INTER-KOREAN RECONCILIATION, ECONOMIC COOPERATION, and the ROLE of MAJOR POWERS (Summary of May 2001 Coference in Shanghai) by Joseph Winder

INTER-KOREAN RECONCILIATION, ECONOMIC COOPERATION, AND THE ROLE OF MAJOR POWERS (Summary of May 2001 Coference in Shanghai) by Joseph Winder

Summary to open up to the South and the rest of the world. They emphasized the importance of a calm external envi- The Shanghai Academy of Social Sciences (SASS) ronment to the process of North-South reconciliation. hosted a conference entitled “Inter-Korean Reconcili- Many of them characterized the current environment ation, Economic Cooperation, and the Role of Major as uncertain, and placed the blame squarely on the Powers” on 9–11 May in Shanghai. The conference United States. A number of speakers criticized the was cosponsored by the Korea Economic Institute of current U.S. policy toward North Korea as well as U.S. America (KEI), the Korea Institute for International policy and actions vis-a-vis Asia more broadly, includ- Economic Policy (KIEP), the Atlantic Council, and the ing plans for a ballistic missile defense program. In United States Institute of Peace. The Korea Founda- the view of many Chinese participants, progress in tion also provided financial support for the conference. North-South reconciliation is dependent on improved relations between North Korea and the United States. The purposes of the conference were to: The U.S. and South Korean participants, on the other hand, expressed the view that improvement in North • Obtain the views and assessments of Chinese schol- Korea’s relations with the United States depends on ars and experts on developments of the Korean Penin- improved North-South relations. There was some sula, discussion of and general support for increased multilateral cooperation in dealing with the problems on the • Expose Chinese scholars and experts to U.S. and Peninsula in both the economic and security spheres. Korean views on developments on the Korean Penin- sula, and North Korea

• Establish personal contact and links between U.S. The unspoken assumption, which formed the basis for and Korean experts and their Chinese counterparts. the discussion throughout the conference, was that North Korea is the “problem.” One Chinese partici- The conference was attended by a large number of pant said that the problem is how both North and South Chinese scholars and experts from Beijing, Jilin, and Korea adjust to the post-Cold War world. He said South Shanghai. A full list of the participants is included at Korea has done a good job, implying that North Korea the end of this report. has not. While the participants’ views on the best way to address the North Korean “problem” varied, the There was a widespread consensus that the North focus on North Korea did not. Korean economy is in dire straits, that North Korea has not addressed the problems effectively, and that Two of the Chinese participants said that North Korea’s reform is essential. There were differences of view over military capabilities are “exaggerated” and “over- the extent of reform underway in the North. A number stated.” One argued that there is no proof that North of speakers from all countries represented expressed Korea has nuclear weapons, and that the Taepodong the view that North-South reconciliation is primarily test was a failure. in the hands of the two Koreas. There was a recognition that economic cooperation is at the heart of the There was a broad consensus that the North Korean North-South reconciliation process to date and that this economy is in dire straits. One participant suggested process seems to have stalled. Many of the Chinese that the economy is not “bankrupt,” but there was no participants said North Korea is sincere in its efforts disagreement about the seriousness of North Korea’s

INTRODUCTION 1 economic difficulties. No one challenged the view that Korea is serious about reform will be when it invites North Korea’s economy is not self-sustaining without the Bank in to do an economic survey. outside assistance. A Chinese expert said that economic reform is being Dr. Yoon Deok-ryong, a Senior Fellow at KIEP, pre- implemented, but it has not yet been linked to politics. sented a paper in which he describes North Korea’s The expert said that the North Koreans’ minds are os- economic problems. He said the collapse of the coop- sified, and they need to study how to integrate theory eration network among socialist countries with the end and practice. The expert said that the relationship of the Cold War led to a decline in North Korea’s capi- between politics and economics is key. Economic dif- tal stock, which in turn triggered a downward spiral ficulties are related to political extremism. They need which persists to this day. The supply of savings—both to accept the fact that economics has its own logic. domestic and foreign—is not large enough to cover the depreciation in the stock of capital in the country. None of the Chinese participants expressed the view Capital has diminished every year, which is the main that North Korea would embrace the Chinese model. cause of North Korea’s continuous negative economic One expert said that North Korea would not adopt the growth. He said North Korea’s economic situation Shanghai model. He said that North Korea would re- seems to fit into what has been called a “poverty trap.” form gradually without using that word. Another A Chinese expert attributed North Korea’s economic expert argued that North Korea would not adopt either problems to bad policies, bad practices, and a bad mind- the Chinese or Russian models. He said that North set. He said that since North Korea gave highest prior- Korea is likely to adopt a very authoritarian model and ity to security concerns, it concentrated on developing base it on the Park Chung-hee regime. heavy industry to the detriment of the economy. North-South Reconciliation Dr. Yoon said North Korea’s immediate needs were to deal with its shortages of food and energy. Beyond that A number of the participants—on both the Chinese and it needs to install new production facilities and to American sides—expressed the view that North-South develop ways to generate hard currency. One Ameri- reconciliation is in the Koreans’ hands. One Chinese can participant suggested that North Korea needs to participant said that the joint actions of the North and devote more resources to building up its human capi- South are the keys to the peace process. One Chinese tal. A Chinese participant suggested that high-tech is expert said that the current efforts at North-South the key to North Korea’s future. reconciliation have a basis in history, and that the meetings in 1972 paved the way for last year’s summit. He No one challenged the view that North Korea needs to praised the results of the summit and said both sides reform and open up its economy. One participant are now making policy changes. argued that North Korea is refusing to change its old economic model. He said there has been no sign of Some participants placed the onus for further progress reform in the North in the wake of Kim Jong-il’s visits on the North. One Chinese participant said that the to Shanghai. He said Rajin-Sombong is only a first, key to North-South rapproachement is the actions North halting step (another Chinese expert called it a Korea will take. Another said that the key to North- failure). South reconciliation will be the direction North Korea will take. He noted that South Korea had offered a Several Chinese participants argued that reform is un- “sunshine” policy; now it is up to the North to respond. derway in North Korea. One participant said that al- An American participant said it is ironic that it is only though North Korea’s fundamental problems are still the insistence of the North that keeps the United States there, change is taking place. Another said that the at the center of the process. recent fifth plenary of the fourth National congress instituted some more reforms. One participant argued One Chinese participant said that North-South recon- that North Korea needs to see some concrete benefits ciliation is a historical process that cannot be stopped. from reform if it is to keep up the pace of reform. The Another said that the short-term outlook is not good. World Bank representative said that the sign that North He argued that the Korean peninsula is now caught up

2 THE KOREA ECONOMIC INSTITUTE OF AMERICA in great power tension. One Chinese expert said that Korean economic system and government are currently the process of North-South reconciliation is underway, obstacles to such cooperation. She praised the changes but its progress should not be exaggerated. He pointed the South is making to enhance North-South economic out that reconciliation in the military sphere is the key, cooperation. Another Chinese participant argued that and said there has been very little progress in this area the process of North-South economic cooperation is to date. Another participant said that North Korea is bogging down. buying more weapons from Russia in response to South Korean purchases of arms from the United States. External Environment

Economic Cooperation Many of the Chinese participants emphasized the importance of the external environment to the process of A Korean participant said that economic relations are North-South reconciliation. One participant said that the main instrument being used to bring the North and a stable relationship among the major powers contrib- South together. He said that, if the policy fails, only uted to the North-South summit. Another said that money has been lost. If, on the other hand, the South détente among the major powers is a key factor in pursues a policy of confrontation, it could lead to war. rapproachement on the Korean peninsula. Another said A Chinese participant argued that political stability is that rapproachement among major powers is a pre- a pre-requisite for North-South economic cooperation. condition for reconciliation on the Korean peninsula. A U.S. participant said that President Kim Dae-jung told The World Bank representative said that economic Chairman Kim Jong-il that he must meet the demands of cooperation is at the heart of the North-South recon- the United States and Japan in order for the South to be ciliation process. He said the challenge is to integrate able to help the North. One Chinese expert took a differ- the economic dimension into the political process. He ent view, however, and argued that outside powers’ said economic cooperation must have an economic logic actions are important but not determining. Another as well as a political logic to be successful, and that expert argued that an improvement in the international economic and commercial viability at the commercial environment is necessary in order to induce North level is essential. He pointed out several obstacles to Korea to move away from its emphasis on heavy in- economic cooperation in both North and South Korea. dustry. A U.S. expert said that the role of external He said the North does not have the resources it needs powers is to give a blessing to the process. A Chinese for capital investment to repair its infrastructure. He expert said that the major powers should provide more said the North also has a shortage of people who are aid to North Korea. knowledgeable about international business. He said the North cannot plan and manage economic strate- Some Chinese participants emphasized the importance gies. He said the South does not have the economic of China’s role in North-South reconciliation. One said strength to support the process on its own. In addition the China’s role is irreplaceable. He pointed out the the South is still facing the challenges of economic contribution that China has made by establishing good reform in its corporate and financial sectors. ties with both North and South. He added that China is conducting lots of trade with North Korea. Another One Chinese participant said that there is currently a participant said that China has a long history of sup- great deal of economic cooperation between North and porting North-South reconciliation. One U.S. partici- South Korea, which is good for both sides. He said the pant said that China is a good role model for North prospects are good since both governments support the Korea. One Chinese participant argued that North- process. He said the principal obstacles in the North South ties are a function of U.S.-China relations. One are infrastructure and psychological barriers. Another expert disagreed with this view, and argued that Chinese participant said that North-South trade is North-South reconciliation is still possible even if growing, and increasing numbers of firms in the South U.S.-China ties are not so good. are getting involved. She said that economic cooperation in other areas is slowing, however. Another One Chinese expert said the external environment is Chinese participant had a less rosy view of North-South characterized by a great deal of uncertainty. The United economic cooperation. She argued that the North States is conducting a policy review, Japan has a new

INTRODUCTION 3 cabinet and the textbook controversy is causing fric- the United States if it develops a missile program. A tion with both North and South Korea. Russia can play U.S. participant said that North Korea does not have only a minimal role. The slowdown in the South to drag the United States into the process; it can move Korean economy has slowed the momentum for eco- forward without U.S. involvement. A Chinese partici- nomic cooperation, and the death of Hyundai founder pant said that if the United States shows hesitancy in Chung Ju-yung has had an impact on private sector dealing with North Korea, it will have an impact on enthusiasm for economic deals in North Korea. South Korean attitudes and policies. Another Chinese participant said the actions of the United States and Japan have created a tense situation A South Korea participant argued that it is hard for on the Korean peninsula. Another Chinese participant North Korea to make concessions on weapons of mass said the North-South reconciliation process has slowed destruction, terrorism, etc., unless the United States due to the attitude of major powers. shows a willingness to build a new relationship with the Korean peninsula based on the end of the Cold War. Several Chinese participants commented on the four- party talks. One participant called for a renewal of the Several Chinese participants were highly critical of the four-party talks. Another participant said that all sides current U.S. approach to North Korea. Some said the should support the four-party talks. Another partici- United States still has a “Cold War” mentality. One pant said the four-party talks are not functional in the said that U.S. officials have made “hard line” remarks, current environment. Another participant said that the which have had a negative influence on the process of four-party talks are useless if the United States intends reconciliation between North and South. Another said to pursue a policy of dominance in the region. South that the United States has interrupted this process. He Korean expert Yoon Young-hwan presented a paper in said the previous administration felt it was being left which he argued that the outside powers need to adopt out, and the current administration is conducting a a holistic approach toward North Korea. He said a policy review. One Chinese participant said the United resolution of the problem posed by North Korea’s pos- States was hesitant and passive in response to the session of weapons of mass destruction requires North-South summit. Another said that the United action to solve North Korea’s economic problems and States is demanding verification from North Korea but to address North Korea’s notion of its security. He said will not give North Korea any security guarantees in that the question of North Korea’s membership in the return. He asked what the United States is prepared to international financial institutions links economic, offer North Korea in return for a missile agreement. political, and military issues. Some Chinese participants also criticized U.S. policy The United States toward Asia. One participant said that recent U.S. actions have undermined the process of reconciliation, A number of the Chinese participants argued that the and he listed as examples the announced shift in U.S. U.S. role is crucial in shaping the environment for military priority away from Europe to Asia, an in- North-South reconciliation. Another argued that the creased number of missiles targeted at China, and an U.S. role is important but not decisive, and the process increased number of warships in the area. Another can go forward without U.S. involvement. A Chinese participant argued that the new administration is participant said that a policy of hegemony has a nega- changing U.S. strategy in Asia from a balance of tive impact on the process. Another participant argued interests to a balance of threats. He said the new U.S. that the United States has a responsibility to “rightly strategy is based on the desire to achieve an absolute influence” the North Koreans. Another argued that U.S. advantage in the military sphere. He said the United actions could lead to increased tension in the region States has already undermined the strategic balance in and growing differences between the United States and Asia by ramping up its fleet. Another Chinese expert China, which in turn could lead to turmoil in the North- characterized the Bush administration’s policy as one South reconciliation process. Another expert argued of unilateralism, a Cold War mentality, and an over- that U.S. policy could force South Korea to act as a emphasis on military power. He said the United States balancer between the United States and China and lead intends to establish a security mechanism in the North Korea to conclude that it can only bargain with Asia-Pacific region based on military alliances with

4 THE KOREA ECONOMIC INSTITUTE OF AMERICA itself as the leader. He said alliances are aimed mili- economic cooperation can support the inter-Korean tarily at a third country while strategic partnerships in reconciliation process. contrast aim to strengthen cooperation for mutual benefit. One expert argued that the United States does • Integration and Training. The knowledge gap be- not want to see a speedy resolution of the Korean Pen- tween the two Koreas can be reduced through creating insula issue because it would remove a rationale for more opportunities for North Korean officials, enter- ballistic missile defense. One official accused the prise managers, and students to learn. United States of trying to upset the strategic balance in the region thus undermining security. He asked what • Technical Expert Workshops. Multilateral organi- the North Koreans are supposed to use for defense in zations can support the two Koreas in expanding their such a circumstance. economic initiatives by arranging workshops where experts from outside the Korean peninsula can bring An American representative argued that the Bush their knowledge and experience to bear on specific administration’s policy toward the Korean Peninsula issues. will have many elements of continuity with the previous administration, and he listed a number of examples, • Membership in International Financial Institutions. including the view that North Korea’s military threat These institutions could assist North Korea mobilize is real and undiminished, the centrality of the U.S.- capital for its economic reconstruction, shape good eco- ROK security alliance and its value as a deterrent, the nomic policies, and build market-friendly institutions. U.S. desire for peaceful change on the Peninsula, support for President Kim Dae-jung’s policy of engage- • Aid Coordination. Coordination mechanisms will ment, the importance of trilateral consultation between be needed to keep the growing number of donor orga- the United States, South Korea, and Japan, continued nizations informed about each other’s activities and to U.S. support for the Agreed Framework, humanitarian learn from one another. aid, and the difficulty of supporting North Korean membership in the international financial institutions. He The paper also outlined ways in which multilateral said the policy review is focusing on a number of ar- cooperation can expand economic integration and in- eas including the timing of North Korea compliance terdependence in support of long-term stability. Among with its safeguard commitments under the terms of the the possibilities are an expanded role for the Tumen Agreed Framework, possible ways to address North River Area Development Program, a gas pipeline Korea’s energy needs, including by switching the two across the Korean peninsula, improved transportation KEDO plants under construction from nuclear to con- links between the two Koreas, and efforts to reduce ventional power, and the extent to which agreements barriers to trade and investment in Northeast Asia. on certain aspects of North Korea’s missile program are verifiable. He said the administration would un- One of the Chinese participants emphasized the need doubtedly place increased emphasis on verification and for a mechanism for multilateral consultation and dia- monitoring of any agreements it might negotiate. logue in Northeast Asia and for a multilateral economic cooperation community in Northeast Asia. Another One Chinese participant said that the United States Chinese participant expressed support for expanded should try to trust North Korea. Another said that North cooperation in Northeast Asia in the energy field. One Korea needs a security guarantee from the United States Chinese participant suggested that multilateral coop- in light of its experience during the nuclear crisis of eration at this point is too complicated for North 1992–1994. Another urged the continuance of nego- Korea, and that assistance for the time being should be tiations with North Korea. limited to bilateral efforts.

Multilateral Cooperation Some of the participants also mentioned the need for multilateral cooperation in the security field. A Chi- The World Bank representative presented a paper in nese participant suggested the establishment of a which he described the various ways that multilateral security cooperation mechanism in Northeast Asia

INTRODUCTION 5 after a North-South peace agreement is signed. He said at that time Russia, Japan, and even Mongolia could be brought in. A South Korean participant spoke in favor of a Northeast Asia regional security forum.

Mr. Winder is President of the Korea Economic Insti- tute of America.

6 THE KOREA ECONOMIC INSTITUTE OF AMERICA Participants

China

Beijing China Institute of Contemporary International Relations Cheng Yujie China Institute for International Studies Yu Shaohua Chinese Academy of Social Sciences, Institute of Asia-Pacific Studies Piao Jianyi Former Chinese Ambassador to South Korea Zhang Tingyan

Jilin Jilin Academy of Social Sciences, Institute of Korea Studies Zhang Ying Jilin University, Institute of Korean Studies Xu Wenji

Shanghai Fudan University, Director, Center for Korean Studies Shi Yuanhua Shanghai Academy of Social Science, Program Officer Yang Jian Shanghai Academy of Social Science, Vice President Zuo Xuejin Shanghai Academy of Social Science, Deputy Director, Center for International Relations Li Yihai Shanghai Academy of Social Science, Senior Fellow, Institute of Asia-Pacific Studies Liu Ming Shanghai Academy of Social Science, Fellow, Institute of Asia-Pacific Studies Wang Lingyi Shanghai Academy of Social Science, Deputy Director, Institute of Asia-Pacific Studies Wang Shaopu Shanghai Academy of Social Science, Institute of Asia-Pacific Studies, Assistant Fellow Yang Hongmei Shanghai Academy of Social Science, Director, Institute of Asia-Pacific Studies Zhou Jianming Shanghai Academy of Social Science, Senior Fellow, Institute of Eurasian Studies Cui Ziying Shanghai Institute for International Studies, Professor Xia Liping Shanghai Institute for International Studies, President Yu Xintian Shanghai International Studies University, Head of Korean Studies Department Li Chunhu Shanghai Society for International Relations, President Chen Qimao Tongji University, Director, Center for East Asian Studies Cai Jianguo

South Korea Korea Institute for International Economic Policy, Senior Fellow Yoon Deok-ryong Seoul National University Yoon Young-kwan

United States Atlantic Council Stephen Costello Atlantic Council Timothy Kraemer Korea Economic Institute, Director for Research and Academic Affairs Peter Beck Korea Economic Institute, President Joseph Winder Korea-America Economic Association, President Choi Kwan Korea-America Economic Association Yesook Merrill United States Institute of Peace Emily Metzgar World Bank, Advisor Bradley Babson

INTRODUCTION 7

SECURITY DYNAMICS

THE CHALLENGES OF BALANCING INTER-KOREAN DÉTENTE WITH BIG POWER POLITICS1 by Park Tong-whan

Introduction Will the two Koreas be able to sustain the momentum More than a decade after the end of the Cold War, the of détente begun with the summit meeting? This is a two Koreas have finally made what appears to be the question of historic proportions. If successful, Kore- beginnings of rapprochement. In June 2000, the first- ans will start paving the way toward reconciliation, ever North-South summit was held in Pyongyang, dem- leading ultimately to a state of de facto unification. onstrating to the world that the two Koreas had the They will see the day when people, goods, and ser- will and capacity to handle their own affairs. Although vices move north and south with little restriction while the summit diplomacy has since produced only modest the two independent governments cooperate to promote results and still awaits Kim Jong-il’s return visit to peace and stability on the Korean Peninsula. If not, the Seoul, it nevertheless was a monumental feat that euphoria of the summitry may fizzle just like the many should help open a new vista in inter-Korean relations. previous attempts at normalizing the bilateral relationship, including most notably the 1992 Basic Agree- In fact, the Korean summit was long overdue. Virtu- ment. It is premature, and even presumptuous, to say ally all South Korean presidents had sought the cov- “yes” or “no” to the question, as the answer would eted prize, and former President Kim Young-sam hinge on the complex interaction of forces on and out- would have made it but for Kim Il-sung’s death in 1994, side of the Peninsula. While the question needs to be two weeks prior to the scheduled meeting. During the subjected to a thoughtful and systematic analysis, the remainder of Kim Young-sam’s tenure, internal and current political situation in Northeast Asia indicates external situations of both Koreas left little room for that there is precious little time to wait for one. From summitry. When Kim Dae-jung took office in Febru- Korea’s—especially Seoul’s—perspective, a negative ary 1998 and began his comprehensive engagement answer must be prevented because now could be the policy toward the North—in concert with a similar most opportune moment to start working on a lasting approach pursued by the Clinton Administration—the arrangement for peaceful integration of the seventy inter-Korean atmosphere became more favorable for million Koreans living on the Peninsula. Kim Jong-il to accommodate the cooperative gestures of Seoul and Washington. Nevertheless, he took his What needs to be done to push the Korean détente for- time in responding to Kim Dae-jung’s constant ward? I will begin with a sketch of where the two overtures, and received DJ in Pyongyang six years af- Koreas are and where they may be headed in light of ter his late father had promised to meet with DJ’s the current rapprochement. I will then move to what I predecessor. think is one of the most critical determinants of Korea’s

1. This is a revised version of a paper presented at the annual meeting of the American Political Science Association, San Francisco, CA, 30 August–2 September 2001. The paper grew out of a “thought piece” delivered at the annual conference on Korea sponsored by the Richard L. Walker Institute of International Studies, University of South Carolina, Columbia, 18–20 May 2001. I want to thank Hong Nack Kim, Katy Oh, Ken Shin, Dixie Walker, and other participants at the conference for their encouragement and criticism.

