . 62 the JoUrnal oF east asian aFFairs

from the Emergency Economic Stabilization Act. The Treasury decided to utilize $250 billion toward an investment plan for recapitalization and as a sovereign guarantee for nine banks.10 The Treasury also contributed another $33.6 billion of bailout to 21 banks in November.11 In February 2009, Congress approved a $787 billion economic stimulus measure in order to support government spending on public works projects, education, healthcare, energy and technology with a combination of fast-acting tax cuts.12 Suffering from the economic crisis, the U.S. Big Three sought a $25 billion government bailout to avoid bankruptcy in September 2008. The Congress was divided, and demanded a comprehensive restructuring plan from the Big Three. The Big Three then submitted a revised $34 billion bailout plan with drastic measures such as cutting executive pay, development of energy-efficient vehicles, and consolidating operations. Chrysler filed for bankruptcy in May 2009 and General Motors filed for bankruptcy the month following. In June, Chrysler was bought out by the Italian automaker Fiat. General Motors became a government-owned company (the U.S. government owns 60.8 percent, the Canadian government 11.7 percent, and the United Auto Workers union 17.5 percent).13 In addition to these massive bailouts, the Congress has prepared various reform measures focusing on how to prevent future crises

10 The nine banks are Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, Merrill Lynch, Goldman Sachs, Morgan Stanley, Bank of New York Mellon and State Street. See “U.S. Injection Lifts Confidence,” Financial Times, 14 October 23008, < http://www.ft.com/cms/s/0/395a0fa6-99f2-11dd-960e- 000077b07658.html-nclick_check=1>. 11 “Treasury: $33.6 billion to 21 banks,” CNNMoney.com, 17 November 2008 . 12 David M. Herszenhorn, “Recovery Bill Gets Final Approval,” New York Times, 13 February 2009, . 13 Micheline Maynard and Michael J. de la Merced, “G.M. Pushes the Case for Its Rebirth in Court,” New York Times, 30 June 2009, < http://www.nytimes.com /2009/07/01/business/01auto.html>. Managing a Financial crisis: a coMparative political econoMic analysis oF the United states and soUth Korea 63

and to ensure efficiency of the financial market. In the early stage of the financial crisis, the Emergency Economic Stabilization Act (EESA) of 2008 was passed and the act created the Troubled Asset Relief Program (TARP).14 The legislation was a means to inject funds for additional home foreclosure relief, to authorize direct loans to the auto industry and additional housing relief and financial assistance under the TARP. In 2009, the new Obama administration and the 111th Congress passed the American Recovery and Reinvestment Act of 2009 (ARRA),15 aimed at economic recovery and stimulus. The ARRA includes about $800 billion and purports to save or create 3.5 million jobs. Some of the funds were entrusted to states, local governments, and individuals for various purposes such as unemployment compensation, health insurances, broadband communication, and energy. On June 17, 2009, President Obama proposed a comprehensive regulatory structure of the U.S. financial system. The plan required that all financial firms be subjected to consolidated supervision and regulation. Under system wide stress, market discipline and transparency should be reinforced. A new Consumer Financial Protection Agency will be created in order to protect consumers’ credit, savings, and payment markets. The government will have a new financial crisis management tool, and make an effort to increase international regulatory standard and improve international coordination.16 According to the Financial Regulatory Reform,17 the proposal focused on five areas: (1) promote robust supervision and

14 Baird Webel and Edward V. Murphy, “Troubled Asset Relief Program: Legislation and Treasury Implementation,” CRS Report RL34730 (Washington, D.C.: U.S. Congress, 2009). 15 Clinton T. Brass et al., “American Recovery and Reinvestment Act of 2009 (P.L. 111-5): Summary and Legislative,” CRS Report R40537 (Washington, D.C.: U.S. Congress). 16 U.S. Treasury, “President Obama to Announce Comprehensive Plan for Regulatory Reform,” U.S. Treasury Press Release TG-175, 17 June 2009, . 17 U.S. Department of the Treasury, Financial Regulatory Reform: A New Foundation: Rebuilding Financial Supervision and Regulation (Washington, DC, June 2009), 3-4. 64 the JoUrnal oF east asian aFFairs

regulation of financial firms, (2) establish comprehensive supervision of financial markets, (3) protect consumers and investors from financial abuse, (4) provide the government with the tools it needs to manage financial crises, and (5) raise international regulatory standards and improve international cooperation. The plan proposed that the Federal Reserve be in charge of monitoring systemic risk in the financial system. The Treasury Department also proposed creating an Office of National Insurance, which will monitor all aspects of the insurance industry, gather information, develop expertise, negotiate international agreements and coordinate policy in the insurance sector.18 The Obama administration continued its effort to crisis management. On January 14, 2010 the President proposed Financial Crisis Responsibility Fee to recoup Every Last Penny for American Taxpayers to recover government financial support incurred during the financial crisis under the TARP. The fee was to be in place for ten years until the costs of TARP are fully paid back. The responsibility fee would target major financial institution with assets of more than $50 billion which benefitted from the TARP.19 Under strong opposition from Republicans and conservative lawyers20 the proposal was removed from the Wall Street Reform and Consumer Protection Act, the financial regulatory overhaul bill. The bill underlined financial regulation and oversight in giving the government a new power to shut down or seize ailing financial companies and to establish a council of federal regulator in order to monitor future threats to the financial system. It also allowed

18 Title V of proposed legislation, “Office of National Insurance Act of 2009,” submitted by Treasury, . 19 The White House, President Obama Proposes Financial Crisis Responsibility Fee to Recoup Every Last Penny for American Taxpayers, 14 January 2010, < http://www.whitehouse.gov/the-press-office/president-obama-proposes- financial-crisis-responsibility-fee-recoup-every-last-penn> . 20 See David John, “The Financial Crisis Responsibility Fee: The Wrong “Solution,” A Testimony on Financial Market (Washington D.C.: The Heritage Foundation, 12 May 2010), < http://www.heritage.org/research/testimony/the- financial-crisis-responsibility-fee-the-wrong-solution>. Managing a Financial crisis: a coMparative political econoMic analysis oF the United states and soUth Korea 65

setting up an independent consumer bureau within the Federal Reserve to protect borrowers from possible abuses in mortgage, credit card and other types of lending.21 Along with these reforms, the Congress introduced several reform measures relating to the failure of credit ratings agencies to derivatives and other financial products. In order to provide for the investigation of financial crisis, the Congress established a special committee, a 10-member Financial Crisis Inquiry Commission. Regarding the housing market, mortgages, and foreclosure, several bills had been introduced. Congress also established the Consumer Financial Protection Agency to protect consumers and regulate consumers’ financial products and services.22 Several bills deal with financial regulatory reform. H.R. 3269, Corporate and Financial Institution Compensation Fairness Act of 200923 is designed to bolster the public company shareholders’ advisory vote on executive compensation and to prevent inappropriate compensation and incentive-granting practices of financial institutions with at least $1 billion in assets. In order to protect consumers and investors, and to regulate the over-the-counter derivatives market and other, the H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009, was passed.24 To prevent predatory and irresponsible mortgage lending, the House introduced the H.R. 1728, the Mortgage Reform and Anti-Predatory Lending Act.25

21 Brady Dennis, “Congress Passes Financial Reform Bill,” The Washington Post, 16 July 2010, . 22 Dick K. Nanto, “The Global Financial Crisis: Analysis and Policy Implications,” CRS Research for Congress RL34742 (Washing D.C.: U.S. Congress, October 2, 2009), 9-10. 23 See < http://www.house.gov/apps/list/press/financialsvcs_dem/3269_as_amended_by_ committee.pdf>. 24 See . 25 See < http://www.rules.house.gov/111/LegText/111_1_hr4173.pdf>. 66 the JoUrnal oF east asian aFFairs

the BacKgroUnd oF the Korean Financial crisis

The Asian financial crisis was a valuable lesson for Korea, a chaebol dominated economy. In retrospect, the tremendous economic growth of the South Korean economy during the 1960s-70s was supported by the Korean developmental state26 and the chaebol’s cooperation. Under the guidance of the strong developmental state, a few handpicked big business groups took a leading role in implementing the government’s heavy and chemical industries (HCI) drive. The Park Chung Hee regime nationalized private banks, channeling huge amounts of financial credit and supporting the chaebol with extraordinarily low interest rates for policy loans. However, the state-chaebol symbiosis faced a serious challenge from an economic downturn during the 1980s, ultimately driving the economy into a financial crisis.27 The chaebol, as an agent of a developmental state, took a leading role in rapid economic development in the past three decades. It benefited from various financial supports from the government’s assistance that encouraged accumulating a huge amount of financial resources. The lion’s share of the chaebol in the Korean economy is supported by various economic indexes. The top 30 big business groups represented almost 15 percent of the Korean GDP in 1996 (see Figure 2). In the same year, the top 30 conglomerates occupied more than half of equity and sales in the private sector. The top five conglomerates accounted for 55 percent of all domestic bank loans in 1997, while the top 30 chaebols represented less than 13 percent profits (see Table 1).28 In addition, most Korean conglomerates typically are uninterested in building a high debt-equity ratio while running their business.

26 Chalmers Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy 1925-1975 (Stanford, CA.: Stanford University Press, 1982). 27 Eundak Kwon, “Financial Liberalization in South Korea,” Journal of Contemporary Asia 34, no. 1 (2004): 80. 28 Peter M. Beck, “Revitalizing Korea’s Chaebol,” Asian Survey 38, no. 11 (November 1998): 1021. Managing a Financial crisis: a coMparative political econoMic analysis oF the United states and soUth Korea 67

As seen in Table 2, the top five chaebols have averaged 473 percent and the top 6 to 30 chaebols have averaged 617 percent of debt-equity ratio, respectively, in 1997. The monopolistic or oligopolistic condition of the chaebol is unique in the world business scene.

Chaebols’ Share in Korean GDP (%) 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 1985 1990 1991 1992 1993 1994 1995 1996 Top5 6.0 6.6 6.6 7.0 7.2 7.7 9.2 8.6 Top30 12.5 12.7 13.0 13.5 13.6 14.2 16.2 14.6

Source: Seong Min Yoo, “Corporate Restructuring in Korea,” 65.

Top 30 Chaebol Economic Concentration Level in 1996 (%) Value Added Equity Sales Profits Employees

All sectors - 57.7 51.8 12.4 4.8

Manufacturing 36.6 52.5 46.4 30.1 13.8

Source: Beck, “Revitalizing Korea’s Chaebol,” 1022. 68 the JoUrnal oF east asian aFFairs

Trend of Debt-Equity Ratios of the 30 Largest Chaebol (%) 1995 1996 1997 1998 1999 2000

Top 5 Chaebol 297.6 344.2 472.9 235.1 148.7 162.0

Top 6-30 Chaebol 435.1 460.8 616.8 497.1 498.5 186.0

Total 347.5 386.5 512.8 379.8 218.7 171.2

Source: Korean Fair Trade Commission, ; Jang-Sup Shin and Ha-Joon Chang, Restructuring Korea Inc. (New York: RoutledgeCurzon, 2004), 85.

The governmental protections and strategic considerations of HCI contributed to the rise of the chaebol. The heavy industrialization of the 1970s suffered serious setbacks due to the global recession that resulted from the second oil crisis in 1979. The government’s financial regulation could effectively promote rapid industrialization and economic development, but did not develop a free capital market. The government’s financial regulation and credit policy made the chaebol dependent on debt financing. This policy was not problematic when the economy boomed, but the government always had to support debt financing and continued heavy controls over the banking sector in order to bail out the troubled industries when the economy recessed, such as during the oil shock. Even the government’s credit policy could exacerbate the moral hazard problem which was one of the main reasons for the 1997 financial crisis. The chaebol believed in “too big to fail,” and strongly depended on the debt-financing management under the umbrella of the government’s financial regulation and credit policy. The capacity of the commercial banks’ non-performing loans increased due to the government bailout and the chaebol’s debt-run management. When a large business group was troubled, the government pressured commercial banks to bail them out, whereupon the volume of the non-performing loans of the commercial banks increased exponentially.29

29 Kwon, “Financial Liberalization in South Korea,” 85. Managing a Financial crisis: a coMparative political econoMic analysis oF the United states and soUth Korea 69

Since the early 1990s, a large increase in short-term foreign portfolio investment became the main source of foreign capital inflow to Korea, accounting for 68 percent of the total debt by mid-1997, and creating a fragile financial system. This financial liberalization increased the chaebol’s influence for the NBFIs and made it easy to access foreign capital. Meanwhile, the government did not establish an effective monitoring and supervision mechanism. From a macroeconomic viewpoint, the Korean economy experienced increasing current account and trade account deficits since 1990 (see Table 3), and a loss of price competitiveness in the export market due to the devaluation of the currency in China and the depreciation of the Japanese yen relative to the dollar. Global demand for Korea’s major export sectors (such as semiconductors, automobiles, and ships) as well as demand from Japan (Korea’s largest trading partner) lagged. The majority of the current and trade deficits were financed by the capital inflows (portfolio investment and short-term loans). Since the early 1990s, a large increase in short-term loans and foreign portfolio investment became the main source of foreign capital inflow to Korea, accounting for 68 percent of the total debt by mid-1997 (see Table 4), and created an exceedingly fragile financial system in Korea.

Balance of Payments, 1989-1997 (In millions of U.S. dollars) Financial account Current Trade Capital Year account account Direct Portfolio Other account investment investment investment

1989 5,360.3 4,805.4 520.0 -710.8 -2,376.7 -318.4

1990 -2,003.3 -3,065.1 -263.1 83.6 3,075.1 -331.2

1991 -8,137.2 -8,956.1 -308.8 3,054.8 3,995.3 -329.5

1992 -3,942.9 -4,638.5 -433.2 5,802.5 1,624.7 -407.0

1993 989.5 192.3 -751.9 10,014.4 -6,046.7 -475.1

1994 -3,866.9 -4,660.5 -1,652.1 6,120.1 6,263.6 -436.5 70 the JoUrnal oF east asian aFFairs

Financial account Current Trade Capital Year account account Direct Portfolio Other account investment investment investment

1996 -23,004.7 -21,144.1 -2,344.7 15,184.6 11,084.5 -597.6

1997 -8,618.2 -6,803.0 -1,946.8 14,763.2 -6,788.8 -589.4

Oct -663.1 -407.6 -182.0 1,044.7 298.2 -58.3

Nov 477.9 614.5 -122.4 -669.3 -2,831.7 -40.2

Dec 3,456.5 2,852.4 -279.4 621.4 -5,865.3 -13.5

Source: Bank of Korea, Economic Statistics Yearbook, 1998, 177.

Korea’s International Claims Held by Foreign Bank, 1995-1997 (in millions of US dollars) Distribution by maturity Distribution by sector Total Year Outstand Short- in % Long- in % Non-bank ing Banks Public term of total term of total private

mid-1995 71,430 51,439 72.0 13,520 18.9 47,583 5,518 18,308

end-1995 77,383 54,130 70.0 14,611 18.9 52,262 5,167 19,919

mid-1996 87,844 62,187 70.8 16,872 19.2 60,167 4,990 22,593

end-1996 99,953 67,506 67.5 19,991 20.0 65,896 5,677 28,310

mid-1997 103,432 70,182 67.9 20,505 19.8 67,290 4,390 31,680

Source: BIS, The Maturity, Sectoral and Nationality Distribution of International Bank Lending, First Half 1996 and 1997 (January 1997 and 1998).

Particularly, the 96 percent share of the total lending distributed by the banks and non-bank private sectors in mid-1997 illustrates the typical structural problems of the Korean economy of which can be described as a by-product of rapid industrialization and export-oriented economic growth aided by the chaebol. Since the Korean government did not build a transparent regulatory and Managing a Financial crisis: a coMparative political econoMic analysis oF the United states and soUth Korea 71

supervisory system for corporate governance along with financial liberalization, it failed to monitor the chaebol’s huge amounts of short-term foreign borrowing. In June 1997, Korea’s short-term bank loans amounted to $70 billion, out of the total loans of $103.4 billion. This lopsided debt structure exacerbated Korea’s vulnerability under a continuous series of bankruptcies by large chaebols. Beginning with Hanbo, many big business groups (Sammi, Jinro, and Kia) went bankrupt in 1997 and amplified the loss of confidence by the foreign creditors and investors who held large claims in the Asian economies. The Korean government had no choice but to accept the IMF’s structural adjustment program, a condition of the $57 billion IMF loan package. The Korea-IMF Stand-By Arrangement and the Letter of Intent to the IMF30 contained several stipulations for the reform of the chaebols. The IMF demanded that the Korean government increase foreign ownership of listed Korean shares up to 50 percent, and introduce comprehensive corporate governance, including transparency of corporate balance sheets followed by international accounting standards, independent external audits, and the provision of consolidated statements of the chaebol. The IMF also prohibited the Korean government from bailing out bankrupt business groups, a principle of free market discipline. Based on the Letter of Intent, the Kim Dae Jung government and the IMF negotiated a more detailed guideline of corporate governance and restructuring chaebols until the end of 1998. A detailed plan of the corporate governance and restructuring was indicated in the Letter of Intent and Memorandum of Economic Policies on February 7, 1998 (see Table 5) submitted by the Kim Dae Jung government to the IMF. According to the letter, the Kim Dae Jung government was required to pursue four broad categories of corporate governance and restructuring: 1) transparency, 2) accountability to shareholders, 3) corporate restructuring, and 4) bankruptcy procedures. To

30 IMF, Republic of Korea- IMF Stand-By Arrangement December 5, 1997, (5 November 2007). 72 the JoUrnal oF east asian aFFairs

establish greater transparency, large conglomerates were required to publish combined financial statements for associated companies followed by international accounting standards. Also, they should reduce the traditional practice of mutual guarantees toward their affiliates (subsidiaries). In reporting correct financial statements, large conglomerates were to introduce an external auditor selected by an outside auditor selection committee. For improving accountability to shareholders, listed companies in the Korean Stock Exchange were required to have at least one outside director with a monitoring role over corporate decision making. The removal of existing restrictions on institutional investors’ voting rights in listed companies and giving minority shareholders a right of class action lawsuit against corporate executive and auditors were introduced to enhance accountability over large conglomerates. For corporate restructuring, the IMF required the Korean government to follow a market-oriented method. The government made it easy for mergers and acquisitions (M&A) and increased foreign ownership of private sector companies up to one third. Bankruptcy laws were amended to facilitate ailing companies to leave the market without government financial aid.

Republic of Korea Letter of Intent and Memorandum of Economic Policies, February 7, 1998

Korea: Memorandum on Economic Program, 1998

Corporate Governance and Restructuring1 Objectives Measures -Require financial statements of listed companies to be prepared and audited in accordance with international standards. -Require publication of combined financial statements for associated companies. -Further reduce the use of mutual guarantees by affiliates/subsidiaries. Transparency -To increase the degree of independence of CPAs, an outside auditor selection committee should be mandatory for listed companies and large conglomerates. The committee should be composed of internal auditors, shareholders, if applicable outside directors, and representatives of creditors. Managing a Financial crisis: a coMparative political econoMic analysis oF the United states and soUth Korea 73

-Require listed companies on the Korea Stock Exchange to have at least one outside director. -Remove restrictions on voting rights of institutional investors in listed companies (Investment Trust Companies and trust accounts Accountability of banks). to shareholders -Strengthen minority shareholders’ rights by lowering substantially the thresholds on exercising these rights (for example, the right to file a representative suit and the right to make a proposal). -Review the possibility of allowing for class action suits against corporate executive and auditors. -Ensure that all corporate restructuring is voluntary and market- oriented. -Liberalization of the domestic mergers and acquisitions by removing the mandatory tender offer requirement. Corporate -Permit takeovers of non-strategic Korean corporations by foreign restructuring investors without government approval. -Raise the ceiling on the amount of stock foreigners can acquire in non-strategic companies without approval by the company’s Board of Directors to one third from 10 percent. Bankruptcy -Amend bankruptcy law to facilitate more rapid resolution of bankruptcy procedures proceedings.

1The details of these measures will either be included in the World Bank Structural Adjustment Loan (SAL) for implementation or be announced by the government in the first half of 1998. Source: The IMF, (2 November 2007). Source: The IMF, (2 November 2007).

the Korean governMent’s responses

To save the bankrupted economy, the Korean government had to depend on a massive bailout from the IMF, the World Bank, and the Paris Club, compelling it to accept a comprehensive structural adjustment program for restructuring the economy. International financial institutions indicated that the mismanagement of the chaebol was one of the major problems of the Korean financial crisis. For example, the failure of corporate governance 74 the JoUrnal oF east asian aFFairs

of the chaebol, which were over-indebted, lack of accounting transparency, and over-investment in similar business areas, drove the country into a financial crisis. Following the structural adjustment program of the IMF, the Kim Dae Jung government prepared a broad corporate reform and overhauled the economy during his tenure. The chaebol was banned from intra-group transactions, was placed under a drastic reduction of debt-to-equity ratio of under 200 percent, and forced to consolidate their oligopolistic corporate structure. Yet, the chaebol, which grew up as the largest interest group, sometimes strongly resisted the government’s economic reforms or passively followed up the reform measures to secure their parochial interests. In the middle of the Korean financial crisis, Kim Dae Jung was elected as the new president of Korea. Unlike earlier presidents, negotiating with the IMF on the reform agenda (structural adjustment program) in return for a bailout loan was the newly elected president’s first arduous job. Although the Korean financial crisis gave him an important reason for pushing through a strong chaebol reform drive, he would have pursued the reform regardless of the crisis. Since Kim Dae Jung spent over three decades as an opposition leader, he had been alienated from power and wealth unlike many incumbent politicians. Furthermore, several dictators such as Park Chung Hee and Chun Doo Hwan had long persecuted him. Notwithstanding this protracted political persecution from the authoritarian leaders, he steadily built his own political philosophy, such as economic theory for the masses (Daejung Kyeongjelon)31 and the Sunshine Policy. He believed that one of the main reasons for the financial crisis was the chaebol’s reckless over-investment in various economic sectors, excessive debt financing, speculation in real estate and the stock market, and mismanagement by adhering to family-oriented business practices. On January 13, 1998, President-elect Kim met four chaebol

31 Dae Jung Kim, Daejung Kyeongjelon (Seoul: Chungsa, 1986); Dae Jung Kim, Mass-Participatory Economy-A Democratic Alternative for Korea (Lanham MD.: University Press of America, 1985). Managing a Financial crisis: a coMparative political econoMic analysis oF the United states and soUth Korea 75

leaders to discuss the corporate reform and agreed to pursue five principles of corporate governance guidelines. The five principles of corporate reform included-enhancement of management transparency, strengthening owner-manager accountability, elimination of cross-debt guarantee among chaebol affiliates, improving financial structure, and consolidation of core business areas. Later, President Kim announced three more supplementary principles of corporate reform in a National Liberation Day speech on August 15, 1999. The three principles sought to regulate the chaebol’s corrupted business practices. It strictly regulates the chaebol’s control of NBFIs, investment practices to the circulatory stake holding system on their affiliates, and irregular inheritance or capital transfer among family members of conglomerates in order to avoid taxes.32 Enhancing transparency in management of the chaebol, the Kim Dae Jung government revised the External Audit Law and mandated the adoption of combined financial statements beginning in 1999. Since combined financial statements bring together the assets, liabilities, and operating figures of two or more affiliated companies, intra-transactions among conglomerates affiliates and cross-debt payment guarantees could be more transparent. At the IMF’s request, the chaebols and listed companies also must oversee their financial statements by outside auditors selected by committee. To strengthen owner-manager accountability, the government strongly demanded various reform measures for the chaebol. The government strongly recommended the abolition of the chairman’s office and the chairmen themselves should be the director of at least one of the subsidiaries having more responsibility for