SECURITY DYNAMICS 9 future—namely, the four surrounding powers with a decade after the German merger, one may justifiably regard to their proclivities toward change in Korea. Of argue, is it not Korea’s turn to have a swing at national the four powers, the United States will be given spe- integration? While virtually all Koreans, South or cial attention, as it clearly has the power to make or North, would express an overwhelming approval to the break Korean détente. Does Washington’s new admin- idea of tongil (unification), the problem lies in what istration want Korea’s unification? If so, in what form? kind of tongil they would be willing to accept. To main- Would it insist on a Seoul-led merger under liberal tain their current regime and lifestyle, the South Kore- democracy?2 Or would it tolerate a hitherto unknown ans would rather fight than tolerate Vietnamese-style hybrid form? Should a liberal democratic unification surrender to Kim Jong-il’s dictatorship. By the same be infeasible in the near future, would the United States token, the North Koreans would do likewise to avoid continue to practice a two-Koreas policy? In that case, dissolution into a liberal democracy à la East Germany. what would be America’s role in inter-Korean rap- Is peaceful unification through negotiations an impos- prochement? Put differently, how would George W. sible quest? Or can Koreans from North and South Bush perceive and respond to the “DJI” process in join hands in seeking a third path, which would not which South Korea’s Kim Dae-jung (DJ) and North assume the primacy of either Korea? Since such a de- Korea’s Kim Jong-il (JI) try to take initiative in man- velopment would mean an intimate dialogue between aging the Korean affairs? These queries pose truly enor- Pyongyang and Seoul, probably with reduced sensi- mous challenges, as there exist no ready made answers. tivity to the international environment, what kind of By combining the peninsular and regional level exami- responses would it evoke from the surrounding pow- nations with special emphasis on the role of the United ers, especially the United States? Difficult as it may States, I hope to find an analytical template that would be to fathom the depth of this complex query, it is none- help synthesize some tentative solutions. theless incumbent upon students of Korean affairs to probe the possibility of unification the Korean way. The Shrimps Have Spoken For starters, we need to investigate the correlation be- An often-used Korean proverb to describe the Korean tween the North-South summitry and the attitudes of situation is that “when whales fight, shrimps have their the two Koreas toward integration, if not unification. backs torn.” After World War II ended, the Korean Are they seeking a genuine détente? Or are they—North Peninsula had its back torn literally, with a permanent Korea in particular—staging a diplomatic show in or- scar running across the middle. Though the separated der to prolong the status quo? If the former is the case, halves have since survived, the 1945 division by the are they prepared to bear the costs the rapprochement United States and the former Soviet Union, both giant will incur along with the domestic and international whales, was especially tragic because it was not an repercussions it will generate? accidental injury as implied in the metaphor. Other than Korea, there were two other shrimps that, due to his- North Korea: Going Forward by Going Backward torical and geostrategic reasons, had to endure a similar fate. Of them, Vietnam became unified in 1975 by In the aftermath of Kim Dae-jung’s visit to Pyongyang Hanoi’s “force of liberation” as America’s interest in last year, one can conjure several scenarios about North Southeast Asia began to wane. A decade and half later, Korea with respect to its current and future political Germany became unified through a process of absorp- economic situation as well as the intentions of its lead- tion by the richer and more powerful West. More than ership regarding national unification. First and fore-

2. It can be presumed that, if a choice can be made, the Bush Administration would prefer a unified Korea in which liberal democracy and a market economy would prevail. Such a posture is consistent with America’s almost missionary zeal to spread democratic ideals. Even toward China, a potential challenger to American hegemony, Secretary of State Colin Powell openly broached the subject of democratic consolidation as a precondition for China to acquire its rightful place in the international community. It is important to note that he made that statement in a press conference given in Tokyo on 23 July just prior to his scheduled trip to Beijing on 28 July 2001 (The Chosun Ilbo, 25 July 2001).

10 THE KOREA ECONOMIC INSTITUTE OF AMERICA most, Pyongyang may be seen heading in the direction He could presumably believe—there is no reason not of China post-1979 when Deng Xiaoping injected to—that the North is superior to the South in its ideo- strong doses of liberalizing reforms to the rigid, cen- logical control and political organization of the people. trally planned economy. Second, North Korea may Hence he might attempt to utilize South Korea’s eco- hypothetically become Gorbachev’s Soviet Union af- nomic resources as a tool to bail out the North Korean ter 1985 when a wholesale program of perestroika and system. And, if the process becomes routinized, it might glasnost was launched. Third, it is possible to conjec- eventually enable him to achieve his vision of unifica- ture that a totally new entity might emerge with the tion in which the southern half becomes part of his label of Kim Jong-il’s North Korea since 2000. domain. Will such a model work, or is it wishful thinking? For the time being, it should not matter either way, Despite the plausibility of North Korea’s adopting the as the other five regional powers—South Korea in par- Chinese model of modernization, it is difficult to tell ticular—are preoccupied with the avoidance of another whether Pyongyang’s leaders would be willing to go armed conflict on the Peninsula. As long as Kim Jong- as far as the Chinese have. Why? The greatest inhibi- il pushes this line of thinking, he will go along with a tor is North Korea’s lack of size and diversity that measured rapprochement with South Korea and West- would allow different pockets of economic growth and ern capitalist societies. Seoul will gladly continue its opening toward the outside world without jeopardiz- policy of propping up the Pyongyang regime with vari- ing the very tight social control from above. Having a ous forms of assistance. South Korea will also encour- homogenous and closed society, the North Korean age the four major powers to follow its lead. regime will find it impractical to contain the demon- stration effect of Chinese style modernization. More- Can Kim Jong-il draw resources from his neighbors over, North Korea has little experience with economic indefinitely? He may be able to gull Seoul for quite reform, if any. If Kim Jong-il’s “new thinking” and some time by exploiting the latter’s fear of war and trip to Shanghai’s Pudong industrial zone earlier this aversion to an absorptive unification. But what about year are to be the harbinger of what he intends to do, the United States, Japan, and other aid donors? Whereas he may have just begun what Deng Xiaoping did more the South Koreans may remain amenable to paying an than two decades ago. “insurance premium” against the potential hazard of war and cost of absorption, will they continue to pro- To dramatize why the North Korean leadership would vide support, which could be seen as money extorted be reluctant to push the Chinese model of liberaliza- by a rogue state? More importantly, how long can Kim tion to the fullest extent, just imagine if China and Jong-il maintain the system of one-man rule? As Taiwan’s situations were reversed. If mainland China living standards improve, will the North Korean possessed Taiwan’s prosperity and democracy while public remain grateful to their absolute ruler for pro- Taiwan were undergoing a market reform under com- curing external assistance, or will they grow munist dictatorship, how long would Taipei be able to emboldened to demand political reforms befitting the last before being swallowed by Beijing? Should the rise in prosperity? North Koreans perceive limitations in duplicating the Chinese experience, they would find the Gorbachevian Nobody can foretell the life expectancy of the Kim reform and opening even less palatable. Gorbachev Jong-il model, which constitutes a unique combina- might have launched his policies in order to transform tion of patriarchic dictatorship and externally supported the former Soviet Union into a normal state with the economy. As time goes by, however, the model may economic status commensurate with its military might. need to be recalibrated in response to the pressures Once the floodgates were opened, however, the Soviet from within and without. Domestically, the rising de- regime could not overcome its own internal contradic- mands for liberalizing reforms and, externally, the cu- tions. The entire process of disintegration took barely mulating fatigue on the part of aid providers could com- six years from the time Gorbachev rose to power in 1985. bine to push the regime to change. Without adjustments, the model may deform and produce catastrophic re- Consequently, Kim Jong-il could be thinking of a dif- sults, including a popular revolt. Not being a fool, Kim ferent model—one that would pose minimal danger to Jong-il should be concerned about such a possibility. his regime while pulling the economy out of bankruptcy. For now, therefore, the best option he can choose is

SECURITY DYNAMICS 11 somehow to slow down or stop the clock ticking in this China and Russia cannot stay free from market reform direction. If he can turn it back, it will be even more and liberalization. About the possible direction of desirable. By earning time, Kim Jong-il can prepare Pyongyang’s transformation, I would cautiously bet that the regime and himself for adaptation to the inevitable it is likely to follow the arrow in Table 1. The vertical change rather than face an abrupt break from the past. portion of the arrow—economic growth—will be pur- Kim Jong-il’s recent attempts to revive relations with sued first, while the horizontal portion—political Pyongyang’s traditional allies—China and Russia— change—would take a much longer time. When that are the calculated steps for such adaptation. Especially, 90 degree turn is made, North Korea will most prob- his month-long train trip to Russia in July–August 2001 ably have established a “development dictatorship” must be considered a creative move taken to achieve similar to Park Chung-hee’s South Korea. multiple purposes. It is by no means a romantic throw- back to the past, but a shrewd move to demonstrate to Why do I think that this would be the most likely path? the world that Kim Jong-il is in charge of North Ko- Once can envison four possible scenarios for North rea,3 that he can win concessions from Russia in com- Korea’s political-economic change: disintegration of mercial and weapons-related deals, and can become a the regime and society; regime change and the rise of a catalyst in rebuilding the Moscow-Beijing-Pyongyang development dictatorship; liberalizing reform without Triangle.4 Kim would try to use the reinforced triangle regiome change; and continuation of the status quo. Of as a launching pad for his ultimate coup de grace: the these, from North Korea’s perspective the first is not normalization of relations with Washington and Japan. an option to take but something to avoid. Among the To be noted is that the Kim-Putin joint declaration of 4 remaining three scenarios, Pyongyang’s leadership August 2001 mentioned the need for the withdrawal of would prefer the status quo as the best possible alter- American forces from Korea, which clearly shows that native and would do everything in their power to pro- Pyongyang would not give up this “ace in the hole” in long it. But they should also realize that it would not its talks with Washington.5 be viable in the long term. In order to alleviate the problem of famine and increase industrial output, they would Eventually, however, North Korea and Kim Jong-il— have to adopt some measures of economic reform. So, or his successors—will not be able to evade the force they would try to maintain the status quo while reform- of systemic change sweeping the entire globe: even ing their economic system—and by extension, the so-

3. His trip was not without incident, however. Apparently for security reasons, Kim Jong-il did not get off the train to meet the hosts at some stops, which could have scored some points with the media. And photos were released to the press showing a broken window—surely not one on Kim Jong-il’s bullet and bombproof car—and what looked like bullet holes on the side of another car. It was also reported that rocks had been thrown at his train and that the train had to make an emergency stop to avoid hitting a cement block placed on the tracks. (Chosun Ilbo, 3 August 2001, quoting Komsomolskaya Pravda and using the photo from Japan’s Jiji Press; Chosun Ilbo, 10 August 2001; KBS-TV Seoul, 10 August).

4. When Jiang Zemin visited Pyongyang in September 2001, we were able to see how Kim Jong-il handles the game of playing China off against Russia, while at the same time completing the triangular setup.

5. That Kim Jong-il was able to place the issue of U.S. forces in the joint declaration has put Seoul in a difficult position. Since last year’s inter-Korean summitry, Kim Dae-jung has repeatedly mentioned in public speeches that Kim Jong-il understood the protec- tive role of the American troops against potential threats from the three regional powers. DJ’s revelation has helped dampen the attacks in the South against his extremely generous attitude toward the North. Now that Kim Jong-il is apparently back to square one on this issue, Kim Dae-jung will face an uphill battle in domestic politics. Did Kim Jong-il “abandon” Kim Dae-jung? Or did DJ misinterpret JI’s signals last year? I believe the truth is neither. Being a realist, Kim Jong-il most probably sees the utility of having the American troops as a foreign legion, which serves two purposes. One is to deter South Korea from attacking the North, while the other is to check the territorial and other ambitions of China, Russia, and even Japan with regard to the Korean Peninsula. Because he is schooled in Realpolitik, he should also understand that the U.S. troops are an issue over which he has the upper hand against Washington. The United States has been pushing Kim Jong-il into a corner with the issues of nuclear weapons development and long-range missiles. With the issue of foreign troops, however, Kim can return the favor. Kim would thus vacillate between the two positions of recognizing the utility of the U.S. troops and denouncing their presence.

12 THE KOREA ECONOMIC INSTITUTE OF AMERICA cial structure—at a careful and glacial pace. As they In particular, the opposition Grand National Party sus- add the elements of the third scenario (measured re- pects that the ruling Millennium Democratic Party is form) to the fourth one (status quo), I would argue that trying to extend its hold on power with the help of Kim over time pressures will mount for a move to the sec- Jong-il. Its reasoning is that the government would use ond scenario of development dictatorship.6 Barring the a dramatic breakthrough in inter-Korean relations as a possibility of liberating the southern half of the Penin- lever in renewing its lease on political life. According sula and building a socialist utopia that neither the to the opposition party, the ongoing tax audits of the former Soviet Union nor Mao’s China could accom- press are an attempt to “tame” the press and silence plish, this might be the most sensible strategy for North criticisms against DJ’s “give-only attitude toward Korea if it were to remain a viable entity. With a de- Pyongyang.” The opposition also argues that, with an velopmental dictatorship, North Korea would be as- “assault” on the freedom of the press, the government sured of a symbiotic relationship with South Korea and hopes to dampen the “noise” in the public forums that the four surrounding powers. indiscriminate aid to North Korea—most of it without legislative approval—has bled the South Korean South Korea: Domestic Turmoil and the Politics of economy. Regardless of the substantive merit of these Unification criticisms, it is significant to note that a sizable portion of the public appears dissatisfied with the way DJ Unlike the northern half, South Korea is firmly set on has been managing South Korea’s political economy a course of democratic consolidation and capitalistic and seems to have found a scapegoat in his North Ko- market reform. Even though these are irreversible rea policy.7 trends, they are currently in danger of being hamstrung by South Korea’s domestic turmoil. At the risk of over- As Kim Dae-jung has less than a third of his five-year simplifying a rather complex picture, the origin of the term left, one cannot but wonder about the efficacy of turmoil can arguably be traced to the way Kim Dae- a lame duck president. More seriously, there is doubt jung has been treating North Korea and its leader, Kim about whether his successor would be willing to in- Jong-il. Faced with the severe economic downturn herit DJ’s “Sunshine Policy” designed to support, but caused mostly by the government’s ineptitude in han- not necessarily to “decloak” (as meant in Aesop’s dling the structural reforms and the uncertainty about fable), North Korea. The single-term presidency tends who would succeed DJ as the next president, many to prompt the new president to seek maximum differ- South Koreans have begun to criticize the government entiation from his predecessor, regardless of whether for playing the North Korea card in domestic politics. the two are from the same political party.

Table 1

Political System Liberal Democracy Development Dictatorship? Cultist Dictatorship

Economy Large ROK

Small DPRK

6. For a detailed discussion of the various scenarios, see Park, Tong Whan (ed). The U.S. and the Two Koreas: A New Triangle. Boulder: Lynne Rienner, 1998.

7. Public opinion polls taken in South Korea during the last six months have shown that DJ’s job approval rating as president remains quite low and that his North Korea policy does not enjoy a high level of popular support.

SECURITY DYNAMICS 13 Perhaps this was one of the reasons why Kim Dae- reference to arms control and military tension reduc- jung had so desperately sought to meet his counterpart tion. By tacitly agreeing to keep the current military in the North. From DJ’s standpoint, the meeting of the balance, the two sides reassured each other of coexist- two heads of state would hopefully put a permanent ence through deterrence. In a similar vein, the declara- seal on his Sunshine Policy and leave a binding effect tion contained only a superficial notation on unifica- on his successors. As such, the 15 June summit decla- tion, acknowledging the existence of similarities in the ration suggests that the two sides seemed to give higher forms of unification each side preferred. significance to the symbolism of the meeting itself than the contents of the agreement. In fact, the declaration Paradoxically, the 15 June summit declaration may touched upon only a small number of bilateral issues accelerate the process of integration, despite, or due contained in the ten-year-old Basic Agreement. to, its failure to include an action agenda for unification. By sidestepping the question of formal merger Kim Dae-jung would view the summitry, especially and treating it as a distant target—20 to 30 years into when completed with Kim Jong-il’s return visit to the future—the two Koreas can feel less encumbered Seoul, as the source of mandate for him to stay the in stepping up their interactions. With reduction in the course. In the remainder of his term as president, he threat of absorption or military takeover, the North and will rush to build some visible landmarks in inter- South Koreans may be able to reach a state of de facto Korean relations. But will the next administration con- unification in which they can enjoy both peace and tinue a similar policy of engagement? Should the rul- cooperation, much different from the peace through ing New Millennium Democratic Party retain the presi- confrontation of the past. dency in 2002, most likely it will not scrap the basic ingredients of the Sunshine Policy. In the case of an What Do the United States and the Other Whales opposition victory, however, changes would definitely Want? be forthcoming. After five years of nonstop denuncia- tion, the opposition Grand National Party would have The Korean Peninsula being what it is, will the four no choice but to distance itself from the Kim Dae- surrounding powers leave the two Koreas alone in their jungian way of engaging North Korea. pursuit of peaceful coexistence and mutual cooperation? In principle, they should, especially because their Whoever becomes the next president of South Korea, top policy priority is the maintenance of peace and sta- however, the new government would not, for two rea- bility in Northeast Asia, and not necessarily Korea’s sons, be able to make a 180 degree turn to isolate and unification. In reality, however, there could emerge fric- punish North Korea. One is that a rather broad nations between the inter-Korean process of rapproche- tional consensus already exists among South Koreans ment and the regional order each major power wishes that they should assist their northern brothers in the to see established. Of particular concern to the sur- struggle for survival. The summitry and ensuing con- rounding powers could be the prospect of the Korean tacts must have further solidified the grounds for people’s attempting to determine their own fate, the humanitarian support. The other is that South Korea result of which may not necessarily serve the vested has few alternatives to engagement. Punitive sanctions interests of the big powers. are unthinkable, because Seoul does not have the military preponderance, not even superiority, over Among the four major powers, the United States is in Pyongyang. The only alternative imaginable is, hence, a position to wield the strongest influence over the the withdrawal or reduction of assistance given to the Korean Peninsula. It remains the blood ally of South North. Inasmuch as the aid is considered a form of a Korea while it has become a “savior” for post Cold premium payment for insurance against war, it, too, War North Korea. Who could have imagined in 1945 cannot be reduced drastically. when World War II ended and 1953 when the Korean War halted that Washington one day would play god- So it is safe to predict that the two Koreas will con- father to both Seoul and Pyongyang? This sea change tinue to muddle through with ups and downs in bilat- was, of course, the product of a global systemic trans- eral contacts and exchanges. Even the summit decla- formation from which a small power like Korea could ration affirmed such policy stances by avoiding any not escape. Using the same logic, one can suppose that

14 THE KOREA ECONOMIC INSTITUTE OF AMERICA another tectonic shift in the Northeast Asian interna- leading groups as the Council on Foreign Relations and tional system may force the United States to alter its the Asia Foundation that have produced reports on two-Koreas policy. This is why the United States has America’s Korea policy.9 Although they counsel the shown an allergic response to the possible emergence continued engagement of North Korea as the most pru- of a regional hegemon that may challenge its unipolar dent course of action, it is important to note that, for dominance. One look at the heavy handed way in which now, the hawks appear to be having their day.10 Washington handled the EP-3P surveillance plane incident reveals America’s apprehension over China.8 Faced with America’s hard line policy, both Pyongyang and Seoul are struggling to find the right formula for Combine this regional outlook with President George their respective U.S. policies. The task seems some- W. Bush’s determination to launch a missile defense what easier for South Korea’s decision makers, as they (MD) program, and it becomes evident that the United know that the United States cannot give up its only States will not be eager to change the status quo on the military foothold in the continental East Asia. Being a Korean Peninsula. Put bluntly, it does not hurt non-regional power, the United States needs its forces Washington’s MD policy for Pyongyang to remain a in Korea as a clear manifestation that it is a player in rogue state. Even without Pyongyang’s long-range the Asian theater. Thus, Seoul will sustain its efforts to missiles, the Bush Administration must have gone support Pyongyang, although it now can leverage its ahead with the MD program. But why not make the assistance with America’s reservations. In other words, best use of the North Korean missiles as a contribut- South Korea can modify or even dictate the terms of ing factor? In fact, Bush was so preoccupied with mis- the support using the “U.S. conditionality.” sile defense that he might have inadvertently mistreated Kim Dae-jung when he visited the White House on 7 North Korea’s answer to Bush’s hard line approach March 2001. In a manner bordering on diplomatic dis- has so far been rejection and brinkmanship. The case courtesy, Bush apparently conveyed to DJ his displea- in point is Pyongyang’s irritation with the “conditions” sure with the latter’s earlier agreement with Russian implied in Washington’s decision to reopen talks with President Putin that the 1972 Anti-Ballistic Missile Pyongyang in early June. Even though Secretary Powell Treaty was an essential cornerstone of international insists that the United States is willing to talk with North security. Korea without any preconditions, clearly he does not mean the United States will commit itself to the kind Adding fuel to Bush’s missile defense program is the of unconditional engagement being pursued by South rise of conservatism in America. Partly a backlash to Korea. Specifically, the United States wants to discuss the Clinton-Gore era liberalism, the “America first- the full safeguard inspections of Pyongyang’s nuclear ism” is spreading at a fast pace, especially among the weapons facilities, the verification of long-range mis- right wing members in Congress. There are voices of sile capabilities, and conventional arms control. moderation, especially from such prestigious opinion Apparently alarmed, Pyongyang canceled the Foreign

8. It is worth noting that the secretaries of State and Defense seem to be taking a more realistic approach to Beijing. While attending the U.S.-Australia security consultative meeting, Powell and Rumsfeld made it clear that they would not characterize China as a “strategic competitor,” but rather take a wait-and-see attitude. Albeit a minor rhetorical gesture, it nevertheless marks a departure from George W. Bush’s continued use of the term during the presidential campaign (JoongAng Ilbo, 31 July 2001).

9. See, for example, The Asia Foundation. America’s Role in Asia: American Views (A Report of The Asia Foundation Commis- sioned Task Force on America’s Role in Asia). San Francisco: The Asia Foundation, 2001; Council on Foreign Relations. U.S. Policy Toward North Korea: A Second Look (Report of the Council-sponsored independent task force). New York: Council on Foreign Relations, 1999. The Council also sent a short letter to President Bush in early 2001 summarizing the merits of engaging North Korea.

10. For a perceptive analysis of why the moderates in the Bush Administration cannot exercise strong influence in foreign policymaking, see Wit, Joel. “The United States, North Korea, and South Korea: Prospects for the Future,” Special Report, 28 June 2001 (www.nautilus.org).

SECURITY DYNAMICS 15 Minister’s trip to the ASEAN Regional Forum (ARF) Korean Peninsula. Even when it was not suffering from where Paik Nam-soon could have made trilateral con- domestic difficulties, Japan tended to follow tacts with his counterparts from the United States and Washington’s lead in approaching Pyongyang. The South Korea. Instead, the North Korean delegation, strategy of “following the leader” has helped Japan headed by a lower raking diplomat—ambassador to kill two birds with one stone. It spared Japan the risk the United Nations—submitted an acidly worded and cost of charting a new course in North Korea policy annual security report to the ARF in which it denounced while allowing the Japanese firms to reap the benefits America’s MD program and hard line policy as a strat- of improved economic relations with Pyongyang. For egy to obliterate North Korea, and hence claimed that the time being, Japan’s wait-and-see attitude will North Korea was justified in beefing up defense capa- remain even more pronounced. It seems that Prime bilities to protect its sovereignty and survival. The Minister Koizumi is hanging on to Bush’s coattails report also stated in no uncertain terms that the launch- while downplaying the friction with Japan’s Asian ing of missiles or nuclear testing was a matter of sov- neighbors. Being deeply involved in Korean affairs via ereignty, in which no outside power may be allowed to the Korean Peninsula Energy Development Organiza- intervene.11 tion (KEDO) and various forms of assistance to Pyongyang, Tokyo will tread cautiously in order not to Do these reactions signify a rollback in Pyongyang’s disrupt the trilateral policy coordination with Wash- ultimate goal of improving its relations with the United ington and Seoul. States? Probably not. Instead, they might suggest that Pyongyang is jockeying for position to play ball with In contrast, Beijing has embarked on an aggressive Washington’s new administration. Having taken diplomacy to engage both Koreas, almost as if it wished advantage of Clinton’s goodwill for so long, North to restore the Confucian world order. Throughout his- Korea may find it difficult to revert to a confronta- tory, China recognized the Korean Peninsula as an area tional mode. And Kim Jong-il must have learned by of vital interest. Geostrategically, Korea offers a buffer now that it could be dangerous to collide with the United between mainland China and the maritime powers to States head on. At the end of the day, therefore, he will the east. Although the Sino-Korean relationship had give George W. Bush what the United States needs: not always been amicable, China had for long main- the image of North Korea as a rogue. But he will seek tained a tributary relationship with Korea. And the a quid pro quo in the form of a rather lengthy shopping dictum of “when you lose your lips, you feel cold in list. Will Bush comply? Bush may try to turn the tables the teeth” still informs China’s Korea policy. and get something for nothing from Kim Jong-il. But the strategy may push Pyongyang closer to South There is an equally powerful motivation for China to Korea and the three regional powers—the kind of de- stay alert to the development in Korea—its potential velopment the United States can ill afford. Thus, it is implication on the relations across the Taiwan Straits. safe to predict that Bush will sooner or later adopt a Roughly put, there are three possible scenarios for the policy of “compassionate engagement” toward North future of Korea, none of which will fully satisfy Korea with emphasis on humanitarian assistance. Beijing’s interests. First is an all out war on the Penin- sula started by a desperate regime in the North. China While the United States appears to be involved in a knows that Pyongyang can in no way win such a con- tug of war with North Korea, how are the other North- frontation, in which the combined forces of South east Asian powers faring in their relations with Korea and the United States would prevail. In this sce- Pyongyang? A brief look at Japan, China, and Russia nario, China will lose more than just a buffer. Having is in order. Suffering from the twin crises of economic tightened its perimeter of defense around China, the depression and political instability, Japan appears to United States will see little restraint in building up be in no shape to take a new initiative toward the Taiwan’s military capability—an outcome Beijing can

11. Chosun Ilbo, 26 July 2001. It must be noted, however, that Pyongyang has repeated its pledge to honor the moratorium on long- range missile testing until 2003.