32 Seong Min Yoo, “Corporate Restructuring in Korea: policy Issues Before and during the Crisis,” KDI Working Paper, No. 9903 (Seoul: Korea Development Institute, 1999), 24.;Phil-Sang Lee, “Economic Crisis and Chaebol Reform in Korea,” Discussion Paper, no. 14 (New York: Columbia University APEC Study Center, 2000): 12.; Jongryn Mo and Chung-in Moon, “Business-Government Relations under Kim Dea-jung,” in Economic Crisis and Corporate Restructuring in Korea: Reforming the Chaebol, eds. Stephan Haggard, Wonkyuk Lim, and Euysung Kim (New York: Cambridge University Press, 2003), 128. 76 the JoUrnal oF east asian aFFairs

management. In their former business practice, the chairmen of conglomerates held their planning and coordination office, which played a major role for the holding company of their subsidiaries, but it was difficult to ask the office about legal liability. To increase transparency and monitor accountability of corporate decision-making, the government required every listed company to appoint an outside director by adding a new condition to the listing requirement of the Korea Stock Exchange. Through the amendment of the Securities Exchange Law, minority shareholders (from 1 percent to 0.01 percent) were allowed to file derivative suits and request the removal of directors (from 1 percent to 0.25 percent).33 The practice of cross-debt guarantee among chaebol affiliates was utilized by the chaebol to secure a bank loan in order to expand various business areas with limited financial resources. This irregular investment practice resulted in a chain of bankruptcies for some chaebols during the Asian financial crisis. When a financial crunch occurs, the cross-debt guarantee among affiliates increases the financial exposure of the whole conglomerates, leading to chain bankruptcy. To eliminate cross-debt guarantee among chaebol affiliates, the Fair Trade Commission continues to investigate intra-group transactions of the chaebol and impose a surcharge to their unfair transactions. In April 1998, the size of debt guarantee of the 30 largest chaebols amounted to 27 trillion won which was 40 percent of total loans of the 30 chaebols.34 To improve the financial structure of the chaebol, the Kim government introduced the Capital Structure Improvement Plan which demanded the chaebol to reduce their debt-equity ratios to below 200 percent by the end of 1999. The top four chaebols, except Daewoo, met the deadline. In order to lower the debt- equity ratios under 200 percent, the chaebol had to repay their debts. However, the chaebol preferred easier methods such as

33 Yoo, 26. 34 Jang-Sup Shin and Ha-Joon Chang, Restructuring Korean Inc. (New York: RoutledgeCurzon, 2003), 96. Managing a Financial crisis: a coMparative political econoMic analysis oF the United states and soUth Korea 77

new stock issuance, assets reevaluation, and selling assets at bargain prices instead of proper repayment. For the consolidation of core business area of the chaebol, the government introduced the “Big Deals” and “Workout” programs. The Big Deals program is designed to swap non-core subsidiaries among the top five chaebols in order to consolidate their core- business areas. The Workout program is designed for debt rescheduling or reduction of financially ailing companies targeting smaller and medium sized chaebols by bank sponsorship.35 The top five chaebols - Hyundai, Samsung, Daewoo, LG, and SK - were required to have a series of collaborations for swapping their industries, including automobiles, electronics, semiconductors, power generation facilities, petro-chemicals, aircraft manufacturing, railway vehicles, marine-engines, and oil refining under strong governmental guidance and pressure. As shown in Table 6, several Big Deals were made by the top five largest chaebols from December 1998 until the end of 2001. Among various big deals, the case of Samsung Motors and the deal between LG Semiconductor and Hyundai Electronics Industry was controversial because the government unilaterally coerced these companies to conclude the deals. Those chaebols were reluctant to make the swap deals, not only did they not want to lose their business, but also could not easily find a satisfactory solution. When the Big Deals did not reach initial expectation, the government was disappointed. The head of the Financial Supervisory Commission (FSU) harshly warned that if the deals were postponed because of chaebol’s resistance, the FSU would recommend that the banks call back old existing loans or cut off new loans.36 Ultimately, the chaebol managed the Big Deals, but by merely taking over or merging the broadly assigned business areas under the governments’ plan, rather than swapping their business.

35 Shin and Chang, 88.; Kyung Suh Park, “Bank-led Corporate Restructuring,” in Economic Crisis and Corporate Restructuring in Korea, 181. 36 Yoo, “Corporate Restructuring in Korea,” 49. 78 the JoUrnal oF east asian aFFairs

The State of the “Big Deal”

Type of Industry Contents of the Agreement in The State as of the end of 2001 Automobiles/ December 1998 Samsung Motors was sold to Renault Electronics Business swap between Samsung Sale of Daewoo Electronics to foreign Motors and Daewoo Electronics investors or manufacturers is in progress Daewoo Motors to be sold to General Motors Semiconductors Hyundai Electronics’ acquisition of Hyundai Electronics took over LG LG Semiconductors Semiconductors in June 1999 Hynix (a new name of the combined company) put on sale to Micron Technology Oil refining Hyundai Oilbank’s acquisition of Hyundai Oilbank agrees to take Hanwha Energy’s oil-refining business over Hanwha Energy’s oil-refining business in April 1999 Petrochemicals Establishment of a company through Due to the delay of the merger the merger between Hyundai caused by the hesitation of Japanese Petrochemical and Samsung General consortium, the deal is as good as Chemicals given up Power generation Sale of assets of Hyundai Heavy Assets of Hyundai Heavy Industries facilities Industries and Samsung Heavy and Samsung Heavy Industries Industries to Korea Heavy Industries, were sold to Korea Heavy Industries a state-owned company in November 1999 Marine engines Sale of Samsung Industries’ engine The two companies agreed to a division to Korea Heavy Industries merger on a 6:4 investment basis in November 1999 Railway vehicles Hyundai, Daewoo, and Hanjin jointly The three companies invested on established a company a 4:4:2 basis, establishing the Korea Railway Vehicle Co. in July 1997 Aerospace Establishment of Korea Aerospace The aerospace divisions of the three Industries through the merger of companies were merged in Korea the aerospace division of Samsung Aerospace Industries in October Aerospace, Daewoo Heavy Industries 1999 and Hyundai Space & Aerospace Source: Shin and Chang, Restructuring Korea Inc., 89-90. Managing a Financial crisis: a coMparative political econoMic analysis oF the United states and soUth Korea 79

In May 1998, the workout program began with the establishment of a bank-led Committee for Corporate Insolvency Evaluation, which assessed potential financial problems of 313 companies. To help the ailing companies, the program introduced various financial measures, including debt-equity swaps, lowering interest rates and debt rescheduling, or allowing new credits. The workout program was initially intended to conclude by the end of 1999, but was extended upon consultation with the World Bank. The creditor banks rescheduled 86 trillion won of debt and offered 4.5 trillion won in additional funds for the companies by May 2000. Of 104 companies selected for the Workout program, 20 companies dropped out, 17 merged with other companies, and 36 successfully restructured.37

conclUsion

The two governments’ responses to the financial crisis make for an interesting comparison. Regarding each government’s capability, the United States, as the high-income economy, has maintained the world’s largest financial and trade market, but Korea was struggling to upgrade its economy from a middle- income economy to the high-income economy. In the transitional period of maturing its economy, Korea experienced a financial crisis. During the Asian financial crisis of 1997-1998, the United States, acting through the IMF and World Bank, required Asian governments, including Korea, to undergo a series of drastic structural adjustment measures, such as large budget cuts, raising interest rates, mergers and acquisitions to foreign financial institutions, bargain sale and bankruptcy of ailing companies, and wider trade and financial market openings to the OECD nations in line with the principles of neo-liberalism. With the advent of the subprime mortgage crisis in the summer of 2007, the U.S. economy became similar to those of Asia. However, the U.S.

37 Park, “Bank-led Corporate Restructuring,” 189. 80 the JoUrnal oF east asian aFFairs

government adopted a completely different approach from those of Asian countries. Ignoring public criticism of using tax dollars to bail out greedy financial firms and auto industries, the U.S. government launched a huge rescue plan and spent trillions to nationalize several big business firms. In contrast, the Korean government did not have enough financial resource to rescue its ailing companies at the time. At the price of bailout from the IMF, the Korean government yielded to foreign pressure for a structural adjustment program. Under the government’s “Big Deals” and “Workout” programs, a number of Korean firms reluctantly dumped their lucrative businesses. Although the Big Deals program purported to swap non-core subsidiaries among the top five chaebols in order to consolidate their core-business areas, they were very reluctant to make the swap deals. In fact, the Kim government’s ambitious reform significantly contributed to establishing a transparent corporate governance tradition in the Korean economy. The 30 largest chaebols’ mutual debt guarantees were visibly lowered and their debt-equity ratios were lowered to less than 200 percent. Thanks to the legalization and institutionalization of corporate governance such as the Monopoly Regulation and Fair Trade Act and the Fair Trade Commission, the business environment has become fair and the chaebol cannot easily circumvent the regulatory networks. The U.S. government installed a similar corporate governance and comprehensive regulatory structure for the financial system. Through the Financial Regulatory Reform, the Treasury and Federal Reserve could promote robust supervision and regulation of financial firms. In addition, several reform measures dealing with the housing market, mortgage, credit agencies, supervision of financial firms, regulation of the over-the-counter derivatives market, and others will bolster the U.S. financial system. Thus, the U.S. financial crisis demanded strong government intervention in the market, opposite of neo-liberalism. The two case studies allow us to more clearly understand inadequate application of neo-liberalism due to increasing speculative high-risk activities of financial institutions and how greedy behavior Managing a Financial crisis: a coMparative political econoMic analysis oF the United states and soUth Korea 81

paralyzed the global economy, which brought a strong state intervention to the market. From the lesson of the United States and the global financial crisis, we clearly recognized that the market is not perfect and further it could not automatically cure its intrinsic problems. Considering that the current U.S. financial crisis originated from the repeal of the Glass-Steagall Act, the lenient management of the Federal Reserve, and risky investment behaviors on Wall Street, a prudential supervision of the market is essential to maintain a stable financial system. The Korean government should heed the lesson of the United States financial crisis under the current condition of a series of deregulations in its economy. Recent Korean government’s introduction of the Capital Markets Consolidation Act and the nullification of the separation of banking and commerce were similar to the old legacy of the United States. In order to perform a successful management to the financial system, a vigilant monitoring role toward the private sector based on a prudential regulatory power of various financial supervisory institutions and the independent policy autonomy of central bank should be guaranteed. 82 the JoUrnal oF east asian aFFairs

reFerences

Beck, Peter M. “Revitalizing Korea’s Chaebol.” Asian Survey 38, no. 11 (November 1998): 1018-1035. Brass, Clinton T. “American Recovery and Reinvestment Act of 2009 (P.L. 111-5): Summary and Legislative,” CRS Report R40537. Washington, D.C.: U.S. Congress, 2009. Dennis, Brady. “Congress Passes Financial Reform Bill,” The Washington Post, 16 July 2010. Available http://www.washingtonpost. com/wp-dyn/content/article/2010/07/15/AR2010071500464_pf.html. Accessed 4 August 2010. Freeman, James. “Bear Stearns: The Fed’s Original ‘Systemic Risk’ Sin.” The Wall Street Journal, 16 March 2009. Available http://online.wsj.com/article/SB123716144450235589.html. Accessed 17 March 2009. Herszenhorn, David M. “Recovery Bill Gets Final Approval.” New York Times, 13 February 2009. Available http://www.nytimes. com/2009/02/14/us/politics/14web-stim.html. Accessed 25 February 2009. IMF. Republic of Korea- IMF Stand-By Arrangement December 5, 1997, Available http://www.imf.org/external/np/oth/korea.htm. Accessed 15 November 2010. John, David. The Financial Crisis Responsibility Fee: The Wrong “Solution”. The Heritage Foundation, 12 May 2010. Available http://www.whitehouse.gov/the-press-office/president-obama- proposes-financial-crisis-responsibility-fee-recoup-every- last-penn. Accessed 22 June 2010. Johnson, Chalmers. MITI and the Japanese Miracle: The Growth of Industrial Policy 1925-1975. Stanford, CA.: Stanford University Press, 1982. Kim, Dae Jung. Mass-Participatory Economy-A Democratic Alternative for Korea. Lanham MD.: University Press of America, 1985. Kim, Dae Jung. Dae Jung Kyeongjelon. Seoul: Chungsa, 1986. Managing a Financial crisis: a coMparative political econoMic analysis oF the United states and soUth Korea 83

Kotz, David M. “The Financial and Economic Crisis of 2008: A Systemic Crisis of Neoliberal Capitalism.” Review of radical Political Economics 41, no. 3 (Summer 2009): 305-317. Kwon, Eundak. “Financial Liberalization in South Korea,” Journal of Contemporary Asia 34, no.1 (2004): 70-101. Labaton, Stephen. “Agency’s ’04 Rule let Banks Pile Up New Debt.” New York Times, 2 October 2008. Labaton, Stephen and Weisman, Steven R. “U.S. Weights Takeover of Two Mortgage Giants.” The New York Times, 11 July 2008. Available http://www.nytimes.com/2008/07/11/business/11fannie.html. Accessed 15 July 2008. Lee, Phil-Sang. “Economic Crisis and Chaebol Reform in Korea,” Discussion Paper, no. 14 New York: Columbia University APEC Study Center, 2000. Maynard, Micheline and Merced, Michael J. de la. “G.M. Pushes the Case for Its Rebirth in Court.” New York Times, 30 June 2009. Available http://www.nytimes.com/2009/07/01/business/ 01auto.html. Accessed 4 February 2009. Meltzer, Allan H. “Reflections on the Financial Crisis.” Cato Journal 29, no. 1 (Winter 2009): 25-30. Miron, Jeffrey A. “Bailout or Bankruptcy?.” Cato Journal 29, no. 1 (Winter 2009): 1-17. Mo, Jongryn and Moon, Chung-in. “Business-Government Relations under Kim Dea-jung,” in Economic Crisis and Corporate Restructuring in Korea: Reforming the Chaebol, eds. Stephan Haggard, Wonkyuk Lim, and Euysung Kim. New York: Cambridge University Press, 2003. Nanto, Dick K. “The Global Financial Crisis: Analysis and Policy Implications,” CRS Research for Congress RL34742. Washington, D.C.: U.S. Congress. October 2, 2009. Schwartz, Anna J. “Origins of the Financial Market Crisis of 2008.” Cato Journal 29, no. 1 (Winter 2009): 19-23. Shin, Jang-Sup and Chang, Ha-Joon Chang, Restructuring Korean Inc. New York: RoutledgeCurzon, 2003. Stiglitz, Joseph E. “The Economic Crisis: Capitalist Fools.” Vanity Fair, January 2009. 84 the JoUrnal oF east asian aFFairs

The White House. President Obama Proposes Financial Crisis Responsibility Fee to Recoup Every Last Penny for American Taxpayers, 14 January 2010. Available http://www.whitehouse.gov/ the-press-office/president-obama-proposes-financial-crisis- responsibility-fee-recoup-every-last-penn. Accessed 22 January 2010. Thompson, Helen. “The Political Origins of the Financial Crisis: The Domestic and International Politics of Fannie Mae and Freddie Mac.” The Political Quarterly 80, no. 1 (January- March 2009): 17-24. U.S. Department of the Treasury. Financial Regulatory Reform: A New Foundation: Rebuilding Financial Supervision and Regulation. Washington, DC, June 2009. U.S. Department of the Treasury. “President Obama to Announce Comprehensive Plan for Regulatory Reform.” U.S. Treasury Press Release TG-175, 17 June 2009. Available http://www.treas.gov/ press/releases/tg175.htm. Accessed 25 March 2009. Yoo, Seong Min. “Corporate Restructuring in Korea: policy Issues Before and during the Crisis,” KDI Working Paper, No. 9903. Seoul: Korea Development Institute, 1999. Webel, Baird and Murphy, Edward V. “Troubled Asset Relief Program: Legislation and Treasury Implementation,” CRS Report RL34730.Washington, D.C.: U.S. Congress, 2009. Received June 14, 2011/Revised August 10, 2011 Article Received: 6/14; Reviewed; 8/20; Revised: 9/13 An AnAlysis of the fDi DeterminAnt of the CleAn Development meChAnism(CDm) 85

An AnAlysis of the fDi DeterminAnt of the CleAn Development meChAnism(CDm)✽

Ki-sik hwang & hyun-Jung Kim Dong-A University & Pusan National University

Abstract

We believe that the Kyoto Mechanism has left many academic tasks to social scientists as it clearly shows how the environmental protection is deeply related with the global economic development. This research tries to analyse the determinant of the Clean Development Mechanism (CDM) under the Kyoto Protocol System, which is expected to be continuously on effect in the Post-Kyoto period. It has chosen Asian Non-Annex I Countries as a case study. Major findings of this study are: firstly, carbon credit is one of essential factors of CDM attraction; secondly, host countries must provide institutional infrastructure and supporting policies. In conclusion, authors argue that it would be necessary to improve CDM by re-considering equity among developing countries.

Key words: Clean Development Mechanism (CDM), Kyoto Protocol, Emission Trading, Foreign Direct Investment (FDI), Carbon Emission

introDUCtion

In recent years, interest in climate change has risen remarkably, and the first “commitment period” for greenhouse gas reduction as outlined by the Kyoto Protocol is nearing its end in 2012. The Kyoto Protocol came into effect on 16 February 2005, and its 86 the JoUrnAl of eAst AsiAn AffAirs

mechanisms are divided into emissions trading (ET), joint implementation (JI), and the clean development mechanism (CDM)1, focusing primarily on developed countries with the obligation of reducing greenhouse gas (GHG) emissions. The Kyoto mechanisms, as “flexibility mechanisms” designed to cost-effectively achieve GHG emissions reduction targets, are continually pursued in order to promote newly-formed related environmental industries and technology development alongside GHG reduction efforts. These efforts are carried out not only for the protection of the environment but also to promote social change toward becoming a low-carbon global society. That is, this is a case in which the issue of the atmospheric environment has been promoted within the social dimension and effectively linked with economic activity, and at the core of this system is ET. ET is a system in which carbon emissions reduction targets are established and countries may engage in transactions in accordance with whether quantified emissions have met the target, creating a carbon market system and thus an environmental economy field. At present (2010), the scale of the carbon trading market is 150 billion USD and is expected to rise to 200 billion USD by 2020. Another core of the Kyoto mechanisms, in addition to ET, is the CDM.2 The CDM, defined in Article 123 of the Protocol,

1 •ET: A system which allows for the transaction of acquired carbon credits from GHG emissions under-cap surplus or investment in the CDM or JI. •CDM: A system in which developed countries invest in developing countries and are given carbon credits in reciprocation of the equivalent GHG reduction that has been materially recognized. •JI: A system in which a developed country may invest in an emission reduction project in another developed country and the GHG reduction is recognized as a domestic reduction. 2 PointCarbon http://www.pointcarbon.com/productsandservices/carbon/ (2010.10.12). 3 Kyoto Protocol Article 12. 2. The purpose of the clean development mechanism shall be to assist Parties not included in Annex I in achieving sustainable development and in contributing to the ultimate objective of the Convention, and to assist Parties included in Annex I in achieving compliance with their quantified emission limitation and reduction commitments under Article 3. An AnAlysis of the fDi DeterminAnt of the CleAn Development meChAnism(CDm) 87

allows a country with an emission-reduction or emission-limitation commitment under the Kyoto Protocol (Annex B Party) to implement an emission-reduction project in developing countries. A CDM project must provide emission reductions that are additional to what would otherwise have occurred.4 The CDM has the ultimate purpose of reducing the total amount of GHG across the globe. It is also significant as it is the only Kyoto mechanism in which non-Annex I countries5 may participate. This paper attempts to analyze the criteria in selecting a host country for CDM investment, separating aspects which are similar to extant foreign direct investment and aspects unique to CDM investment. Until now, research on the CDM has focused on whether CDM projects improve the environment of developing countries or assist in developing sustainable fields or on the legal issues surrounding the operation of the CDM system or an analysis of the system for receiving reduction approval. However, while this sort of research has been carried out, the CDM has become a competitive system supported by the major domestic policies of non-Annex I countries. It may be compared to the situation in which each nation and region was adjusting domestic systems and policies in order to attract FDI while scholars were concerned with whether Foreign Direct Investment (FDI) would provide advantages to the host countries as advanced by liberalism or host countries would remain in the periphery as advanced by dependency theory. As a result, this paper hypothesized that carbon emission volume is the most direct criterion for the attraction of CDM investment. In addition, another prerequisite is the establishment of an agency which can oversee the minimal legal procedures as institutional infrastructure necessary to the host country, and the government of the host country must designate sectors for reduction appropriate to their particular situation and establish an institutional support

4 UNFCCC http://unfccc.int/kyoto_protocol/mechanisms/clean_development_ mechanism/items/2718.php(2010.10.12). 5 Developing countries party to the UNFCCC but not subject to GHG reduction obligations 88 the JoUrnAl of eAst AsiAn AffAirs

system for CDM projects. Through this process, there is significance in the environmental aspect, as carbon emissions will be reduced if the CDM system becomes activated along with the expansion of the carbon credits market; in the political/social aspect, as the responsibility for long-term air pollution through industrialization is cost-effectively given to developed countries; and in the economic aspect, as environmental issues will be resolved through competition in the formation of a carbon credits market and carbon financing. In order to verify this hypothesis, this paper collected and analyzed various sources of primary data. First, data was collected on the progress of CDM projects and their distribution by region from CD4CDM (Capacity Development for the CDM), which provides CDM-related information from the UNEP (United Nations Environment Programme), as well as data on the conditions of CDM projects by country from “Stop Global Warming Save Environment”, a database which provides climate change-related information from the Korean Ministry of Environment. An analysis was also conducted on data on carbon emissions from the UNFCCC (UN Framework Convention on Climate Change) and FDI-related data from the EIU (Economist Intelligence Unit). In this paper, Section 2 analyzes the prior research on ET and the CDM, and Section 3 categorizes and presents the current status of CDM by project, country, and region. Section 4 analyzes host countries’ CO2 emission volumes and Section 5 investigates transaction costs by country as criteria for CDM investment.

CDm prior reseArCh on et AnD the CDm

The influence of greenhouse gases (GHG) is global. Unlike local air pollutants such as carbon monoxide, nitric oxide, and volatile organic compounds (VOC), GHGs are accumulative pollutants. As these pollutants remain in the air for long periods of time and accumulate, they generally tend to blend together. When considering the characteristics of these greenhouse gases, global-scale An AnAlysis of the fDi DeterminAnt of the CleAn Development meChAnism(CDm) 89

management is necessary.6 Therefore, all parties to climate change agreements have been given the obligation of reporting their GHG emissions to the appropriate administrative body. In the Kyoto Protocol, which was agreed upon during the Conference of Parties III (COP3), 39 developed countries and market economies identified 6 gases for reduction and agreed upon concrete targets for reduction. The six gases identified are carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), sulphur hexafluoride (SF6), hydrofluorocarbons (HFCs), and perfluorocarbons (PFCs), and the reduction objectives are represented as a conversion into a CO2 equivalent (CO2e). In the Kyoto Protocol, developed countries committed to a reduction of greenhouse gas emissions to 5.2 percent below 1990 levels for the period from 2008 to 2012. As a result, there has been much research on ET, with a disproportionate amount focusing on either introducing ET systems of developed countries and market economies such as the EU or pricing criteria in carbon credits. First, research on the EU Emission Trading Scheme (ETS), which is leading the movement to reduce GHGs, has been dominant. Boemare et al. (2003) explained it as follows. The EU is pioneering the development of greenhouse gas emissions trading, but there is a tension between the “top-down” and “bottom-up” evolution of trading schemes. They explore the potential interactions between the EU ETS and the negotiated agreements in France and the UK and use these to illustrate some important generic issues. Wettestad (2009) emphasized the fact that the EU ETS was the first large-scale system. The case of the Australian approach to climate change is used to highlight the responses that occur in political and institutional environments characterised by a plurality of actors and the difficulties associated with developing a coherent national response (Griffiths et al., 2007, 415). In addition, Griffiths et al. (2007) analyzed the case of Australia, predicting that the different ET systems of each country would

6 Stop Global Warming Save Environmental, http://www.gihoo.or.kr/ portal/index.jsp(2010.10.7). 90 the JoUrnAl of eAst AsiAn AffAirs

produce differing results. Branson et al. (2007) researched the ET system of New Zealand, and the United States and Canada Air Quality Agreement (2007) have mapped out a unique GHG reduction system for the United States and Canada. In addition, there has been much research by the U.S., which is investigating an original ET system as the EU has already been spearheading ET under the Kyoto Protocol system.7 Paltsev et al. (2007) analyzed the climate change response system led by the Center for Global Change Science (CGCS) and the Center for Energy and Environmental Policy Research (CEEPR).8 In addition, the Japan Bank for International Cooperation (JBIC) has established a new market for the electronic transfer of carbon credits in November 2007 and, by reducing the price units of carbon credits, has induced the participation of various constituents. This sort of research on ET systems of individual countries has been research on mutual approval of global level carbon credits in the post-Kyoto system (the second “commitment period”, 2013~2018) and comprehensive research by region. The GHG reduction system

7 There are two major schools of thought on international movements on climate change after 2012. They are the Kyoto system, led by the EU, and the International Technology-Oriented Agreements system, led by the U.S. The EU-led Kyoto system supports binding reduction objectives and top- down objective establishment and is currently discussing plans to grant technology transfers and incentives to developing countries in order to induce them to commit to voluntary reduction obligations. On the other hand, the U.S.-led Asia-Pacific Partnership and the 17-nation Major Economies Forum proposed by the U.S. are plans to establish global medium to long-term GHG reduction targets separate from the Kyoto system and domestic short and medium-term reduction targets. Members of the Major Economies Forum, which is focused on non-binding reduction objectives and bottom-up voluntary goal-establishment, are responsible for over 80 percent of global emissions (Choi 2007, p.58). 8 As opposed to the U.S. Federal Government, which is passive with regard to climate change measures, active GHG policy has been promoted primarily by many state governments and non-governmental organizations. In December 2005, seven Northeastern American states agreed to the Regional Greenhouse Gas Initiative (RGGI), placed caps on the CO2 emissions from thermal power stations, and began CO2 trading from 2009 (Kim, 2006, p.5). An AnAlysis of the fDi DeterminAnt of the CleAn Development meChAnism(CDm) 91

of climate change agreements has settled and if its effect is to reach developing countries in the future, the compatibility of carbon credits between countries may be regarded as the most important issue. Of course, from an environmental sociological perspective, it has been pointed out that the ET system advances the capitalization of nature and commercialization of the environment; however, it is certain that it is an effective means of inducing participation on a global scale. Nevertheless, as a system oriented around developed countries, corporations considering production costs may move overseas and industries producing high levels of GHG emissions may become more active in developing countries, actually increasing the global level of GHG as asserted in the pollution haven hypothesis.9 In reality, EU Member Nations have modeled the EU ETS from 2005, and each country has seen a marked drop in GHG figures. The GHG reduction figures of the major countries of the EU are as follows: Germany reduced its emissions by 12.31 percent from 897.8 million tons of CO2e in 1995 to 787.3 million tons in 2007; France has reduced its emissions by 5.48 percent from 393.0 million tons of CO2e in 1995 to 371.4 million tons in 2007; England has reduced its emissions by 4.41 percent from 564.1 million tons of CO2e in 1995 to 539.2 million tons in 2007. Even Russia, which has shown a tepid attitude toward climate change agreements among Annex I countries, has reduced its emissions by 1.42 percent from 1.558 billion tons of CO2e in 1995 to 1.536 billion tons in 2007. Only the U.S., which has refused to ratify these agreements, has increased its emissions from 5.215 billion tons of CO2e in 1995 to 5.832 billion tons in 2005, an increase of 11.83 percent, and maintained its position as a leading country of carbon emissions until 2005. However, the increase of GHG in developing countries

9 Countries with strict environmental regulations impose higher regulatory costs on applicable enterprises than countries with relaxed or no environmental regulations, resulting in a decrease of exports due to a loss of international competitiveness through the rise of production costs, and this increases the income of countries with relaxed environmental regulations or causes environmentally sensitive industries to move their factories overseas (Levinson and Taylor 2004, p.21). 92 the JoUrnAl of eAst AsiAn AffAirs

which are not subject to these treaties has been dramatic, and after 2006, China surpassed the U.S., taking the lead in carbon emissions. In 1995, China’s emissions were roughly half of the U.S. at 3.318 billion tons of CO2e; however, as China has disregarded movements for sustainable development and environmental protection, its emissions have risen to 6.533 billion tons in 2007 and the scale of this increase is not decreasing. The GHG emissions increase of newly rising economy India is also conspicuous. India’s emissions were 919.3 million tons of CO2e in 1995; by 2007, it had risen to 1.611 billion tons, an increase of 75.25 percent. Korea has also seen a rise in emissions from 371.9 million tons of CO2e in 1995 to 502.9 million tons in 2007, an increase of 35.21 percent. As developing countries such as China, India, and Korea are major importers of fossil fuel energy and occupy a significant share of global GHG emissions, the emissions reduction regime is meaningless if these countries do not participate. Therefore, research on CDM must have a greater depth, and research on this is as follows. First, research on whether the CDM system fulfills GHG reduction objectives while assisting in the sustainable development of host countries has been vigorous. In addition, Sutter et al. (2007) pointed out that a large part (72%) of the total portfolio’s expected CERs10 are likely to contribute significantly to sustainable development in the host country. Macdonald (2010), in focusing on whether the CDM system allows for the improvement of sustainable development, concluded that it is skeptical that the sustainable development of host countries and the reduction of GHGs can proceed simultaneously. And Yim et al. (2009) try to evaluate the current status of rapidly expanding

10 CERs (Certified Emission Reduction): CDM projects can earn saleable certified emission reduction (CER) credits, each equivalent to one tonne of CO2, which can be counted towards meeting Kyoto targets. Assigned Amount Unit (AAU): An emission certificate as defined by the Kyoto Protocol. Annex B countries can use AAUs to fulfill their obligations as stipulated in Article 3, Paragraph 1 of the Kyoto Protocol. ERUs (Emission Reduction Unit): Joint Implementation issued to project participants in Joint Implementation project activities. An AnAlysis of the fDi DeterminAnt of the CleAn Development meChAnism(CDm) 93

CDM whether it contributes to sustainable development in developing countries. As a result, they found that the current CDM projects under operation have not contributed to sustainable development in developing countries, because CDM projects do not satisfy proper establishment of baselines and an additionality principle and, therefore, do not contribute to the realization of environmental sustainability (Yim et al. 2009, p.282). Under the CDM, in order to receive approval for Certified Emission Reductions (CERs), the implementing country must receive recognition of “additionality”, which proves that if it weren’t for the particular CDM project, the emission reduction would not have taken place.11 There has been much research on the decisions of additionality, as well as previous research on the legal and procedural risks of the CDM. Oh et al. (2009) focused on the uncertain domestic/international legal environment with regard to CDM certification and the special characteristics of CDM projects. Oh explained that the form of risks differ in accordance with whether the transaction is a CER or Voluntary Emissions Reduction (VER)―in CER transactions, the majority of the burden of the risks belong to the seller, while in VER transactions, the buyer assumes the risks―therefore, a perception of these regulations must be present during transactions (Oh et al., 2009, pp.227~228). Foot (2004) points out that CDM has occurred through a combination of expanded modalities, reached through international negotiation and the development of stakeholder tools, and has led to increased standardization of CDM practices, although at the cost of numerous failed projects. In particular, research on the legal position and regulations of the CDM occupies a large portion of the prior literature on the CDM. Lee (2008) insists that the Afforestation and Reforestation CDM (A/R CDM) have many benefits in terms of sustainable development but the current ET markets have not responded favorably to the A/R CDM project participants. The extremely low registered number or A/R CDM demonstrates essential weaknesses

11 Kyoto Protocol Article 12. 5. (c) Reductions in emissions that are additional to any that would occur in the absence of the certified project activity. 94 the JoUrnAl of eAst AsiAn AffAirs

of forestry-based CDM projects: non-permanence, socio-economic impact assessment and the sovereignty retained for pursuing nation’s sustainability objects (Lee 2008, p.314). Lee (2008) investigated the negotiation process and the major disputes of A/R CDM, analyzed the practical legal issues in carrying out the projects and presented solutions, and argued that A/R CDM discussions and investments must be reviewed in a completely different light. Prior research on the CDM such as this has been active; however, the majority has focused primarily on the enterprises or countries which are initiating the CDM. The majority of the research on the CDM has either been on the legal problems or the detailed steps from registration to approval or on carbon financing matters such as AAU (Assigned Amount Units) traded in the ET or the CER from the CDM. In addition, as the CDM has recently been experiencing rapid growth, research on the CDM attraction strategies of host countries has been just as active. As CDM results in the direct investment of developed countries in energy efficiency, eco- friendly energy, GHG collection and storage, and reduction activities, financial resources influx and technological transfer for developing countries may be expected. It is true that CDM investment in the area of sustainable development has been unexhausted and the reduction of carbon emissions in cost-effective areas of developing countries which may be given emissions reduction obligations in the near future may be taken completely by developed countries, multiplying the reduction efforts of developing countries.12 Aside from these issues, as each nation has been unable to form a consensus on the post-Kyoto system,13 there also exists the issue

12 Developed countries reserve emission reduction measures for developing countries rather than applying them domestically and maintain carbon-intensive lifestyles, and if developing countries attracting CDM are given the obligation of reduction in the future, it gives future generations in those host countries a larger burden as low-cost reduction methods are exhausted through CDM projects and only high-cost reduction methods remain (Yun 2002, p.14). 13 In December 2007, during the 13th Conference of Parties to the UNFCCC, the “Bali Road Map” was adopted in order to further discuss the direction of the An AnAlysis of the fDi DeterminAnt of the CleAn Development meChAnism(CDm) 95

that the continued existence of CDM projects is unclear (Korea Environment Cooperation 2009, p.12).14 However, it will not be easy to discontinue the CDM system, which includes the participation of China, India, Brazil, and Korea, countries currently holding primary rankings in terms of carbon emissions, and there is not sufficient justification to do so. Rather, there must be research on the strategies of developing countries which are lacking CDM investment, and there must be guidance so that investment may be directed to more sustainable sectors. Therefore, this paper attempts to systematically analyze CDM investment attraction through an analysis of which criteria of the host country attracts CDM investment. Furthermore, this paper also investigates how CDM host countries should deal with GHG reduction when receiving reduction obligations after the post-Kyoto system. In addition, research is required on how developing countries may overcome handicaps in order to adapt to the carbon trading market system which has already experienced growth. Section 3 presents a concrete analysis of the current status of CDM projects.

the CUrrent stAtUs of the CDm

The original price of secondary CER15 to be transferred to investing countries in December 2010 has risen by 0.14 euros from its price two weeks previous, closing at 12.23 euros on August post-Kyoto system. Through this, participating nations re-confirmed the objective in which Annex B countries of the Kyoto Protocol must reduce carbon emissions by 25~40 percent of 1990 levels by 2020 (Yim et al. 2008, p.7). 14 According to PointCarbon, an intermediary for carbon credit trading, there is a possibility that all the developed and developing countries will fail to support the CDM in the UN Summit on Climate Change (PointCarbon, http://www.pointcarbon.com 2010.10.7). The future of the CDM in the Post- Kyoto system will be discussed at the UN Climate Change Conference to be held in Cancun in December 2010. 15 The secondary CER market is used for trading credits which are already delivered or with a guarantee of delivery or compensation if the contract is broken. 96 the JoUrnAl of eAst AsiAn AffAirs

3rd. Primary CER16 has been maintained at 8 to 10 euros for the long term (Korea Environment Cooperation 2009, p.14). In order to attract CDM projects, a Designated National Authority (DNA)17 must be established. CDM investment enterprises must draft a CDM-project design document (CDM-PDD) for investment and go through a process for approval. For the validation, registration, and verification in the approval process, the enterprises have to work out necessary, technical, organizational matters and identify project information and the project baseline, as well as monitoring methodology. The enterprise has to acquire approval of voluntary participation from the DNA of each authority, including the host party, and, after a third-party Designated Operational Entity (DOE) has completed an independent evaluation on whether the CDM project conditions have been satisfied on the basis of the CDM-PDD and verified the reasonability of the project, the enterprise must then submit a project registration application to the CDM Executive Board (EB) in accordance with procedures in order to receive official approval.18 After going through verification19 and certification20 processes, the enterprise receives the CERs.

16 It is possible to buy CERs directly from such a project, which is then called primary CER. With a Primary CER you also share the risks related to a project (project risk, credit risk, technology risk, delivery risk, market risk, etc.). (Climex http://community.newvalues.net/2007/05/secondary_cers.html 2010.10.12). 17 DNA is the body granted responsibility by a Party to authorise and approve participation in CDM projects. The CDM rules provide only limited guidance on the role of the DNA or the requirements for establishing a DNA. These issues are instead left to the Party to determine (CDM Rluebook http://cdmrulebook.org/64 (2010.10.5)). 18 Stop Global Warming Save Environmental, http://www.gihoo.or.kr/ portal/01_General_Info/04_CDM01.jsp (2010.10.7). 19 Validation is the process of independent evaluation of a project activity by a designated operational entity against the requirements of the CDM as set out in decision 17/CP.7, the present annex and relevant decisions of the COP/MOP, on the basis of the project design document, as outlined in appendix B below (3/CMP.1, Annex, paragraph 35). 20 Certification is the written assurance by the designated operational entity that, during a specified time period, a project activity achieved the reductions An AnAlysis of the fDi DeterminAnt of the CleAn Development meChAnism(CDm) 97

At the present, there are 150 DNAs established internationally, and as of October 2010, a total of 5,529 projects have been registered with a total of 439,601 kCERs issued. Table 1 analyzes CDM projects by type.

CDM projects by type (Oct, 2010)

CDM projects Expected issuance from CDM CDM project with in the pipeline projects in Pipeline CERs issued

2012 2020 Issued Issuance Projects kCERs Projects kCERs kCERs kCERs success

Afforestation 10 421 1976 17,240

Agriculture 1 10 18 100

Biomass energy 705 44,932 188,001 510,428 129 16,129 87%

Cement 38 7,088 33,052 71,808 8 1,321 69%

CO2 capture 3 29 156 396 1 10 26%

Coal bed/mine 72 39,766 144,003 440,361 11 3,172 47% methane

Energy 20 5,795 16,614 58,545 distribution

EE households 61 2,005 5,405 20,162

EE industry 141 5165 19,410 52,488 26 1,308 87%

EE own 448 56,327 219,563 590,644 59 19,323 80% generation

EE service 25 308 1,030 3,084 1 6 63%

EE supply side 83 34,240 60,288 348,600 7 425 78%

Fossil fuel switch 125 50,164 178,888 547,856 27 6,512 57% in anthropogenic emissions by sources of greenhouse gases as verified (3/CMP.1, Annex, paragraph 61). 98 the JoUrnAl of eAst AsiAn AffAirs

CDM projects Expected issuance from CDM CDM project with in the pipeline projects in Pipeline CERs issued

Fugitive 40 17,875 68,988 189,093 2 4,600 114%

Geothermal 15 3,353 14,753 40,363 5 684 38%

HFCs 22 81,715 476516 1,100,202 18 218,637 107%

Hydro 1498 165,978 473,606 1,794,447 183 21,944 91%

Landfill gas 315 45,534 203,095 523,882 50 10,126 35%

Methane 604 28,382 119,695 309,031 64 6,693 47% avoidance

N2O 73 50,303 253,666 651,829 21 106,188 123%

PFCs and SF6 18 5162 13,372 52,273

Reforestation 47 4506 14,410 61,111

Solar 70 1981 4,193 19,895 1 1 18%

Tidal 1 315 1,104 3,631

Transport 32 3,529 9,646 38,467 2 201 42%

Wind 1,062 96,911 306,524 1,050,160 163 22,322 84%

5,529 751,796 2,827,972 8,496,095 778 439,601 96.5%

Source: CD4CDM http://www.cd4cdm.org/ (2010.10.12).

CDM projects are categorized into the following 15 types: Energy Industries (renewable/Non-renewable sources), Energy distribution, Energy demand, Manufacturing Industries, Chemical Industries, Construction, Transport, Mining, Mineral production, Metal production, Fugitive emission from fuels (solid, oil and gas), Fugitive emission from production and consumption of halocarbons and sulphur hexafluoride, Solvents use, Waste handling and disposal, Afforestation and reforestation, and Agriculture. The most common types of projects are Hydro (1498), Wind An AnAlysis of the fDi DeterminAnt of the CleAn Development meChAnism(CDm) 99

(1062), Biomass energy (705) as shown in Table 1. Although there are only 22 Hydro (165,978 kCERs), Wind (96,911 kCERs), HFCs (81,715 kCERs) projects in the reduction sector, HFCs are analyzed as large-scale projects. In 2012, the predicted rankings of CDM projects in terms of reduction volume are HFCs (476,516 kCERs), Hydro (473,606 kCERs), Wind (306,524 kCERs), and in 2020, the predicted rankings of CDM projects in terms of reduction volume are Hydro (1,794,447 kCERs), HFCs (1,100,202kCERs), and Wind (1,050,160 kCERs).

The distribution of CDM projects by region (Oct. 2010) For all projects

Total in the Number of Number of Number of kCERs 2012 kCERs CDM Pipeline small-scale full scale all projects

Latin America 394 15.3% 495 16.7% 889 16.1% 86,004 384,341 13.6%

Asia & Pacific 2,075 80.7% 2,298 77.7% 4,373 79.1% 612,468 2,269,174 80.2%

Europe· 24 0.9% 37 1.3% 61 1.1% 13,809 40,996 1.4% Central Asia

Africa 57 2.2% 86 2.9% 143 2.6% 29,505 98,956 3.5%

Middle‐East 20 0.8% 43 1.5% 63 1.1% 10,011 34,505 1.2%

Less developed 2,570 100% 2.959 100% 5,529 100% 751,796 2,827,972 100% World

Source: CD4CDM http://www.cd4cdm.org/ (2010.10.12).

We can see that the Asia-Pacific region currently holds over 80 percent of CDM projects. As the 27 EU Member Nations and North American region are obligated to reduce GHG emissions, they have been excluded from CDM destination targets. Along the same lines, there are only 4 countries (Albania, Malta, Macedonia, and Moldova) which are non-Annex nations in the European region. The African and Middle-East regions only attract 3~4 100 the JoUrnAl of eAst AsiAn AffAirs

percent of CDM projects.21 Aside from the Asia-Pacific and Latin American regions, the only other major CDM destinations are Azerbaijan, Nigeria, and South Africa. From the expected figures for 2012, Azerbaijan was at 16.4 million tons and Nigeria 16.8 million tons, at a similar level to Indonesia (16,363kt), Thailand (14,694kt), or Vietnam (1445,576kt). The expected figure for South Africa in 2012, 7.3 million tons, is similar to that of Chile (7,414kt) or Columbia (7,501kt).22 In the Latin American region, Brazil, Mexico, and Chile have been attracting CDM projects but only roughly one-fifth that of China and India. Table 3 analyzes the changes of CDM projects in each region by time. The number of CDM projects attracted or total amount of capital generated by China and India far exceed the total of the remaining CDM nations, and the total amount invested in China alone between 2004 and 2010 was about 66.6 percent of the global total. In addition, the total of China and India combined is about 81.9 percent of the global total, showing that CDM projects are concentrated on these two countries. Until 2004-2006, Latin America and Asian regions showed similar conditions; however, the influx of CDM investment in China and India after 2006 has showed a marked increase. The investment capital flowing into Latin America peaked in 2006 and has been decreasing, and it is noteworthy that in 2010, Latin America attracted only 303 million USD, less than that of Africa (363 Million US$), which has been rather weak in attracting much CDM investment. The growth of CDM projects is also noteworthy. In 2004, the total invested was 19 million USD and focused primarily in the Latin American region; however, in 2009, the total reached 25.8 billion USD disproportionately concentrated on China and India.

21 The competitive system of CDM projects leads to inequality between regions and countries. The likelihood of promoting CDM projects in the poorest countries such as in Africa, as opposed to developing countries which have already constructed sufficient infrastructure, is weak (Karp et al. 2000, pp. 25~26). 22 CD4CDM http://www.cd4cdm.org/ (2010.10.12). An AnAlysis of the fDi DeterminAnt of the CleAn Development meChAnism(CDm) 101

The changes of CDM projects in each region by time (Oct. 2010) (Million US$)

Registered Share of Host country All years 2004 2005 2006 2007 2008 2009 2010 projects investments

China 969 50,149 0 59 1,329 5,323 10,556 18,627 14,255 66.6%

India 534 11,498 0 106 1,312 3,964 1,227 3,962 928 15.3%

Latin America 479 7,377 19 400 2,464 1,554 1,433 1,200 306 9.8%

Rest of Asia 321 3,589 0 87 909 422 341 1,062 768 4.8%

Africa 45 1,552 0 110 386 291 65 337 363 2.1%

Middle-East 26 841 0 0 2 301 65 473 0 1.1%

Europe· 26 261 0 6 123 5 5 110 11 0.3% Central Asia

Total 2,400 75,267 19 768 6,526 11,860 13,693 25,771 16,631 100.0%

Note: Rejected projects excluded. Source: CD4CDM http://www.cd4cdm.org/ (2010.10.12).

Table 4 analyzes the number of projects and emissions reduction of major CDM countries.

The number of projects and emissions reduction of major CDM countries (Sept. 2010)

At validation Request registration Registered Country numbers kt CO2 numbers kt CO2 numbers kt CO2

Argentina 16 1,635 1 55 17 4,201

Brazil 173 11,071 2 141 178 20,552

Chile 37 3,091 0 0 38 4,720

Colombia 41 3,578 0 0 24 3,223

Mexico 49 5,448 1 179 123 9,635 102 the JoUrnAl of eAst AsiAn AffAirs

At validation Request registration Registered Country numbers kt CO2 numbers kt CO2 numbers kt CO2

Peru 17 3,193 0 0 21 2,466

China 1,144 162,075 110 18,466 929 230,369

India 833 85,535 31 14,942 526 43,121

Indonesia 56 6,172 2 1,198 48 4,327

Malaysia 46 2,688 2 39 83 5,286

Pakistan 16 2,249 1 36 9 1,689

Philippines 31 1,799 1 107 41 1,474

Singapore 2 38 1 102 1 15

South Korea 34 2,892 3 15 43 17,007

Thailand 80 4,312 5 167 37 2,155

Vietnam 87 5,976 4 125 30 1,721

Azerbaijan 6 5,786 0 0 0 0

Uzbekistan 6 3,371 0 0 7 1,105

Egypt 8 1,198 2 653 5 1,966

Nigeria 6 5,984 0 0 3 4,155

South Africa 19 3,007 0 0 17 2,960

Iran 8 453 0 0 1 463

Israel 17 2,106 1 20 16 1,849

total 2,930 342,830 169 36,289 2,344 378,059

Source: Stop Global Warming Save Environmental. http://www.gihoo.or.kr/portal/cdm/nation/content.do?info_idx=1244&number=70&cdm_code= &pageNum=1&column=&field= (2010.10.7).

Although there are many CDM projects in the Latin American region which have completed registration as initiated in the early stages of the Kyoto Protocol, there are only five new projects which are in the registration application stage. In contrast, the CDM influx of China and India is overwhelmingly high in terms An AnAlysis of the fDi DeterminAnt of the CleAn Development meChAnism(CDm) 103

of both the number of projects as well as emissions reduction. In particular, in terms of emissions reduction volume for projects in the verification and registration completion stages, China has two to four times that of India. The emissions reduction volumes for projects which have completed registration for Brazil, Korea, and Mexico are 20.6 million tons, 17.0 million tons, and 9.6 million tons, respectively. When comparing the emissions reduction volume for projects in the verification stages, China and India are naturally far ahead of the rest, and Brazil (11.071 million tons), Indonesia (6.172 million tons), Vietnam (5.976 million tons), Nigeria (5.984 million tons) and Azerbaijan (5.786 million tons) have become newly advancing destinations for CDM projects. It is significant that, aside from Asia and Latin America, Nigeria, Azerbaijan and South Africa are also CDM investment countries. This paper analyzed the major criteria for attracting CDM projects by categorizing them into the CO2 emissions of the host country and the transaction costs at the time of investment, that is, CDM investment system and direct investment attraction policy. Section 4 analyzes the CO2 emissions of host countries as a criterion for the attraction of CDM projects.