16 THE KOREA ECONOMIC INSTITUTE OF AMERICA hardly tolerate. The second scenario involves the dis- This could hamper the indigenous efforts by the Kore- integration of North Korea and its absorption into the ans to solve their own problems. Especially if Korean South. China should find this possibility just as unac- détente is seen to cause a major shift in the regional ceptable as the first scenario, if not more. While both configuration of power, outside forces may intervene would result in a unified Korea under American hege- to protect their spheres of influence. Should that hap- mony, the loss of North Korea without a fight would pen, how would international power politics play out be adding insult to injury. The third scenario is the con- in Northeast Asia? Overwhelmed by external pressures, tinuation of the status quo on the Korean Peninsula would the two Koreas continue as the buffers or cli- with incremental progress toward de facto unification. ents for their respective patrons? Or would there be This could be the least objectionable development to room, however small, for them to maneuver among the China, as it is not likely to generate any spillover ef- four powers looking down from their “saddle points?” fect on the Beijing-Taipei relationship. In a sense, today’s circumstances may be likened to Turning to Russia, its diminished stature has ironically that of a century ago when the major powers were try- afforded it greater room to maneuver in Northeast Asia. ing to deny each other a privileged position in dealing While America’s attention seems fixed on China, Presi- with the Korean Peninsula. But two critical differences dent Putin has been “overplaying his hand.” As in judo, exist between then and now. One is that there are now the sport in which Putin carries a black belt, a weaker two independent and ideologically different polities player can often take advantage of the slack in the stron- instead of one, making the calculus of power struggle ger opponent’s moves. Putin’s Russia can be seen as among the big powers extremely complex. The other that kind of player and has achieved some remarkable difference is that both Koreas are quite strong com- results. Not only has Moscow been able to renew its pared to the Chosun Dynasty. Not only does each Ko- treaty relationship with Beijing, but it has also been rea possess the capability to inflict unbearable dam- quite successful in forging friendly ties with both age on potential aggressors, but the South boasts an Pyongyang and Seoul. economy ranking in the world’s top fifteen. These strengths held by the two Koreas should constrain the A full restoration of the Cold War-era northern triangle surrounding powers from acting unilaterally to increase linking Moscow with Beijing and Pyongyang could be their influence. It would be simply impossible for one a pipe dream. By attacking Bush’s hard line policy as power to dominate the Korean Peninsula as imperial a neo-containment strategy, however, Putin may suc- Japan did in 1910. ceed in setting up a common front with China against the United States while using North Korea as a “point Hence, the current regional situation may be offering man.” In addition, another triangle connecting Mos- the occupants of the Korean Peninsula an opportunity cow, Pyongyang, and Seoul is being formed and could to attempt something that they could not dream of in help Russia rebuild its sphere of influence in the re- the early 1900s. It is to Koreanize the Korean prob- gion. The bottom line is that Putin will use the status lem. Koreanization means neither a neo-isolationistic quo to elevate Russia’s international stature. return to a Hermit Kingdom nor a wanton neglect of the international environment. On the contrary, it sig- So, it is clear that for the time being the United States nifies a proactive utilization of regional politics for the and the other surrounding powers will try to live with benefit of the two Koreas. Between the two major di- the status quo on the Korean Peninsula. Put differently, mensions that affect the Korean situation—peninsular they may not be prepared to confront the uncertainties to and regional—the Koreas may now be able to shift arise from a major shift in the balance of power, regard- more weight to the former than the latter. The two less of its nature. Is this good news or bad news to the Koreas can restore their status as primary players in two Koreas if they are to pursue bilateral reconciliation? the handling of Korean affairs. It will surely take con- certed efforts by the Koreans to demote the surround- Toward Koreanizing the Korean Problem ing powers to the position of “interested parties.” For too long, the big powers have managed the Korean situ- Korea’s neighbors are carefully watching the Korean ation as if they were the puppeteers. Now that they situation, with little intention to alter the status quo. seem hesitant to make a first move that might disrupt

SECURITY DYNAMICS 17 the status quo, the two Koreas can start the other powers friendly to the United States to assist in Koreanization drive with the diminished fear of nega- solving the Korean problem. tive sanctions from their neighbors. • In the international community, demonstrate that the Specifically, what are the steps the two Koreas might two Koreas can join hands and work together. In sports, take to Koreanize the Korean problem? A sample list arts, literature, scholarly activities, and other non- may include the following. political fields, cooperate in the form of joint sports teams, exhibitions, and conferences. • Make progress on Korean détente. As economic cooperation progresses, do not hesitate to initiate mili- Doing all these provides no guarantee that Koreans tary tension reduction. But go slowly in visits across will be able to Koreanize the Korean problem in the the border and other people-to-people contacts lest near future. As the Koreanization process continues, Pyongyang feel paranoid about the potential for a Tro- however, all six powers in Northeast Asia will learn jan horse effect. the new modus operandi and make necessary adapta- tions to maintain peace and stability in the region. • Cooperate in dealing with the three regional powers. Gradually, the two Koreas will be able to swing the Toward Japan, join forces to combat its distortion of center of gravity from the regional and international colonial history and demand a fair share of support for dimensions to that of the Peninsula. Equally slowly, North Korea. Both Pyongyang and Seoul can be some- the four surrounding powers will get socialized in treat- what aggressive toward Tokyo, as Japan’s involvement ing the two Koreas as actors rather than reactors. And on the Peninsula is already too deep. Toward China, that will eventually help pave the way toward unifica- while promoting triangular economic cooperation, tion the Korean way. occasionally show a gesture of deference to its superordinate position as in the old days of a tributary relation. The two Koreas need to approach China with Dr. Park is a professor of political science at North- caution, as it is in a state of transition, both politically western University and economically. With Russia, establish some pilot projects of triangular cooperation—e.g., Siberian natural gas exploration—and work toward larger plans that may include the linking of the Trans-Siberian Railway with the Trans-Korean Railway system.

• Vis-à-vis the United States, skillfully play the game of trilateral diplomacy. Pyongyang is to maintain the level of tension just sufficient to help Bush justify his missile defense program. Simultaneously, the two Koreas need to reach a tacit agreement about how they would approach the issue of American forces stationed in Korea. Seoul is to signal Washington that it would welcome the continued presence of U.S. troops even after unification. On the other hand, Pyongyang will find it profitable to use the issue as a card in dealing with Washington. Its optimal strategy would be to hold onto it until Pyongyang’s security and economic needs are fulfilled. Whenever appropriate, the two Koreas are to treat the United States as a benevolent guardian while quietly portraying the other three big powers as potential villains with a design over the Peninsula. Fi- nally, leave the door open for the European Union and

18 THE KOREA ECONOMIC INSTITUTE OF AMERICA ESTABLISHING A SECURITY MECHANISM ON THE KOREAN PENINSULA by Xia Liping1

Introduction smaller than in the bipolar East-West framework in Europe. Thus, the turbulence surrounding the collapse Since the inter-Korean summit meeting held in of the USSR had a smaller impact on Northeast Asia Pyongyang in June 2000, the process of reducing ten- than on Europe. A strategic framework of five powers, sion on the Korean Peninsula has made significant comprising China, the United States, Russia, Japan, progress, but many uncertainties remain. In recent and eventually a reunited Korea, is gradually taking years, relationships among the major powers in North- shape. Among the powers, there are some triangles, east Asia have been undergoing adjustment. The United including China-United States-Russia and China- States intends to lead the establishment of a security United States-Japan, which are playing a regional mechanism in the Asia-Pacific region based on its security role. military alliances. This is contrary to the main trend of peaceful relations in the world since the end of the Cold A strategic balance in Northeast Asia should be estab- War. National Missile Defense (NMD) and Theater lished and maintained. During the post-Cold War era, Missile Defense (TMD) will complicate the major a balance in United States-China-Japan triangular re- powers’ relationships and may cause a new arms race lations is one of the most important factors in the in East Asia. Some countries (or regions) have been maintenance of stability and peace in the region. No developing their armaments too rapidly. In the long run, one of the three countries should try to control one or cooperative security mechanisms in Northeast Asia both of the others. The three should increase their se- may take shape at multiple levels (including subregional curity dialogue and exchanges, especially between and bilateral levels), in multiple forms (official and China and the United States and between China and unofficial), and in multiple functions. Japan, so as to establish cooperative and mutually beneficial “win-win-win” relations among them. Main Characteristics of the Current Security Situ- ation in Northeast Asia However, even if Northeast Asia is becoming multi- polar, the United States will not be matched in power Multipolarity by others until at least 2015. On the other hand, even if the United States succeeds in maintaining itself as The regional strategic framework of Northeast Asia is the leader in Northeast Asia over the long run, the continuing to develop towards multipolarity. Northeast multipolarization trend in the region will continue. Asia was the region of the world in which this trend first arose. In the early 1970s, the strategic triangle of Evolution of Relationships China-United States-USSR emerged. From the late 1980s, with the improvement of the United States- Relationships among the major powers are evolving. USSR relationship and the emergence of Japan as a Since the end of the Cold War, the major powers have major power, the strategic triangle of China-United been adjusting their mutual relationships so as to meet States-USSR was replaced by the strategic quadrilat- the needs of new international situations and the adop- eral of China-United States-USSR-Japan. In this stration of new strategies. For example, in recent years tegic framework, the role of the USSR was much China has made substantial progress in establishing

1. This article is a revised version of a paper presented at the Nautilus Institute’s Fudan University Conference in March 2001 and at KEI’s Shanghai Academy of Social Science Conference on 20 May.

SECURITY DYNAMICS 19 partnerships with other countries. It has established a together, embody the Guidelines. These provide for: constructive strategic partnership with Russia, a com- 1) Japanese rear-area support for the United States prehensive partnership with France and Britain, and a during regional crises, including search and rescue friendly cooperative partnership with Japan, working operations; 2) logistics support, including the use of for peace and development. The leaders of China and Japanese hospitals, ports, and airfields, and the provi- former U.S. President Clinton declared that both coun- sion of fuel and equipment; and 3) the use of Japanese tries would devote themselves to establishing a con- ships to evacuate Japanese citizens from conflict ar- structive strategic partnership in the 21st century. At eas.2 the same time, China has also established partnerships with many third world countries, including its neigh- The United States is concerned that China may become bors. These partnerships are different from the mili- its future potential adversary, and is also preparing for tary alliances and strategic partnerships of the Cold possible military intervention in the Taiwan Strait. The War period—the latter were usually aimed militarily new U.S.-Japan Defense Cooperation Guidelines ex- at a third country. Current strategic partnerships are panded the scope of cooperation, providing for “coop- not aimed at a third party and are not military alli- eration in situations in areas surrounding Japan that ances. Their aim is to realize mutual friendship, to will have an important influence on Japan’s peace and strengthen cooperation, and to preclude confrontation. security.”3 Thus, the area for cooperation is not geo- They should be based on equality and mutual respect. graphic but situational. Whether the region covered At the same time, they are not exclusive. includes Taiwan was initially deliberately left ambiguous, but it has been made clearer since the Bush U.S. Policy Administration came to power. Deputy Secretary of State Richard Armitage said that, if the U.S.-Japan The United States intends to lead the establishment of Alliance is very close, it can limit the disputes between a security mechanism in the Asia-Pacific region with China and Taiwan.4 itself as the leader, based on its military alliances. This is contrary to the main trend of peaceful relations in The strengthening of the U.S.-Japan military alliance the world since the end of the Cold War. At present, in will spur separatists on Taiwan to go further towards order to strengthen its leadership in the world and to Taiwan independence, which will increase the possi- maintain its position as the only superpower, the United bility of armed conflict across the Taiwan Strait. States wants to continue to play the leading role in the Because the Taiwan issue is an internal issue for China, Asia-Pacific region. It has used its forward-deployed I will not discuss it in detail in this paper. military forces and defense alliances in East Asia and the Pacific as the main pillars to realize this objective. South Korea’s Sunshine Policy and the Bush Ad- The United States maintains about 100,000 military ministration personnel in East Asia and is strengthening their mobile capabilities and precision-guided weapon The process of reducing tension on the Korean Penin- capabilities. sula has begun, but there are still many uncertainties. The situation on the Korean Peninsula has been inch- At the same time, the United States is enhancing its ing towards political resolution. In June 2000, the military alliances with Japan and South Korea. The North-South summit meeting was an important break- United States and Japan issued new U.S.-Japan De- through in the relationship between the two sides. In fense Cooperation Guidelines in September 1997. In order to resolve serious internal economic problems, May 1999, the Japanese Diet passed three bills which, North Korean leader Kim Jong-il will pursue a policy

2. Blackwill, Robert D., and Paul Dibb (eds.). 2000. America’s Asian Alliances. Cambridge: MIT Press: 38.

3. Ibid., 39.

4. Kyodo News Agency, 23 January 2001, Washington, DC.

20 THE KOREA ECONOMIC INSTITUTE OF AMERICA of reform and openness to some extent. However, main- previous Administration, which favored a “step by step tenance of North Korea’s internal stability will still be approach,” the Bush Administration plans to take a his top priority. Thus, he will be quite cautious when “comprehensive approach” to address the many ele- he introduces any policy of reform or openness. ments that comprise Korean Peninsula and regional security policy and to try to make progress simulta- On the other hand, because the growth of South Korea’s neously on as many issues as possible. economy has slowed, and the level of unemployment has risen, the Sunshine Policy of South Korea’s leader, At the same time, the Administration has declared that Kim Dae-jung, has been criticized by many South it will endeavor to develop and deploy the NMD and Koreans who believe that he has been moving too rap- TMD systems. Because the United States has used idly and has given too much to North Korea. This North Korea as one of its reasons to deploy NMD and reaction has made it very difficult for President Kim to TMD, the Administration may not have much incen- take any significant step towards reunification in the tive to make a breakthrough in its talks on missile near future in the absence of positive signals from North issues with North Korea in the near future. Korea. Until now, North Korea has held talks with the new When the new U.S. Administration assumed office, it Administration only at a low diplomatic level and has stopped the process of negotiation on missile issues not resumed the high-level dialogue with Seoul with North Korea and began a review of U.S. policy (suspended by Pyongyang since March 2001). The towards North Korea. On 6 June 2001, President Bush DPRK has also not set a date for Kim Jong-il’s visit to announced completion of the Administration’s review. the South. The review confirmed what President Bush had told South Korean President Kim three months earlier— Because North Korea has placed priority on economic namely, that Washington will continue to support the development and needs economic aid from both South Sunshine Policy, the Agreed Framework, and the Tri- Korea and the United States, it will be more willing lateral Coordination and Oversight Group (TCOG) over the long run to sign a formal peace treaty. Some process. It also signaled Washington’s willingness to American scholars have even said: “There is a better engage Pyongyang in dialogue on a broad range of is- than even chance that there will be a South-North peace sues, including missiles. The Administration stressed treaty before 2005 (and most likely before 2003).”7 reciprocity and verification in any future negotiations.5 The main difference in Bush’s approach was the U.S. However, if the Bush Administration maintains its cur- desire for a more “comprehensive” dialogue. As As- rent attitude and insists on a “comprehensive approach” sistant Secretary of State Kelly said during his House towards North Korea, Pyongyang may harden its testimony, “the President has directed us to undertake position. For example, the DPRK vowed to take coun- serious discussions with North Korea on a broad termeasures for self-defense in response to the U.S. agenda, including improved implementation of the NMD test in July 2001 aimed at intercepting long-range Agreed Framework, a verifiable end to the DPRK’s missiles launched against the United States, because it missile production and export programs, and a less thought the test was a “deliberate provocation.”8 threatening conventional military posture.”6 Unlike the

5. Cossa, Ralph A., 2001. “Bush Asia Policy Slowly Taking Shape” in Comparative Connections. Honolulu: Pacific Forum CSIS E-journal on East Asian bilateral relations: Vol. 3, No. 2, July.

6. Ibid.

7. Cossa, Ralph A., and Alan Oxley. 2000. “The US-Korea Alliance,” Chapter 4 of America’s Asian Alliances. Cambridge: MIT Press: 70.

8. North Korea Vows Countermeasures in Reply to U.S. Test, Reuters 15 July 2001, Seoul

SECURITY DYNAMICS 21 Broader Implications of NMD and TMD parts, or technologies to its allies and Taiwan would be a very serious proliferation of weapons and missile NMD and TMD will complicate the major powers’ technologies. Under such circumstances, other coun- relationships and may cause a new arms race in East tries would feel it unnecessary for them to comply with Asia. The United States is now placing great impor- the Missile Technology Control Regime (MTCR). tance on developing NMD and TMD. Since he came to office, President Bush has vowed to deploy NMD Furthermore, such transfers to Taiwan would give the and said that the United States will never balk at abol- wrong signal to the separatists on Taiwan. They would ishing the ABM Treaty in order to develop missile de- believe that, if they declared independence and the fense. Defense Secretary Rumsfeld has been an active mainland responded militarily, the TMD of the United advocate of NMD and TMD. Since assuming office, States, Japan and Taiwan itself could protect them from he has spared no effort to push forward missile de- missile attacks from the mainland. As a result, they fense systems. Russia, China, and even some Euro- would push for independence. That would intensify the pean allies of the United States have opposed the plan level of military confrontation and increase the possi- to deploy NMD. They believe that deployment of NMD bility of armed conflict between the two sides across and abolition of the ABM Treaty would disrupt the the Taiwan Strait. strategic balance in the world and spur an arms race extending it even to outer space. Thus, U.S. deploy- Evolution of the Concept of Security ment of NMD would seriously complicate the relationships among the major powers. China would have to The growth of economic interdependence between react strongly and take countermeasures. countries and the end of the Cold War have led more countries to accept a new security concept, but the And if the United States deploys TMD in East Asia or armaments of some countries (or regions) have been decides to deploy NMD, arms competition in the developing too rapidly. In recent years, with the rapid region will be aggravated. Some countries will feel it development of trade and economic exchanges in the necessary to develop similar weapon systems and to region, economic interdependence among Northeast increase the number or improve the capability of their Asian countries has grown closer. This factor and the missiles and their nuclear weapons in order to offset post-Cold War international situation have induced the influence of TMD and NMD. This will lead to a China and other countries gradually to change their new arms race in East Asia. security concepts and to accept new ones. Those new security concepts include: comprehensive security; If the United States transfers the TMD system to Tai- “security is mutual”; cooperative security; confidence- wan, that would significantly enhance Taiwan’s over- building measures (CBMs); transparency; and so forth. all capabilities for offense and defense. It would enable Taiwan to directly threaten the airspace over the However, some countries, including the only remain- Taiwan Strait and China’s adjacent mainland. If the ing superpower, still have a Cold War mentality, which United States puts Taiwan under its TMD protection, has had a negative impact on Northeast Asian regional that would lead to a de facto “para-military alliance” security. between the United States and Taiwan, which would be a grave breach of the obligations the United States Furthermore, although arms transfers to East Asia undertook when it established diplomatic relations with declined during the first half of the 1990s after the end China—namely, to abrogate its mutual defense treaty of the Cold War, they increased during the second half with Taiwan. Putting Taiwan under a U.S. or U.S.- of the decade. Some countries (or regions) are devel- Japan TMD umbrella would signify a major policy oping their armed forces too rapidly. U.S. arms sales change by the United States on the Taiwan issue and to Taiwan grew, especially from 1991 to 1998, reach- definitely produce a serious negative impact on ing $20 billion, which made Taiwan the biggest arms China-U.S. relations. recipient in the world. Such sales may lead to an “action and reaction” arms race and increase the TMD technologies can also be used for ballistic mis- possibility of armed conflict in East Asia. siles. Transfer by the United States of TMD missiles,

22 THE KOREA ECONOMIC INSTITUTE OF AMERICA Possibilities and Models for Durable Cooperative ral resources cooperatively, if feasible, as in the South Security Mechanisms in Northeast Asia China Sea.

Since the end of the Cold War, multilateral mechanisms • Establishment of multilateral security mechanisms for regional and subregional security dialogue and in accordance with the theories of common security cooperation have made some progress in East Asia. and cooperative security. During the post-Cold War Security dialogue and cooperation are developing at era, with the rapid development of mutual economic multiple levels, through multiple channels, and through interdependence between countries, security is also mu- both “Track One” and “Track Two.” Track One in- tual. At present, no country can increase its sense of cludes the ASEAN Regional Forum (ARF), the security without impairing the security interests of other “ASEAN + 3,” the Four Party Talks, the Korean Pen- countries. Furthermore, many security problems—e.g., insula Energy Development Organization (KEDO), environmental pollution, the greenhouse effect, drug and others. Track Two includes the Council for Secu- trafficking, terrorism—are transnational and cannot be rity Cooperation in Asia-Pacific (CSCAP), the North- resolved through traditional military means. Thus, east Asian Cooperation Dialogue (NEACD), and oth- security common to all countries in the region should ers. Track Two mechanisms can usually create favor- be the objective of regional multilateral security able conditions for Track One mechanisms and supple- cooperation. ment them. • Gradual Progress. Establishment of multilateral The development levels of Northeast Asian countries security cooperation mechanisms in Northeast Asia differ significantly. There are developed countries, should progress step by step. newly industrialized economies, and developing countries. Cultures and values are very divergent. There • With the establishment of regional multilateral are disputes over territories and maritime interests. In security cooperation mechanisms, the role of bilateral particular, the world’s two remaining divided coun- military alliances should be reduced. Military alliances tries—China and Korea—are both in the region. Thus, are usually aimed at one actual or potential adversary, the establishment of multilateral security cooperation and seek security for only a subset of countries in the in the region should be in line with the characteristics region. In fact, they put security of some other coun- of the region and should not copy models of other tries at risk and will be unable to meet the needs of the regions or the values of Western countries. post-Cold War era.

Some basic principles for the establishment of multi- • Begin with the increase of mutual understanding and lateral security cooperation in Northeast Asia should trust among major powers. That will be a precondition be agreed, reflecting the characteristics of the region for the institution of CBMs and the effectiveness of and experiences of history and the current process: regional multilateral security cooperation mechanisms.