Co2 emission volUme By CoUntry As A Criterion for CDm investment

The EU put into effect a voluntary agreement which restricts the import of automobiles with CO2 emissions above 140g per kilometer, and in accordance with the estimation that it will be difficult to achieve its reduction objectives through this agreement, the EU has announced that the regulations will be tightened to 130 g/km by 2012 and further to 120g/km in the future.23 Although these individual nation environmental regulations are not direct regulations like the Kyoto Protocol, they can be applied as factors to impose the reduction of GHG emissions. Although Korea is not

23 Europa http://ec.europa.eu/environment/index_en.htm (2010.10.13). 104 the JoUrnAl of eAst AsiAn AffAirs

subject to GHG reduction obligations, the aforementioned environmental regulation of the EU acts as a trade barrier as automobiles are one of Korea’s exports to the EU. That is, even if a country is not subject to GHG reduction obligations, there are many cases in which GHG reduction regulations act as trade regulations in the foreign trade market with developed countries which are Annex I countries. However, the CO2 emissions of major CDM host countries is rapidly increasing at the present, and it is the reality that a comprehensive social agreement on the environment has not been formed. This section investigated whether CO2 emissions by country are being applied as a criterion for attracting CDM projects. Despite the carrying out of the Kyoto Protocol, the volume of global carbon dioxide emissions has continually increased. The level of global carbon dioxide emissions as of 2007 is as follows: 1st China (6,533,018.2 kt), U.S.A. (5,832,194.0 kt), India (1,611,042 kt), Russia Federation (1,536,099.0 kt), Japan (1,253,516.7 kt), Germany (787,291.0 kt), Canada (556,884.0 kt), United Kingdom (539,175.9 kt), Re. of Korea (502,909.6 kt), Iran (495,581.6 kt). In particular, four out of the top 10 are countries not subject to GHG reduction obligations, and as the volume of carbon emissions rapidly increases, it is clear there is a need to supplement the Kyoto Protocol system. Of course, with respect to domestic GHG emissions, there is a difference between the situations of developing countries such as China and India and developed countries. Shue (1993) pointed out that the GHG emissions of developing countries are “emissions for survival” in order to satisfy the subsistence demands of a growing population, while the per capita GHG emissions of developed countries which exceed the global average are more akin to “emissions for luxury.” In addition, charging developing countries which are still experiencing economic growth with the responsibility for issues such as the environment also runs contrary to the principle of equilibrium.24 In reality, agreements

24 In its report, the World Resource Institute (WRI) asserts that the reason negotiations on the GHG reduction obligations of developing countries has reached An AnAlysis of the fDi DeterminAnt of the CleAn Development meChAnism(CDm) 105

related to the environment have the effect of hampering many developing countries which are attempting to experience economic growth through “late” industrialization and it is not fair to regulate the current emissions without considering the accumulated emissions or harmful influences of developed countries which have first experienced industrialization after the Industrial Revolution (Koo et al. 2004, pp.403~404). Although this sort of criticism is reasonable and persuasive, it is the reality that achieving the ultimate objectives of climate change agreements is difficult without the active participation of newly rising developing countries, and therefore, the issue of the participation of developing countries in order to sustain the climate change regime for the long-term is an inevitable one (Paik 2003, pp.20~21). It is true that a problem is that, apart from GHG reduction goals, countries with high and/or rising CO2 emissions are more likely to attract CDM investment; however, it is predicted that the CDM may function as one method in which a solution to the balance between developed-developing countries may be approached. Table 5 shows the carbon dioxide emissions of major CDM countries.

The carbon dioxide emissions of major CDM countries

(Unit: kt CO2) Country 1990 1995 2000 2005 2006 2007

Algeria 77000.0 946,15.5 116,768.0 138,741.0 133,420.9 140,005.1

Argentina 109,700.0 122,447.2 140,961.4 158,310.4 171,456.9 183,577.4

Brazil 209,500.0 275,338.6 329,855.3 349,681.2 352,253.3 368,015.8

Chile 356,00.0 43,576.0 60,045.6 65,376.8 67,926.9 71,645.9 an impasse is because a great part of the current discussion is based upon a faulty assumption, and therefore, the assumption that an absolute restriction will be placed on the GHG emissions of developing countries as on developed countries is also faulty. It was explained that the idea of setting restrictive emissions caps for developing countries experiencing rapid economic growth in the short-term is unrealistic (WRI http://www.wri.org/ (2010.10.14). 106 the JoUrnAl of eAst AsiAn AffAirs

Country 1990 1995 2000 2005 2006 2007

China 2,398,200.0 3,317,568.8 3,402,309.8 5,609,477.7 6,108,276.4 6,533,018.3

Colombia 58,000.0 59,562.0 57,876.5 59,129.6 61,511.2 63,387.2

Egypt 75,400.0 95,645.1 141,214.2 163,220.2 178,253.6 184,508.2

India 681,500.0 919,293.9 1,185,692.4 1,409,973.2 1,503,115.7 1,611,042.5

Indonesia 213,800.0 224,757.1 257,909.0 340,814.3 342,547.4 396,818.5

Iran 218,200.0 284,685.5 338,964.0 426,606.8 481,581.5 495,581.6

Israel 33,100.0 54,190.6 62,639.7 59,162.6 65,724.8 66,684.8

Kazakhstan 288,100.0 166,594.8 127,664.4 177,088.4 191,971.6 227,208.3

Malaysia 55,300.0 121,032.9 126,499.6 183,295.3 185,266.5 194,316.6

Mexico 413,100.0 349,915.7 389,772.7 440,555.7 447,374.4 471,073.2

Nigeria 45,300.0 34,888.6 79,116.8 110,370.7 97,784.8 95,194.4

Pakistan 68,000.0 84,414.9 106,362.3 136,524.3 145,735.6 156,265.9

Philippines 43,900.0 63,653.8 78,823.6 80,545.7 67,523.9 70,858.1

Peru 21,000.0 23,856.3 30,294.0 37,178.6 34,976.5 42,953.1

Saudi Arabia 254,700.0 234,664.5 297,505.8 366,766.4 384,071.5 402,120.3

South Africa 331,700.0 353,169.3 368,308.9 407,894.8 403,402.7 433,172.7

South Korea 241,100.0 371,936.3 441,684.2 462,678.9 470,234.1 502,909.6

Singapore 45,100.0 47,071.4 52,303.6 59,514.4 56,176.4 54,146.6

Thailand 95,700.0 181,313.0 201,384.4 270,209.0 278,914.7 277,884.2

Uzbekistan 129,200.0 10,0829.6 118,753.9 112,411.5 115,518.6 118,753.9

Vietnam 21,400.0 29,825.0 53,553.0 103,379.8 1,04,746.4 111,286.7

World 22,695,900.0 23,401,968.0 24,688,032.0 29,205,744.0 30,136,400.0 30,649,360.0

Source: The World Bank http://data.worldbank.org/indicator/Environment (2010.10.7).

In Table 5, we can see that the volume of CO2 emissions of developing countries has increased dramatically. Despite the fact that, after the Kyoto Protocol, many nations among the parties An AnAlysis of the fDi DeterminAnt of the CleAn Development meChAnism(CDm) 107

to the protocol have been reducing their GHG emissions, global CO2 emissions have increased from 22.696 million tons in 1995 to 30.649 million tons in 2007, an increase of 35.04 percent. In particular, in the years after the Kyoto Protocol came into effect, there has been a gradual rise from 29.205 million tons in 2005 to 30.136 million tons in 2006 and 30.649 million tons in 2007. When looking at the rankings in terms of absolute volume of CO2 emissions, as of 2007, China (6,533,018.3 kt), India (1,611,042.5 kt) have recorded overwhelmingly high volumes. Korea (502,909.6 kt) follows as the third-highest ranking. In the CO2 emissions volumes for 1990, the base year of the Kyoto Protocol, China was at 2.398 million tons, India at 681.5 million tons, and Mexico at 413.1 million tons. If the rise of CO2 emissions in the 15 years between 1990 and 2005 is calculated, China has risen by 133.90 percent, India by 106.89 percent, Korea by 91.90 percent, Indonesia by 59.41 percent, Malaysia by 231.46 percent and Vietnam by 383.08 percent. When compared to the figures for the Asian region, the numbers for Brazil (66.91 percent) and Mexico (6.65 percent) are relatively small; however, they still show an increasing trend. In addition, Nigeria has shown an astonishing rise of 143.64 percent. Table 6 analyzes and compares the changes of CDM of non- Annex countries over time and analyzes the relationship between CO2 emissions and CDM investment attraction.

The changes of CDM of non-Annex countries over time

2006.11 total 2007.10 total 2008.9 total 2009.9 total 2009.10 total Country number kt CO₂ number kt CO₂ number kt CO₂ number kt CO₂ number kt CO₂

China 120 63,138 820 2,177,991 1,377 294,416 1,832 360,539 2,183 4,109,910

India 362 31,288 757 55,294 1,046 76,004 1,179 100,694 1,390 143,598

Brazil 179 21,136 235 24,079 303 30,369 344 30,708 353 31,764

South Korea 15 13,856 36 15,925 52 16,462 67 18,071 80 19,914 108 the JoUrnAl of eAst AsiAn AffAirs

2006.11 total 2007.10 total 2008.9 total 2009.9 total 2009.10 total Country number kt CO₂ number kt CO₂ number kt CO₂ number kt CO₂ number kt CO₂

Mexico 67 7,829 174 10,367 187 14,036 157 12,699 173 15,261

Indonesia 10 1,726 49 5,627 81 8,015 94 10,824 106 11,696

Nigeria 2 4,404 2 4,029 3 5,353 7 7,169 9 10,139

Malaysia 18 1,988 66 10,322 133 13,406 127 8,109 131 8,013

Vietnam 6 840 11 1,098 30 2,131 75 5,442 121 7,822

Chile 24 3,725 42 6,374 56 7,211 68 7,429 75 7,811

Colombia 8 724 21 3,137 32 4,434 43 4,227 65 6,801

Thailand 12 1,229 37 2,728 55 3,429 103 5,942 122 6,633

South Africa ‐ ‐ 21 4,198 25 4,467 29 4,004 36 5,967

Argentina 10 3,655 19 4,377 30 5,194 27 5,140 34 5,891

Peru 8 1,502 18 2,364 25 3,331 30 5,265 38 5,659

Israel 4 186 19 1,580 33 3,620 28 2,753 34 3,975

Pakistan 1 1,150 3 2,727 10 3,027 19 3,552 26 3,973

Egypt 3 1,808 7 2,452 9 2,817 13 3,180 15 3,817

Philippines 25 445 47 2,143 73 2,628 79 3,143 73 3,379

Qatar ‐ ‐ 1 2,500 1 2,500 1 2,500 2 2,506

Iran ‐ ‐ ‐ ‐ ‐ ‐ 3 670 9 916

Singapore ‐ ‐ ‐ ‐ 4 534 8 679 4 155

Saudi Arabia ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 1 141

Kazakhstan ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Algeria ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Source: Stop Global Warming Save Environmental. http://www.gihoo.or.kr/portal/cdm/nation (2010.10.7).

As shown in Table 6, in 2006, around the time CDM projects were initiated, the primary target countries for investment were China (120 projects), India (362 projects), Brazil (179 projects), An AnAlysis of the fDi DeterminAnt of the CleAn Development meChAnism(CDm) 109

and Mexico (67 projects). When comparing the emissions reduction volumes, China (63,138kt) and India (31,288kt) are overwhelmingly high and Korea (13,856kt) is also at a high level. The Asian region as a whole has a high absolute amount of CO2 emissions, and there has been an increasing trend in CDM attraction after 1990 in proportion to the rise of CO2 emissions. Therefore, it is necessary to pay attention to the countries that stand outside the norm. In the 15 years between 1990 and 2005, CO2 emissions have increased by 31.96 percent for Singapore and 95.21 percent for Iran. However, in the case of Singapore, the absolute value of CO2 emissions was only 54.147 million tons in 2007. This is small even when compared to countries of similar economic scale in terms of GDP such as Malaysia (194,316.6kt) and Nigeria (95,194.4kt) and countries with a lower GDP such as the Philippines (70,858.1kt) and Vietnam 25 26 (111,286.7kt). Furthermore, Singapore has reduced its CO2 emissions since 2005. As the Kyoto Protocol was put into effect in 2005, it is difficult to regard Singapore as a desirable CDM investment country from the perspective of investing countries. On the other hand, Iran has seen a high rate of increase of CO2 emissions and absolute volume, similar to that of Korea at 495.6 million tons in 2007. However, there had only been one CDM project by 2008, and as of September 2010, there are only 9 CDM projects and a recorded drop of emissions of 916 thousand tons. So why hasn’t the CDM investment environment of Iran received the attention of developed countries? Table 7 compares the carbon dioxide emissions and FDI of major CDM countries.

25 2009 GDP ranking by country: 41. Malaysia (191,463), 43. Singapore (177,132), 44. Nigeria (173,428), 48. Philippines (160,991), 57. Vietnam (92,439) (US $ million) (International Monetary Fund (IMF) www.imf.org/ (2010. 10. 13)). 26 Karp et al. (2000) use data from developing countries to estimate a two-equation system adapted from One equation, the revenue function, which explains GDP as a function of carbon emission and other factors and the second equation explains the level of emission (Karp et al. 2000, p.16). 110 the JoUrnAl of eAst AsiAn AffAirs

The carbon dioxide emissions and FDI of major CDM countries (2007) Unit: FDI inflows (US $bn)

27 Country Kt CO2 FDI inflows World rankings Non-Annex I rankings

Argentina 183,577.4 6.5 37 14

Brazil 368,015.8 27.5 14 2

Chile 71,645.9 10.9 25 6

China 6,533,018.3 86.8 3 1

Colombia 63,387.2 6.3 40 16

Egypt 184,508.2 6.0 41 17

India 1,611,042.5 20.4 18 5

Indonesia 396,818.5 6.6 36 13

Iran 495,581.6 0.4 80 -

Kazakhstan 227,208.3 6.7 35 12

Malaysia 194,316.6 6.8 34 11

Mexico 471,073.2 22.7 17 4

Nigeria 95,194.4 2.1 58 23

Philippines 70,858.1 2.4 55 22

Saudi Arabia 402,120.3 7.9 29 8

South Africa 433,172.7 3.2 49 19

South Korea 502,909.6 7.2 31 9

Singapore 54,146.6 27.1 15 3

Thailand 277,884.2 8.9 27 7

Vietnam 111,286.7 6.5 38 15

Source: The World bank http://data.worldbank.org/indicator/Environment (2010.10.7). Economist Intelligence Unit (EIU), 2008, p.9.

27 Non-Annex I Parties are mostly developing countries. Certain groups of developing countries are recognized by the Convention as being especially An AnAlysis of the fDi DeterminAnt of the CleAn Development meChAnism(CDm) 111

Although Iran has the fourth highest CO2 emissions among CDM target countries, in terms of FDI, it remains among the lowest ranked at 80 out of 82 countries. It is conspicuous when compared to other Middle Eastern countries such as Saudi Arabia, ranked 29th (7.9 bn USD), and the United Arab Emirates (UAE), ranked 23rd (12.8 bn USD). There are many factors which may explain why a low FDI ranking does not attract investment28; however, in the case of CDM investment, rather than attraction criteria such as market opportunities or the labor market, investment is more heavily dependent on transaction vulnerable to the adverse impacts of climate change, including countries with low-lying coastal areas and those prone to desertification and drought. Others (such as countries that rely heavily on income from fossil fuel production and commerce) feel more vulnerable to the potential economic impacts of climate change response measures. The Convention emphasizes activities that promise to answer the special needs and concerns of these vulnerable countries, such as investment, insurance and technology transfer (UNFCCC, http://unfccc.int/parties_and_observers/items/2704.php 2010.10.2) 28 Of the theories on the factors involved in attracting FDI, Dunning’s Eclectic Paradigm is often cited. In the Eclectic Paradigm, Dunning presented the OLI theory. The OLI model, as the theory which most conservatively cites the factors involved in attracting FDI to date, categorizes the attraction factors objectively. In the OLI model, the advantages of attracting FDI are classified and analyzed in three categories in accordance with the investment objectives and motivations of multi-national corporations: Ownership-specific advantages, locational-specific advantages, and internalization-specific advantages. Ownership-specific advantages refer to comparative advantages of the multi- national corporation when it has assets, technology, or conditions that locally competitive enterprises do not have. These advantages, as advantages from property rights or intangible assets, includes production innovation, production management, marketing systems, innovative capacity, experience of human capital, finances, and know-how. Next, locational-specific advantages may be advantages gained through the reduction of production costs through the union with local resources, and multi-national corporations must consider whether the substitute region provides for better production activities or whether it can more appropriately apply its ownership-specific advantages. The last is internalization-specific advantages which apply to alternatives through regional attraction in the stage of creating and developing their core functions and include investment that occurs with the goal of sales or lending in the host country’s local or neighboring markets (Dunning 2000, p.164). 112 the JoUrnAl of eAst AsiAn AffAirs

costs,29 considering the time required until CER issuance, such as a system which facilitates CDM investment, infrastructure and political environment. Therefore, it can be said that, in the case of Iran, although CO2 emissions and CDM opportunities are high, the hassle cost is also high as well. That is, in order to attract CDM investment, one must not only consider the scale of CO2 emissions or the increase rate of emissions but the transaction costs involved in investment as well. The transaction costs involved in CDM investment are analyzed in Section 5.

trAnsACtion Costs By CoUntry As A Criterion for CDm investment

An enterprise which is attempting to acquire a CER through CDM investment, before considering the scale of the host country’s CO2 emissions, must first analyze the CDM investment system and environment and the stability of investment.30 Establishment of a DNA is one of the requirements for participation by a Party in the CDM.31 Prior to CER issuance, the enterprise must first draft a CDM-PDD, then go through validation, registration, and verification steps before receiving governmental approval from the host party DNA.32 Afterwards, if verification and certification are

29 Transaction costs comprehensively include market investigation costs, negotiation costs, and other transactional costs and taxes that are incurred during various trade transactions. 30 Most economic studies focus on pros and cons, opportunities and costs of free trade agreement in terms of its impacts on macro economic variables such as consumer welfare, GDP, unemployment, etc. (Lee 2000, p.66). 31 Parties participating in the CDM shall designate a national authority for the CDM (3/CMP.1, Annex, paragraph 29). 32 ‘Unilateral CDM’ projects refer to those CDM project activities that do not have an Annex I Party letter of approval at the time of registration of the project. These are classified into “bilateral CDM”, which is promoted by the investing country and the host country, and “multilateral CDM”, in which several developed countries or agencies jointly invest in one project. (Roh 208, p.28). An AnAlysis of the fDi DeterminAnt of the CleAn Development meChAnism(CDm) 113

achieved through the monitoring process,33 the CER is issued. The average period for the aforementioned process is presented in Table 8.

Average period delays for all CDM projects

Days Months Years

Validation (start comment until request registration) 326 10.9 0.9

Registration (request registration to registration) 151 5.0 0.4

Average number of days from registration until the 447 14.9 1.2 date of first issuance:

Total from start comment to first issuance 923 30.8 2.6

Source: CD4CDM http://www.cd4cdm.org/ (2010.10.12).

The average period for validation is 326 days, 151 days for registration and 447 days until issuance, making a total of approximately 923 days for the entire process. Therefore, as a period of several years is required to acquire a CER through investigation of the marketability and an analysis of validity, this process accrues many opportunity costs. Nevertheless, in order to attain the objective of acquiring a CER effectively at a lower cost than in the enterprise’s home country, this period of time is essential to the investment enterprise. However, if the fundamental risks related to CDM investment are not resolved, it is impossible to invest at all. The United Nations Environment Programme (UNEP) recommends the following. There are three main risk categories which a CDM Project presents for stakeholders:

33 Monitoring refers to the collection and archiving of all relevant data necessary for determining the baseline, measuring anthropogenic emissions by sources of greenhouse gases (GHG) within the project boundary of a CDM project activity and leakage, as applicable (CDM Glossary of Terms Version 3). 114 the JoUrnAl of eAst AsiAn AffAirs

ⅰ) risks due to the fact that the project is incorporated in a developing country with certain political and regulatory uncertainties; ⅱ) general project risks which are common to all projects in developing and industrialised countries; ⅲ) special risks due to the fact that a revenue stream from a CDM Project relies upon a new and developing international legal framework (UNEP 2004, p.80). First, political and regulatory uncertainties generally function as hassle costs, obstructing investment. Enterprises must analyze the major criteria in attracting CDM investment through analytical data on major countries’ CDM policy. Second, general project risk, as a matter embedded not only in CDM investment but all types of investment, requires the investor’s discerning judgment. Third, there exists variability, and as mentioned in Section 2, the investor should pay close attention to the trends in international society. In order to attract CDM projects in an already competitive system, host countries must prepare systems and policies to attract investment enterprises in the same way it attracts FDI. Dunning (1997) advised the following with regard to the industrial policy a government must promote in a globalized environment. Dunning asserted that first, highly skilled manpower must be produced through job training; second, physical infrastructure, such as transportation and communications, must be secured throughout the society; third, transparent and stable legal and regulatory mechanisms must be provided, thereby constructing an institutional infrastructure; and finally, social order and political stability must be secured (Dunning 1997, pp.118~120). That is, in order to attract CDM, first, host countries must participate in climate change agreements and the Kyoto Protocol, and after related climate change agreements are put in effect, DNA and governmental bodies necessary to the approval process of CDM projects must first be established. This is applicable as minimal institutional infrastructure. Second, the stability of the An AnAlysis of the fDi DeterminAnt of the CleAn Development meChAnism(CDm) 115

political environment must be secured, considering the long period of time involved in CER issuance, which should already be sufficiently considered in the general FDI market. Third, countries attempting to attract CDM investment must promote strategic reduction sectors, considering their domestic natural environment, status of industries, and possibility for sustainable growth and investment. Unless the host country has the capability to cover the majority of sectors as China or India does, it is essential to select strategic reduction sectors (China and India also support strategic sectors.). Through political support and tax benefits for strategic reduction sectors, these sectors may be successful in attracting CDM in the competitive system. Therefore, an analysis of the CDM investment environment of the countries desiring to attract CDM was conducted, analyzing the above three conditions. This section analyzed countries in Asia, where fierce competition to attract CDM investment is being staged. Figure 1 shows the distribution of CDM projects in Asia by country. China (50 percent) and India (33 percent) are unrivaled, and Malaysia, Vietnam, Thailand, Indonesia, the Philippines and Korea each occupy approximately 2-3 percent. Figure 2 shows the distribution by country in Asia based on the number of CER attainable by the year 2012. China (68 percent) and India (20 percent) take up 88 percent, while Korea is at 5 percent, Indonesia at 2 percent, and Malaysia, Vietnam, and Thailand each at 1 percent. China and India, as already established attractive destinations for FDI, have already developed the foundational environment for investment, and when considering the natural environment and industrial structure, have the advantage of satisfying all aspects of CDM eligibility. If that is so, we must analyze what the differences in CDM investment environment and systems are between China and India and the rest of the Asia. There is a need for a more detailed analysis of areas which have a similar economic level in terms of GDP but lower levels of CDM investment (ex Singapore) and areas which have a better natural environment but are largely ignored by CDM investors (ex Cambodia, Myanmar). 116 the JoUrnAl of eAst AsiAn AffAirs

Number of CDM projects CER until 2012 in Asia by country

Pakistan Pakistan SriLanka South Korea Pilippines South Korea Pilippines 1% 1% SriLanka 0.5% 5% 0.6% 2% 2% Indonesia 0% Indonesia Others 2% Others 2% 1% Thailand 0% Thailand 1% 3% Vietnam Vietnam 1% 3% Malausia India Malausia China 1% 20% China 3% 50% India 68% 33%

Source: CD4CDM http://www.cd4cdm.org/ (2010.10.12).

The first consideration and a basic condition for the attraction of CDM investment is participation in climate change agreements and the Kyoto Protocol and the establishment of a DNA and governmental bodies which oversee the CDM process. Of the 192 parties (including regional unions) and observers, 155 nations have installed a DNA as of October 2010. Table 9 presents data on activities and trends related to climate change agreements.

Data on activities and trends related to climate change agreement

China Indonesia Malaysia Philippines India

signature 92.6.11 92.6.5 92.6.6 92.6.12 92.6.10

ratification 93.1.5 94.8.23 94.8.13 94.8.2 93.11.1 FCCC entry into 93.3.21 94.11.21 94.10.11 94.10.31 94.3.21 force An AnAlysis of the fDi DeterminAnt of the CleAn Development meChAnism(CDm) 117

China Indonesia Malaysia Philippines India

signature 98.5.29 98.7.13 99.3.12 98.4.15 -

ratification 02.8.30 04.12.3 02.9.4 03.11.20 02.8.26 Kyoto Protocol entry into 05.2.16 05.3.3 05.2.16 05.2.16 05.2.16 force

DNA foundation 2004.6 2005.7 2003.5 2004.6 2003.4

Source: UNFCCC http://maindb.unfccc.int/public/country.pl?country=CN.

China, Indonesia, Malaysia, the Philippines and India have signed and ratified the June 1992 UN Framework Convention on Climate Change and put it into effect from 1993~1994. Afterwards, the Kyoto Protocol, which has been criticized even among developed countries, was signed by the rest of the Asian countries, including China, between 1998 and 1999. It was put into effect in 2005 through domestic ratification procedures. China, the foremost GHG emitter, established the National Development and Reform Commission in June 2004 through a provisional statute to perform the functions of a DNA in managing and maintaining CDM and established the National Coordination Committee on Climate Change (NCCCC) in order to oversee CDM policy and standard review. In addition, the National CDM Board (NCB) reviews the qualifications of CDM project participants and plays the role of monitoring the progress of projects and drafting legal recommendations related to CDM.34 Indonesia established the National Commission for CDM (NCCDM) through an order from Ministry of Environment in July 2005. The Indonesian government designated the energy and forestation sectors as strategic reduction sectors, and the CDM Working Group is maintaining CDM projects in the Afforestation and Reforestation sector. Malaysia established the National Committee for Clean Development Mechanism in the national cabinet in order carry

34 CDM Online Support System http://www.gihoo.or.kr/portal/cdm_online/ (2010.10.12). 118 the JoUrnAl of eAst AsiAn AffAirs

out the duties of a DNA in May 2003. The Philippines appointed the Department of Environment and Natural Resources (DENR) as a DNA in accordance with an order from the Department of the Interior and Local Government. In this way, although there are small differences in the period, Asian nations have expediently established DNAs, the most basic institutional infrastructure in attracting CDM investment, after the Kyoto Protocol came into effect. However, Haiti, Iraq, North Korea,35 along with the poorest developing countries in Africa (Central African Republic, Comoros, Congo, Somalia, Tonga and United Republic of Tanzania, etc.), have yet to even establish a CDM. In principle, this shows that, on the contrary, CDM projects do not reach the poorest developing countries, causing environmental polarization36 even between developing countries. Although carbon emissions are high, which is a direct attraction criterion for CDM investment as mentioned in Section 4, Iran (Department of the Environment), Cambodia (Ministry of Environment, Climate Change Office), and Myanmar (Ministry of Forestry, Planning & Statistics Department), which have low levels of CDM attraction, have all established DNAs. The second item for review is the investment stability of CDM investment target countries. First, China and India, which are foremost in attracting CDM, are both spotlighted destinations in the FDI market as well. As of 2007, China was ranked 3rd with a 5.79 percent share of the global FDI market, and India was ranked 18th with a 1.36 percent share (EIU 2007, p.9). Table

35 Han et al. (2007) researched the economic viability of forestation CDM projects in North Korea; however, the DPRK has not established a DNA at present, and Han presupposed the establishment of a DNA in the near future (Han 2007, p.236). 36 “Environmental polarization” as used by the author refers to the fact that environmental improvement systems, through international agreements on the environment such as the CDM system, are focused on one pole (developed countries or advanced, large developing countries). There is a need to reconsider the situation in which countries not having gone through industrialization and mechanization and with low per capita carbon consumption are excluded from the benefits from environmental agreements. An AnAlysis of the fDi DeterminAnt of the CleAn Development meChAnism(CDm) 119

10 presents the business environment rankings37 of China and India.

China & India’s business environment rankings

China India

score rank score rank Business environment 02-06 07‐11 02‐06 07‐11 02‐06 07‐11 02‐06 07‐11

Political environment 4.6 4.8 62 61 5.2 5.7 50 54 Political stability 5.5 5.1 55 62 5.5 6.3 55 50

Political effectiveness 3.9 4.5 61 58 4.9 5.2 45 46

Policy towards FDI 6.0 6.9 57 49 5.1 6.9 66 49

Labour market 5.8 6.2 54 57 5.6 6.2 64 56

Infrastructure 4.7 5.6 56 55 3.3 4.5 76 72

Source: EIU 2007, p.128 & p.132.

China has been attracting sizeable amounts of FDI for some years, and FDI inflows are forecast to remain high during the forecast period. China and India still ranked by many international firms as their preferred investment destination, although India’s poor infrastructure, excessive bureaucracy and interdepartmental wrangling will slow the pace of opening in many sectors (EIU 2007, p.129 & p.133). That is, as market opportunities of these countries, which have experienced continued large-scale economic growth through the introduction of a market economy, are a direct criterion generally in attacting FDI, if CDM investment is supported by minimal

37 The EIU has divided and analyzed the business environment of each country into the following 10 areas; political environment (Political stability, Political effectiveness), Macroeconomic environment, Market opportunities, Policy towards private enterprise & competition, Policy towards FDI, Foreign trade & exchange controls, Taxes, Financing, Labour market and Infrastructure. 120 the JoUrnAl of eAst AsiAn AffAirs

institutional infrastructure and political stability, we can see that there must be a business environment which attracts CDM and political support for the industries related to CDM. Third, in order to attract CDM projects, governments must designate sectors for emissions reduction and provide support. China has been in the spotlight as the CDM market with the largest scale and the most favorable outlook, and foreign enterprises have flocked to take part in its market. At present, there has been active CDM project investment from Europe and Japan. Therefore, the Chinese government has designated possible industries and induced fierce competition between foreign enterprises.38 It can be said that this situation is exceptional to China which occupies over 60 percent of CDM projects, and the rest of the countries must designate and support sectors in which carbon emissions may be easily reduced and may be profitable to the country. The Chinese government designated improvement of energy efficiency, methane collection and usage, and development and use of new and renewable energy as strategic reduction sectors for CDM projects (Ministry of Environment 2008, p.188). Although Indonesia, having a large natural environment and the fourth largest population in the world, has favorable conditions for the attracting CDM, has been unable to smoothly attract CDM projects. After 2009, the government has been actively adopting policy in the CDM sector and investment attraction has been steadily increasing. The strategic reduction sectors recommended by the Indonesian government are new and renewable energy and forestation sectors (Ministry of Environment 2008, p.285). Indonesia is currently the highest ranked emitter of carbon emissions in Southeast Asia and also the leading attractor of CDM in the region. The Philippines constructed a national strategy for GHG reduction through a development plan for the medium and long term and has designated

38 The Chinese government has made it so that only foreign investment enterprises which are joint ventures 51 percent owned by Chinese enterprises may engage in CDM projects and has made it clear that from 2 to 65 percent of the carbon credits acquired from the projects are property of the government under its jurisdiction (Kotra 2009, p.22). An AnAlysis of the fDi DeterminAnt of the CleAn Development meChAnism(CDm) 121

energy, development, biomass, and forest resources sectors as strategic reduction sectors. In addition, in order to attract CDM projects, the government put into law the ‘Ecological Solid Waste Management Act of 2001 R.A9003’, the ‘Mini-Hydroelectric Power Incentive Act of 1991 R.A 7156’ and ‘Development Act of 1978 P.D 1442’ (Ministry of Environment 2008, pp.529~530). Malaysia, as a primary member nation of ASEAN, has been standing out as a central commercial power in Southeast Asia through infrastructure- focused investment and improvement of the financial management environment. The Malaysian government designated new and renewable energy and forestation sectors as strategic reduction sectors and CDM projects are focusing on sectors related to the production of palm oil. The Malaysian government established the Energy Commission and placed stress in the construction of institutional infrastructure in order to attract CDM projects in the energy sector and established the Malaysia Energy Center in order to facilitate energy policy and promote the entry into the renewable energy market (Ministry of Environment 2008, p.406~407). Therefore, there is a need to analyze whether the positive and dangerous aspects of each country in order to attract CDM project investment. Table 11 shows data presented by the Ministry of Environment on the project investment environments of the major CDM countries above. The investment environments of China, Indonesia, Malaysia, and the Philippines are presented. As shown in Table 11, China, Indonesia, Malaysia, and the Philippines have dangerous aspects in their political environments and regional characters; however, they have all experienced relative success in their industrial sectors of interest. These countries have relatively high carbon emissions compared to countries in other regions and the region has risen as an area of interest for CDM by establishing fundamental CDM-related systems and investment environments, designating primary CDM sectors, and providing support. There is a need to investigate the cases of Cambodia and Myanmar based on the above content. The two countries, as primarily agricultural countries with weak manufacturing industries, 122 the JoUrnAl of eAst AsiAn AffAirs

have relatively low levels of carbon emissions and thus have insufficient conditions for attracting CDM projects. Although Singapore has a more favorable investment environment which is a major CDM criterion that Cambodia and Myanmar are lacking, it has been excluded from the CDM market. Compared to city- state Singapore, Cambodia and Myanmar possess a more favorable natural environment. The Cambodian government regards the CDM as an opportunity for sustainable national development and the eradication of poverty and has prescribed that foreign enterprises be given all proprietary rights and authority in order to attract CDM projects. However, the status of CDM attraction is still weak and as of September 2010, only 7 projects have been initiated with a total reduction of 575,000 tons. Myanmar has established a DNA as a poorest country designated by the UN39; however, there are no CDM projects to date due to a lack of interest by the government, low carbon emissions as typical of poorest countries, and insufficient infrastructure.

CDM project investment environment by country

Positive aspects Dangerous aspects

● Establishment of DNA and CDM ● Authoritarian bureaucratic

procedures organizations, including the

● Expansion of foreign investment government

and supplementation of system ● Rise of prices and labor costs China ● Increase of government interest ● Recent reduction of tax benefits

● Ease of approach from adjacent for foreign investment enterprises

regions Unstable supply and demand of

● Abundance of CDM project targets energy and raw material

39 In 2007, Myanmar established a CDM department under the Ministry of Forest. An AnAlysis of the fDi DeterminAnt of the CleAn Development meChAnism(CDm) 123

Positive aspects Dangerous aspects ● Establishment of DNA and CDM procedures ● Need for additional lobbying ● Expansion of foreign investment activities and costs due to Indonesia and supplementation of system governmental corruption ● Stabilization of political situation ● Industrial delays due to protests ● Low level of prices and labor from the regional society costs Possibility of natural disasters ● Establishment of DNA and CDM procedures ● Expansion of foreign investment ● Potential for social unrest in and supplementation of system accordance with the demand for ● Relatively satisfactory social liberal democratization in the indirect capital long-term ● Stable government as opposed ● Loss of price competitiveness to neighboring countries, possibility due to a recent rise of labor Malaysia for economic growth on top of costs in relation to neighboring social countries ● Lower possibility of natural ● Insufficient labor resources disaster compared to neighboring Hindered use of nation’s resources countries and potential due to policy which ● Firm and stable intention of the favors the native population government in encouraging investment and provision of a consistent industrial environment ● Establishment of DNA and CDM procedures ● Political corruption ● Establishment of support system ● Unstable government of the DBP in order to support Philippines ● Industry delays due to protests CDM projects from the regional society ● Open to foreign investment Possibility of natural disasters ● Ease of communication as an English-speaking nation Source: CDM Online Support System www.gihoo.or.kr/portal/cdm_online/fsCDM_Biz_int.jsp?mf=B/B_1.jsp (2010.10.17). 124 the JoUrnAl of eAst AsiAn AffAirs

As stated above, as CDM projects put their objectives in the sustainable development and technological transfer of developing countries, there needs to be investment in the poorest developing countries which desperately need investment in efficient energy usage and the environment. However, a competitive structure for the attraction of CDM investment has already been established and has become a major part of the carbon trading market, a structure which focuses attention on certain large developing countries which are cost-effective and have already been institutionally established.

ConClUsion

This paper analyzed the investment status of CDM countries and investment criteria involved in the CDM. The most direct criterion for attracting CDM investment is the volume of carbon emissions, and this must be supported by a basic institutional infrastructure and political support for CDM by the host country. When comparing the carbon emissions of developing countries as of 2007, China, India, Korea, Iran, Mexico, Indonesia, and Brazil have shown large numbers. In particular, after 1990, the carbon emissions of Asian nations have risen rapidly and this result is accurately reflected in CDM investment. In 2010, the Asia-Pacific region occupies approximately 80 percent (79.1 percent of projects and 80.2 percent of emissions reduction in 2012) of CDM investment. It can be said that this is a result of China and India’s impressive ability to attract CDM investment; however, the rapid progress of Southeast Asia cannot be overlooked. In 2012, in terms of reduction volume, China and India account for 88 percent, and CDM investment in Korea and Southeast Asian nations such as Indonesia, Malaysia, Vietnam and Thailand are steadily increasing. This paper analyzed the increase and decrease of CDM investment and the carbon emission volumes of each country and FDI influx and the special characteristics of each country in analyzing CDM investment criteria. CDM investment is directly influenced by An AnAlysis of the fDi DeterminAnt of the CleAn Development meChAnism(CDm) 125

carbon emissions volumes. This is because the objective of CDM investment is the reduction of carbon emissions, and this can be said to be inevitable from the perspective of investment enterprises which search for cost-effective means to do so. In addition, when considering the long period required for CDM investment, political stability and institutional infrastructure of host countries must be considered. When comparing the CDM investment status of Asian countries, the minimal level of basic institutional infrastructure and political stability so that investment will not be in danger is at a sufficient level. In addition, it is effective to designate CDM project sectors and present a support system in order to attract small-scale CDM. This research was executed under the hypothesis that the CDM system will be sustained under the post-Kyoto system as well. The discussion over the post-Kyoto system is rife with repeated difficulties due to the acute differences in opinion between the U.S. and the EU and developed and developing countries. However, after constructive negotiations in June 2010, the 11th meeting of the “AWG-LC, Ad-hoc Working Group on Long-term Cooperative Action” and the 13th meeting of the “AWG-KP Ad-hoc Working Group on Further Commitments for Annex-1 Parties”, in accordance with the Kyoto Protocol, were held in the first week of August in Bonn. The representatives of each country have been divided into various groups and carry out discussions on GHG reduction, adaptation, finances, Land Use, Land Use Change, Forestry (LULUCF), and technology and ability cultivation (Korea Environment Cooperation 2010, p.3). Korea is in an extremely unique situation which is difficult to compare with other nations. In the post-Kyoto system, it is predicted that China and India will maintain their positions as developing countries, whereas Korea may be classified as country with reduction obligations.40 In addition, Korea is ranked third in

40 It is difficult to jump to a hasty conclusion as there are many possibilities with regard to future GHG reduction obligation methods; however, in the case that GHG emissions are to drop to 5 percent lower than 1995 levels 126 the JoUrnAl of eAst AsiAn AffAirs

Asia for CDM attraction in terms of reduction volume and fourth of non-Annex countries as a major CDM destination; however, unilateral CDM through domestic enterprises accounts for 72.97 percent of total projects.41 It can be said that this is a reflection of concerns of becoming a country with obligations for carbon reduction in the post-Kyoto system starting from 2013. There also remain several other considerations for Korea in the post- Kyoto system. Under the Kyoto Protocol, when a non-Annex country becomes a country with obligations for carbon reduction and if 1995 becomes the base year for the post-Kyoto system, there are concerns that the improvement of carbons emissions volume through the CDM in the period afterward will be dually totalled. Furthermore, there is the problem that CDM investment is concentrated on large industrialized countries such as China and India, having little or no influence on other developing countries and the poorest countries in particular. That being said, there are various opinions on the future of the post-Kyoto system; however, the continuance of the CDM system must be maintained in accord with the purpose of its establishment and a system which complements the previous system in addressing designated issues must be prepared. In particular, the polarization of the environment between developing countries will become a major research topic for the CDM sector

(assuming a post-Kyoto standard of 1995) from 2013, it has been analyzed that Korea will experience a decrease in real GNP growth rate by 0.78 percent (Stop Global Warming Save Environmental, http://www.gihoo.or.kr/portal/ (2010.10.17)). 41 India leads with respect to the number of CDM projects and the number of issued CERs. At the time of writing almost 35 percent of all registered CDM projects (287 over 826) and 34 percent of all CERs issued come from India. China leads when it comes to projected volume from registered projects. Almost 45 percent of all expected average annual CERs are from China, compared to 16 percent from India (Gorina 2007, p.7). An AnAlysis of the fDi DeterminAnt of the CleAn Development meChAnism(CDm) 127

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Korea Environment Cooperation, 2010 Up-to-date Trend of Carbon Market, September 2010. http://www.keco.or.kr/ Korea Trade-Investment Promotion Agency (Kotra) http://www.kotra.or.kr/ Ministry of Environment www.me.go.kr/ PointCarbon, http://www.pointcarbon.com Stop Global Warming Save Environmental, http://www.gihoo.or.kr/portal/ The World bank http://data.worldbank.org/indicator/Environment United Nations. 1998, Kyoto Protocol to the United Nations Framework Convention on Climate Change. United Nations Environment Programme (UNEP), 2004 Legal Issues Guidebook to the Clean Development Mechanism. pp.1~202. UNFCCC http://unfccc.int World Resource Institute http://www.wri.org/ Received: 8/16; Reviewed: 9/20; Revised: 10/26 An AnAlysis of ChArACteristiCs of KoreA’s MultiCulturAlisM: PoliCies And ProsPeCts 131

An AnAlysis of ChArACteristiCs of KoreA’s MultiCulturAlisM: PoliCies And ProsPeCts

yeogmi yun & Ki-cheol Park (Pyeongtaek University)

Abstract

This study aims to examine the limitations of the major characteristics of Korean multiculturalism according to the type of beneficiary categorization, and to discuss its development schemes by revisiting the multiculturalism policies that are currently in place, which are designed for social integration. The characteristics of the government- initiated Korean multiculturalism are as follows; foreigners are distinguished by legitimacy; the beneficiaries of the policy are only those foreigners who are legitimately residing in the country; its social-integration and national-interest promotion targets take priority over the individual rights and circumstances of foreigners. The implementation of Korea’s integral policies for immigrants, including the Overseas Compatriot Law, which was promulgated to make up for these policies’ limitations, requires the identification of the immigrants’ status quo and the recognition or acceptance of their respective cultures, considering their diversification and settlements. As regards the hierarchical dimension of Korea’s policies on multiculturalism, with focus on marriage immigrants, changes in the country’s beneficiary-oriented structural recognition and related policies must be instituted to contribute to the establishment of a multicultural Korean society and a strong cultural capacity by accepting cultural diversification. Moreover, at the cultural dimension, systematic administrative services, multicultural education, and human resources training are needed, extending to as far as immigrant- oriented policy proposal and services for the long term. To this end, 132 the JournAl of eAst AsiAn AffAirs

the overlapping tasks and inefficiency of government agencies, which are currently being discussed often, call for the immediate establishment of or a “Department of Policies on Multiculturalism” to take charge of global multiculturalism policies in an efficient and systematic manner, as a specialized and comprehensive office, in terms of setting up a cooperation network and pursuing long-term tasks.

Key Words: multiculturalism, marriage immigrants, social-integration, cultural diversification, multicultural education, Immigrant- oriented policy

introduCtion

According to the data obtained from the Ministry of Justice, the number of foreign residents in Korea has been on the rise every year and is expected to consistently increase. The number of foreign residents stood at 95,778 in 1994 and at 1 million (including 220,000 illegal residents) as of the end of 2007. These figures include foreign workers, marriage immigrants, and children with multicultural family backgrounds, overseas Koreans, immigrants from North Korea (“North Korean defectors”), tourists, industry trainees, and illegal residents. Of these, long-term residents (registered foreigners) number 724,967 while the rest are short- term residents with permission to stay in Korea for a maximum of 90 days. They come from more than 40 countries. By nationality, the Chinese top the list (441,334, 44%), followed by the Americans (117,938, 12%) and the Vietnamese (64,464, 6%). Among the Chinese residents are more than 150,000 Korean-Chinese. If this drastic trend continues, the ratio of foreigners to Koreans is estimated to increase to 2.8% by 2010, to 5% by 2020, and to 9.2% by 2050. This means that Korea is entering an era where 10% of the Korean population is foreign residents. Such figure shows that the Korean society can be considered an immigration society. An immigration society is one where more than 10% of the entire population is immigrants from OECD member-nations An AnAlysis of ChArACteristiCs of KoreA’s MultiCulturAlisM: PoliCies And ProsPeCts 133

(e.g., France, Germany, and England), whose societies usually have immigrants-related issues. In the recent general elections in Spain, where more than 10% of the population are immigrants, issues related to immigrants have emerged as major agenda. In the 2000s, it emerged as a renewed “Promised Land” to the Africans and Eastern Europeans. In 2007, the number of foreign residents in Spain stood at 4.51 million, up almost four times compared with 923,000 in 2000. The UN Committee on the Elimination of Racial Discrimination already recommended the following: “Korea’s emphasis on the nation-state, a homogeneous society sharing a pure blood line with no mixed races, may constitute racial discrimination by international standards. Accordingly, the Korean government should take the lead in eradicating discrimination against other nations and other races in their land. As Korea experiences a steep increase in the number of foreign residents therein and is thus no longer a nation-state, it is confronted with the reality of having to coexist with such foreign residents amid an inevitably growing interest in a multiracial and multicultural society, in multiculturalism, and in the policies thereon.1 The drastic increase in the number of foreigners in Korea is mostly attributable to the preponderance of foreign workers in the country and of foreign women marrying Korean males and eventually settling in Korea. In particular, the number of foreign workers that have entered the country since the 1990s is expected to reach 450,000 in December 2009. Low fertility rates and a shortage of workers in the 3D job categories are behind this trend, which is seeing a steady increase. A 2001 UN report pointed out that Korea will need no less than 1.5 million workers from 2030 to 2050 if it is to maintain its current economic level. There was also a drastic increase in the number of international marriages in the country. From 1990 to 2005, the number of foreign women married to Korean men in Korea stood at 159,942. In 2006,

1 Cho, Yong Ho, “Multi-Cultural Society and Managing Migration,” paper was presented International Conference, Inha University, 16 Oct. 2008, pp.27~29; Joongang Daily, 2008.3.7. 134 the JournAl of eAst AsiAn AffAirs

international marriages accounted for 13% of all the marriages that took place in Korea. The corresponding figure in the rural areas is even higher (33%). The number of children with multicultural family backgrounds was 30,727 as of April 2006 while the number of school attendees reached 7,000.2 As the foreign residents in the country become diversified, ranging from foreign workers (including illegal visitors) and foreign women with Korean spouses to refugees, a growing interest in multiculturalism policies is inevitable. Moreover, major issues on multiculturalism policies have been voiced in relation to the appropriate treatment of the foreigners in the country under the law, and to the violation of such foreigners’ human rights, as well as to the communication problems of female marriage immigrants, their family relations, and their socio-economic and cultural adaptation. Measures to ensure proper foreigner treatment and social integration as well as various policies and assistance for them are in place, led by the government, self-governing local governments, and civil groups, such as Migrant Women Korean Women (MWKW) and the Women Migrants Human Rights Center. The present study aims to look into the limitations of the current Korean policies on multiculturalism according to the categorization of their beneficiaries, who are at the center of the major transformation and issues. Furthermore, the study aims to extensively review the future related tasks. Towards this end, a conceptual analysis of multiculturalism was carried out, and the major characteristics of Korea’s multicultural society as well as the transformation of the country’s multiculturalism policies presently in force to effect social integration were revisited. The structure of the study is as follows. Firstly, the status quo of the female marriage immigrants in Korea, who are the major beneficiaries of Korea’s multiculturalism policies, and the major policies designed for them were examined through

2 Kosian, a compound word, is another term for children with multicultural family backgrounds. Park, Cheon-ung, “Korean Multicultural Movement Practice: Focused on Borderless Village in Ansan,” The Korean Political Science Association, Theorizing Korean “Multiculturalism,” Presidential Committee on Northeast Asian Cooperation Initiative, 2007, p.177. An AnAlysis of ChArACteristiCs of KoreA’s MultiCulturAlisM: PoliCies And ProsPeCts 135

a theoretical study of multiculturalism in general and of Korean multiculturalism in particular. Following this, the actual conditions and the categorization of the foreign workers in Korea, who have paved the way for the advent of a multicultural era in the country, were analyzed. The paper concludes by suggesting the major tasks in relation to Korea’s multiculturalism policies that should be carried out by the government in the future.