• Mutual respect of sovereignty and territorial integ- • Endeavor to develop economic exchanges and coop- rity, and mutual noninterference in other countries’ eration among countries on the basis of equality and internal affairs. mutual benefits. This is the basis of regional security cooperation and an important part of instituting CBMs. • Dialogue and consultation on an equal footing, and resolution of territorial and other disputes through • Arms control and disarmament should become an peaceful means. Before the final resolution of territo- important part of multilateral security cooperation rial and maritime disputes, they should be suspended, mechanisms. Because military technologies of devel- and no country concerned should take any action which oped countries greatly exceed those of developing could be regarded as provocative. Countries should countries, and because developed countries have ex- endeavor to institute CBMs so as to create favorable ported large amounts of sophisticated weapons to conditions for final resolution. They should also en- developing countries, they should assume a special deavor to create favorable conditions to exploit natu- responsibility to stop deploying and transferring such

SECURITY DYNAMICS 23 weapons to Northeast Asia, which may create regional instability.

In the future, the international community and countries concerned should endeavor to help bring about a formal peace agreement between North Korea and South Korea within the mechanism of the Four Party Talks. Both China and the United States can play a role as guarantors of the agreement. After a peace agreement is signed, the Four Party Talks can be expanded to include Japan, Russia, and even Mongolia, so as to become a subregional multilateral security cooperation mechanism in Northeast Asia.

Professor Xia is Director of the Center for Interna- tional Strategic Studies, Shanghai Institute for Inter- national Studies

24 THE KOREA ECONOMIC INSTITUTE OF AMERICA CRAFTING A PEACE MECHANISM FOR THE KOREAN PENINSULA by Liu Ming

Introduction world. Pyongyang was especially unsatisfied with the existence of two supervisory bodies—the Neutral The armistice ending the Korean War has been in place Nations Supervisory Commission (NNSC) and the for almost 50 years. The summit between North and Military Armistice Commission (MAC)—that were South Korea in 2000 created a new opportunity and suspicious about all North Korean policies. Accord- satisfied one condition for building a structure for peace ingly, the DPRK wants to shed this unfavorable frame- on the Peninsula. However, the realization of this is work. Nevertheless, it is also worried that a future peace still in the distant future. mechanism could legitimize the division, allowing U.S. forces to remain on the Peninsula indefinitely and vest- The Truce Agreement and Birth of Four Party ing the major powers with great influence over North Talks Korea.

The armistice agreement was signed on 27 July 1953 From the start, South Korea was not satisfied with the between the UN Forces Command on one side and the armistice agreement and accepted it reluctantly. But North Korean People’s Army and Chinese Volunteer over time it has increasingly come to believe that the Army on the other side. In terms of international law, armistice mechanism plays an indispensable role in this agreement was just a temporary cease-fire between maintaining stability. Seoul has usually held the view the commanders of the combatants and must be replaced that the state of separation would last for a long time by a formal document which declares a permanent end and has doubted the feasibility of negotiating a peace of hostilities and which is signed by the sovereign states treaty with Pyongyang. The most worrisome problem concerned. Unfortunately, given the Cold War, North was that South Korea did not want to see a transfor- and South Korea, the United States, the former Soviet mation from an armistice to a peace agreement which Union, and China have failed to reach such an agree- significantly affected the presence of U.S. forces on ment. Consequently, the status of “no war and no peace” the Peninsula. has been maintained. For similar reasons, before 1996 the United States had For a long time, the two Koreas and the United States no strong desire to change the armistice structure and maintained a complex attitude towards the status quo fully normalize relations with the DPRK. The second and possible transformation of the armistice agreement. Clinton Administration changed this passive policy and North Korea, while acknowledging and generally abid- began to promote the “Four Party Talks,” but the new ing by the armistice agreement before 1996, harbored Bush Administration has quickly reversed that change. deep reservations about it. In the North’s view, it is This reversal reflects predominant thinking in the this truce mechanism that keeps U.S. forces on the Pen- United States that the U.S. Government is capable of insula and prevents North Korea from realizing unifi- controlling the situation and benefitting from it, and cation. This stalemate has also prevented the North that a new mechanism could end up crippling U.S. from normalizing relations with various Western coun- strategic interests in the region (since its principal tries, including the United States, and thus from devel- provisions cannot be predicted and could generate oping cooperative economic relations with the outside instability).1

1. One Korea analyst in CIA told me in a discussion held in Shanghai last April that the United States would not encourage South Korea to resume the “Four Party Talks” in the foreseeable future, because there was no hope for crafting a peace regime. In my view, there are two main reasons for the U.S. pessimism: first, the time is not ripe for negotiations; and second, the U.S. focus would be on reduction of North Korea’s nuclear, missile, and conventional threat and on a change in its political system.

SECURITY DYNAMICS 25 The Four Party Talks were initiated by former presi- ited time remaining in his term, but the United States dents Clinton and Kim Young-sam; however, the ob- is not poised to cooperate on this policy and will not jective was not to craft a peace mechanism but rather allow him to take independent measures related to U.S. to respond to North Korea’s provocations in the Joint forces. President Kim thus appears to be isolated and Security Area (JSA) of the Demilitarized Zone (DMZ) destined to achieve no success beyond the summit. As and to the growing tensions resulting from the paraly- for North Korea, its priority is to obtain massive eco- sis of the armistice structure since 1991. A collateral nomic assistance and to improve relations with devel- result of the talks was that North and South Korea oped countries, not to deal with the intractable issue of established a channel to communicate with each other peace negotiations. Accordingly, peace talks are during the suspension of the inter-Korean dialogue. unlikely to advance in the foreseeable future, and no possible breakthrough has been identified. U.S.-South Korean overtures put North Korea in an awkward position, as it wanted to hold direct talks only On the issue of who will lead, North and South Korea’s with the United States and to craft a new military frame- positions are also far apart. South Korea has persis- work on the joint management of the DMZ between tently held that the two Koreas should negotiate a peace them. It did not want to see South Korea and China mechanism, with the United States and China playing become full players in the talks or in a future arrange- a supporting role by assuming guarantor obligations ment, and did not envision a comprehensive peace in the latter stages of peace talks and playing an over- agreement with the United States which would restrict sight role over implementation. South Korea argues its future military development or impede its unifica- that, although it was not a full signatory of the armi- tion scheme. stice agreement, it was among the 16 countries represented in the UN Command and had invited UN forces Consequently, Pyongyang adopted a delaying tactic for to join the Korean War. Furthermore, North and South nearly one year. It did eventually agree to participate Korea are the only two legitimate, sovereign, and in the talks, but on the condition of food assistance homogeneous states on the Peninsula, and the Basic from the United States and South Korea. It also sought Agreement between them signed in 1992 explicitly maximum leverage, rejecting any proposals that would provided that the two Koreas were to be the main reduce its military capability. Due to the large differ- “negotiators” in peace talks. ences between the two sides, the talks had to be ad- journed indefinitely after six rounds. North Korea claims that South Korea is not eligible to be a negotiating counterpart as it was not a signatory The Dynamics of Negotiating a Peace Treaty of the armistice agreement, and that only itself and the United States can be direct negotiating parties in mov- Before starting peace talks, all concerned should first ing from the armistice to a peace treaty. While silent resolve two major issues: (1) ensure that each party is about China’s role, North Korea apparently does not sincere about striving to overcome all obstacles; and expect China to play the same kind of role it did in (2) decide who should play the leading role. At present, negotiation of the armistice agreement and subsequently the U.S. government seems to be in no rush to restart in the MAC. Its view clearly is that North Korea and the Four Party Talks or to prepare for a peace treaty the United States were direct military counterparts in that would affect the presence and role of U.S. forces the Korean War and that China was only an auxiliary in Northeast Asia. Washington’s principal objective is of the People’s Army of North Korea. It is also in es- to continue consolidating the U.S.-South Korea mili- sence asserting that U.S. forces are still in charge of tary alliance and deterrent capabilities while signifi- South Korean defense and security, that South Korea cantly reducing North Korea’s military capability. has no authority to determine the future presence and role of U.S. forces on the Peninsula, and that therefore South Korean President Kim Dae-jung wants to work the issues unresolved by the war and the ultimate ar- toward the crafting of a peace mechanism in the lim- rangement for peace should be handled only by North

26 THE KOREA ECONOMIC INSTITUTE OF AMERICA Korea and the United States.2 As for the issues of in- the friction with South Korea that could result from ter-Korean relations (economic cooperation, reconcili- direct talks between the United States and North ation, unification, etc.), the DPRK holds that they Korea. should be dealt with without U.S. interference through consultations reflecting the intranational nature of the Nevertheless, the Four Party Talks took place at a time problem rather through signing a peace treaty, which when North and South Korea had halted all talks and would be suitable for international relations. the armistice mechanism was in jeopardy. In this sense, the talks were a makeshift effort aimed at dragging In principle, China and the United States both support North Korea to the negotiating table, soothing it, and having North and South Korea play the leading role in attempting to reopen the channel for inter-Korean peace talks, but they have some differences on specific dialogue. As the Korean Peninsula situation has im- issues. In light of its traditional security interests in proved, and North and South Korea have resumed the area, China wants to be involved in peace talks to direct talks, the imperative for holding “Four Party some degree, mediating disagreements between the two Talks” no longer exists. Therefore, South Korea is again Koreas and reserving a role in the implementation of emphasizing the importance of “two plus two talks” an agreement, but not directly engaging in the negotia- whereby the Four Party Talks would be preceded by tion process. As for the United States, it has more com- direct North-South talks. With U.S. interests focused plex interests. On the one hand, it does not want to on the DPRK’s missile development and exports, and lose its current key role in security on the Peninsula. on its conventional weapons, the course of future talks On the other hand, it may be prepared to share the will largely depend on U.S. and South Korean policies leading role with South Korea through consultations and on North Korea’s willingness to open up. and by establishing certain parameters or specific requirements regarding the pace and scope or other Prerequisites and Problems in Crafting a Peace aspects of the negotiations which are closely related to Mechanism its interests.3 Accordingly, any talks in the near future will be the subject of bargaining among the United Any future peace talks must have a solid foundation or States and North and South Korea, and it will be im- they will become a meaningless debating forum, as the possible to exclude any one of the three. China will no Four Party Talks did. This required foundation includes: doubt take a mediation role for granted. substantive progress in the inter-Korean dialogue and the level of mutual cooperation; establishment of a sus- The convening of the Four Party Talks from 1997 to tainable level of understanding and trust between the 1999 reflected a compromise between the United States two Koreas; an implementable agreement between the and South Korea. The best option for the South to United States and North Korea on the issues of missile counter the North’s proposal on U.S.-North Korea di- development and light-water reactor construction; and rect talks was to let China participate in the talks, as a start by the United States on normalizing relations North Korea was unable to reject South Korea’s par- with North Korea and assisting its economy, so as to ticipation in a multilateral venue. South Korea could create a basic level of trust between the two. characterize the talks as an expanded version of the inter-Korean dialogue. It was equally good for the The peace talks would need to entail both bilateral dis- United States, which could justifiably engage in nego- cussions and multilateral coordination, including: tiations for a future peace mechanism while avoiding

2. After the inter-Korean summit, North Korea appeared to be willing to talk directly with South Korea about the peace issue. However, Radio Pyongyang reiterated at the beginning of 2001 that the United States, not South Korea, should be the counterpart of North Korea in peace talks. See Kim Ji-ho, “North Still Wants to Negotiate With US On Peace Treaty,” The Korea Herald, 8 January 2001.

3. When President Kim decided to visit Pyongyang last year, President Clinton was concerned and asked President Kim to include issues in the summit in which the United States was interested and to consult and coordinate on preparations for the summit.

SECURITY DYNAMICS 27 • U.S.-North Korea discussions on normalization of The most crucial barrier to a peace mechanism is po- relations and U.S. forces on the Peninsula; litical and military distrust between the two sides on the Peninsula and mutually exclusive conditions. North • Inter-Korean consultation on the two countries’ Korea considers withdrawal of U.S. forces to be a pre- legal status, political and economic relations, external condition and also calls for abrogation of the U.S.-South relations, and unification; Korea Mutual Defense Treaty, suspension of joint military exercises, and forgoing the introduction of ad- • Consensus between South Korea and the United vanced weapons in South Korea. Why does North States on the timing and framework of a peace mecha- Korea impose such tough conditions? Because it thinks nism and on the future role of the United States on the they are related to its basic security needs if it reduces Peninsula; and its own military strength. But for the United States and South Korea, these conditions affect their fundamental • Negotiations among the two Koreas, the United security and strategic interests, and thus they are out States, and China, based on their respective bilateral of the question. discussions, to prepare for a package agreement ending the war and building a durable basis for peaceful Some people believe that Pyongyang raised the issue coexistence through agreements on mutual diplomatic of withdrawal of U.S. forces as a bargaining chip and recognition, the scale and nature of any foreign troop will agree to separate this issue from talks on a peace presence on the Peninsula, the mutual reduction of con- treaty once it obtains certain concessions. Yet, North ventional arms and other confidence building measures Korea’s long-term national security interests justify its by the two Koreas, establishment of a nuclear free zone views on this issue, as indicated by its tentative thoughts on the Peninsula, and arrangements for supervision and about a change in the U.S. role from security protector guarantees of the peace. of South Korea to neutral guarantor of Korean Penin- sula security. In light of its basic values and domestic It would be relatively easy to realize a peace declara- politics, the United States probably would not make tion and establishment of diplomatic relations, but such a functional shift.4 Thus, it will not be easy to rather difficult to reach agreement on reduction of con- find common ground. ventional arms and establishment of a supervisory body. Given that the United States is unlikely to withdraw On the issue of setting up a major power supervisory its troops from the Peninsula or dissolve the U.S.-South body, Pyongyang has so far not openly opposed such Korea military alliance, it would be unrealistic to ask an arrangement, but it would not accept a regime that North Korea to sharply reduce its military forces and could override its decisions or that would empower the pull back most of its troops from the DMZ. Even if United States, China, or other major countries to inter- North Korea established relatively peaceful relations fere deeply in Korean affairs. This position is evident with the United States, its leaders, particularly high- from North Korea’s attitude towards the NNSC and ranking officers, would not relax their ideological the MAC in the armistice structure. South Korea has a vigilance. In this sense, Pyongyang has very little room similarly ambivalent view. For example, on the one to maneuver. Also, given Chinese and Japanese mili- hand it believes that Chinese participation could tary development and the strategic rivalry among supervise and check North Korea’s behavior, but on Japan, China, and the United States in this area, South the other hand it fears that China would expand its Korea is unlikely to reduce its military capability just influence through the peace mechanism, thereby for the sake of a peace mechanism. annoying Japan and Russia, and possibly siding with

4. When North Korea’s second ranking leader, Marshal Cho Myung-rok, visited Washington in the summer of 2000, he asked the United States to give assurances on North Korea’s security, reflecting the North’s worries over the U.S. military role. So far there has been no positive response by the U.S. government. Indeed, former Secretary of Defense William Perry said bluntly in a seminar at Stanford University that, as North Korea is a communist regime and a moribund power, giving it such assurances would be impossible.

28 THE KOREA ECONOMIC INSTITUTE OF AMERICA North Korea again in a future military conflict. South Korea is also ambivalent about the U.S. military role, considering that the United States could abuse its power in bilateral and regional relations. Therefore, after a general peace mechanism is set up by the Four Party Talks, South Korea wants Japan and Russia to join in the process and build a six-way security mechanism in Northeast Asia in order to provide checks and balances among the major powers.

In sum, there is a long way to go before peace talks can begin. Only when overall inter-Korean relations improve, the United States relinquishes its Cold War mentality and policy of military deterrence in East Asia, and North Korea starts to reform its system and change its external behavior can a concrete peace mechanism be established

Dr. Liu is Associate Professor for Diplomacy and In- ternational Relations at the Institute of Asia-Pacific Studies, Shanghai Academy of Social Sciences

SECURITY DYNAMICS 29 THE KEDO LWR PROJECT: LOCOMOTIVE FOR PEACE AND RECONCILIATION IN KOREA by Yang Chang-seok *

Introduction The LWR Project has served as a useful channel to engage with the DPRK in the past six years. KEDO’s The Korean Peninsula Energy Development Organi- experiences with the DPRK can provide valuable zation (KEDO) was founded in March 1995 to coor- lessons for the outside world in developing humanitar- dinate cooperation among interested parties and to ian projects or in seeking improved relations with the facilitate the financing and execution of the projects DPRK. needed to implement the Agreed Framework. The Agreed Framework, signed in October 1994 between KEDO’s mission is “to contribute to the strengthening the United States and the Democratic People’s of the international nonproliferation regime while Republic of Korea (DPRK), was intended to resolve improving the prospects for lasting peace and stability the crisis on the Korean Peninsula prompted by the on the Korean Peninsula and beyond.”2 This article DPRK’s nuclear program. makes a preliminary assessment of whether KEDO has succeeded in accomplishing the purposes of ensuring The Agreement on the Supply of a Light Water Reac- nonproliferation and peace in Korea. It also examines tor (LWR) Project to the DPRK, signed in December KEDO’s role in engaging with the DPRK on its open- 1995 between KEDO and the DPRK, set out the scope ing up and other issues. of the LWR Project and the conditions under which KEDO and its contractors and subcontractors will Peace and Stability in Korea operate in the DPRK.1 The ground was broken in August 1997 to build two units of LWRs in accordance The LWR Project funded and managed by KEDO has with the Agreed Framework. The LWR Project will contributed to ensuring peace and stability in Korea enter into a new stage with the power block excava- for the past six years, which, in turn, has fostered a tion in September 2001. favorable atmosphere for reconciliation between the DPRK and the outside world. The Project has proceeded on the basis of the Supply Agreement and eight implementing protocols. Numer- Peace in Korea was threatened when North Korea ous negotiations took place to conclude these agree- announced shortly after the inaugurations of the new ments between KEDO and the DPRK. Contacts have administrations in Seoul and Washington in early 1993 been made at the construction site between DPRK that it would withdraw from the Non-Proliferation managers and KEDO’s contractors to discuss construc- Treaty.3 North Korea accused the United States and tion related technical issues. The LWR Project has thus IAEA of making unjustifiable demands for special been considered as a model case for future projects inspections of “its military facilities.” involving the DPRK and the international community.

* The views expressed in this paper are solely those of the author.

1. KEDO. 1995 Annual Report. 8.

2. Korean Peninsula Energy Development Organization Mission Statement.

3. The DPRK had joined the NPT on 12 December 1985.

30 THE KOREA ECONOMIC INSTITUTE OF AMERICA In early 1994, the situation in Korea was very tense. Engagement with the DPRK The United States was considering options for increasing U.S. forces in and around Korea to heighten readi- In the process of negotiations with North Korea to lay ness further.4 The options were being discussed on 16 the foundation for the construction of the LWRs, KEDO June in the White House Cabinet Room, where Presi- has engaged the DPRK deeply, building a bridge be- dent Clinton was sitting with Secretary of Defense tween the isolated hermit kingdom and the outside William Perry, National Security Advisor Anthony world. Lake, Secretary of State Warren Christopher, and other senior officials. A telephone call came in from former A Working Relationship Was Built President Carter, who had met with North Korean leader Kim Il-sung in Pyongyang, reporting that a The North Koreans believed that they won the politi- breakthrough had been achieved during his meeting cal chess game in Geneva with the United States by with Kim Il-sung on a way to end the crisis. High level holding on to a tough, confrontational negotiating meetings then resumed between the United States and stance. At the beginning of its negotiations with KEDO, the DPRK in Geneva, and the Agreed Framework was the DPRK tried similarly confrontational tactics, turn- concluded in October 1994. ing to brinkmanship and political blackmail in an effort to extract unilateral concessions. Over the years In accordance with the Agreed Framework, the DPRK of meetings with KEDO, however, the North Koreans froze operation of its 5-megawatt graphite moderated have learned the art of compromise. It seems that North reactor and construction of the 50-megawatt and Korea and the international community can work 200-megawatt reactors which were nearing comple- together—not amicably, but at least in a businesslike tion. In return for this immediate freeze and the manner. This has been demonstrated by the products eventual dismantling of its existing nuclear program, of KEDO-DPRK negotiations, including eight proto- the United States promised to provide two light water cols and procedures to implement these protocols. reactors with a capacity of 1,000 megawatts each and 500,000 tons of heavy fuel oil each year for North A Venue for Inter-Korean Dialogue and Reconcili- Korea until the reactors were completed. KEDO, an ation international consortium, was founded in March 1995 to assist in implementation of the Agreed Framework After inter-Korean dialogues broke down in the mid- by financing and constructing the two LWRs in the and late 1990s, South Korea was able to take advan- DPRK and by providing the DPRK with the heavy fuel tage of KEDO-DPRK meetings as a window of op- oil. portunity for direct contact with North Korea. This was true despite North Korea’s initial insistence that the Despite its on-and-off threats to discard the agreement, United States had to be its principal point of contact the DPRK has so far remained in compliance with its for the KEDO Project. The North Koreans did not even obligations under the Agreed Framework. If the North recognize South Korean delegates to early meetings in Korean nuclear program had not been frozen under the a normal sense. For example, when a KEDO delegate agreement, North Korea by now would have had the from South Korea asked a question, the head of the capacity to produce enough plutonium to manufacture North Korean delegation would direct his answer to dozens of nuclear bombs. In spite of some shortcom- the American delegate. But, as time went by, this atti- ings like the postponement of the clarification of North tude toward South Koreans changed. Experts from Korea’s past nuclear activities, including its past pro- North and South Korea have since begun to discuss duction of plutonium, the Agreed Framework has served technical issues face to face, sometimes even in the the cause of peace by averting the most immediate threat Korean language. of nuclear proliferation.

4. Oberdorfer, Donald. 1997. The Two Koreas: A Contemporary History. Reading: Addison Wesley: 323–331.

SECURITY DYNAMICS 31 At the construction site, 100 North Korean workers wire fences around the construction site in Kumho, a are now working together with about 700 South Ko- town on the northeastern coast of the DPRK. North rean workers. The DPRK authorities do not allow their Korea did not allow KEDO staff and South Korean workers to talk freely with their South Korean cowork- workers to travel in the daytime until the middle of ers, but there are some interactions, such as sharing 1998. cigarettes and getting acquainted. At the peak of the construction, about 10,000 workers from both Koreas Through the LWR Project, however, the North Korean (7,000 from the North) will be working side by side. leadership has come to realize that they could manage to minimize the impact of the LWR Project on their A Model for Four Party Talks people. Currently, a bus with “KEDO” (in Korean) markings runs through North Korean villages in the The Four Party Talks were jointly proposed by the daytime, eliciting welcoming hand waving by North presidents of the United States and South Korea in April Koreans, mostly children. Through the LWR Project, 1996. In early 1996, the DPRK proposed that the therefore, the North Korean leadership has apparently United States conclude an interim peace treaty with it come to realize that they could manage to minimize and attempted to nullify the Armistice Agreement the impact of the LWR Project on their people. signed at the end of the Korean War. Both the U.S. and South Korean governments have considered ways to The North Korean leadership seems to be confident replace the “temporary” armistice agreement with a that, by setting “mosquito nets,”5 they can enter into permanent peace mechanism. profitable business with or get assistance from the outside world without much concern over possible seri- Senior officials of the two countries have noted that ous harm to their internal stability. Accordingly, they KEDO had been working well because the United started the Mt. Kumgang tourism project (although States was the principal point of contact with North barbed wire barriers were placed along the roads to Korea. In his meeting in the spring of 1996 with an the mountain to keep their people away from capital- envoy of the U.S. President, a South Korean cabinet ists from the South) and have sought to normalize their minister noted that the North-South Agreement on relations with the international community. Reconciliation, Nonaggression and Exchanges and Cooperation of 1992 had not been implemented, while Tradeoff between Pragmatism and Security the Agreed Framework was being implemented. He asked what was the difference between the two agree- DPRK leaders have been obsessed with national secu- ments and then answered his own question—the inter- rity, particularly since China and Russia normalized Korean Basic Agreement did not have an “insurance their relations with South Korea, and the North’s company” for its implementation as did the Agreed economy almost collapsed. Survival of their regime Framework. The insurer was the United States. Thus, became a primary policy objective for the Pyongyang the Four Party Talks forum was created, aimed at es- leadership. Since the death of Kim Il-sung, who ruled tablishing a peace mechanism to be agreed by the two the country for half a century, the so-called “military Koreas and guaranteed by the United States and China. first” policy has prevailed throughout the country.

KEDO as a Learning Process for the North Korean In negotiations for a protocol on transportation in 1996, Leadership North Korean officials cited the concern of the security agencies or the People’s Army as the reason why North Korean leaders have been afraid that their people they could not accept KEDO’s proposal to transport might learn about the outside world. Thus, they have staff and workers to the site by sea. From the end of attempted to prevent their population from interacting 2000, however, North Korea began to allow KEDO’s with people from outside. North Korea has built barbed cargo passenger ship carrying up to 50 passengers to

5. Since the collapse of the former Soviet Union and the Socialist countries in East Europe, the DPRK leadership has stressed the importance of setting “mosquito nets” to prevent counterrevolutionary ideas from reaching its people and society.

32 THE KOREA ECONOMIC INSTITUTE OF AMERICA run about 15 miles off the coastline on a barge route Conclusion originally established to transport only construction materials. The DPRK agreed in May 2001 to further The KEDO project has contributed to ensuring peace increase the number of passengers on that route up to and stability in Korea and Northeast Asia and has in- 100. This was a considerable concession for them. The duced policy changes by the North Korean leadership. North Korean leaders apparently became pragmatic as long as they could obtain benefits from a change in The road ahead, however, is still long and bumpy. The their security policy. The Mt. Kumgang project is a project has to be implemented in cooperation with one good example of easing security policy to earn hard of the most isolated countries in the world. North currency. Korea keeps complaining that the project has been delayed and demanding compensation for the conse- Economic Benefits for the DPRK quent loss of potential electricity generation. However, North Korea has refused to provide sufficient labor The North Korean economy has almost collapsed. In for the project, asking for unrealistically high wages particular, with the collapse of the Soviet Union and for its workers. Tough negotiations are expected to socialist countries of Eastern Europe, North Korea lost conclude protocols on nuclear liability, the delivery almost 70 percent of its market and thus the main source schedule, and repayment. of hard currency earnings.6 To make things worse, China demanded that the DPRK pay market prices in The KEDO project has survived tense periods of cool hard currency instead of the so-called friendship prices relations between the United States and the DPRK, for Chinese goods, including oil and grain. This ad- and between North and South Korea. Essential infra- versely affected thermal power stations in North Ko- structure for the main construction has been completed, rea, and energy shortages became one of the most with the site grading finished and power block exca- serious economic challenges for the North. vation scheduled for September 2001.

Kim Il-sung badly wanted to get light water reactors This project has thus far played a very positive role in and, on the occasion of his economic minister’s visit to keeping North Korea from resuming its nuclear weap- Seoul in July 1992, went so far as to propose that South ons program and in engaging with this isolated Korea build an LWR plant near the DMZ. The 2 mil- country to promote contacts and reconciliation with the lion kilowatts of power to be generated from the two international community. Distinctive lessons for deal- light water reactors at Kumho will boost industrial ing with North Korea can be learned from the experi- production and economic growth in North Korea, ences of this most extensive project ever involving the although its dilapidated electrical grid system will have DPRK and the outside world. to be modernized to make use of this electricity.

In addition to long-term economic benefits, the DPRK Mr. Yang is Assistant Director, Division of Policy and has earned valuable hard currency from the LWR DPRK Affairs, at the Korean Peninsula Energy De- Project. The Korea Electric Power Company velopment Organization (KEDO) in New York City. (KEPCO), the primary contractor for the project, has purchased diesel fuel from the DPRK to operate its small power plants at the construction site. The DPRK has also earned hard currency by leasing telephone lines for the project.

6. Kim Jong-u. 1996. “North Korea’s External Economic Policy.” A paper presented at a seminar sponsored by the Gaston Sigur Center for East Asian Studies of the George Washington University in Washington, DC. 22–23 April.

SECURITY DYNAMICS 33 THE HUMAN FACE OF DIVISION: SEPARATED FAMILIES AND SOUTH KOREA’S SUNSHINE POLICY by James A. Foley

North-South Summit—15 June 2000 a half century of enforced separation and silence) of learning the fate of their relatives. To Korea’s divided On 15 June 2000—almost 55 years after the Korean families, the 15 June summit meeting held the latent Peninsula’s arbitrary division between U.S. and So- hope that the Demilitarized Zone (DMZ), the de facto viet zones of influence, 52 years after the establish- border between the two Korean states after the end of ment of two rival states, and 47 years after the end of the Korean War in 1953 and, despite its euphemistic the Korean War—the leaders of the North Korean and title, the most heavily militarized border on earth, the South Korean states, in the glare of the world’s press, manmade barrier dividing them from their loved ones, finally met and shook hands on the tarmac of Sunan could at last be pierced—not by bullets and armor this Airport in Pyongyang, North Korea. Their meeting took time, but by letters, perhaps even phone calls, and, hope place two months to the day before the first round of of hopes, by fraternal human contact. divided family exchange reunions. Korea’s divided families are the human face of an of- The historic meeting of the two Korean leaders in ten inhuman and arbitrary division. While the division Pyongyang was the first meeting ever between leaders of the Peninsula after liberation from Japanese rule in of the two Korean states. An event hitherto unimagin- 1945 and the subsequent tragedy of the Korean War able to the citizens of both Koreas, it raised to an un- are the two main periods in which the vast majority of precedented level hopes that an end may at last be in divided families were separated from their relatives, sight to Korea’s long and painful division, and to the the roots of Korea’s tragedy lie further back in time in two rival states’ often violent and always bitter con- the national trauma of Japan’s forty year occupation. frontation. The social and economic relations which had existed for centuries prior to Korea’s fateful loss of sovereignty For the vast majority of Koreans today, a united Korea and the Korean diaspora were overturned. is not even a memory. Hard demographic statistics show that, by 1997, 76.2 percent of the South Korean popu- As of mid-2001, the hope of reunion kindled by the 15 lation had been born after 1954, and thus have no liv- June summit had only been fulfilled very briefly for a ing memory of the most painful and destructive epi- handful of lucky families. Chosen by computer lottery sode in Korea’s long and often turbulent history—the from among the 116,460 who applied to the South Korean War.1 The majority of young Koreans today— Korea National Red Cross, 300 divided family mem- North and South—know of their country’s proud and bers—in visiting groups of one hundred—won the right unique past as a unified and independent country only to meet their relatives on three-day visits to Pyongyang. through the pages of history books. Their only experi- From the North, the same number—carefully chosen, ence is of bitter national division. apparently on the basis of their perceived loyalty to the DPRK—made up the three groups of one hundred To one group in Korean society, however, the historic who visited the ROK’s capital, Seoul. meeting between South Korea’s President Kim Dae- jung and North Korea’s leader Kim Jong-il was of par- The three exchange visits which took place on 15 ticular importance, as it heralded the possibility (after August and 11 November 2000, and on 26 February

1. ROK Bureau of Statistics, cited in: Kim Kwi-ok. 1999. Wolnaminui saenghwal kyonghomgwa chongche song, [The True Character of the Life Experiences of Refugees from the North]. Seoul: Seoul National University Press: 4.

34 THE KOREA ECONOMIC INSTITUTE OF AMERICA 2001, are, thus far, the most tangible result of the two siderations, this means that little time remains if a Koreas’ latest tentative moves towards rapprochement. solution is to be found to this generation’s suffering A trial exchange of correspondence has also been re- before their deaths. This was tragically underlined on alized for three hundred divided family members, and the eve of the exchange reunions, when two of those 1200 divided family members have been able to as- aged first generation divided family members chosen certain the status and whereabouts of their relatives. by the ROK Red Cross to meet their relatives died Although these limited moves are considered to be before their reunions with their relatives could take important steps along what will be an exceedingly dif- place. By 28 June 2001, a mere eleven months after ficult and complex path to reconciliation for the two the first round of reunions in August 2000, 12,664 of Korean states, the total number of individuals affected the 116,460 original applicants for reunion had died. by the divided families issue is such that the measures This represents 10.9 percent of the total number of agreed upon do little more than scratch the surface of applicants from the southern side.2 These figures clearly what is a considerable social and political problem. underline the pressing need for a solution to be found While providing a brief ray of hope for a few, added to this issue before the first generation of divided fami- frustration is piled on the many who were not fortu- lies finally disappear and the infringement of their nate enough to be chosen in the 2000-2001 exchange fundamental human rights which they have endured for program. so long becomes irreversible.3

Statistics about the depth and nature of familial divi- Besides the actual physical separation of family mem- sion in Korea are revealing. In a survey carried out by bers by Korea’s division, clearly the most stressful the author of sixty North Korean refugees in 1997, the psychological factor in their predicament is the uncer- majority of the respondents were between the ages of tainty surrounding their loved ones’ fates. The major- 60 and 79 years. While five were under 60 and two ity of respondents to the author’s 1997 survey—83 under 50, the former had only limited memory of the percent—had no idea of the whereabouts or status of events surrounding their separation from their relatives, their relatives.4 Another statistic which confirms the and the latter two had no memory of the trauma of the confrontational and parlous nature of North-South Korean War. Divided family members of this age group Korean relations, and of the widespread worries sur- may perhaps best be described as the “in-between rounding the nature of the North Korean regime and generation” rather than first or second generation the wider issue of human rights in the DPRK, is that separated family members. fully 68 percent of respondents had not even attempted to ascertain the whereabouts and status of their rela- The relevance of these statistics is that the first gen- tives or to contact them. The most common reason given eration of divided family members—those most for this was “fear of incurring repression on their rela- affected by Korea’s division because of the living tives from the North Korean regime or disadvantaging memories of families and loved ones that they carry relatives in the North.”5 One respondent rather with them—is fast disappearing. In terms of policy con- poignantly remarked that he did not wish to have his

2. ROK Unification Ministry data, reported by Yonhap News on 2 July 2001.

3. The International Conference on Humanitarian Laws, which was held in Geneva in 1976, established the “right of family” as a fundamental human right.

4. Mechanisms for ascertaining the whereabouts and status of relatives in the DPRK, while existing in theory, do not function. Since the first North-South Red Cross talks began in 1971, divided family members have applied to the ROK Red Cross to verify their relatives’ status. The ROK Red Cross then passes these requests to the International Committee of the Red Cross (ICRC), which in turn passes them to the DPRK Red Cross, but there the chain stops. The DPRK Red Cross has consistently failed to respond to these requests.

5. Foley, James A. 2000. Divided Families in the Republic of Korea. Ph.D Thesis. University of Sheffield: 218–9.

SECURITY DYNAMICS 35 worst fears about his wife’s fate confirmed, as they Divided Families in Korea: Fleeing North, Fleeing had both been openly involved in antigovernment South activities in the North before the outbreak of the Ko- rean War. Although a small fraction (3 percent) of re- For divided families in the two Koreas, the most im- spondents said they had no desire to contact family portant categorization has always been the direction members in the North, most (88 percent) said that they of their flight—and hence, by implication, their would like to contact their relatives. These figures go motive for flight—at the time of their separation. Two some way towards explaining the disparity between Korean terms are generally employed to indicate this: estimates of the total numbers of surviving first gen- wolbuk and wolnam. A “person crossing to the North” eration divided family members and the number is referred to as a wolbukin, and a “person crossing to (116,460) who applied to be included in the exchange the South” as a wolnamin. In the ideological confron- visits which resulted from the June 2000 summit. tation between the two Korean states, familial separa- According to the author’s own estimate, while demo- tion has always been assigned an implicitly ideologi- graphic data are largely absent for the periods in which cal motive. most families were separated, the number of first generation divided families in Korea is between While in the heated political atmosphere of post-lib- 500,000 and 750,000. While this is a long way from eration Korea some refugees did indeed make a clear, the “ten million” families so often quoted in the South ideologically motivated choice of allegiance, the Korean and international press, it must be remembered author’s 1997 survey of North Korean refugees and that this figure is for first generation divided family surveys undertaken by Korean scholars all indicate that, members only, and that the majority of them have rela- for the majority of refugees, motives for flight were so tives and families “on the other side.” varied and complex as to make any generalization of their motives extremely problematic, if not impossible.8 Notwithstanding the inherent difficulties, expense, and The survey results and the subsequent in-depth inter- dangers involved, a sizeable minority (17 percent) of views with the respondents all confirm that, in the respondents to the 1997 survey had managed to ascer- disruption and turbulence of the post-liberation period tain their North Korean relatives’ fates. A smaller num- and in the maelstrom of the Korean War itself, most ber (12 percent) had also managed to exchange corre- Koreans were confused and, quite understandably, did spondence and send their northern family members not fully comprehend the events overtaking them. money or provide them with some sort of assistance in Korea’s division was believed by most Koreans at that kind.6 These verifications and contacts were all accom- time to be merely a prelude to a return to national unity, plished clandestinely through the good offices of friends and many Koreans saw their flight and separation from or relatives in a third country, usually, although not their families as a temporary event. The majority of always, China, which is home to an ethnic Korean divided family members became separated from their community of 2 million, most of whom live in areas families in one of two distinct periods: the post-libera- contiguous to the North Korean border.7 tion period, from liberation on 15 August 1945 to the

6. “In kind” in one case was in the form of bottles of aspirin which, given the near collapse of the DPRK economy and the serious shortage of basic medicines, the North Korean family member was able to exchange for foodstuffs and other goods.

7. While none of the respondents to the author’s 1997 survey employed agencies to contact their relatives, such agencies do exist in the Korean Autonomous Prefecture in Yanbian (Kor. Yonbyon), China. While the process is expensive and time consuming and does not meet with a high rate of success, as far as the author is aware these agencies only charge a fee in the event of successfully tracing an applicant’s relative(s).

8. Kim Kwi-ok. op.cit. 70-72. Also see Kang Chong-gu. 1992. Haebanghu wolnaminui wolnam tonggiwa kyegup songe kwanhan yon’gu [A Study of the Motives and Social Classes of Refugees Moving South in the Post-Liberation Period], in Han’guk chonjaenggwa han’guk sahoe pyondong [The Korean War and Korean Social Movement and Change], Seoul: Pulpit.

36 THE KOREA ECONOMIC INSTITUTE OF AMERICA outbreak of the Korean War on 25 June 1950; and the made on the divided families issue, and the hopes that period of the Korean War itself, from its outbreak to had been raised among first generation divided family the cease fire on 27 July 1953. All the surveys of first members were cruelly dashed. generation North Korean refugees thus far completed, including the author’s own, would indicate that between It is difficult not to arrive at the conclusion that, while 25 and 35 percent became refugees in the post-libera- acting as a convenient vehicle for contact for the two tion period, while the remaining 65 to 75 percent regimes, neither side ever really intended to make the became refugees during the Korean War. It would be concessions necessary for any kind of satisfactory reso- almost 20 years before any progress was made to start lution of the issue. reuniting divided families. The 1985 Exchange Visits The 1971–72 Red Cross Talks After the failure of the 1971–72 round of Red Cross The first movement by both Korean states toward ar- talks on the divided family problem, the next time the riving at least at some kind of modus vivendi came issue was to be raised by the two sides was in 1984, through the vehicle of Korea’s most pressing and un- when, after floods had caused massive damage to prop- resolved humanitarian issue—the problem of the count- erty in South Korea, President Chun decided to accept less Korean families which had been sundered by their a North Korean offer of aid in the form of rice, tex- country’s division. While ostensibly aimed at finding tiles, and cement. However, all was not as altruistic as a solution to the “humanitarian” problem of Korea’s at first seemed. The North, in spite of its mounting divided families, the Red Cross negotiations were economic problems, was anxious to use its offer of aid accompanied by a parallel series of secret meetings as a propaganda tool to show its system’s superiority between the two Korean governments which were to to the rapidly advancing South and to improve rela- culminate in the first diplomatic agreement ever to be tions with the Reagan administration, whose election reached by Seoul and Pyongyang: the 1972 July 4th had in the North’s view worsened prospects for any Joint Communique. While only containing seven withdrawal or even reduction of U.S. forces from the clauses, the July 4th Joint Communique was a more Korean Peninsula; the South was anxious to placate comprehensive document than the joint statement the North for fear that Pyongyang might disrupt the issued after the June 2000 summit. The July 4th Joint 1988 Olympic Games in Seoul. Communique contained three key points: that unification should be achieved independently; that unifica- In an important show of support for South Korean tion should be peaceful; and that national unity should policy, the U.S. government expressed support for transcend the differences in ideology between the two confidence building measures between the two Koreas, sides. Clause four of the agreement also pledged both specifically mentioning reunions of divided families. sides’ “positive cooperation” to “seek an early suc- In a speech to the United Nations General Assembly cess of the South-North Red Cross Conference,” i.e., on 24 September 1984, Reagan himself had reiterated to seek an early resolution to the divided families this point. These statements seemingly offered issue. However, in what was to be the first of many Pyongyang the possibility of progress in U.S.-DPRK disappointments for Korea’s divided families, the talks relations were the North to respond in a positive way were soon to collapse in acrimony. The point on which to South Korean proposals. In the early 1980s, in an the two sides failed to agree was the issue of just who attempt to woo the Reagan administration and wider would be allowed to visit their relatives. The South international opinion, the DPRK had begun to allow wanted to restrict this to those who were blood rela- limited reunions in the DPRK for those Korean divided tives, while the northern side also wanted to allow family members who held U.S. or other non-South “friends” to be allowed access to the other side’s terri- Korean passports. The Reagan administration’s inter- tory, arguing for “freedom to come and go,” i.e., vir- ventions in this matter, however, clearly signaled to tual freedom of movement across the DMZ. While the the DPRK that attempts to improve relations with the North-South Coordinating Committee set up to imple- United States would not be successful without any ment the terms of the July 4th Joint Communique con- improvement in the disastrous state of North-South tinued to meet until 1977, no progress whatsoever was Korean relations. North Korea had compounded its

SECURITY DYNAMICS 37 growing reputation as an international pariah in 1983 Joint Declaration on Denuclearization of the Korean by a terrorist bomb attack in Rangoon aimed at South Peninsula. Korean President Chun Doo-hwan during a state visit to Burma. Although Chun had escaped serious injury, In response to the signing of the “Basic Agreement,” seventeen leading South Korean officials, including and to South Korean President Roh’s suspension of Foreign minister Yi Pom-sok,9 and four Burmese na- the annual Team Spirit exercises, the North agreed to tionals had been killed. renew talks on the divided families issue in 1992. How- ever, despite previous assurances that the exchanges Despite obvious misgivings on the part of the Chun of divided family members were to be made “uncondi- regime, Chun’s acceptance of the proffered North tionally, without any prerequisites,” the DPRK con- Korean aid provided the vital element to soothe the tinued to make other demands. Chief among these were North’s belligerent pride, and the talks began in Seoul that the South should release and “return” to the North on 28 May 1985. This second attempt to negotiate a long-term unconverted “political prisoners,” some of solution to the divided families issue soon led to the whom had been held in South Korean jails since the first officially-sponsored exchange visits of aged first Korean War. The South in turn sought discussion of generation divided family members. On that occasion, the issue of international inspections of nuclear facili- both sides exchanged groups of 50 divided family ties. While the South did try to placate the North by members on 20 September 1985. However, out of the returning one long-term prisoner, Li In-mo, amidst a 100, only 65 divided family members were able to meet blaze of publicity, the second issue, international their relatives. This round of talks was also to come to nuclear inspections of the DPRK’s nuclear facilities, an ignominious end on 15 July 1986, ostensibly as a was to prove the undoing of efforts to restart the result of the DPRK’s demand that the South suspend exchange program for divided family members. the annual Team Spirit joint ROK-U.S. military training exercises. Growing pressure from the international community, particularly from the United States, and the DPRK’s The 1991 Basic Agreement announcement that it would withdraw from the Nuclear Non-Proliferation Treaty (NPT) in March 1993 brought Faced with increasing diplomatic isolation, the DPRK the Korean Peninsula to the brink of war in 1994. The began its own diplomatic offensive in an attempt to North claimed that the International Atomic Energy restore diplomatic parity between the two Korean Agency’s (IAEA) demands for nuclear inspections were states. Pyongyang’s key objective in this, despite its a violation of DPRK sovereignty. The DPRK’s tough customary anti-imperialist vitriol, was the establish- stance on the nuclear issue was eventually to pay off ment of diplomatic relations with the ROK’s key with the first ever direct negotiations between North allies: the United States and Japan. In order to accom- Korea and the United States. The talks, held in Geneva, plish this aim, however, the North had first to improve were to lead to the signing of the U.S.-DPRK nuclear its relations with the South. The two sides met at prime “Agreed Framework” on 21 October 1994. In return ministerial level for the first time in Seoul in Septem- for allowing international inspection of its nuclear ber 1990. The renewed dialogue finally bore fruit with facilities and a freeze on the DPRK’s nuclear program, the signing of The Basic Agreement on Reconcilia- the United States promised to help to provide North tion, Nonaggression and Exchanges on 13 December Korea with two light-water reactors (LWRs) and an 1991. This agreement—by far the most comprehen- interim supply of heavy fuel oil to compensate it for sive thus far agreed by the two sides—contains a clause the energy losses it claimed it would incur by shutting specifically aimed at providing a framework within down and ceasing construction of its proliferation prone which a solution to the problem of divided families graphite-cooled reactors. may be found. The two Korean states also signed a

9. Yi Pom-sok, as chief of the South Korean Red Cross delegation, had hosted the visiting North Korean Red Cross delegation in Seoul during the Red Cross Talks in 1971–72.