ConCePtuAl APProACh towArds MultiCulturAlisM

Concept of Multiculturalism and Korean Multiculturalism Policies

Culture refers to the outcome of all the mental activities that humans have invented over time, of which there are many kinds. Today’s international society has created and accumulated various types of cultures by time, nation, race, gender, and group. Such diversity of cultures points to the fact that recognition is required to understand not only the coexistence of other cultures within a society but also their uniqueness. In other words, cultural diversity allows diverse ethnic groups to coexist in the society while retaining their own cultural identity. Moreover, at the same time, it preserves a culture that is shared by the members of the society while advocating mutual interaction between such diverse ethnic groups.3 This stemmed from the stance calling for the acceptance of various heterogeneous and marginal cultures into an institutional territory. Its attributes make it different from uniformity? or consistency-oriented assimilation.4 It is for this

3 Cho, Yongho, Ibid., pp.30~31; Lee, Gijeong, “Cultural Supportive Policy and Tasks of Multicultural Society, the 2nd Discussion at the Multicultural Policy Forum, 2008.03.19, p.56. The Korea Defense Daily, 2008.3.3. 4 Culture came from the Latin colo, and its verb is colere, meaning “to cultivate or culture. http://kdaq.empas.com/knowhow/view.html-num= 105725&ps=kl&pq=(2010.3.9). 136 the JournAl of eAst AsiAn AffAirs

reason that multiculturalism eliminates ideological ordering between a predominant culture and a non-predominant culture, or between a central culture and a marginal culture. This practice advocates the understanding of and respect for cultural diversity. According to Martiniel (2002), the term multiculturalism is used “to explain the demographic and cultural diversity of the human society.” Multiculturalism has its roots in the acceptance of the diverse cultures that coexist in a society.5 According to the dictionary, the term multiculturalism was first used in 1975, in describing Switzerland. It became popular in Canada in the latter 1960s and quickly spread in the English- speaking regions afterwards. It is part of a policy designed to manage cultural diversity in a multicultural society, and it also officially put a premium on reciprocal respect for and tolerance of cultural differences.6 It was at around the 1970s that the concept of multiculturalism started to see extensive use. As there appears to be diversity in terms of the societies that embrace multiculturalism and its goals, its definition may well vary. What is worthy to note here is that multiculturalism is not merely a cultural practice. Rather, it is closely related to the issues that are triggered by racial, class, and gender differences in a wide range of political, economic, and social fields. It takes a political and ideological stance advocating cultural pluralism, and it refers to policies, an ideology for national integration initiated by the government, or the goals of a civil movement.7 It is an ideology that reflects a range of values, and an ideological system that enables the

5 Marco Martiniel, Yun, Jin (translation), Modern Society and Multiculturalism, Seoul: Hanul, 2002, p.88; Shin, Hyeun-soo, “Directions on Welfare Policies for New Settlers with an Integrated Cultural view,” [Multicultural Family Studies], Multicultural Family Center at Pyeongtaek University, 2007.4, pp.147~150. 6 http://ko.wikipedia.org/wiki/%EB%8B%A4%EB%AC%B8%ED%99%94%EC%A 3%BC%EC%9D%98 (2010.9.10). 7 For the discussions see, Song, Jong-ho, “‘Transition’ to Multiculturalism Awakening from Illusion of Homogeneous Nation,” [Minjokyeongu], 30, 2007; http://home.pusan.ac.kr/~discuss/Paper/moon_060615.htm (2010.9.10). An AnAlysis of ChArACteristiCs of KoreA’s MultiCulturAlisM: PoliCies And ProsPeCts 137

coexistence of diverse ethnic cultures with mutual acknowledgement and respect, without assimilation into a uniformed culture. It is categorized into various types according to a country’s political stance or policy implementation method. Fundamentally, it seeks the participation of diverse ethnic groups in politics and community life, with equal rights, regardless of their cultural differences.8 Accordingly, it is an ideology, movement, and policy aimed at the coexistence of all the ethnic groups in the society, and of their diverse cultures, with mutual respect and recognition, without assimilation into a single culture or language. What caused the emergence of multiculturalism in the developed countries from the 1960s to the 1980s? It was a means for developed countries like the European countries, Canada, the U.S., and Australia to address their shortage of workers due to their low fertility rates and high wages. These countries allowed the influx of unskilled and low-waged laborer immigrants from developing countries like Africa, Southeast Asia, and Latin America as a national policy. The influx of laborer immigrants to such developed countries, however, posed a new challenge to most of them, ranging from demographic changes to changes in their economy, politics, society, and culture that had a huge impact on their national identity. To overcome such issues, in the 1990s, the developed countries adopted a policy that sought to integrate the laborer immigrants into the existing social structure through the ideology of multiculturalism. Such developed countries share a common characteristic: Multiculturalism became a means of promoting the stability of the political order of liberalism therein, while acknowledging their cultural survival and identity as minorities and natives along with a racial? and cultural-minority voice that allows them to express their demands and to put pressure on the government so it would grant these. In other words, with the

8 Kang, Hwi-won, “Integration of Korean Multicultural Society: Factors and Policy Directions,” Institute of Public Policy and Administration, 2007, pp.5~34; see for more details, Benedict, Anderson, Imagined Community, London: Routledge, 1991. 138 the JournAl of eAst AsiAn AffAirs

spread of the human rights movement, the natives’ and ethnic minorities’ awareness of their individual rights is likewise increasing. Moreover, the racial prejudice and discrimination by the majority groups leads to the social maladjustment of the ethnic minority groups. Accordingly, developed countries have adopted the ideology and policy of multiculturalism as a solution to the social conflict therein between the majority and minority groups and to the social problem of division. The importance of multiculturalism was pointed out by the UNESCO in Article 2 of its Universal Declaration on Cultural Diversity (2001), as follows: “Our society, which is becoming ever more diversified, should ensure the coexistence of and harmonious interactions between individuals with multiple, diverse, and dynamic cultural identities and a group. It is clearly demonstrated that cultural pluralism is a policy designed to actualize cultural diversity.” This was emphasized by adopting the Convention on the Protection and Promotion of the Diversity of Cultural Expressions (2005), in which it was stated that “efforts should be devoted to protecting the cultures of ethnic minorities and small countries and to securing diversity.”9 Consequently, multiculturalism policies are government- initiated policies and programs that ensure social ideology and socio-cultural diversity, which positively recognize the demographic phenomena of a pluralistic race, nation, and culture as well as socio-cultural diversity. Moreover, they ensure equal opportunities to everyone, without discrimination and exclusion, according to race, ethnic group, and nationality. The discussion on the characteristics of Korea’s multiculturalism policies is gradually growing in the academic circle and among the civil groups and human rights activists. Moreover, the government’s political assistance leads to a steady increase in the assistance for and interest in multicultures through research into

9 Lee, Gijeong, Ibid., p.56. Ko, Ki-bok, “The Status Quo of Korea’s Multiculturalism and Change in Recognition-Multiculture Discourse, Why are Human Rights an Issue?” The first discussion at Multicultural Policy Forum, 2008.2.12, pp.2~10. An AnAlysis of ChArACteristiCs of KoreA’s MultiCulturAlisM: PoliCies And ProsPeCts 139

various multiculturalism related seminars, and the operation of multicultural centers. In detail, what has triggered the emergence of Korean multiculturalism and its associated policies? The influx of foreign workers, whose number saw a steep increase in the late 1980s, had an enormous impact on the economy, particularly in terms of creating an economic activity zone, as industrial laborers who made up for the shortage of labor and who assumed the neglected 3D job categories while underpaid and with inferior working conditions. In the same vein, the discussion in the Korean society on what roles these immigrant workers play in practice and what social implications they will have in the society in the future started to see added vigor. In those days, the Korean government’s most remarkable policy for immigrants was a “labor force control scheme” centering on immigrant workers. It replaced and rotated immigrant workers without giving them permission for permanent settlement, and its core was “control and management.” Its task was focused on immigration control, such as labor force control and a crackdown on illegal workers.10 It was only when the scale of immigrant workers in Korea gave rise to control issues like the granting of visas, human rights violations, and the delayed payment of wages that the government and civil groups started to pay political attention to the issues surrounding immigrants. Under the circumstances then, where no immigration policies were implemented by the government and where immigrant workers were not only discriminated in terms of receiving ridiculous wages, being required to work for very long hours, and receiving inferior treatment and welfare but also suffered human rights violations, the issues in relation to the

10 Han, Gyeung-gu & Han, Gun-soo, “Ideals and Reality of Korean Multicultural Society: Beyond Pure-blood Lineage and Cultural Differentiation,” The Korean Political Science Association, Theorizing Korean “Multiculturalism,” Presidential Committee on Northeast Asian Cooperation Initiative, 2007, p.71; for more details see, Yun, Yeongmi, “Research on Characteristics of Korean Multiculturalism and Development Measures: Focused on Immigration Integration Policies,” [Multicultural Family Studies], Multicultural Family Center at Pyeongtaek University, 2008. 140 the JournAl of eAst AsiAn AffAirs

employment security of immigrants were endlessly raised as a renewed area of social movement. As there was growing interest in the human rights of immigrant workers, the civil groups’ consultation activities in relation to human rights violations and addressing related problems were nothing short of temporary remedies. Finally, the government introduced the Industrial- Trainee Scheme in 1993 in an attempt to resolve the issues concerning immigrant laborers. Under the Industrial-Trainee Scheme, immigrant workers were accepted as trainees and not as workers under the law, which implied that the immigrant workers were not guaranteed labor rights. The Industrial-Trainee Scheme, however, defined the type of their social existence, although it faced another social problem: that of the mass production of non- registered workers.11 Female marriage immigrants started to be recognized as “main social players with whom (the Koreans) have to coexist and not just as strangers in the society” in the institutional territory and to become the subject of the discussion on the fundamental change in the constitution of the Korean society. Accordingly, the formation of a “multicultural society” and “multiculturalism policies,” according to the trend of multiracial and multiethnic groups in Korea, illustrates fundamental differences from the classic immigration policy of the West, which accompanies its formation of a multicultural society. This explains why the multiculturalism policies in the Korean society have different beneficiaries in the course of the society’s transition into a multicultural one. At the same time, it also faces the task of embracing phased recognition in relation to who plays a major role in realizing a multicultural society and who will be covered by the accompanying policies. In this respect, Korea’s multicultural phenomenon is said to be complicated and

11 Yun, In-jin, “Government-initiated Multiculturalism and Citizen-initiated Multiculturalism,” The Korean Political Science Association, Theorizing Korean “Multiculturalism,” Presidential Committee on Northeast Asian Cooperation Initiative, 2007, pp.254~255; for more discussions see, Park, Gyeongseo “Discussion Paper on Major Issues and Tasks of Korea’s Policies on Multiculturalism,” The Second Seminar at Multicultural Policy Forum, 2008.3.19. An AnAlysis of ChArACteristiCs of KoreA’s MultiCulturAlisM: PoliCies And ProsPeCts 141

multilayered. What matters is that the multicultural-society phenomenon may be interpreted and projected in a different manner depending on who plays a major role therein.12 The phased acceptance and expansion of the coverage of the multiculturalism policies and of who plays a major role in the multicultural society are regarded as practical tasks for the establishment of Korean multiculturalism and move forward as the society faces immigrant workers and their families, whose presence in Korean multiculturalism is increasing, and looking beyond them, as the number of Korean men married to foreign women increases and as issues concerning illegal residents and an increase in the Koreans’ xenophobia are observed.13 As pointed out earlier, the key point of the earlier policies concerning the foreign residents in Korea, including the initial immigrant workers therein, was concentrated on the national interest and on the “control and management” of immigration. Apart from this, however, the Korean society is in a transitional period in which it faces a new paradigm of social integration, dubbed “mutual understanding and coexistence,” such as the introduction of labor and the talented, a balance in human rights protection, and the establishment of a national security system for the sake of protecting the national interest. The renewed major policies towards foreigners have become more influential since the Nationals Residing in Korea Treatment Act, which was proposed by the Ministry of Justice in December 2006, was passed by the National Assembly in April 2007, and took effect in July 2007. This bill includes the following major contents: (1) it clarifies the obligations of the nation and of its self-governing local governments; (2) it clarifies the establishment of policies concerning foreigners and the related propulsion system;

12 Han, Gyeung-gu & Han, Gun-soo, ibid., p.73. 13 Xenophobia is a phenomenon involving the display of dislike for foreigners or strangers. It is a compound word consisting of xenos, meaning “stranger”, and phobos, meaning “dislike”. This phenomenon has emerged as a big issue in the Western society. The unconditional dislike of foreigners, if unchecked, may develop into criminal acts such as indiscriminate violence against foreigners. 142 the JournAl of eAst AsiAn AffAirs

(3) it assists in safeguarding the human rights of the foreign nationals residing in Korea, and in ensuring their social adjustment, in relation to their treatment; (4) it promotes the introduction of specialized foreign human resources into the country; (5) it creates a multicultural environment in the country; (6) it concerns the appointment and training of human resources fully in charge of foreigner-related issues and establishes a general information center for foreigners. In particular, the core of the country’s multiculturalism policies rests on the confirmation of a department that is to be made in charge of foreign-national management and of the promotion of consistent policies. As for the establishment of policies concerning foreigners and of the related propulsion system, the Justice Minister establishes basic plans regarding systematic policies concerning foreigners every five years, in consultation with the concerned central administrative agencies, followed by a deliberation and confirmation by the members of the Foreigners’ Policies Committee.14

Social-Integration-intended Immigrant Policy

The execution of a scheme in March 2007 that allows overseas compatriots who have acquired foreign nationality to invite their relatives to Korea for employment purposes has led to a rapid increase in the number of registered foreign residents in Korea. In August 2007 the number of foreigners residing in Korea has reached 1 million. In 2007, for the first time, the ratio of a whole population of foreigners residing in Korea reached over 2%. The total number of foreigners residing in Korea was 1,168,477, representing 2.35% of the whole population, as of year-end in 2009. This year, the number of foreign residents in Korea is placed at 1.2 million. In 2009, an economic downturn caused a

14 Lee, Hae-gyeong, “Immigration Policy and Multiculturalism: Evaluation Materials on Government’s Multicultural Policies,” The Korean Political Science Association, Theorizing Korean “Multiculturalism,” Presidential Committee on Northeast Asian Cooperation Initiative, 2007, pp.234~235. An AnAlysis of ChArACteristiCs of KoreA’s MultiCulturAlisM: PoliCies And ProsPeCts 143

drop or a small increase in the number of unskilled laborers and overseas compatriots with work permission in Korea (H-2), while the number of foreign students (13.2%) and professionals (9.1%) including lecturers (9.1%) has been rising consistently since 2005 .

Status of Residing Foreigners

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Number of Residing 491,324 566,835 629,006 678,687 750,873 747,467 910,149 1,066,273 1,158,866 1,168,477 Foreigners

Long Time 219,962 244,384 271,666 460,261 491,409 510,509 660,607 800,262 895,464 920,887 Residing

Short Time 271,362 322,451 357,340 218,426 295,464 236,958 249,542 266,011 263,402 247,590 Residing

Short Time 205,205 272,626 208,165 154,342 209,841 204,254 211,988 223,464 200,489 177,955 Residing

Source: Ministry of Justice, 2010.

In particular, the present study looked into the current status quo of the rapidly increasing female marriage immigrants, who are the legal beneficiaries of Korea’s multiculturalism policies and of the government’s policy concerning foreigners. The comprehensive measures that were announced by the Korean government on April 26, 2006 have been determined to be part of a “state- sponsored multiculturalism” given that multiculturalism policies are being implemented in full swing at the level of the central government. The government sponsored international marriages to address the low fertility rates and the ageing population in the country, and it implemented multiculturalism policies to tackle the issue of the social integration of female marriage immigrants and of children with multicultural family backgrounds. 144 the JournAl of eAst AsiAn AffAirs

Number and Rate of International Marriage (Unit: Number, %)

Total Number of International Foreign Years Foreign Wives Marriage Marriage Husbands

2000 332,100 11,605(3.5) 6,945(2.1) 4,660(1.4)

2001 318,400 14,623(4.6) 9,684(3.0) 4,839(1.5)

2002 306,600 15,202(5.0) 10,698(3.5) 4,504(1.5)

2003 304,932 24,776(8.1) 18,751(6.1) 6,025(2.0)

2004 310,944 34,640(11.1) 25,105(8.0) 9,535(3.0)

2005 316,375 42,356(13.3) 30,719(9.7) 11,637(3.7)

2006 332,752 38,759(11.6) 29,665(8.9) 9,094(2.7)

2007 346,600 37,560(10.8) 28,580(8.2) 8,980(2.6)

2008 327,700 36,204(11.0) 28,163(8.6) 8,041(2.5)

2009 309,759 33,300(10.8) 25,142(8.1) 8,158(2.7)

Source: Korea Immigration Service, 2010.

shows a steady increase in the number of international- marriage immigrants. In 1990, international marriages accounted for a mere 1.2% of the total number of marriages in the country. The figure, however, has steadily increased: 3.4% in 1995, 3.7% in 2000, 4.8% in 2001, 5.2% in 2002, 8.4% in 2003, 11.4% in 2004, and 13.6% in 2005. Furthermore, the number of foreigners who were granted Korean nationality in the year 2000 was merely 1,800, but the figure increased 9.5 times (17,000) in 2005. It accounted for 13.6% of the total number of marriages in Korea in 2005 and for 34% of the number of marriages in the rural areas in the same year. The 2006 saw a slight drop in the number of international marriages in Korea. This was due to the execution of a scheme that allows foreign residents who have acquired Korean nationality to invite their relatives to Korea for employment purposes. This scheme brought about increased opportunities for overseas compatriots to enter Korea. In addition, the wide spread An AnAlysis of ChArACteristiCs of KoreA’s MultiCulturAlisM: PoliCies And ProsPeCts 145

of negative public opinions regarding international marriages, such as that they are sham marriages, was found to be the reason behind the slight decrease in the number of international marriages in Korea. Also the number of internal marriage immigrants has been on the rise every year and is expected to consistently increase . A look into the gender distribution in the international marriages in the Korean society will reveal that marriages between Korean men and foreign women make up a dominant section. In 2005, female marriage immigrants accounted for 88.8% of the marriage immigrants residing in Korea, and male marriage immigrants accounted for 11.2% of them. Accordingly, the main characteristic presented in terms of gender distribution is that most Korean- men-and-foreign-women couples are residing in Korea, and that the chances for acquiring Korean nationality increase in the case of Korean-men-and-foreign-women marriages, while most Korean- women-and-foreign-men couples are not residing in Korea. This largely explains why the discussion on marriage immigrants is centered on the marriage of Korean men and foreign women despite the steady increase in the international marriages between Korean women and foreign men .

Internal Marriage Immigrants Status

Dichotomy 2002 2003 2004 2005 2006 2007 2008 2009

Number 34,710 44,416 57,069 75,011 93,786 110,362 122,552 125,197

Rate of Increase - 28.0 28.5 31.4 25.0 17.7 11.0 2.4 & Decrease(%)

Source: Korea Immigration Service, 2010.

As of December 2005, the Chinese (including the Chinese Koreans) topped the list, followed by the Vietnamese, Filipinos, Japanese, and so on. This wide nationality distribution range of the female marriage immigrants in Korea means that more than 50% of all 146 the JournAl of eAst AsiAn AffAirs

the female marriage immigrants in Korea, except for the female Chinese Koreans, enter married life without knowing the Korean culture and without a command of the Korean language. As international marriages become popularized, such mixed-nationality couples are able to enter Korea without being given adequate education on the Korean language and culture in their countries and are confronted with complex problems concerning social adjustment, newlywed life, troubled relationships with mothers- in-law, domestic violence, and child-rearing.

Status on Nationality and Sex of Marriage Immigrants(2009)

Korean Total China Vietnam Philippine Japan Cambodia Mongolia Thailand Etc. Chinese

Total 125,197 33,204 33,468 29,985 6,196 5,120 2,984 2,304 2,075 9,864

Men 15,529 6,605 3,262 152 160 506 8 46 39 4,751

Women 109,668 26,599 30,206 29,833 6,033 4,614 2,976 2,258 2,036 5,113

Source: Korea Immigration Service, 2010.

As for the nationalities of female marriage immigrants who marry Korean men, the numbers of those from China and Southeast Asia are increasing. For example, according to the 2005 data of the Ministry of Gender Equality, China topped the list of nationalities of the foreign women who married Korean men in the farming and fishing occupation in 2004 (48.5%), followed by Vietnam (30.9%) and the Philippines (10.7%). The nationalities other than Chinese accounted for only 10% of the foreign women who married Korean men. In 2005, the female Vietnamese topped the list (53.2%), followed by the Chinese (34.1%) and the Filipinos (6.9%). Majority of the foreign women who married Korean men in recent years were Vietnamese, Chinese, and Filipinos, and most of them did so to acquire Korean nationality, which led to a drastic increase in the number of applications for the acquisition of Korean An AnAlysis of ChArACteristiCs of KoreA’s MultiCulturAlisM: PoliCies And ProsPeCts 147

nationality. With this as a backdrop, there appears an expansion of various multiculturalism policies for female marriage immigrants as well as a momentum in the initiation of such policies by the government and self-governing local governments. In addition, instead of focusing on the human rights of illegal residents and on the practical issues concerning immigrant workers, civil groups are shifting their focus onto programs for female marriage immigrants and for children with multicultural family backgrounds, which gain much social empathy and support as well as government assistance as a government-entrusted business, or are adding new projects to their existing activities, leading to the spread of multiculturalism into the private sector.15 The government has prepared and implemented a three-phase marriage immigrant assistance measure. At the government level, the multiculturalism policies initiated by the self-governing local governments and civil groups in the country have become varied and are rapidly increasing, with some differences among them. What are remarkably different between the government-initiated and the civil-group-initiated multiculturalism policies are their goal and the categorization of their beneficiaries. In other words, from the viewpoint of civil groups, the aim of a multiculturalism policy is to ensure that the native Koreans and the immigrants share a common identity as Korean residents and live together harmoniously in the community, with the so-called “multicultural coexistence,” and they include illegal residents as well as legal foreign residents among the beneficiaries of their multiculturalism policy. This view has sustainable-development ramifications in the effort to seek a new political approach towards government- initiated and citizen-initiated multiculturalism policies in the future, and to arrive at a consensus as regards the beneficiaries of such policies.