38 THE KOREA ECONOMIC INSTITUTE OF AMERICA The DPRK’s main reason for signing the Agreed “benign neglect” leading to “unification by absorption,” Framework, apart from its severe energy shortage, was i.e., to stand back and wait for North Korea to col- clearly that the terms of the accord allow for the lifting lapse, was appropriate. This effectively sealed the fate of U.S. economic sanctions against the DPRK and, of North-South Korean relations, at least until Kim eventually, for the establishment of diplomatic rela- Young-sam’s term in office was completed in Febru- tions with the United States. The North Koreans be- ary 1998. lieve that this will guarantee their state’s security and provide them with the access to key international The Sunshine Policy financial institutions which will enable them to survive what appears to be an ever-deepening economic The election of South Korea’s next president—Kim crisis. Nonetheless, the sine qua non of the Agreed Dae-jung—heralded the formulation of the so-called Framework, and indeed included as such in the terms “Sunshine Policy” toward North Korea. This policy is of the agreement itself, is that relations between the the most comprehensive engagement effort yet to be North and South must improve. implemented by the South. While continuing some of the aspects of the unification policies of Presidents Roh However, rather than an improvement, relations be- Tae-woo (1988–1993) and Kim Young-sam (1993– tween the two rivals were to deteriorate after the sign- 1998), the Sunshine Policy differs in one important ing of the Agreed Framework. After coming to power aspect; while preserving a firm defensive posture in in 1993 on a wave of popular support, Kim Young- the face of North Korea’s massive conventional forces, sam, South Korea’s first truly democratically elected a clear separation is made between economic or and civilian president, initially pursued a half-hearted humanitarian aid and political progress between the policy of engagement with the North. Pyongyang’s two states. In other words, aid given to ease North intransigent attitude to South Korean worries about Korea’s desperate economic plight or to alleviate Pyongyang’s suspected nuclear ambitions soon humanitarian issues, such as the famine which has provoked a sea change in the South’s unification policy, plagued the country since 1996, will not be made however. Consequently the decision was taken by the dependent on the state of political relations between Kim Young-sam government to reinstate the Team the two Koreas. Spirit military exercises in response to Pyongyang’s unyielding stance on the issue of nuclear inspections. One aspect of the Sunshine Policy’s approach is the In spite of reaching an agreement on what would have clear prioritization of the issue of Korea’s divided fami- been the first ever meeting of the two Korean states’ lies. In spite of the Sunshine Policy’s generosity to- leaders—a deal brokered by ex-U.S. President Jimmy wards an often belligerent North Korea, however, it Carter when visiting North Korea in spring 1994 in an was two years after Kim Dae-jung came to office that attempt to defuse the rapidly escalating nuclear cri- the policy was finally rewarded with agreement in Feb- sis—the situation further deteriorated after the death ruary 2000 to hold a summit meeting of the two lead- of the DPRK’s founding father, Kim Il-sung, on 8 July ers in June. An attempt by the South in 1998 to barter 1994. President Kim Young-sam’s decision to place chemical fertilizer—badly needed to restore agricul- the ROK’s armed forces on a state of high alert in tural productivity in the North after the disastrous 1996 expectation of either an attack from the North or a rapid floods—for progress on the divided families issue was collapse of the DPRK government deeply offended and rebuffed by North Korea. angered Pyongyang. The South Korean President’s refusal to send any form of condolence to Kim Jong- The 2000–2001 divided family three-stage exchange il—Kim Il-sung’s son, chosen successor, and by then program, the measures regarding the verification of de facto leader of the DPRK—further aggravated an whereabouts and status, and the trial exchange of cor- already tense situation. The South Korean government’s respondence between 300 divided family members were mistaken analysis of the situation in the North led it to all agreed to with the quid pro quo of the release from believe that the collapse of the isolated North Korean South Korean jails and the “repatriation” to North Ko- state was imminent, and that, therefore, a policy of rea of 63 long-term “unconverted” “political prisoners.”

SECURITY DYNAMICS 39 A Bargaining Chip and a Vehicle for Contact between the South Korean Red Cross and South Korean government reunification policy.10 From this brief description of the history of North-South Korean contacts, we may draw some conclusions re- The attitudes of the two Korean states to the problem garding the role of the divided families issue in inter- of divided families, as revealed through the medium of Korean relations. First, it is clear that in the confron- the Red Cross talks, differ considerably. Simply put, tation between the two Korean states the divided fami- while South Korea has long insisted that the divided lies problem, and the strong emotions it evokes among families problem is a humanitarian issue to be ap- the divided family members themselves and among the proached outside of the bigger issue of Korean reuni- wider Korean population, has often been employed as fication, North Korea has always maintained that the a political tool and bargaining chip in inter-Korean issue should be viewed from the broader context of talks. Attempts, successful and unsuccessful, have been reunification itself. This difference in approach can be made to trade progress on the divided families prob- clearly seen in the early Red Cross contacts of 1971– lem for political concessions on other issues, such as 72. At the time, the initiation of contacts with North i) the cancellation of U.S.-South Korean military Korea was viewed by the Park Chung-hee government exercises; ii) cash and economic assistance, such as as a necessary, but rather dangerous, tactic in Park’s the $450 million in economic aid promised to North attempts to fortify his regime against the shocks it would Korea by South Korea at the June 2000 Summit; iii) the have to face as a result of U.S. attempts to extricate release of political prisoners; iv) and even fertilizer. itself from the Vietnam War and improve relations with China. The divided families issue provided a conve- However, in the absence of any normal relations be- nient vehicle through which contact could be estab- tween the two Korean states, i.e., in the absence of lished with the North on a “humanitarian” issue, i.e., direct diplomatic links between the two Koreas, the an issue which was not overtly political. This was by divided families issue has provided an invaluable no means the first time that the issue of familial sepa- avenue of contact via the Red Cross societies of both ration had been used by South Korea as a propaganda countries. All inter-Korean contacts thus far have been tool. The numbers of refugees moving to the South from led, or at least accompanied, by negotiations on the the North in the liberation and Korean War periods— divided families problem. This point also raises the all, according to South Korean propaganda, because question of the impartiality of the Red Cross societies of their hatred for the North Korean regime and rejec- of the two Korean states. Repeated attempts by the tion of communism—were from the early days of the North Korean Red Cross to include unrelated issues ROK consistently exaggerated to blacken the image such as the abolition of the ROK’s National Security of the North Korean regime. Up until the time of the Law, the disbandment of “anti-communist organiza- ROK Red Cross proposal to open talks with North tions” in the ROK, the cancellation of military maneu- Korea on the divided families issue in 1971, any con- vers, and the withdrawal of U.S. troops from the tact with the northern “enemy” had been seen as Korean Peninsula—coupled with the fact that no truly inherently treasonous by nature in South Korea. The independent organizations are allowed to exist in the scars left by the Korean War were still too fresh. DPRK—provide compelling evidence of the total North Korean government control over this organization. As the drama of the Red Cross talks unfolded, how- Also, the fact that the heads of the South Korean Red ever, the attention of the world’s media revealed an Cross have often been former leading politicians, while important aspect of the divided families problem: the not providing conclusive proof of that organization’s degree of sympathy which could be accrued by South total subordination to government, certainly gives rise Korea—then a repressive regime with a reputation for to suspicions regarding its impartiality and suggests human rights abuses—on the basis of the humanitar- that there is at least a strong degree of coordination ian tragedy of Korea’s divided families. This recon-

10. Choe Tu-son, Kang Yong-hun, Kim Sang-hyop, and Lee Yong-dok are all former prime ministers of the ROK who have been presidents of the South Korean Red Cross.

40 THE KOREA ECONOMIC INSTITUTE OF AMERICA firmed the divided families issue’s place in the South’s democracy. Liberalization and the enhancement of free- arsenal of propaganda weapons and set the tone for dom of speech have also meant an increasingly open the ROK’s future use of the problem in its dealings airing of views. While this process of democratization with the DPRK. After the collapse of the Red Cross and liberalization is still far from complete, it has meant talks in 1973, frustration at what was seen as North that the complex reality of many divided families’ situ- Korean intransigence on this emotional humanitarian ations, backgrounds, and histories have been at last problem finally led to the launching of the 1983 Ko- revealed. rean Broadcasting System (KBS)/Red Cross “Cam- paign to Reunite 10 Million Divided Families.” The There are a number of points to be made regarding the scale of the divided families problem and its enormous effect of these developments on the ROK government’s emotive weight in South Korean society were indubi- handling of the divided families issue. The propaganda tably revealed by the enormous impact of this cam- value of the issue to the government has been consid- paign. Aimed at reuniting divided families, but neces- erably enhanced by the attention it has drawn in the sarily restricted to South Korean territory by the world press—not only to the problem itself, but also to refusal of the DPRK to reopen the Red Cross talks, the the development of democracy in South Korea. The original campaign was planned as a 95-minute pro- divided families themselves also form a sizeable and gram to be broadcast on the thirty-third anniversary of significant constituency within that democracy, and the the outbreak of the Korean War. The program’s format ongoing process of democratization has given at least allowed divided family members fifteen seconds air a partial and independent voice to their discontent and time each to appeal directly to their lost relatives in the added internal domestic pressure to other factors in- hope that some of them may have found their way to fluencing the ROK government. In the ongoing com- South Korea in the chaos and disruption of the Korean petition between the two radically opposed and rival War. The overwhelming response from the ROK pub- systems on the Korean Peninsula, the divided families lic forced KBS to extend its broadcast time to two and issue also poses a powerful point of comparison be- a half hours as news of the program spread throughout tween the two societies—democratic pluralism and South Korea, and the number of applications became freedom of speech versus totalitarian control. In this greater and greater. In order to answer the growing sense, the increasing prioritization of the divided fami- number of appeals to appear on the program, KBS was lies issue by successive South Korean governments can forced to extend and continue the broadcasts, which be seen as an implicit challenge to the North to open ran from 30 June to 14 November 1983. In total, there its closed society and resolve this “humanitarian” were 453 hours and 45 minutes of live broadcasts.11 issue. Out of a total of 109,000 applications looking for 184,258 people, 4,697 meetings or reunions were ar- If South Korea’s development can be characterized as ranged. By the end of the telethon, 10,000 people had an uneven and often chaotic path towards systemic been reunited with their relatives.12 change, punctuated by military coups, revolution, and mass civil protest, then North Korea’s post-Korean War The obvious humanitarian aspect of the divided fami- history can be seen as remarkably stable. All the lies issue has since been considerably reinforced in elements we now recognize as typical in North Korea’s South Korea by the development of democracy and by system were present as long ago as 1948, when the the subsequent rapid development of a civic society. DPRK was founded. Systemic change, as such, has Since the change of the constitution to allow for demo- not occurred in North Korea. Any change which has cratic elections in 1987, the ROK has seen a veritable taken place may be characterized as a strengthening of explosion in the number of non-governmental organi- the state’s all-pervasive grip on every aspect of soci- zations (NGOs) in South Korea’s rapidly developing ety, the economy, and politics. Consequently, in North

11. Kim Sang-hyop. Taehanchoksipchasa 80 nyonsa [South Korea’s Red Cross: an 80-Year History]. Seoul: ROK National Red Cross: 221.

12. Kim Choong-soon, op.cit. 112.

SECURITY DYNAMICS 41 Korean society the divided families problem is effec- The considerable differences between the two societ- tively a “non-issue.” Not only does the problem of fa- ies have meant that the two Koreas have employed the milial separation hardly ever appear in the pages of divided families issue in their negotiations with each the strictly-controlled press, but among North Kore- other in quite different ways. While the South has ans themselves it is clearly not a subject for discussion played on the sympathy the issue evokes both in South or debate—certainly not public debate, in any case. Korea and in the international community, and on its Anecdotal evidence from North Korean defectors to implicit challenge to the North’s closed, secretive, and South Korea and a study of the pages of the North tightly-controlled society, the North has used the is- Korean press both confirm this opinion. sue, or, more exactly, the degree of cooperation it has been prepared to extend in resolving the problem, as a The DPRK is perhaps the most structured, hierarchi- bargaining chip in return for political and economic cal society in the world today. While information on concessions and for other issues which Pyongyang sees North Korea is difficult to obtain and sometimes as important, such as the release from South Korean exaggerated, distorted, or unreliable, it would appear prisons of long-term political prisoners. that every citizen is allocated a “social ranking” (songbun) at birth. In other words, persons are cat- Ascendancy and Attribution of Blame egorized according to their perceived degree of “trust- worthiness” and “value” to the North Korean state. Whether the issue is used as a vehicle for contact, as a Most people are unaware of their exact social ranking, bargaining chip, or as a propaganda weapon, the pain- and only learn about it indirectly by experiences dur- ful outcome has remained largely unchanged in the ing the course of their lives. Access to education, jobs, thirty years since the first Red Cross talks began in place of residence, and even marriage are all directly 1971: the divided families remain divided, unable even affected by one’s songbun. According to recently to contact their loved ones, the majority of them igno- obtained anecdotal evidence, North Korea’s people are rant even of the fate of their relatives. Why this re- divided into three main groups; a “core” group mains the case after half a century of separation is a (haekshim kyechung), a “vacillating” group (tongyo key question. kyechung), and an “enemy” group (choktae kyechung).13 These three main groups in society are Although the separation of Korean families is evidently further ranked into 51 different subdivisions or cat- an important and pressing humanitarian issue, it is also egories. As the names of the three main groups sug- clearly of secondary importance in the overall prob- gest, only the members of the “core” group are consid- lem of Korea’s division and the security of the two ered fully trustworthy members of society. Divided Korean states. Despite the euphoria and raised hopes family members, whether they be relatives of those who occasioned by the historic June 2000 summit meeting, fled south, came to the North, or were repatriated from approximately 1,600,000 heavily armed troops still Japan or China, are generally thought to belong to the face each other across the DMZ, and the risk still ex- “vacillating” group. Such social stratification and its ists of an armed conflict which could quickly escalate influence on North Koreans’ lives are obviously not and result in a conflagration even worse in its scale of conducive to open debate on one’s family origins. destruction than the tragedy of the 1950–53 Korean War. Evidence collected by the author in South Korea from North Korean refugees in 1997 would suggest that, This key, overriding issue of state security, in the ab- while in some cases having relatives who had “gone sence of anything approaching “normal” relations, still south” was not in itself necessarily indicative of nega- dominates all aspects of the relationship between the tive political and social discrimination, in other cases two Koreas. Consequently, all previous attempts at it clearly was. inter-Korean rapprochement have been characterized

13. Chosun Ilbo, 25 June 2001.

42 THE KOREA ECONOMIC INSTITUTE OF AMERICA by certain behavior patterns. Simply put, for real increasingly isolated in the international community. progress to be made, “it takes two to tango,” and when Although objective economic data on the North’s either government has been frustrated in achieving or economy are hard to find—due to the DPRK’s long has attained its predetermined objectives in engaging held policy of not releasing any information relating to in talks with the other side, a pretext has been found its society or economy—by all reckoning, the North’s and the talks have collapsed—as has been the issue of economy was in virtual free fall throughout the 1990s. the divided families so many times in the past. Natural disasters have compounded the situation. The floods which damaged large areas of North Korea in Another important point emerging from this brief his- 1996 seriously aggravated an endemic food shortage. tory of inter-Korean talks is that the Korean state which Since then, the once proud North Korean regime itself has been in the ascendancy—politically and economi- has been forced to beg for humanitarian aid to feed its cally—at the time of the talks has always been the side own population. most willing to go the furthest in terms of concessions. In the 1971–72 Red Cross talks, North Korea was In the negotiations surrounding preparations for the clearly in such a position. Politically, South Korea’s three sets of exchanges of visiting groups of first gen- key ally, the United States, was facing defeat in Viet- eration divided family members agreed by the leaders nam; economically, North Korea’s command economy at the June 2000 summit meeting, it was the northern was providing a better standard of living for its citi- side which was anxious to prevent access to family zens; and South Korea, while well on the road to its graves and hometowns, and to restrict the exchanges own economic success, was governed by the repres- to the tightly-controlled format eventually agreed to sive Park Chung-hee regime. The reason given for the by the Red Cross societies of both sides. The striking failure of the Red Cross talks is illustrative of this point. disparity between the standards of living enjoyed by As noted earlier, while the South wanted to restrict ac- Koreans in the North and in the South has forced the cess to its territory to those North Koreans who had northern regime to further tighten its already repres- blood relatives in the South, North Korea demanded sive control over its own citizens and to take the ut- that the category of “friends” be included and the vir- most care that they come into no contact with non-North tual elimination of travel restrictions between the two Koreans, especially with South Koreans. The state of states. The fear in the South Korean government was, virtual self-imposed siege that the DPRK authorities of course, that the North would use the pretext of di- have inculcated in North Korea has seemingly become vided family exchanges to infiltrate the South with its an all-but-indispensable element in the survival of the agents, build a “fifth column” in the ROK, and disrupt regime. The economic deterioration of the DPRK and its society in preparation for a communist-inspired take- its political isolation both raise the question as to over and reunification. whether North Korea is indeed even capable of allowing the necessary measures to solve the divided fami- The apportionment of blame for breakdowns in talks lies problem and running the inherent risks such mea- has also followed the zero sum logic of inter-Korean sures would entail to their grip on power. relations, blame always being attributed to the weaker side in the North-South Korean equation. In essence, a solution to the divided families problem requires what both North and South Korea have at dif- The June 2000 summit further illustrates and supports ferent times, according to their changing relative this view by showing an almost exact reverse of the strengths and fortunes, avoided with the utmost care— situation in 1971–72. According to most economists, the renewal of natural human contacts, links beyond South Korea’s economy surpassed the North’s ailing the control of either government, among ordinary command system as long ago as the mid-1980s and Koreans across the unnatural border which now, fifty- has since continued to show vigorous growth. Most six years after Korea’s division, still separates them. economists now estimate South Korean GDP as being approximately twenty times that of the North. Politi- An Appropriate Mechanism cally, the collapse of the Soviet Union and East Euro- pean communism and China’s rapid economic reform The chaotic, heart-rending intermingling of joys and have both dealt the North severe blows and have left it sorrows revealed through the media coverage of the

SECURITY DYNAMICS 43 2000–2001 reunions of divided family members clearly indeed the human face of Korea’s division, and as such illustrated the inadequacy of the format agreed by the contains all the contradictions inherent in the Korean two Red Cross societies for the meetings. Family mem- conflict itself. These are contradictions which, although bers, most of whom had been separated by Korea’s enormously complex and often ambiguous, must be division for at least half a century, then had to bear the faced squarely, with equanimity, and without bitter- pains of further separation a mere three days after ness if any process of reconciliation between the two embracing their relatives. No mechanism as yet exists Koreas is ultimately to bear fruit. Progress on this is- to maintain the contact so briefly renewed after fifty sue, rather than increases in the amount of North-South long years of waiting among the divided family mem- Korean trade, should perhaps be viewed as the key bers who were chosen to meet their relatives in the indicator of progress towards Korean reconciliation. exchanges.

However, outside of reunification, and subject to the Dr. Foley is Professor of Political Science at the still strained and confrontational state of inter-Korean School of East Asian Studies, University of Sheffield, relations, what mechanism can we realistically expect United Kingdom. to be put in place to address the divided families issue effectively? In answer to this question, the author respectfully proposes the following:

• Establishment of a durable and effective mechanism to allow the tracing of relatives in North and South and the verification of their status, i.e., whether they are alive or dead;

• Exchange of correspondence among divided family members and access to telephone communications;

• In the absence of a free travel agreement between North and South for divided family members, the establishment of a permanent meeting place for separated families, shielded from the intrusive, manipulative glare of the media; and

• Permission for divided family members to visit their ancestral homes and graves on a regular basis.

While the measures outlined above would represent an enormous improvement over the present situation, they are still some way from achieving that which was agreed by both Korean leaders at the June 2000 summit. They then declared that: “. . . all Koreans should have the right to live anywhere in Korea they choose.”

In the light of the disparity between the declared aspi- rations of Kim Jong-il and Kim Dae-jung, and the reality of the lives of today’s surviving first generation divided family members, one would perhaps be for- given for asserting that the failure of the two sides to solve this problem was due to sheer inhumanity. However, the problem of divided families in Korea is

44 THE KOREA ECONOMIC INSTITUTE OF AMERICA NORTH-SOUTH ECONOMIC COOPERATION

THE ROLE OF ECONOMIC COOPERATION IN RAPPROCHEMENT ON THE KOREAN PENINSULA by Yoon Deok-ryong1

Introduction compensation payments by Japan and the support of international financial organizations. However, that The Korean Peninsula, where one may find the last will be possible only after the launching of reforms in remnants of the Cold War, is now changing rapidly. the North, even though the North needs financing to The engagement policy of the Kim Dae-jung govern- begin to change. This conundrum is the source of great ment has encouraged North Korea’s leader, Kim Jong- distress for both Koreas. il, to come to the negotiation table. After the summit talks in Pyongyang in June 2000, both Korean govern- This article deals with the economic aspect of the rap- ments have realized what the Korean people have de- prochement process on the Peninsula. To better under- sired for a long time. Separated families have visited stand the economic situation in North Korea, the sec- relatives on the other side, and ministers and other se- ond section looks into the economic problems currently nior officials have engaged in meetings to improve facing the North. The third section describes the po- relations between the South and North. All these political and business interests of South Korea. The fourth litical changes had economic motives and will undoubt- section explains the role of economic cooperation in edly influence economic activities for the better on the the rapprochement process, and the final section pre- Peninsula. sents conclusions.

South Korea has moved to ease the decades of tension Economic Problems of North Korea in the Short with North Korea through the building of common eco- to Medium Run nomic interests. This strategy gained momentum with the implementation of a policy of intensive engage- Why Did North Korea’s Economy Decline? ment—the so-called “Sunshine Policy.” The volume of inter-Korean trade reached over $400 million for North Korea suffered from negative economic growth the first time in 2000. Both Koreas are planning di- for about ten years until 1998. It is puzzling why the verse joint projects to facilitate long-term economic North Korean economy declined for such a long time cooperation. However, the growing economic ex- and whether the economic growth of the last two years change, driven by political initiatives, faces financial signals the start of an economic upturn. A formal analy- constraints. Given its limited economic capacity, South sis is needed to answer these questions. The traditional Korea cannot bear the entire financial burden of pull- model of economic growth explains the production ing North Korea out of its poverty trap. Securing fi- capacity in an economy as a function of the quantity of nancial resources at an early stage will prove to be an production factors and the technology that combines immense problem. North Korea may access other them. With growing acknowledgment of the possible financing sources in the medium term, e.g., government’s role, institutions and policy have become

1. A more technical version of this paper was presented at the international conference on Inter-Korean Reconciliation, Economic Cooperation and the Role of the Major Powers, on 9–11 May 2001 in Shanghai, China, organized by the Shanghai Academy of Social Sciences and the Korea Economic Institute of America. Comments are welcome: E-Mail: [email protected]

NORTH-SOUTH ECONOMIC COOPERATION 45 important factors in deciding the economic growth in a resulted in severe deindustrialization in North Korea, country. Barro & Sala-I-Martin (1995) introduced the not unlike that in East European countries in the early government into the traditional model of economic 1990s.4 growth.2 • Changes in the payment system According to this analysis, the production function of The payment system among the former socialist coun- an economy exhibits constant returns to scale on the tries changed from a clearing system using transfer private inputs of labor and capital stock, increases in rubles to a payment system with hard currencies. North the technical level, and inputs of all public goods, in- Korea was not prepared to pay for necessary imports cluding institutions. An economy’s production de- because of a chronic deficiency of hard currencies. This creases when capital stock is reduced, the quantity of caused a decline of capital utilization, which had ad- labor decreases, or technology is downgraded. Lack of verse effects on production through capital destruction. infrastructure, inappropriate policy measures, and an inefficient institutional framework can also cause nega- • Demand decline through market contraction tive economic growth. The cooperative network among socialist countries secured export markets by a clearing system. The In the case of North Korea, its economic slowdown breakdown of this network resulted in market contrac- began with the decline of its capital stock. The main tion and a decrease in demand. The lower demand for reason for this was the collapse of the international its exports constrained North Korea’s scope to earn cooperation network among socialist countries. The foreign currency, thereby affecting its imports. The most severe shock came from the abrupt rupture of reduction in capacity to import important materials economic relations with the Soviet Union. The capital exacerbated the decline in capital utilization. stock of North Korea decreased for the following reasons: • Capital withdrawal by the Soviet Union • Increase of import prices The Soviet Union stopped providing new loans in 1987 and began to demand the repayment of outstanding The destruction of the cooperative network among loans, thus withdrawing capital from North Korea. In socialist countries abolished socialist friendly prices, effect, the main capital provider turned into a capital which usually ranged between one-fourth to one-third extractor. of prices prevailing in the international market. The North’s import costs rose abruptly as socialist coun- All of these factors severely reduced the volume of real tries demanded normal market prices for their exports. capital in North Korea, which triggered the abrupt North Korea imported mainly critical investment goods negative economic growth at the beginning of the and essential production materials and resources such 1990s. as crude oil and coking coal. The three or fourfold rise in the prices of important production materials drasti- Has North Korea’s Economy Turned Upward? cally increased the input value over the output value.3 This has had a detrimental effect on capital stock in In 1999, North Korea realized positive economic North Korea, which intensively used cheap materials growth after almost ten years of economic downturn, and resources from socialist countries. Because the raising the question why the North Korean economy capital-using imports were employed mainly in the continually declined for almost ten years. The sustained industrial sector, the consequent capital destruction

2. Barro, Robert, and Xavier Sala-I-Martin. 1995. Economic Growth. New York: McGraw Hill: 153.

3. The price of crude oil from China has risen from $60 per ton in 1989 to $135 in 1992.

4. Deindustrialization was not a result of the transformation process, but a result of the abrupt price increase. In particular, a rise in energy prices led to inefficient capital utilization.