15 Cho, Yong Ho, Ibid., p.33; further details see, Seol, Dong-hoon, et al., “Studies on the Status Quo of Marriage Immigrant Families and Mid-to- longer Term Assistance Policies Measures,” Ministry of Gender Equality and Family, Republic of Korea, 2006.12; Korea Immigration Service, 2010. 148 the JournAl of eAst AsiAn AffAirs

The Korean government, self-governing local governments, civil groups, and the media recognize immigration issues as social issues and accept immigrants as critical subjects of the society that the Koreans have to coexist with, putting an emphasis on their cultural and educational dimensions for the sake of their settlement in Korea, given the increase in the number of female marriage immigrants in the country. The government should focus on the enactment and institutionalization of multiculturalism policies and should implement a system of gathering opinions from civil-group volunteers and onsite so as to address the related problems and to facilitate the establishment of a multicultural Korean society. The government should also come up with measures to address the loopholes in the system. Institutional complementation and financial assistance should also be expanded in a sustainable manner through the implementation of assistance measures and the expansion of the assistance center so as to rapidly increase the number of female marriage immigrants and their families in Korea. The current assistance policy for female marriage immigrants and their families is attracting criticism because it tends to create social integration by “adding and stirring,” in which a minority culture is added to the mainstream culture and is mixed or stirred with. In other words, various education and training-oriented multiculturalism policies for female marriage immigrants and their families, majority of which are focused on the existing Korean lifestyle and Korean language learning method, are formulated. This underscores the fact that since such marriage immigrants are considered the beneficiaries of education and those who have to adopt the Korean way of life, they are not properly recognized as cultural subjects who can practice their own culture. Furthermore, they are even regarded in their own homes as inferior cultural subjects who cannot be respected as independent cultural subjects not only in the local community but also in the Korean society. As mentioned earlier, in the discussion of the concept of “multiculturalism,” the transition of a society into a mature multicultural one requires that the minority cultures therein have An AnAlysis of ChArACteristiCs of KoreA’s MultiCulturAlisM: PoliCies And ProsPeCts 149

equal security, and that there is institutional and political assistance for the harmonious coexistence of different races of people and of their corresponding cultures.16

diversity And CoMPrehensive AssistAnCe APProACh

Likewise, the policies and assistance programs that accompany the transition of a nation’s recognition of female marriage immigrants have become diversified. It should also be noted that various types of foreign visitors can now be found in Korea. Among the types of temporarily-staying foreign visitors therein, such as those on an ordinary visit, a trade negotiation, or technology consultation, the recent trend shows an increase in the number of long-staying foreign visitors. The steady increase in the number of foreign workers and overseas compatriots in Korea has been attributed to the increase in the international marriages in the country, foreign-student luring, the introduction of the Work Permit Scheme and the Foreign-Relatives Employment Sponsoring Scheme, and the enactment of the Nationals Residing in Korea Treatment Act. At the same time, the settlement of foreigners has become distinguished, centering on specific regions. For example, foreign residential villages (e.g., Seorae Village in Seoul’s Seocho-gu for French nationals, and Chinatown in Incheon’s Jumg-gu for Chinese, Indian, and Pakistani laborers) seem to be sprouting in some self- governing local-government regions. According to the Korean government’s categorization of foreigners by policy application, foreigners can be classified into four subtypes in terms of social

16 Moon, Gyeung-hee, “Policy Needs and Development Measures on Marriage Immigrants through Female Marriage Immigrants in South Chungcheong Province,” The Second Seminar at Multicultural Policy Forum, 2008.3.19, pp.40~41. To further the discussions see, Igor Saveliev, “The Transitions from Immigration Restrictions to the Importation of Labor: Recent Migration Patterns and Chinese Migrations in Russia,” Forum of International Development Studies, Nagoya University, Aug. 2007. 150 the JournAl of eAst AsiAn AffAirs

integration: compatriots who have acquired foreign nationality, foreigners who have been granted permanent residence, the second generation of immigrants and native Koreans. Based on their enhancement of the nation’s competitiveness, foreigners can be classified into three subtypes: professionals, unskilled laborers, and foreign students. As for the humanitarian aspect, foreigners can be classified into refugees and illegal foreign residents.17 As shown so far, the diversity and permanent residence of the foreigners residing in Korea have become distinguishable, although the government’s current multiculturalism policies limit the beneficiaries only to marriage immigrants and their families. Over the last 15 years, since the end of the 1980s, the number of immigrant workers in Korea has steadily increased and stood at about 450,000 as of December 2007 (The total number of foreigners residing in Korea has now reached 1 million). Of the immigrant workers, who account for 40% of the total number of immigrants in Korea, the number of illegal foreign workers exceeds 220,000. Considering the social integration, national competitiveness enhancement, and humanitarian aspects, appropriate and consistent policies concerning immigrant workers in Korea should be formulated and implemented. Along with this, it should be noted that there is a steady increase in the number of Korean women who marry foreign men. As mentioned earlier, the government considered immigrant workers “labor influx windows” that have to return to their home countries following their completion of their work despite the possibility of their becoming citizens’ spouses or members of the society. By taking this stance, the Korean government limited the granting of marriage immigrant homes to Korean- men-and-foreign-women couples, resulting in the exclusion of the Korean-women-and-foreign-men couples from the scope of

17 Kim, Namil, “Policy Directions on Foreigners for Open Society,” Korean Sociological Association, Theorizing Korean “Multiculturalism”, Presidential Committee on Northeast Asian Cooperation Initiative, 2007, p.163; for more discussions see, Mamadou Dian Balde’s, “Refugee Protection and Migration Today,” paper which was presented at the International Conference, Inha University, 16 Oct. 2008. An AnAlysis of ChArACteristiCs of KoreA’s MultiCulturAlisM: PoliCies And ProsPeCts 151

its multiculturalism policies. In detail, in the case of the general immigrant workers, men accounted for 88% of them, and in particular, the Korean Chinese men accounted for 62% of them, according to the 2007 data of the Ministry of Labor. On average, men accounted for no less than 74% of the country’s general immigrant workers, thus creating social circumstances where there is a high possibility of an increase in the number of Korean women marrying such men. In the meantime, although the government has pushed for policies to reduce the number of illegal foreign residents in Korea, the figure has increased at a steady pace every year. The number of illegal foreign residents in Korea has gone beyond 220,000, making one out of five foreign residents in Korea an illegal foreign resident. The number of illegal foreign residents has decreased by 52.3% (151,183), compared to the previous year, due to the implementation of “measures in which a grace period for voluntary departure was issued, and legalization measures were implemented” in 2003. Following a steady increase since then, the number of illegal foreign residents reached 223,464 in 2007, representing 21.0% of the number of foreigners residing in Korea. In 2009, it reached 177,955, representing 15.2% of the total number of 1,168,477 foreign residents in Korea .

No. of Illegal Residents in Korea

2001 2002 2003 2004 2005 2006 2007 2008 2009

No. of illegal 272,626 272,626 272,626 272,626 272,626 272,626 272,626 272,626 272,626 Residents

Source: The Ministry of Justice demographic data, 2010.

As major countermeasures, an appeasement policy was implemented in 2002, as in the case where a grace period for voluntary departure was issued, and legalization measures were implemented in 2003. A problem resolution officer was also appointed in each 152 the JournAl of eAst AsiAn AffAirs

Immigration Control Office nationwide. In addition, the Ministry of Justice set up the Foreigner Human Rights and Interests Promotion Council in the ministry and in each Immigration Control Office nationwide in January 2006 and has concentrated on relief for infringement on foreign workers’ rights, such as the delayed payment of their wages, as well as on the protection of foreign women’s interests, such as those of marriage immigrants. The ministry has resolved 11,810 related cases in 2006, up 352% compared with 2002’s 2,611 cases. This increase is particularly related to the human rights violation issue and to the policy implementation to provide illegal workers’ children with access to education and with medical coverage, which is closely related to the human rights violation issue. The children and parents of those illegal foreign workers who have voluntarily presented themselves to the authorities are given temporary permission to stay in Korea. If the illegal-foreign-worker parents of certain children are caught during the latter’s school term, the parents are temporarily released from detention so that their children could finish the school term.18 The Korean government has also promoted human rights protection for the illegal foreign residents in Korea while pushing for a reduction in the number of such foreigners. In 2003, to lay the foundation for the execution of the Work Permit Scheme, the government carried out a resolute action to legalize 184,000 illegal residents who voluntarily presented themselves to the authorities, among the illegal workers who had been residing in the country for less than four years. In addition, to prevent the harmful effects on the Korean society of the increase in the number of illegal residents therein, and to execute the Work Permit Scheme early, “Comprehensive Measures for the Reduction of Illegal Residents in Korea,” which included a joint crackdown and guidance with concerned institutions, was prepared and

18 Kim, Namil, Ibid., p.162; for more discussions see, Evans Charney, “Identity and Liberal Nationalism,” American Political Science Review, 97(2), 2003, pp.295~310; The Ministry of Justice demographic data, 2010. An AnAlysis of ChArACteristiCs of KoreA’s MultiCulturAlisM: PoliCies And ProsPeCts 153

implemented in July 2004. In 2005 and 2006, a voluntary departure program for illegal overseas compatriots was executed, minimizing conflict with the overseas compatriot societies due to the crackdown on illegal residents. In particular, for those foreigners who had been forced into the country through sex trade, regular assault, or abuse, or who had fallen victim to serious crimes, the government allows them to work in the country temporarily, until the end of the relief procedures, implementing a system that protects their interests.19 Likewise, a wide range of policies are in place to protect the interests of the illegal foreign residents in Korea, although there are many cases that have not been reported or that have been excluded from punishment, such as an employer’s delayed payment of an illegal foreign resident’s wages, their unlawful dismissal, the violation of their human rights, and the non-provision of medical coverage to them. The number of foreign criminals in the country also rapidly grew from January to November 2007, with 20,947 cases, more than double the 2002’s 8,046 cases. Due to the drastic increase in the total number of foreign criminals in the country, negative views on illegal residents in the country are widely spreading. Thus, it is necessary to carry out human rights education when giving job training to foreign workers, and labor inspectors must intensify their investigation of cases involving violations of the human rights of foreign workers. There should also be enhanced assistance for addressing the delayed payment of wages to those foreigners who are under protection, along with the implementation of measures to improve the existing protection facilities. Fundamentally, the investigation of cases involving illegal acts that trigger illegal stay in the country, such as illegal-entry consultation and fake invitation to gain entry into the country, which cultivate illegal residents, should be intensified. Although it is said that the crackdown infrastructure is reinforced yearly to ensure safety, it is necessary to put in place a complementary

19 Lee, Junejh, “Managing Global Mobility: IMO’s View,” paper was presented International Conference, Inha University, 16 Oct. 2008, pp.10~11. 154 the JournAl of eAst AsiAn AffAirs

system to the labor market expansion policy for foreigners’ employment as a preventative measure for the reduction of long- staying illegal residents. Starting year of 2008, policies designed to reduce the number of foreigners in Korea with a motive to illegally stay in the country will be put in place through system complementation, which will enable the long-term employment of skilled foreign workers.20

ConClusions

As mentioned, “multiculturalism” and “social integration” are the global phenomena and immigration policies that the government seeks. From 2006 the government-initiated multiculturalism policies to date have sought a shift into comprehensive social-integration ones that consider the social and cultural aspects, although their limitations still have to be pointed out. For the development of a multicultural Korean society, the present study proposed the following political tasks. Firstly, the development of a multicultural Korean society requires the recognition and acceptance of various cultures and an understanding of the foreigners’ status quo. This is what multicultural researchers consistently claim, and efforts to attain national recognition of various multicultural policies are much needed. There should be recognition of a multicultural society where various foreign cultures should be acknowledged, taught, and respected, and where there is a positive view of female marriage immigrants. Policies with multiculturalism as a viewpoint must be adopted, and discriminative and assimilative policies must be shunned. To this end, the Korean government should identify the status quo of the foreign immigrants who are living in different areas of the country, and each local government should further crank up appropriate assistance for them. At the same time, the assistance for foreigners who have become permanent residents must be

20 Kim, Namil, Ibid., pp.162~163. An AnAlysis of ChArACteristiCs of KoreA’s MultiCulturAlisM: PoliCies And ProsPeCts 155

expanded, and the identification of their status quo and characteristics must be initiated by the government, self-governing local governments, and civil groups.21 Secondly, systematic administrative services and multicultural education and human resources training are required. The creation of a communication channel infrastructure setup requires institutionalized and consistent assistance measures for language learning, cultural exchange, and counseling through the operation of a shelter. Political assistance tailored to each self-governing local government is also urgently needed. Considering a specific foreigner’s permanent residency, the provision of active and open- minded administrative services to foreigners and of assistance to them through multicultural education is much needed. In all elementary schools and universities as well as in all self-governing local governments, administrative teams to take full charge of foreigner assistance, and a task force to take full charge of professional training, should be formed. Thirdly, given the overlapping tasks and inefficiency of the related institutions, it is necessary to create an institution that will take full charge of the efficient implementation of the country’s multiculturalism policies for the sake of cooperative-system establishment and effective, long-term management. Although various institutions have been promoting a wide range of foreigner- related policies and multiculturalism policies with the aim of social integration, the government-initiated policies still do not sufficiently politically represent the country’s minorities and do not sufficiently consider their everyday life. There is a need to reflect on the current situation, characterized by the overlapping of the tasks of the related institutions and by the nonexistence of an integral service system, which results in inefficient policies and inefficient

21 For more discussion see, Yun, Yeongmi, “Characteristics of Korean Policies on Multiculturalism and Tasks of Civil Society,” the 80th Multicultural Volunteer Special Forum, Ansan Volunteer Center Lee, 2008.10.30; Kim, Eun-mi, “Analysis of Multi-ethnicity on Space and Class: Focused on the Seoul Region”. Korean Sociological Association, Theorizing Korean “Multiculturalism,” Presidential Committee on Northeast Asian Cooperation Initiative, 2007, p.135. 156 the JournAl of eAst AsiAn AffAirs

government spending as well as in non-specialized bodies carrying out Korean language education. Lastly, although a new government almost always intends to be a small government, as many relevant scholars have already mentioned, it is necessary to set up a similar assistance center in the long term and to upgrade the current Immigration Control Office to an “Immigration Department” or to create a Multicultural Department that will take full charge of the integral control of the foreign residents in the country and that will monitor their activities, as well as of the implementation of the country’s multiculturalism policies, given the latter’s political efficiency and importance. The entry into Korea of a wide range of foreign residents and the number of foreign residents therein acquiring permanent-resident status are expected to increase in a consistent manner. The duties of Korea Immigration Service were expanded in May 2007 to include taking charge of all issues relating to “the social integration of foreigners,” in addition to its existing immigration-related tasks as a head office for immigration and for policies concerning foreigners. For the efficient execution of the country’s multiculturalism policies in the future, however, Korea Immigration Service must be upgraded to an Immigration Department rather than simply being a head office, so that it can take full charge of a wide range of multiracial? and multiethnic- groups-related tasks in a systematic and coordinated way, being a specialized and comprehensive institution. Concurrently, as there is a steep increase not only in the influx of foreigners entering the country but also in the outflow of Koreans for overseas employment or study, or for emigration, the creation of an institution that will take full charge of the integral control of all the foreigners in the country and of the execution of the country’s multiculturalism policies, including those that relate to the Koreans, is much needed. At present a consistent increase in the number of foreign residents in Korea is expected due to the following factors: an increase in foreign workers caused by a low birth rate and ageing population, and an increase in the number of marriage immigrants An AnAlysis of ChArACteristiCs of KoreA’s MultiCulturAlisM: PoliCies And ProsPeCts 157

caused by international marriages and the influx of overseas compatriots with foreign nationalities. Statistics in relation to the number of foreigners residing in Korea was based on the figures of foreigners residing in Korea including illegal foreign residents at every year-end. A wide range of multicultural-related events including the government or civil group-initiated forums for immigrant policies are currently arranged by each self-governing local governments. This means our society is ushered into an era in which both consideration for advance in multicultural society and coexistence with other cultures are required. To build an egalitarian society, community programs for immigrants should be developed and implemented. This should serve as a venue in which the following are implemented: consistent studies on the status quo of immigrants and issues; nurturing experts in multicultural policies with a view to expanding multicultural families; local residents’ participation in multicultural projects and opinion gathering on required services; local agencies’ policy promotion; service provision. 158 the JournAl of eAst AsiAn AffAirs

referenCes

Kang, Hwi-won (2007). “Integration of Korean Multicultural Society: Factors and Policy Directions,” [Institute of Public Policy and Administration], 20(2). Ko, Ki-bok (2008.02.12). “The Status Quo of Korea’s Multiculturalism and Change in Recognition-Multiculture Discourse, Why are Human Rights an Issue?” The first discussion at Multicultural Policy Forum. Kim, Nam-il (2007). “Policy Directions on Foreigners for Open Society,” Korean Sociological Association, Theorizing Korean “Multiculturalism,” Presidential Committee on Northeast Asian Cooperation Initiative. Kim, Nam-kook (2005). “Deliberative Multiculturalism: A Path to Cultural Rights and Cultural Survival,” [The Korean Political Science Association], 39(1). Kim, Beom-soo et al. (2007). Multicultural Social Work Practice, Seoul: Yangseowon. Kim, Eun-mi (2007). “Analysis of Multi-ethnicity on Space and Class: Focused on the Seoul region,” Korean Sociological Association, Theorizing Korean “Multiculturalism,” Presidential Committee on Northeast Asian Cooperation Initiative. Kim, Hae-soon (2006). “Discourse on Korean ‘Multicultural Society’ and Marriage Female Immigrants: A Prerequisite to Policy for Adaptation and Integration,” The Korean Political Science Association, Change and Integration in Korean Society in the Northeast Multicultural Era, Presidential Committee on Northeast Asian Cooperation Initiative. Moon, Gyeung-hee (2008.03.19). “Policy Needs and Development Measures on Marriage Immigrants through Female Marriage Immigrants in South Chungcheong Province,” The Second Seminar at Multicultural Policy Forum. Marco Martiniel, Yun, Jin (translation) (2002). [Modern Society and Multiculturalism], Seoul: Hanul. Lee, Hae-gyeong (2007). “Immigration Policy and Multiculturalism: An AnAlysis of ChArACteristiCs of KoreA’s MultiCulturAlisM: PoliCies And ProsPeCts 159

Evaluation Materials on Government’s Multicultural Policies,” The Korean Political Science Association, Theorizing Korean “Multiculturalism,” Presidential Committee on Northeast Asian Cooperation Initiative. Lee, Junejh, “Managing Global Mobility: IMO’s View,” paper was presented International Conference, Inha University, 16 Oct. 2008. Oh, Gyeong-seok et al. (2007). Multiculturalism in Korea: Reality and Issues. Seoul: Hanul Academy. Park, Gyeongseo (2008.03.19), “Discussion Paper on Major Issues and Tasks of Korea’s Policies on Multiculturalism,” The Second Seminar at Multicultural Policy Forum. Park, Cheonung (2007), “Korean Multicultural Movement Practice: Focused on Borderless Village in Ansan,” The Korean Political Science Association, Theorizing Korean “Multiculturalism,” Presidential Committee on Northeast Asian Cooperation Initiative. Park, Nan-sook (2008.10.30), “Periodical Customized Service Assistance to Multicultural Families,” the 80th Multicultural Volunteer Special Forum, Ansan Volunteer Center. Seol, Dong-hoon, et al. (2006.12), “Studies on the Status Quo of Marriage Immigrant Families and mid-to-longer term Assistance Policies Measures,” Ministry of Gender Equality and Family, Republic of Korea. Shin, Hyeun-soo (2007.4). Directions on Welfare Policies for New Settlers with an Integrated Cultural View. [Multicultural Family Studies], Multicultural Family Center at Pyeongtaek University. Yun, In-jin (2007). “Government-initiated Multiculturalism and Citizen-initiated Multiculturalism,” The Korean Political Science Association, Theorizing Korean “Multiculturalism,” Presidential Committee on Northeast Asian Cooperation Initiative. Yun, Yeoung-mi (2008.3.3). “Let me accept differences,” The Korea Defense Daily, _____. (2008.10.30). “Characteristics of Korean Policies on Multiculturalism and Tasks of Civil Society,” the 80th Multicultural 160 the JournAl of eAst AsiAn AffAirs

Volunteer Special Forum, Ansan Volunteer Center. _____. (2008). “Research on Characteristics of Korean Multiculturalism and Development Measures: Focused on Immigration Integration Policies,” [Multicultural Family Studies], Multicultural Family Center at Pyeongtaek University. Song, Jong-ho (2007). “ ‘Transition’ to Multiculturalism awakening from Illusion of Homogeneous Nation,” [Minjokyeongu], 30. Han, Gyeung-gu & Han, Gun-soo (2007). “Ideals and Reality of Korean Multicultural Society: Beyond Pure-blood Lineage and Cultural Differentiation,” The Korean Political Science Association, Theorizing Korean “Multiculturalism,” Presidential Committee on Northeast Asian Cooperation Initiative. Research Materials from the Multicultural Family Center at Pyeongtaek University (2007). Anderson, Benedict (1991). Imagined Community. London: Routledge. Balde, Mamadou Dian, “Refugee Protection and Migration Today,” paper was presented International Conference, Inha University, 16 Oct. 2008. Cho, Yong Ho, “Multi-Cultural Society and Managing Migration,” paper was presented International Conference, 16 Oct. 2008, Inha University. Charney, Evans (2003). Identity and Liberal Nationalism. American Political Science Review, 97(2). Saveliev, Igor (Aug. 2007). “The Transitions from Immigration Restrictions to the Importation of Labor: Recent Migration Patterns and Chinese Migrations in Russia,” Forum of International Development Studies, Nagoya University. Maeil Business Newspaper, 2008.2.12. Joongang Daily, 2008.3.7. Kooje Newspaper, 2010.10.7. Hankook Daily, 2010.10.17. Bulgyo Newspaper, 2010.7.7. Statistics Korea Demographic Statistic Data (2010). Ministry of Justice Marriage Immigration Data (2010). http://home.pusan.ac.kr/~discuss/Paper/moon_060615.htm (2010.09.10). http://kdaq.empas.com/knowhow/view.html-num=105725&ps=kl&pq An AnAlysis of ChArACteristiCs of KoreA’s MultiCulturAlisM: PoliCies And ProsPeCts 161

=(2010.03.9). http://ko.wikipedia.org/wiki/%EB%8B%A4%EB%AC%B8%ED% 99%94%EC%A3%BC%EC%9D%98 (2010.9.12) http://kdaq.empas.com/knowhow/view.html-num=105725&ps=kl&pq = (2010.3.9). http://home.pusan.ac.kr/~discuss/Paper/moon_060615.htm (2010.9.10).

Received: 9/21; Reviewed: 10/20; Revised: 10/30 Does Culture Matter for eConoMiC DevelopMent in Korea? 163

Does Culture Matter for eConoMiC DevelopMent in Korea?

o. Yul Kwon Griffith University

Abstract

Recognising the complementarity of the multiple factors for economic development, this paper focuses culture as one of the important development factors and assesses the effects of recent changes in Korean culture on its economic prospects. Different from the traditional Confucian model in which culture affects the economy through Confucian cultural features such as thriftiness, the work ethic and educational zeal, this paper introduces the concept of transaction costs as an intermediary between culture and economic development. Under this model, culture affects the level of social trust which in turn has an effect on transaction costs, thereby on economic development. Culture in this model also affects the economy through its impacts on creative capacity of citizens. This paper examines a variety of cultural changes in Korea in the recent past, such as a declining sense of community, trust and law observance. These all raise transaction costs and socio-economic instability which in turn affect the economy adversely. In addition, the future orientation that fosters citizens’ creative capacity is weakening in the face of rising socio-economic uncertainty and injustice. Recent cultural changes unpropitious to the Korean economy are reinforced when relevant cultural features are compared to those of advanced countries. Culture is therefore not ceteris paribus for economic development.

Key words: Social Capital; Transaction Cost; Korean Economic Development. 164 tHe Journal of east asian affairs

introDuCtion

This paper explores the role of culture in Korea’s economic development, with an eye to future prospects. Economic development is a complex phenomenon influenced by capital, labour, technology, and formal and informal institutions. Culture has important bearings on the economy not only through its direct effects on the behavioural patterns of individual economic actors but also through its effects on the performance of formal institutions. Culture underpins formal institutions and functions as one of the underlying prerequisites for successful institutional performance. Post-crisis reforms of the Korean economy involved embedding new institutional arrangements, which are consistent with the advanced Western system. Yet the required cultural underlay has not yet developed, leading to limited success of the reforms (Kwon 2010a). Recognising the complementarity of the multiple factors for economic development, this paper explores the role of culture as one of the important development factors to better understand the nature of economic development in Korea and how recent cultural changes augur for future prospects of the national economy.

literature revieW

Conventional economists have traditionally shied away from analysing culture in economic development because of its complexity, the difficulties in quantification, and the ambiguity of causality in the relationship between culture and economic development. Neoclassical economics simply assumes away culture as a matter of ceteris paribus. It was Max Weber (1950) who had at first considered different cultural influences on economic development. Weber argued that the Protestant work ethic was the basis of Western economic development and modernisation, and that the absence of this ethic in Asia was the reason for the region’s lower level of economic development. Swift and unprecedented economic success in East Asia, including Does Culture Matter for eConoMiC DevelopMent in Korea? 165

Korea, has inclined scholars to take a cultural approach to East Asian economic development, recognising that economically successful East Asian countries share Confucianism as a common cultural influence. A number of scholars (Tu 1988, Tai 1989, Pye 1990, Levy 1992, Throsby 2001, Adams et al 2007, Allen et al 2007, Power et al. 2009, to name a few) argue that Confucian culture is the key to East Asian economic success. They point to specific characteristics of Confucian culture, including hierarchical collectivism, loyalty toward authority, emphasis on education, diligence, frugality and discipline. However, the Confucian model has a number of serious theoretical and methodological problems. It does not take into account cultural differences between national contexts. The Confucian model simply assumes causality from culture to economic development without demonstrating it empirically. It lacks a firm empirical basis as it relates culture, which is by nature a micro- psychological phenomenon and changes relatively slowly, to the ever-changing macro processes of economic development. To investigate the role of culture in Korean economic development, one must therefore adjust the Confucian model so that it is conceptually useful for dealing with Korea as a special case. A number of Korean scholars (L.J. Cho 1994; S.S. Park 1995; Y.H. Kim 1994; K.C. Lee 1995; Koo 1995; Nam 1994) argued particularly during the 1980s and 1990s that national culture contributed significantly to economic development over the three decades from the early 1960s. Nam (1994), who served as one of the major architects and managers of Korean economic development during the 1960s and 1970s in the positions of Finance Minister, Deputy Prime Minister (in charge of the Economic Planning Board), and Prime Minister, has identified six principal factors that accounted for Korea’s rapid economic development, and four of them are related to culture. Korean society has a relatively homogeneous culture with traits similar to Confucian cultural values.1 The

1 For detailed examinations of historical developments of Confucian culture and its salient characteristics in Korea, see Grayson (2002), Kweon (2003), Han (2003), Yi (2003), Hahm 2003). 166 tHe Journal of east asian affairs

Confucian model, as applied to Korean economic development, is also subject to the same theoretical and methodological problems as examined above. Therefore, in order to make a cultural model more operational and able to identify an easily conceivable causality, an operational intermediary should be introduced between culture and economic development. This is the concept of transaction cost. Transaction costs, which have been assumed away by neoclassical economics, arise through the processes of negotiation between economic agents, valuation of goods and services to be exchanged, and enforcement of contracts (North 1990).2 Not only do transaction costs affect the economy directly as part of economic costs, but they also work as an important determinant of how well markets function. Well-functioning markets lead to a high degree of specialisation and division of labour in an economy, which in turn leads to a higher level of productivity and economic progress. Therefore, appropriate institutions (both formal and informal) that would minimise transaction cost are required for economic development. Harrison (1985), drawing from his extensive study of economic development in South American countries over two decades, argues that differences in economic development among countries or ethnic groups arise primarily due to cultural differences. He argues that culture shapes the radius of trust and identification that people experience and the rigour of a society’s system of ethics, which are equivalent to ‘social capital’ (Fukuyama 1995) and affect the level of transaction costs. A broader radius of trust and identification lowers transaction costs because in such a fiduciary relationship people generally believe that others will play by the rules. Strong inclination to follow laws and rules reduces enforcement costs of contracts. A broader radius of trust and identification and a higher ethics level improve cooperation and compromise

2 North (1993) cites an empirical study which has found that 45 percent of US GNP was devoted to the transaction sector in 1970. In addition, there are a number of empirical estimates of transaction costs. For this, see Wang (2003). Does Culture Matter for eConoMiC DevelopMent in Korea? 167

among members of society, which are part of social capital. Harrison also argues that the rigour of the ethical system determines the sense of social justice or fairness which in turn increases social capital.3 Together with reduced state protection as part of economic liberalisation from the beginning of the 1990s, Korea has undertaken a series of structural reforms and further liberalisation measures of the economy after the 1997 financial crisis. An important factor inspired by market liberalisation was the need for more domestically generated creative thinking. The creative capacity of Korean people had not been so critical for Korean economic development in so far as the country was catching up with advanced countries. Korean enterprises were able to purchase technology from advanced countries. However, as Korea became a serious contender in many areas of international business, the Korean economy could not survive with technologies imported from competitor nations. This has forced Korea to develop its own technology and to enhance its international competitiveness more than ever. This shift was reflected in low productivity growth and low international competitiveness from the early 1990s (Kwon 2010a). To maintain its rapid economic development, Korea needs to raise the level of the nation’s creative capacity and, among other factors, its requisite cultural values. In this regard, Harrison (1985) contends that in dynamics the creative capacity of all citizens is the main source of economic development. Culture affects economic development through its impact on the creative capacity of all citizens. Harrison identifies cultural traits that foster creative capacity as ‘future orientation, rationality and equality/authority’. The time orientation of a society is also highly important for economic development. If people’s

3 There are a number of studies on effects of social capital (or trust) on transaction costs (Putman 1995; Dyer and Chu 2002). Wang (2003) surveys measurements of transaction costs. Lee and Jeong (2009) estimate the levels of social capital of 72 countries in 2008, the components of which include: social trust, observance of social rules, social network, society’s unfairness and conflicts. 168 tHe Journal of east asian affairs

major focus is on the future, and the idea of progress is well established in their culture, the notion that planning, savings and investment will be rewarded by improved living conditions will dominate. Future orientation also implies the possibility of change, including introduction of new technology and the well-known concept of ‘creative destruction’ of Schumpeter (1951). People with future orientation are more likely to undertake education and work hard at the expense of present enjoyment of leisure.4 It is readily conceivable that rationality and equality contribute to a nation’s creative capacity. Rationality encourages the pursuit of scientific discovery. People’s orientation toward equality is more conducive to economic development than an orientation toward hierarchy and authoritarianism, as equality encourages free competition, mobility and pursuit of knowledge. This new approach with the concepts of transaction cost as an intervening variable between culture and economic development and creative capacity is employed in investigating the role of culture for the future prospects of the Korean economy.

Cultural trenDs anD tHe future Korean eConoMY

Recent Cultural Changes in Korea and Its Economic Prospects

In the current liberalised and globalised economic environment, minimising transaction costs and maximising creative capacity of the Korean people are critically important for Korea to hold its economic performance relative to other nations. While cultural change is usually slow, the government introduced a raft of institutional and legal reforms in response to the 1997 crisis,

4 Vecchi and Brennan (2009) argue that a nation’s culture is associated with its innovation capacity, and their findings suggest that individualistic, low power distance and uncertainty avoidance cultures will display better innovation performance. Does Culture Matter for eConoMiC DevelopMent in Korea? 169

which has in turn induced relatively swift cultural changes. The resulting changes in cultural values have become sources of decline in trust or increases in social discontent. In 1998 the labour law was changed to allow managers to lay-off workers for management reasons. This opened the way for private companies to dismiss a large number of staff as part of business restructuring, diminishing the concept of lifetime employment. Companies have also introduced performance-based compensation and promotion to replace the seniority system. These changes in human resource management create uncertainty for workers and inevitably reduce the level of trust between employers and employees. This reduction of trust in employment relations lowers loyalty toward companies and aggravates labour relations. All this is reflected in high labour disputes in Korea and its poor ranking internationally with labour relations (Tables 1 and 2), which would in turn have raised transaction costs. Second, trust has declined from the rising disparity between regular and non-regular workers. Since the 1997 crisis, many employers have changed employment from regular to non-regular workers to reduce production costs and to improve employment flexibility. As shown in Table 1, the proportion of non-regular workers increased from 27.4 percent in 2002 to 34.9 percent in 2009. Non-regular workers are treated substantially worse than regular workers in terms of remuneration and social and statutory benefits. The proportion of non-regular workers’ monthly income to regular workers’ income decreased from 67.1 percent in 2002 to 54.6 percent in 2009 (KLI 2010). There are four social safety net programmes (employment insurance, industrial accident compensation insurance, national health insurance and national pension) for which both employees and employers have to contribute. Many non-regular workers are not covered by these social programs (KLI 2010), nor are they eligible for statutory benefits by their companies such as overtime pay, paid annual leave and maternity leave. In response to perceived injustice toward employees, the appeal of such approaches as cooperation, compromise, stability, and continuity has declined in Korean society, while confrontational 170 tHe Journal of east asian affairs

attitudes have strengthened. Third, as Harrison (1985) and Josten (2004) argue, increasing inequality in income distribution reduces social capital and thereby increasing transaction costs. Inequality in income distribution has been rising. As shown in Table 1, income distribution measured by the Gini coefficient has somewhat worsened in the recent past. The ratio of income of the richest 10 percent of urban employees to that of the poorest 10 percent (Q10/Q1) increased from 7.48 in 2000 to 8.29 in 2009. Perceptions of injustice in society are also on the rise due not only to rising inequality in income but also in wealth distribution. J.W. Lee (2003) points out that disparity in the distribution of wealth is much worse than the inequality of income distribution, because of the heavy concentration of land ownership and the high price of land. Perceptions of social injustice in a number of forms are reflected in low social trust. According to SERI (2009), Korea ranked 24th out of 29 OECD member countries for the level of social trust with an index number of 5.21, or 19 percent less than the OECD average of 6.18. Fourth, it appears that the rising income polarisation has been utilised for political purposes, and as a result, the political culture has developed in such a way that suspicion of, and hostility toward, political opponents continues to escalate. Consequently, political confrontation has become the rule of the game, while the concepts of cooperation and compromise have disappeared. One may expect the prevailing wrangling within the political sphere to adversely affect prospects for cooperation and compromise and the radius of trust within Korean society at large. Fifth, the social participation rate in community activities, which could enhance social capital, is extremely low. In 1999, only 23.1 percent of individuals had affiliation with social organisations. The majority of those participants are members of social meetings, religious organisations, and hobby, sports and leisure organisations; only 13.6 percent of them are participating in civil society organisations, community interest groups and political groups. This shows that Korea’s group society is based on family, education, regions and religions. The social participation rate improved to Does Culture Matter for eConoMiC DevelopMent in Korea? 171

38.8 percent in 2006, yet only 15.3 percent of those participants are involved in civil society, community interest groups and political groups (KOSTAT 2011).5 Sixth, Fukuyama (1995) has argued that the rise of crime and litigation indicates the decline of social trust. In Korea today, the rule of law appears to be losing its regulatory power, as does the prerequisite underlay of trust and ethics that enables, sustains and reinforces the rule of law. As shown in Table 1, the number of penal code criminal cases increased from 523,000 in 2000 to 993,000 in 2009, or a 7.4 percent annual increment over the period. The number of judicial processing of civil cases, which reflects litigation among citizens, has increased from 2,757 in 2000 to 4,246 in 2008, or a 5.5 percent annual increment over the period (Table 1). In the recent past, large-scale political corruption cases have been exposed, and illegal activities by corporations, unions and interest groups have been prevalent, vitiating the ethical system and its regulatory capacity over Korean society.6 Finally, nationalism is still high in Korea, although like other emotional responses such as trust, it too is weakening. Relatively strong nationalism by comparison with other national examples helps to explain why many observers from overseas still regard Korean people as xenophobic (Dong-A Daily 2008, Dodgson 2009). Indeed, the xenophobic attitude of many Koreans in general reduces the radius of identification and raises transaction costs in international commercial dealings, while globalisation transforms national economies worldwide. The future orientation that fosters creative capacity within society also appears to be declining in recent years. Uncertainty

5 Allick and Realo (2004) find out of their empirical studies of 37 countries that those societies characterized by the highest levels of individualism had the highest levels of interpersonal trust. A similar result was found by Realo et al. (2008). 6 Cha (2007) estimates that if the level of law observance in Korea over the last 10 years were the OECD average level, Korea’s annual economic growth rate could have been at least one percent point higher. 172 tHe Journal of east asian affairs

perceived by workers after 1997, and uncertainty and instability generated by inconsistent government policy measures in the recent past have also hindered the future orientation of citizens (Kwon 2010b). Declining savings and investment rates may reflect decline in future orientation. As shown in Table 1, the savings rate decreased from 33.0 percent in 2000 to 30.0 percent in 2009, while the investment rate also decreased from 30.7 percent to 25.8 percent during the same period. These decreases in savings and investment rates will adversely affect economic growth potential. As imbedded in hierarchical collectivism with social stratification based on education and ranks in organisation, Korean society is lacking equality, as compared to advanced countries. In this respect, Oh and Kim (2002) and Yang and Lim (2007) and Dodgson (2009) argue that hierarchical collectivism in Korea impedes productivity, innovation and entrepreneurship.

Korea’s Social and Economic Indicators

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

GDP growth(%) 8.8 4.0 7.2 2.8 4.6 4.0 5.2 5.1 2.0 0.2

Saving rate(%) 33.0 31.1 30.5 31.9 34.0 32.1 30.8 30.8 30.5 30.0

Investment rate(%) 30.7 29.3 29.3 30.0 29.9 29.8 29.7 29.5 31.0 25.8

Labor disputes 250 235 322 320 462 287 138 115 108 121

% of non-regular workers n.a. n.a. 27.4 32.6 37.0 36.6 35.5 35.9 33.8 34.9 Gini coefficient 0.296 0.303 0.298 0.298 0.301 0301 0.299 0.304 0.303 0.301 Q10/Q1(urban employees 7.48 7.63 7.24 8.24 8.48 8.37 8.01 8.20 8.15 8.29 Penal code criminal cases(000) 523 554 797 857 827 826 828 845 898 993 Judicial processing of civil cases 2757 2740 3146 4410 4094 3663 3603 3932 4246 n.a. Sources: KOSTAT (2010), KLI (2010), KOSTAT (2011), KIHASA (2011). Does Culture Matter for eConoMiC DevelopMent in Korea? 173

Comparative Analysis of Recent Cultural Trends in Korea

So far the wide-ranging cultural changes within Korean society have been analysed in terms of their possible effects on the future economy through their influences on transaction costs and the nation’s creative capacity. This analysis is augmented, particularly to comprehend Korean cultural effects on its international competitiveness, by an analysis of a variety of Korean cultural facets relevant to economic development, compared to those advanced countries against which Korea has to compete. To this end, recent trends of relevant cultural facets within Korea are examined by comparing pertinent social indicators, which would reflect those cultural facets to those of other countries. Table 2 shows Korea’s global rankings across various social indicators between 2000 and 2010 developed by a number of well-known international organisations including the International Institute for Management Development (IMD), the World Economic Forum (WEF), and Transparency International (TI). Obviously trust has declined in the Korean labour market markedly more than other countries. According to the IMD and WEF, Korea’s labour relations were consistently among the worst over time (Table 2). Over the period 2000~2010, both the IMD and WEF show that Korea belonged to the worst 95 percentile. As a result, Korea was one of the countries that had most industrial disputes, as indicated by Korea’s rank of 39.9th on average out of 52 countries surveyed over the 2000~2008 period. Korean society’s view of individual firms’ behaviours is quite low, indicating a relatively low level of trust in companies, compared to advanced countries. According to the IMD, Korea’s rankings for the social responsibility of business leaders held fairly steady between 2000 and 2007, with a striking improvement in 2008 before worsening in the following two years, thereby bringing up an average ranking of 26.8th out of 53 countries. Over the same period, corporate ethical practices demonstrated a similar pattern, remaining at one of the worst until 2007 and improving somewhat 174 tHe Journal of east asian affairs

thereafter, ranking on average 34.4th. For ethical behaviours of firms surveyed by the WEF, Korea’s rank was 38th in 2002, fluctuated over time and significantly worsened in the last two years, resulting in an average rank of 40.2nd out of 109 countries. The low level of trust in companies together with poor labour relations would be reflected in a relatively low level of work ethics. Unlike the renowned hallmark diligence of Korean workers, the IMD ranked Korea 32.4th out of 53 countries on its worker motivation as an annual average over the 2000~2010 period. The level of trust, rigor of ethics and law observance are remarkably lower in Korea than other advanced countries. Korea’s ranking on the Corruption Perceptions Index (CPI) developed by Transparency International (TI) remained more or less steady over the period between 2000 and 2010 with an average rank of 42.7th out of 180 countries. This indicates a high prevailing perception that the corruption level in Korea’s corruption level is relatively quite high, compared to advanced countries. The WEF survey on corruption supports the TI results with Korea’s ranking of 37.9th out of 109 countries over the period 2000~2010 on favouritism in official decisions. According to the IMD and WEF, the perception that social justice is not fairly administered prevails quite highly. Over the period 2000~2010, the IMD ranked Korea on its social justice index 43.3rd on average out of 53 countries. The WEF ranked Korea on average 47.5th out of 109 countries on its judicial independence index (Table 2). Does Culture Matter for eConoMiC DevelopMent in Korea? 175

Comparative Stances of Korea’s Social Indicators

Avg 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (2000~10) 1) Labour market Labour relations 54.0 44 46 47 30* 60 60 61 55 55 56 56 (IMD) (53)# Industrial dispute 38 25* 44 45 43 37 38 36 38 n.a. n.a. 39.9 (IMD) Labour relations 90.3 56 72 55 93 103 81 114 55 95 131 138** (WEF) (109)# Worker motivation 33 32 19 16* 42 37 32 33 30 38 28 32.4 (IMD) 2) Society’s view of firms Social responsibility 39 40 24 18* 30 30 34 41 2 15 13 26.8 (IMD) Ethical practice 38 39 29 26* 38 36 40 41 29 26 28 34.4 (IMD) Ethical behaviour n.a. n.a. 38 33 61 35 38 25 27 48 57 40.2 (WEF) 3) Observance of ethics and laws 42.7 CPI(TI) 48 42 40 50 47 40 42 43 40 39 39 (180) Justice(IMD) 32 32 35 18* 41 35 42 30 31 32 33 34.3 Favouritism in official Decisions 27 35 30 18 49 26 46 15 22 65 84 37.9 (WEF) Judicial independence 44 47 41 49 48 45 51 35 45 58 60 47.5 (WEF) 4) Social attitudes to globalisation Attitudes to n.a. 20 16 3* 14 7 13 32 13 15 13 15.9 globalisation(IMD) National culture(IMD) 47 48 44 30* 49 53 55 55 55 56 52 51.4

Sources: IMD (2000~2010); WEF (2000?2011), TI (2000~2010). 176 tHe Journal of east asian affairs

Notes on some of the terms: Social responsibility (IMD): the level of social responsibility of business leaders. Ethical practice (IMD): ethical practices are implemented by companies. CPI (TI): Corruption perceptions index by Transparency International Justice (IMD): justice is fairly administered. Favouritism in official decision (WEF): favouritism given to well-connected firms and individuals when deciding on policies and contracts. National culture (IMD): the national culture is open to foreign ideas. * In publication year 2003, (except for industrial disputes in 2001), IMD subcategories of data were divided into countries/regions with populations above and below 20 million. Korea’s rankings are out of 30 countries studied with populations over 20 million. The 2000~10 IMD average excludes values for 2003. ** For WEF, the annual value for a certain year is an average of that year and the immediately following year. For example, the 2010 value is a 2010~2011 average. # The total number of countries studied in 2010: IMD: 58, WEF: 139, and TI: 178. These numbers have increased over time.

Finally, as compared to other countries, Korean society has relatively opened toward globalisation, yet people’s mindsets have remained quite closed to it. According to the IMD survey, Korea’s rankings for social attitudes to globalisation between 2000 and 2010 fluctuated, ranging 7th to 13th, with an average rank of 15.9th. By contrast, Korea ranked poorly in terms of national culture being closed to foreign ideas. Korea was the worst, ranking an average of 51.4th out of 53 countries over the 2000~2010 period notably in 2000, 2003, 2007 and 2008. This vindicates the arguments that nationalism and xenophobia as its corollary are still prevalent in Korea. The above comparative analysis of social indicators reinforces the argument that the recent cultural trends within Korea society are unfavourable for future economic development by raising transaction costs. The relative rankings with the above social indicators provide comparative assessment of the nation’s business environments and are critically important in informing foreign investors and businesses when considering opportunities. Therefore, for the nation’s strategic goal of achieving the status of advanced countries, Korean mindsets, which are the underpinning of formal institutions and economic development, have to adjust towards those of advanced countries and the advent of globalisation. Does Culture Matter for eConoMiC DevelopMent in Korea? 177

ConClusion

By refining the shortcomings of the Confucian model of explaining economic development in East Asia, including Korea, this paper has developed a new model to explore the relationship between Korea’s Confucian culture and its economic development. This model introduces the concept of transaction costs and peoples’ creative capacity as an operational intermediary between culture and economic development. Under this model, culture affects economic development through its impacts on transaction costs in the static case and through its impacts on creative capacity in the dynamic case. Using this model, this paper has found that a variety of cultural changes in the recent past have decreased the level of trust in Korean society, thereby increasing transaction costs. Trust between employers and employees has decreased, thereby deteriorating labour relations and raising labour disputes. The strong work ethic of Korean workers has weakened, alongside the decline in their diligence, loyalty and dedication to their employer companies. The perception of injustice in society has been aggravated because of increasing inequality in income and wealth distribution and the widening gap between regular and non-regular workers in their working conditions. The rising social injustice has fed into national political life, making for a more confrontational politics. The rule of law has lost regulatory strength. These developments have contributed to a declining sense of community and trust, a weaker appreciation of cooperation and compromise, and stronger inclination towards confrontation. These outcomes all serve to raise transaction costs and socio-economic instability, which will adversely affect the Korean economy in the future. Other findings are also consistent with this inauspicious economic trajectory. The future orientation that fosters citizens’ creative capacity has faded. A social view tending to disparage entrepreneurs and business has evolved, discouraging entrepreneurship and creativity. Uncertainty perceived by workers and instability generated by inconsistent government policy measures in the recent past 178 tHe Journal of east asian affairs

have also hindered the future orientation of citizens. Korean society is lacking the sense of equality due to the enduring hierarchical collectivism with social stratification. This paper has also analysed a variety of Korean cultural facets relevant to economic development, compared to those of other countries by means of social indicators developed by a number of well-known international organisations. This comparative analysis reinforces recent cultural changes in Korean society, as examined above. Trust in the labour market, society’s trust in private business, and the level of trust, the rigor of ethics, and law observance in Korea are all relatively low, compared to advanced countries. Further, Koreans are relatively intransigent to foreign cultures and ideas. All this would adversely affect Korea’s international competitiveness and make it difficult for Korea to take full advantage of globalisation. In conclusion, the complex and wide-ranging changes in Korean culture in the recent past are serving to raise transaction costs and curtail the Korean people’s creative capacity. The effects of these cultural changes on the Korean economy are likely to be negative in the future. This is further reinforced when relevant facets of Korean culture are compared to those of advanced countries. Culture is not a matter of ceteris paribus. Even if all else remains the same, the prospects of the Korean economy will be weakened by the influence of culture. To improve Korea’s economic prospects in the emerging globalisation era, careful attention needs to be paid to the cultural changes now under way in response to recent policy and institutional changes. Government, business and society as a whole will need to work together to redirect what appear to be deleterious cultural changes to a direction conducive to economic development. Does Culture Matter for eConoMiC DevelopMent in Korea? 179

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