46 THE KOREA ECONOMIC INSTITUTE OF AMERICA negative economic growth in North Korea after the Short-term Economic Problems abrupt initial decline can also be explained by the continuous decrease of capital stock. All real capital has a Food shortage is the most pressing economic problem limited lifetime because of natural decay and technical in North Korea. According to reports by international deterioration. aid organizations, the number of starving people in the 1990s is estimated to have been between 300,000 to Production must be greater than the sum of deprecia- 2,000,000, with famine being most serious in the pe- tion and consumption if a decrease in national produc- riod 1994–1996. The severe food shortages resulted tion is to be avoided. If domestic production is not great from consecutive floods and droughts, shortages of fer- enough to cover depreciation and consumption, foreign tilizers and oil, and the small amount of arable land, capital should flow in to compensate for the capital which accounts for only 18 percent of total land area. deficiency. Otherwise, capital volume will decline, as Even though the food situation has improved with out- will domestic production. side help, North Korea still reported a 1.87 million ton grain shortage in 2001. North Korea is reliant on im- The present severe famine situation has revealed that ported oil to generate fuels and fertilizer. Oil imports North Korea’s production cannot even cover its basic have been squeezed by foreign exchange shortages and consumption needs, which means that capital has by the reduction in subsidized supplies from Russia diminished every year. The diminishing capital stock and China. is the main reason for continuous negative economic growth in North Korea. Its economic situation seems Second, North Korea is suffering from a severe short- to fit into what has been called the “poverty trap.” The age of electricity, which is mainly generated using coal supply of domestic and foreign savings is so low that and hydro power. North Korea’s installed generating the depreciation of physical stock has not been replaced. capacity was estimated at 7.14 million kilowatts in In fact, GDP per capita decreased to such a low value 1990, with 60 percent (4.29 million kilowatts) from that North Korea soon reached a point where further hydro power and the remainder from thermal sources.6 capital decline was impossible. Electricity generation has been hampered by difficulties in extracting the increasingly inaccessible and low North Korea’s economic growth in 1999, and possibly quality domestic coal reserves. Beyond the problem of in 2000, was boosted by capital inflows, especially lack of energy inputs, the power grid (which has been from South Korea. The Hyundai Group of South largely placed underground for security purposes) is Korea paid over $200 million for the Mount Kumgang said to suffer from extraordinarily large transmission tourism project in 1999. Hyundai intends to pay a fur- losses. ther $150 million yearly.5 Furthermore, China and Russia in 1999 increased their economic assistance so Third, North Korea needs to install new production as not to lose influence. Humanitarian assistance from facilities. Its industrial equipment is out of date. Most the United States and other countries increased as well. was established with technology from the Soviet Union All of these factors contributed to the economic growth immediately after the Korean War, and some is even of North Korea in the past two years. North Korea, from the Japanese colonial period. These outdated however, does not have sufficient production capacity production facilities continued to be used because North to satisfy domestic consumption and to compensate for Korea was dependent on subsidized production mate- capital depreciation. This suggests that the recent rials from the old socialist countries. North Korean positive economic growth in North Korea may evapo- specialists believe that at most only 30 percent of the rate at any time, particularly if capital inflows cease. industrial equipment would be able to run without

5. The value of this capital injection was about 15 percent of North Korea’s total export volume. Its export volume in 1999 was $1.48 billion.

6. See “North Korea-A Country Study,” at the Library of Congress. Search at http://lcweb2.loc.gov/frd/cs/cshome.html.

NORTH-SOUTH ECONOMIC COOPERATION 47 subsidization. This implies that North Korea cannot Third, North Korea needs to build up a new interna- produce enough to satisfy minimum consumption needs tional trading network. After the destruction of its in- without new investment in its production capacity. ternational network of old socialist countries, North Korea was unable to establish a new network because Fourth, North Korea needs hard currency to run the of political and economic restrictions by the United economy. No production facility is viable if North States. However, it is important to note that North Korea cannot provide the necessary materials on Korea cannot survive without international coopera- account of the shortage of hard currency. The avail- tion, because its economy is not self-sufficient. The ability of important spare parts has also been declin- country needs to interact with international markets as ing, adversely affecting production capacity. However, well. prospects for access to hard currency remain bleak. South Korea’s Political and Business Interests in Medium-term Economic Problems North Korea and the Developing Relationship

North Korea has much to do in order to develop its Political Interests economy in the medium term. Important tasks are listed below. Inter-Korean economic exchange is regarded as an important instrument that will help transform the two First, infrastructure should be constructed as soon as countries’ hostile relationship into one characterized possible. The transportation and communication sys- by cooperation. With increasing economic gains, they tems are outdated and in poor condition. North Korea will become partners rather than foes. Economic co- uses the railroad as its main mode of transport, but operation can therefore be the most practical way to most of the railroads have just one track, usually very build confidence between the two Koreas, as it will old, thus limiting speeds to under 30 kilometers per enable them to pursue common interests for mutual hour. Many harbors cannot handle containers exceed- benefit. This cooperation, if expanded, will help the ing 18 meters in length. The telephone system is manu- two sides to form a national economic community. Af- ally operated and has very limited network capacity. ter Seoul allowed economic interaction with North The poor infrastructure creates bottlenecks and lowers Korea in 1988, the two-way trade volume between the productive capacity. Without improvements to the South and North reached over $287 million in 1995. infrastructure, economic development will be almost The South has emerged as the North’s third largest trade impossible. partner, next to China and Japan. Economic exchange between the two countries has had its ups and downs, Second, transformation of the economic system is with problems mainly resulting from the lack of im- indispensable for North Korea’s economic develop- portant institutional frameworks for business such as ment. A new system that contains more of the charac- investment guarantees, a direct payment system, and teristics of a market economy is required. However, contracts for dispute resolution. However, during this North Korea faces two constraints. One is the incom- period, a paradigm change did not occur because eco- patibility of a market economy with its authoritarian nomic profits did not grow enough. This stalemate political system. The other is the need to guarantee demanded a breakthrough by governmental dialogue. successful reform. North Korea continues to maintain its authoritarian political system, which does not al- The summit talks in June 2000 opened up the rap- low for any political risk. That is, the system will not prochement process between the two governments. risk the possibility of unsuccessful reform. However, Both governments agreed to establish a much-needed it is difficult to imagine that the North Korean situa- institutional framework for economic cooperation. This tion can deteriorate further, because the people already institutional framework will raise market transparency live in extremely desperate circumstances. More in North Korea. Furthermore, political stability is sacrifice could provoke resistance among the common expected to reduce political risk as well as the com- people, even if reforming the system demanded only bined risk premium. All these changes should contrib- normal adjustment costs. ute to increasing economic exchange and peaceful cooperation.

48 THE KOREA ECONOMIC INSTITUTE OF AMERICA Direct Business Interests pecially China and Russia. For example, China, with its growing purchasing power, is increasingly becom- First, South Korea can use the relatively cheap labor ing an important business partner for South Korea. force in North Korea. North Korea demands a mini- Russia is also providing new business potential with mum monthly wage level of $74 per worker in special Siberian development projects. economic areas and $100 otherwise. Additionally, investors must contribute $20–$30 per worker monthly Fourth, South Korean investors want to seize the fu- for social insurance. The resulting minimum wage level ture North Korean market before others enter. South then reaches around $100 to $130.7 However, the wage Koreans believe that the South and North will be re- level in North Korea is much higher than in Vietnam unified at least economically in the near future. Invest- or China, other Asian countries in the process of re- ment now costs much less than it will in the future. form. The average wage level in Vietnam is no more Early investment will make it possible to find optimal than half of North Korea’s, and China does not de- locations and develop good quality labor ahead of other mand such high wages from foreign investors. Ac- competitors. knowledging this problem, North Korea provided investors with another way to use the labor at a cheaper Fifth, South Korea’s domestic market is more or less wage level, namely “processing on commission.” This saturated, and competition in the international market is a form of investment in which investors pay wages is becoming more intense. North Korea, therefore, may on the basis of products, not workers or working hours. provide new room for economic growth. Although The investors bring the production facilities and all North Korea does not have enough purchasing power, production materials into North Korea. The workers the natural resources, cheap labor, and new links to produce goods using the delivered materials and ma- the Asian continent can be a valuable substitute for chines for a production fee. The fee for one unit is dif- money. The possible joint project for natural gas de- ferentiated according to the type of good. In this sys- velopment in Siberia is an example of the potential for tem, the average level of wages per worker is under mutual economic benefit. $50 per month. This processing on commission has steadily increased and is now the main type of eco- Sixth, North Korea may function as a supporting re- nomic exchange between the South and North. gion for the South Korean economy, as Shenzhen does for Hong Kong. North Korea is like a vacant field which Second, South Korea can use the relatively abundant is ready to accept any investment. Investors can help natural resources of the North. North Korea is famous to reshape the industrial landscape. A complementary for its iron and metal products. It has abundant depos- relationship between the South and the North could be its of iron, coal, magnesium, lead, zinc, tungsten, mer- established through new investments. According to cury, gold, and silver. There are even reports of pos- Choi,8 the new competitive sectors in the North were sible oil deposits. Acquiring raw materials from the built by investments from the South in the 1990s. The North is convenient and relatively cheap. planned industrial complex in Kaesong is an important example. Third, South Korea can make use of North Korea as a transit route to other Asian countries and Europe. Even Prospects for Rapprochement on the Korean Pen- though South Korea is on the Asian continent, it has insula through Economic Cooperation not been able to reach its neighbors by land. Being able to do so can potentially reduce transport costs and The Sunshine Policy is based on the conviction that stimulate economic activity with other countries, es- economic interests can forge a way to peace. The stra-

7. Cited from the (South) Korea Trade-Investment Agency (KOTRA) http://www.kotra.or.kr/nk/

8. Choi Jean-ah. 2000. Changes in North Korea’s Trade Structure and Revealed Comparative Advantage. (Thesis Paper). Seoul: Major in International Cooperation, Graduate School of International Studies, Yonsei University.

NORTH-SOUTH ECONOMIC COOPERATION 49 tegic framework of the Sunshine Policy lies in maxi- cooperative paradigm on the Peninsula. All of this mizing economic interaction between the two Koreas points to strengthened inter-Korean economic relations. so that common interests can persuade North Korea to cooperate with the South. Summary and Conclusions

First, North Korea is in a difficult situation after the Since the inauguration of U.S. President Bush, eco- ten-year economic downturn. The consequent rise of nomic relations between the two Koreas have stagnated. the marginal utility of economic profit to a very high This raises questions about the future of relations be- level has made the North interested in the economic tween the South and North. On this point, economic profit provided by the South. Accordingly, the South is theory says that North Korea cannot help but open its in a position to reward the North with just relatively doors, especially to the South. It has fallen into a pov- small payments. erty trap, and the South is the most likely investor. The South has been actively working to stabilize peaceful Second, South Korea offers the greatest potential for relations with the North under the Sunshine Policy. investment in the North. North Korea is expecting eco- Almost all of the obstacles to inter-Korean economic nomic aid from the South to increase. It is highly pos- relations have to be resolved institutionally and politi- sible that economic cooperation between the two cally. The South and North have sufficient motivation Koreas will also bring profit to the South because of to solve the institutional problems. Agreements in the similar cultural and national identity and geographical ministerial dialogue are evidence of this kind of im- proximity. The interests of the two Koreas in economic provement. If the two Koreas cooperate closely, eco- cooperation can be harmonized more easily than the nomic interests will become great enough to strengthen interest of any two other countries. However, private their relationship further. investment can be activated without any governmental assistance only if the basic elements of infrastructure such as the transport system and electricity are in place. Dr. Yoon is a Research Fellow in the Center for Re- gional Studies, Korea Institute for International Eco- Economic relations between the two Koreas are ex- nomic Policy, in Seoul. pected to be strengthened further because of the interest of both sides in economic cooperation. Through the Sunshine Policy, the South is pursuing greater economic interaction to stabilize peaceful relations with the North. At the private level, enterprises in the South can reduce production costs by using cheap North Korean labor. The Kyungui railroad can open a new way for South Korea to reach the Chinese and Russian markets.

For the North, finding a stable partner to provide economic assistance is necessary. It seems that strengthening inter-Korean economic relations is the only way to get out of the poverty trap because South Korea has the greatest political and economic interest in the North. The summit talks in June 2000 showed that both Koreas are prepared to intensify economic relations. The institutional problems, which have restricted inter- Korean economic cooperation, are being removed by ministerial dialogue.

An economic relationship is the main instrument to bring the two Koreas together and establish a new

50 THE KOREA ECONOMIC INSTITUTE OF AMERICA NORTH KOREA’S ECONOMIC DEVELOPMENT: AN AGENDA FOR COOPERATION by Richard A. Christenson1

Introduction nomic brain trust created an ambitious and sound economic blueprint. The American economist recalled The economy of the Democratic People’s Republic of to me that the experience of working with the Korean Korea (DPRK) is in very dire straits, and the immedi- team was among the most rewarding of his career. ate outlook for improvement is not good. Before trying Why? “Because the Koreans made the most of every to assess the DPRK’s future economic prospects, a look opportunity we gave them, and they were extremely back at history may be helpful. In 1953, at the close of capable and bold. They seemed to have a culture well- the Korean War, the Korean peninsula lay devastated, suited to the demands of economic development.” and prospects for economic recovery were indeed bleak. Culture—more on that later. Production levels in the South had declined to pre-1940 levels, and per capita GNP was a mere $63. In that The American economist added that the Koreans were same year, by comparison, the Philippine economy was also very independent, sometimes ignoring American doing quite well, and economists cited the Philippines advice, as in deciding to go ahead with the Seoul-Pusan as a model developing country, with bright prospects highway project and the rural self-help program that for economic growth. Today the Philippine economy came to be called the Saemaul Movement. Moreover, continues to struggle, while the economy of the Re- there was one chronic disagreement between Ameri- public of Korea (hereafter ROK, or South Korea) has can and Korean economists that was never resolved, surged powerfully ahead to become one of the great and that was disagreement over what the economic economic success stories of our age. No economist in growth target should be. The Americans held that if the world would have predicted this in 1953. How did Korea did everything right it could hope to sustain a the ROK do it? GDP growth rate of 5 percent. The Korean economists adamantly insisted they could reach 10 percent, which I discussed this question recently with an American the Americans politely said was “unprecedented and economist who, as a freshly minted Ph.D., went to unattainable.” In recounting this anecdote to me, the Korea in the early 1960s with U.S. Agency for Inter- American economist good-humoredly acknowledged national Development to assist Korea’s newly launched that “The Koreans turned out to be right, and they got development effort. The American economist explained their 10 percent.” to me how President Park Chung-hee, during his first months in office, had dallied with unsound economic I recount this bit of history to raise a somewhat policies such as directing that mulberry trees be planted contrarian notion: might North Korea someday do the in poorer parts of Cholla-do. However, Park soon same, confound the dark predictions of economists and realized the futility of such approaches and turned for at some point take wing toward dramatic economic advice to economically astute senior officials like growth? What would it take for that to happen? In pon- Chang Ki-yong and Kim Hak-yul, and later to capable dering that question, let us examine where the DPRK foreign-trained economists such as Nam Duk-woo. economy now stands, and what combination of inter- Working closely with U.S. counterparts, Park’s eco- nal efforts and international cooperation could brighten their prospects for achieving economic development.

1. This article is a revised version of a paper prepared for the Research Institute for National Security Affairs (RINSA) Conference in Seoul on 6 April 2001 while the author was at the U.S. Institute of Peace. The views in this paper are the author’s and are not statements of U.S. policy.

NORTH-SOUTH ECONOMIC COOPERATION 51 The DPRK Economy Today the population. In 1999 the Bank of Korea recorded a small apparent rise in DPRK economic performance, There was a time in the 1970s when the DPRK but on closer scrutiny many economists now believe economy actually outperformed the ROK economy. that the DPRK economy peaked in 1989, that overall Part of the reason was the DPRK emphasis on mass economic output declined roughly 50 percent between mobilization and the use of non-economic incentives 1994 and 1999, and that the economy remains in de- to spur workers to Herculean efforts, in the cline. It is fortunate that international aid has signifi- Stakhanovite tradition of Stalinist Russia—these cantly alleviated the misery of some of the North Ko- proved very effective in the early years. However, in rean people in recent years, but this aid has had no true the absence of rational economic inputs, these advan- economic effect—international aid has in effect been a tages soon reached their limits. Early economic suc- sprinkling of dollars across a landscape of rusted and cess also owed much to the considerable outside broken economic machinery. What was broken remains support the DPRK received from China, and even more broken. from the Soviet Union. Thus the North Korean economy remains crippled, and The DPRK’s chronic dependence on outside economic the suffering of its people continues. Many have help is often interpreted as a contradiction of the prin- starved—estimates range as high as the Buddhist ciple of juche. In fact, though, juche never meant not Sharing Movement’s figure of three million dead—and, taking outside help, because there has never been a while emergency aid has now become semi-institution- time during the DPRK’s history when it was not de- alized, malnutrition is pandemic, and death from star- pendent on outside help. Rather, the juche concept was vation continues. The question naturally arises: how developed beginning in the 1950s as a codification of much longer can the DPRK continue like this? We the DPRK’s deep resolve not to allow its inescapable should be cautious not to conclude that economic economic and geopolitical dependency on China and duress will cause the DPRK to collapse—bear in mind the Soviet Union to extinguish its autonomy. Indeed, the error of predictions in the early 1990s that the death the DPRK, more than most any other small nation, has of Kim Il-sung would cause the collapse of the DPRK. refined the art of accepting outside help while fending The DPRK regime has proven itself tough and durable off conditionality or intrusive processes. The juche- and fiercely determined to persevere in its own way, inspired effort to avoid intrusive conditions in interac- and if it is willing to continue to allow its people to tions with China and the Soviet Union bred, over the suffer horribly, it could perhaps continue this way for course of time, a confident, proud, patterned rejection a long time. Thus we should not be surprised if the of any conditionality. Thus the DPRK has no prece- DPRK continues for some years to limp along in this dent in its national experience for accepting the kind grim fashion. At the same time, we would not be of intrusive conditions—particularly relating to trans- surprised if economic duress caused the DPRK to fall parency and free market mechanisms—that the inter- into one form of chaos or another next week. The fact national economic community will surely require is, no one really knows, including North Koreans. before making aid available. It is thus ironic that the Prediction is impossible. juche ideology that served the DPRK well in its early years as a conservator of the nation now acts as an In 1996 and 1997 it was fashionable among some in obstacle to obtaining the economic programs the DPRK South Korea and the United States to hypothesize that needs in order to survive. early collapse of the DPRK regime would mean early release of the North Korean people from suffering, and The withdrawal of Soviet aid in the early 1990s, along therefore that collapse was desirable, the sooner the with curtailments of Chinese aid, rocked the founda- better. Further reflection led most to conclude that tions of the DPRK economy, and a vicious flood- collapse would set off cataclysmic chaos, possibly in- famine cycle in the mid 1990s proved catastrophic. cluding war, and in that scenario it was hard to imag- Severe energy and infrastructure problems brought ine anyone on the Korean Peninsula whose condition production to a near halt, and food production in re- would be improved, or whose sufferings would be cent years has amounted at best to only 3.5 million attenuated. And collapse would certainly raise the price tons of the 5 million tons needed to adequately feed tag of eventual economic rehabilitation. The DPRK

52 THE KOREA ECONOMIC INSTITUTE OF AMERICA might take meager comfort to note that few outsiders “slippery slope,” and that accepting the World Bank now argue that collapse is desirable. But still, the ba- assessment might of itself create pressures on the sic problem remains: the North Korean economy is DPRK to proceed down unknown and dangerous roads. broken. What will the DPRK do to fix it? DPRK reluctance also stems from the absence of any clear vision of what the future would look like if they Is the DPRK Ready to Reform Its Economy? undertook economic reforms—the future does not beckon, but frightens. Thus, fearful of the future and These days it is much debated whether the DPRK is deeply wed to its ways, the DPRK has decided it would ready yet to make the kind of bold structural changes be better not to even take the first step. This under- that will be necessary to rehabilitate its economy. Some scores the deeply conservative nature of the DPRK, assess that the DPRK is ready, noting that; the new conservative in the sense that it is extremely reluctant DPRK constitution promulgated in 1998 includes in to depart from its orthodox way of doing things. This Articles 33 and 74 provisions that legitimate limited is particularly so because most of that orthodoxy was new economic activities; there has been a modest in- mandated by Kim Il-sung, which means to depart from crease in the number and scale of marketplaces; the it would be disloyalty, treason, or heresy. DPRK is sending economic experts abroad to survey economic and trade opportunities; the DPRK has con- We may sometimes see at work in the DPRK some- cluded agreements with the ROK on investment guar- thing like the “muscle memory” that is engineered into antees, double taxation, dispute arbitration, and pay- some new plastics, such that no matter how much the ment mechanisms; and Kim Jong-il’s visit to the Shang- plastic is bent, it returns to its original shape and cur- hai hi-tech district signals that he is ready to take the vature. In the same way the DPRK may on occasion plunge toward economic reform. Skeptics, on the other show a willingness to entertain economic reform, but, hand, point out that the DPRK has so far taken no con- upon reflection, the DPRK usually returns to orthodox crete steps to introduce true economic reforms, and that policy lines. This kind of muscle memory may also the most we can see are small tactical steps that do not account for instances in the past in which the DPRK even begin to address the DPRK’s fundamental eco- flirted with dramatic change but then reverted to nomic problems. orthodoxy, such as the 1972 North-South Accord or the 1992 Basic Agreement with the ROK. One lesson Given that the DPRK has made no real economic to draw from this pattern is that dramatic single events reforms yet, the skeptics have won the debate so far. are not likely to overcome this muscle memory. On the Perhaps the best insight on Kim Jong-il’s visit to Shang- other hand, a consistent, sustained program of positive hai is that Shanghai is nearly unique among Chinese reinforcement may yield results. An illustrative cities in the degree to which party control remains firm example, still in progress, is the sustained North-South while the economy blossoms. This is probably the ver- follow-up to last year’s summit that appears to be keep- sion of the China model that most appeals to the DPRK, ing alive the summit’s positive momentum, thereby and, once the DPRK has studied this model sufficiently, thwarting the muscle memory that otherwise might have it might make some efforts to adopt it. But for now, the led the DPRK to move away from the summit’s agree- DPRK appears consistently wary of any economic in- ments. teraction with the outside world that might be intrusive, and of course the ordinary requirements of free- What steps to improve its economy is the DPRK ready market intercourse would be alarmingly intrusive by to take now? It appears willing to take only modest, DPRK standards. cautious steps that it judges it can fully control. Thus, rather than accept a World Bank assessment team, the A modest example underscores this point. The World DPRK seems to prefer to send its economists abroad Bank has, without imposing any a priori conditions, to learn some of the necessary economics, then bring offered to conduct an assessment of the DPRK economy that knowledge home so the DPRK could make its own that would doubtless conclude with extremely useful economic assessment. There is in fact great value in recommendations. The DPRK so far has declined the having the DPRK’s bright young students go abroad offer, principally out of concern that even such an now to study and learn the mechanics of the interna- assessment would be too intrusive and something of a tional economy, for, if the DPRK someday decides to

NORTH-SOUTH ECONOMIC COOPERATION 53 reform, it will need thoroughgoing experts who can rules clearly preclude any funding for the DPRK until interact capably with outside economists and who can the DPRK institutes sound macroeconomic policy. do what the ROK’s talented economists of the 1960’s Thus, for now only informal dialogue with the IFIs is did—make best use of every opportunity. Given that it possible. The IMF and World Bank can continue to takes years to fully train an economist, it may also be invite the DPRK to attend their annual meetings— valuable to hold intensive short-term seminars for cur- invitations that the DPRK has thus far declined to rent senior government officials. The World Bank and accept—and the World Bank can continue to explain IMF have the potential to provide such training. to the DPRK the value of an economic assessment. While the DPRK has shown more interest in the ADB But can the DPRK’s cautious approach work? Perhaps than in the IMF, in fact the actual practical gateway to over time this approach could introduce needed eco- the World Bank and ADB is IMF membership. The nomic reform, but the question is whether the DPRK roles of Japan and the United States loom large in this and its barely-breathing economy can afford such a matter. Both the United States and Japan are concerned leisurely pace. The American economist Marcus about unresolved issues each has with the DPRK— Noland, having studied the Russian attempt to execute Japan is particularly concerned about its kidnapped a slow and methodical pace of economic reform, con- citizens, and the United States has a variety of concludes that bold, fast reform may in the end be less cerns. Until more progress is made on issues of con- costly and disruptive. Bold reform can also prevent the cern, neither the United States nor Japan is likely to rise of corrupt apparatchiks who can use the darkness support DPRK membership in these institutions, and, of semireform to siphon off capital and conceal their without that support, DPRK entry is not possible. abuses. However, as data accumulate on the experience of countries like Poland that adopted such an In the meantime, the World Food Program (WFP) can approach, it is increasingly apparent that speed can and should continue to provide emergency food create a new set of problems, and thus a new-forming support to the DPRK. In an effort to offset “donor fa- wisdom is that the sequence of reform may be more tigue,” the WFP should insist on improved monitoring important than speed itself. It is interesting to note a and transparency of distribution. Efforts should also confluence of views among DPRK and ROK thinkers: be made to move away from emergency food aid by both seem to think a measured pace of reform would introducing agricultural reforms that improve produc- best suit the DPRK’s needs—something like the China tion. In this, the United Nations Development Program, model. If that course were to be adopted, then a reli- the International Fund for Agricultural Development, able supply of aid would have to be secured in order to and the Food and Agriculture Organization can play assure the midterm subsistence needs of the North helpful roles. In the long run, however, the DPRK’s Korean people. geography and climate preclude food self-sufficiency on an economically rational basis, and therefore the In the end, the DPRK must decide for itself what pace ultimate solution is for the DPRK to exercise its of economic change it can tolerate. Right now it ap- comparative advantage in the international market- pears able to tolerate very little real change. Under place, trading to obtain the food that even a reformed these circumstances, how can the international com- agronomy cannot produce. munity be helpful? Also, work on the Agreed Framework should continue. An Agenda for International Cooperation: The Calls for its revision are clarion these days, and while Short Term discussion of ways to improve it may be useful, we should be careful not to start down a path toward revi- DPRK reluctance to undertake meaningful economic sion that could risk losing the advantages that are reforms significantly constrains the international inherent in the Agreed Framework. For example, the community’s ability to help. Within these constraints, Agreed Framework has built into it strong leverage what can be done? First, a word of caution: not much toward an important goal, the revelation of the DPRK’s now can be expected from the international financial nuclear past, for the nuclear core will not be installed institutions (IFIs) and the Asian Development Bank in the light water reactors (LWRs) until that past is (ADB). The IFIs are not courting the DPRK, and their revealed. Any revision would have to duplicate or

54 THE KOREA ECONOMIC INSTITUTE OF AMERICA improve upon that leverage. Claims that the LWRs are these concerns are addressed, the United States will too expensive or not as suitable as thermal plants have not likely offer economic assistance beyond food aid. not been substantiated, and the ROK—which is paying the lion’s share of the LWR costs—disagrees with An Agenda for Cooperation: The Long Run these assertions and wants to implement the Agreed Framework as is. In the end, the Agreed Framework In the longer run, depending on our assumptions about can be amended only by consensus of all parties, and, changes on the Korean Peninsula and in the region, a if such a consensus cannot be reached, the Agreed more robust agenda for cooperation can be articulated. Framework should be implemented on the original First, let us make some assumptions—tending some- terms. Separate new programs can be initiated to solve what toward the optimistic—that would create more outstanding problems, such as the need to upgrade the positive conditions for international cooperation. Let DPRK electrical grid and transmission system. us assume that ROK-DPRK cooperation continues, though perhaps at a more modest pace, due to domes- In the short term, individual nations will also make tic political constraints in the ROK. Let us assume that their own economic arrangements with the DPRK. the U.S.-DPRK dialogue has resumed and that the China has long maintained an independent economic United States and DPRK are making some progress in relationship with the DPRK, declining to join KEDO, addressing security and other issues. This should in- for example, but still ranking, after the ROK, as the clude a credible reduction in DPRK military spending largest provider of economic assistance to the DPRK, so that scarce internal resources can be freed up for providing principally coal, oil, and grain. China has development tasks; it should also include mechanisms historically devoted roughly one third of its foreign aid that will ensure aid cannot be diverted to military uses. budget to the DPRK, and is now formulating a 2001– Let us assume that the U.S.-China relationship is basi- 2005 Five Year Economic Plan that is expected to cally healthy, though perhaps marked by ongoing include provisions for continuing aid to the DPRK. tension in some areas, and that the U.S.-Japan rela- Great Britain is just beginning to embark on a diplo- tionship is sound. Let us assume the ROK economy is matic relationship with the DPRK, and is making a in reasonably good shape. modest start with library and museum exchanges, and with provision of university-level English teachers. The Under these conditions, what kind of cooperation might DPRK has opened diplomatic relations with 13 of the be extended to the DPRK? First, the United States and 15 EU countries—soon to be 14 when relations with Japan could positively support DPRK entry into the Ireland are inaugurated—and Sweden’s Prime Minis- IFIs and the ADB. This could open up an array of pos- ter made a visit to the DPRK in his role as EU Presi- sibilities for assistance along familiar lines of assis- dent. Thus, we might soon see important EU initia- tance to developing economies—again provided the tives, economic and political, toward the DPRK. DPRK met IFI transparency and macroeconomic policy Japan has the potential to pay large sums of aid when requirements. The first step would be for the DPRK to relations are normalized, but, as noted earlier, given accept the World Bank assessment, which could lead the absence of progress on outstanding issues, there is to productive discussion of the proper development no near-term prospect of normalization. model for the DPRK, which in turn could lead to focused studies of particular sectors, beginning with the What about the United States? The Bush Administra- energy sector, possibly followed by the transport section is still undertaking a review of U.S. policy toward tor. Given the enormous scale of the DPRK’s needs, a the DPRK, and, until it is completed, only brief con- special focused North Korea Development Program jecture is possible. Granting food aid to countries in might be established. need is a U.S. policy that dates back to the overflow- ing U.S. granaries of the 1950s, and, given this tradi- In addition to such multilateral programs, bilateral aid tion, there are good prospects that food aid to the DPRK would also likely flow to the DPRK. In this the most will continue. However, as noted earlier, the Bush important nation would continue to be the ROK, whose Administration is concerned about DPRK military unique status would undeniably give it the greatest capabilities and a number of other issues, and, until burden of any country extending bilateral aid. One pri-

NORTH-SOUTH ECONOMIC COOPERATION 55 ority task might be to move ahead with establishment The DPRK’s Unique Strengths and Weaknesses of the Kaesong industrial park. China to date has preferred to extend its aid to the DPRK on a bilateral ba- As noted at the outset, in 1953 no economist in the sis, and that would presumably continue, although re- world would have predicted the ROK’s dramatic rise vitalization of regional projects like the Amur River out of the rubble of war to become one of the power- project might attract China’s support as well. Normal- house economies of Asia. Clearly the ROK brought ization between Japan and the DPRK is expected to unusual strengths to the task of development. The ques- include some form of aid payments to the DPRK along tion naturally arises: can Koreans in the North repli- the lines of the reparations paid to the ROK when cate the miracle that Koreans in the South achieved? Japan and the ROK normalized relations in 1965. The amount could be large, but is subject to negotiations, On the way to answering that question, let us first con- and in the end the Japanese would give not cash but sider what might be the secret of the ROK’s economic probably a mix of contributions to IFI programs, tied success. The ROK had strong political leadership, well- loans, and investments. In addition, many of the coun- educated economists, and generous external financing. tries that have recently opened diplomatic relations with So have many other countries that failed to achieve the DPRK would probably institute or expand bilat- what the ROK has achieved. The ROK’s additional eral aid programs. advantage was cultural: the ROK harnessed those elements of its cultural heritage that were conducive to Again, what about the United States? Assuming a economic development, and at the same time suppressed significantly improved U.S.-DPRK relationship, the those that were not conducive, while also importing United States could become a positive voice of sup- useful new non-native elements. port for IFI programs for the DPRK. Humanitarian aid would continue and possibly increase, and the United Thus, the ROK drew well on the traditional Confucian States would likely seek to move more in the direction emphasis on education—and what matters in economic of sustainable development programs. However, again development is not so much higher education but a word of caution is in order: given the current state of widespread egalitarian education of both sexes. The U.S.-DPRK relations, it is difficult to imagine signifi- ROK also harnessed the Confucian virtues of respect cant non-humanitarian U.S. bilateral aid to the DPRK for authority, loyalty, filial devotion, self-sacrifice for in the near future. Moreover, the United States and the the sake of larger goals, and frugality to create an IFIs would probably concur that, before significant aid extremely effective work ethic and business culture. can be made available, the highly military-oriented At the same time, the ROK suppressed the traditional DPRK economy should to some extent be civilianized Confucian bias against commercial activity. It also built in order to free up domestic resources for investment. on what it had learned of Japanese enterprise during the colonial period, and adopted entirely new elements In the end, who will pay the costs of DPRK economic of economic and business wisdom that its students and development? A large burden will unavoidably fall to businessmen brought home from abroad. These ele- the ROK in its complex role as the DPRK’s nearest ments converged to form the cultural basis of Korea’s neighbor, next of kin, patron, and tutor. Right now the economic success. ROK is in fact carrying the heaviest burden. But some economists believe that, once IFI programs come fully Can the DPRK replicate these conditions? Many on stream and Japan begins disbursing its funds, these thoughtful South Koreans believe the DPRK indeed two sources can provide the bulk of mid-term develop- has the right cultural elements to do so. Underneath mental funding. In the long run, private sector invest- the heavy overlay of the DPRK political and social ment will be of critical importance as the main engine system, the Koreans in the North are still Koreans, and of the DPRK’s development into a mature economy. many traditional Korean views and values lie dormant At some point on this road to economic health, the but alive. A dramatic example of this persistence of DPRK must become a nation that pays its own bills. cultural memory is how, after many years of little mar-

56 THE KOREA ECONOMIC INSTITUTE OF AMERICA ket activity, economic crisis forced North Koreans to itself as a victim of foreign hostility, and interpreting create some form of market activity, and they created its present difficulties as resulting from that hostility, markets that turned out to be faithful reproductions of the DPRK feels morally aggrieved and believes that traditional Korean country markets. Today country the world owes it compensation. But aside from the markets in the South and in the North have uncanny special case of Japan—and even in Japan this will be similarities—the way of displaying goods, the way of a hard sell—no country will understand or accept this haggling, the way rival shopkeepers quarrel. view. The DPRK will have to set aside this entitlement mind-set if it is to compete well in the international Thus the division of North and South has not entirely marketplace. Unconditional ROK aid to the DPRK in extinguished their common cultural roots. More to the recent years, while valuable for its pump-priming point, the DPRK, like the ROK, still places strong effect on North-South dialogue, nevertheless probably emphasis on education, hierarchy, loyalty, filial devo- reinforced the DPRK sense of entitlement. The anti- tion, subordination of self to group goals, and frugal- dote is for the ROK and DPRK to move, as much as ity. Historically, Koreans in the northern provinces of practicable, toward conducting their transactions on Pyungan-do and Hamkyung-do were renowned market terms. throughout Korea as the most shrewd and skillful merchants, and some residual penchant for the mar- Perhaps the most serious of obstacles to economic ketplace may remain and be usable. In some cases the development is the DPRK’s modern version of a tradi- DPRK has created new cultural behaviors that are com- tional virtue, filial piety. How, North Koreans must patible with economic development: the extreme ask themselves, can we simply abandon the values and tenacity and goal-orientation of the Chollima Move- systems that Kim Il-sung created for us without perpe- ment, for example, could be usefully harnessed to the trating an act of utter disloyalty? The suggestion of an tasks of economic development. answer to this conundrum might be found in a water- shed historical process that began in Japan in 1868, At the same time, the DPRK would have to shed some the Meiji Restoration. In that process Japan extricated cultural behavior that does not facilitate economic itself from its feudal past and embarked on the road to development. The most obvious case is the DPRK’s modernity—interestingly, not in the name of the fu- culture of studied resistance to the concepts of modern ture, but as a way to hold fast a revered past. The move- market economics. The beginning of a solution, as noted ment was explained and justified as being not a depar- earlier, might be for the DPRK to send its brightest ture from the past, but rather a restoration of what was young economic minds abroad for thoroughgoing best about the past, the emperor system. education in economics, and give its managerial level bureaucrats short, intense courses in aspects of practi- The DPRK, of course, is highly unlikely to look to Japa- cal economics relevant to their work. A deeper-rooted nese history for inspiration, but the concept of embark- problem is the DPRK’s suspicion and deep hostility ing on a new and better road in the name of honoring toward foreign investment, which has its origin in the the past may afford a way for the DPRK to resolve one historical memory of invasions, colonization, and of its most difficult political and ideological dilemmas. exploitation by foreign powers. Consider that even in An example from China’s history further illustrates the the much more open and economically advanced ROK, point: Confucius, hoping to bring warring states to hostility toward foreign investment persisted so strongly peace, invoked the halcyon image of China’s golden that as recently as 1998 President Kim Dae-jung made age under Emperors Yao and Shun, and this inspired a strong personal appeal to the Korean people to change warring armies to lay down their arms in hopes that a their thinking and accept the need for foreign invest- revered past could be restored. Indeed, it is a historical ment. If this hostility still lingers in the South, it is all leitmotif for some Asian cultures to revere the past and the more strong in the North, and overcoming it will fear the future, and this is so with the DPRK today. be an important task if the North is to create a positive investment climate. In the end it may be possible for the DPRK to justify structural economic change as the righteous way to Another cultural obstacle to development is the sense honor Kim Il-sung’s wish that his people live well. And of entitlement that the DPRK has internalized. Seeing perhaps the juche philosophy could also be adapted to

NORTH-SOUTH ECONOMIC COOPERATION 57 modern economic life, for in essence juche is a strong determination that is shared equally by the economically successful South Koreans: the determination that Koreans must preserve their nation’s autonomy against the pressures of larger countries.

Summing up, under the circumstances that apply today, there are certain modest efforts the international community can take to assist the DPRK economically. As circumstances inside the DPRK and in the DPRK’s international relations improve, an array of promising larger possibilities comes into play. And ultimately, it appears the DPRK may have the cultural “right stuff” to create its own version of the ROK economic miracle. A point worth emphasizing is that the DPRK has within its power today the ability to make the crucial decisions that could start this process.

Mr. Christenson is presently the Deputy Chief of Mis- sion at the U.S. Embassy in Tokyo

58 THE KOREA ECONOMIC INSTITUTE OF AMERICA POTENTIAL FOR MULTILATERAL ECONOMIC COOPERATION IN NORTH KOREA by Bradley O. Babson

Introduction Multilateral Cooperation to Support Inter-Korean Reconciliation Tensions deriving from historical conflicts and the Cold War have dominated Northeast Asia for most of the The inter-Korean Summit of June 2000 represents a past century. The division of the Korean Peninsula has critical historical moment because the leadership ini- defined and held this tension for over 50 years. In tiative for advancing the goal of reconciliation was recent decades, economic progress in Japan, South seized by the two countries themselves. A Korean-led Korea, and China has been dramatic, and the region process to reduce the longstanding tension on the now is home to three highly industrialized economies Peninsula is the right way forward, and both President with a combined weight that rivals that of North Kim Dae-jung and Chairman Kim Jong-il deserve America and Europe. The continued tensions, which credit for abandoning the status quo and embarking on are unique to this region, have inhibited the natural an uncertain and courageous new path towards recon- development of regional economic cooperation ciliation. Willingness to expand inter-Korean economic mechanisms that are now well established in Europe, relations is a central feature of this process. North America, Latin America, and Southeast Asia. As a result, economic relations in Northeast Asia tend Two basic challenges face the two Koreas as they move to be dominated by a web of bilateral agreements and forward. One is to address the enormous gap between arrangements to a much larger degree than in other the size of the two economies. The strategy must be parts of the World, and the region does not have a first to help North Korea stabilize its economic con- coordinated economic policy or strategic vision. While traction and then to set its economy on a path of long- this may conform to a political logic rooted in recent term sustainable growth, with the objective of narrow- history that gives priority to balance of power and ing the gap over time. It is inevitable in the process security in the region, it does not take advantage of an that North Korea will need to make some changes in economic logic that would bring immense benefits to its internal economic policies and management in the people of Northeast Asia if deeper economic inte- order to make best use of resources for development gration and genuine regional economic cooperation and to expand external economic relations with other could take root. countries, including not only South Korea, but also China, Japan, Russia and countries outside Northeast The basic thesis of this article is that reconciliation on Asia. The second challenge is to deepen integration of the Korean Peninsula holds the potential to unleash a the two Korean economies while the two countries new era where regional stability and economic well- remain as separate states for the foreseeable future. being can be advanced by an increased role for multi- The two Koreas have already established the adminis- lateral economic cooperation initiatives. It addresses trative mechanisms for working on inter-Korean two aspects. One is the role of multilateral economic economic issues, set an initial agenda, and achieved cooperation to support the inter-Korean reconciliation some tangible successes. process and gradual integration of the two economies. The other is the role of multilateral cooperation in There are a number of obstacles to the ability of the expanding regional economic integration and interde- two Koreas to successfully meet these two challenges: pendence that can support long-term stability interests.

NORTH-SOUTH ECONOMIC COOPERATION 59 • North Korea does not have the resources to meet its • North Korea does not have much experience with need for capital investment in public infrastructure, the workings of the international economic and finan- especially the rebuilding of the electric power system cial system and thus must develop trust in the fairness and the transport network. South Korea does not have of the system and also in the intentions and advice of the economic strength to undertake to provide these foreign economic partners. Understanding the economic resources on its own. Thus, the two Koreas will re- logic of trade and investment proposals and the basis quire financial support from the international commu- for mutual benefit will be essential to building this trust. nity to achieve their reconciliation objectives in the economic arena. While there are many things the two Koreas can and should do to advance inter-Korean economic coopera- • North Korea does not have the knowledge of market tion, there is a role for multilateral mechanisms to economics and international experience needed to shape support and complement them. and manage economic policies that will be successful in overcoming its basic difficulties. Education and Training

• South Korea still faces significant challenges in cor- The knowledge gap between the two Koreas on eco- porate restructuring and in strengthening the financial nomics and commerce can be reduced through creat- sector. Both Koreas will have to manage economic ing more opportunities for North Korean officials, policy and management reforms while trying to bring enterprise managers, and students to learn. Study tours, their economies more closely together. specially designed programs for in-country and out- of-country training, and scholarships can all support • Foreign investors are unlikely to provide significant this need. Cooperation in this area between the two financing for industrial or commercial ventures with- Koreas can be supplemented by both bilateral and out more transparency in economic and financial multilateral training and educational efforts. North information, a legal code that respects foreign inter- Korea’s recent normalization of relations with many ests and is enforced, a financial system that can countries in Europe and around the Pacific Rim means accommodate the needs of foreign partners, and be- that these countries can be enlisted to play a growing haviors in negotiating and implementing international role in this area. Creating opportunities to collaborate business agreements that conform to normal business on training programs with institutions in China and practice. This is true for South Korean investors and other neighboring countries can provide valuable also true for foreign investors more generally. While support to the development of the inter-Korean eco- there may be a temptation to undertake politically nomic relationship and also to North Korea’s efforts motivated investment in North Korea, and a risk that to build better policies and management capabilities the South Korean government would grant subsidies for economic reconstruction. or guarantees to encourage investment, private investment will ultimately need to be commercially and Technical Expert Workshops economically viable if it is going to be sustainable. As the two Koreas define and move ahead with an ex- • Donor countries are not going to be willing to shift panding agenda of economic initiatives, one way to external official financial support to North Korea from support them is to arrange workshops where experts humanitarian aid to development assistance, without from outside the Korean Peninsula can bring their assurance that North Korea will use these resources to knowledge and experience to discussion of solutions attend to the basic needs of the people and to improve to specific issues. The experience of the two Germanies the economy, and not divert resources into maintain- will certainly be useful in this regard, but there are ing a high military profile and expenditure that exceed many other relevant experiences. One example is the reasonable self-defense requirements. This is a domes- proposed Kaesong industrial park. There are many les- tic political issue in South Korea and a policy issue for sons from experiences of other countries, including countries which have normalized relations with North China, on how to make these initiatives successful and Korea but which wish to support a reduction in to identify the problems that need to be overcome. If tensions, not a rearming of North Korea. the international community could find ways to help

60 THE KOREA ECONOMIC INSTITUTE OF AMERICA the two Koreas make Kaesong a success story, it would expanded multilaterally managed programs and policy make a major contribution to building trust and to the dialogue than through already heavily burdened bilat- reconciliation process more generally, which are criti- eral relationships. cal to North Korea’s growing participation in the international market economy. The Future of KEDO

Membership in the International Financial Institu- The Korean Peninsula Energy Development Organi- tions (IFIs) zation (KEDO) is an existing example of multilateral cooperation on the Korean Peninsula, but it is also a North Korea is not a member of the International misnomer. KEDO was created to resolve a nuclear cri- Monetary Fund, World Bank or Asian Development sis, but it has neither the mandate nor the resources to Bank. South Korea has enjoyed close relations and address the deeply rooted problems in North Korea’s support from the IFIs since the 1960s and has publicly energy sector. In fact, unless mechanisms are put in advocated North Korea’s membership in the IFIs since place and resources mobilized to rebuild the North’s 1997. Joining the IFIs would be a major step in bring- power transmission system, the nuclear power plants ing multilateral support to the inter-Korean reconcili- under construction by KEDO will not be usable and ation process. A future role for the IFIs on the Korean will not provide any tangible economic benefits to Peninsula could be to support the long-term interests North Korea. As the linkages between the KEDO of both countries by helping North Korea mobilize project and the wider and longer-term needs of the capital needed for its economic reconstruction, shape energy sector are increasingly recognized and become good economic policies and build market-friendly front burner concerns, it will be desirable to adjust institutions that would help North Korea become a suc- KEDO’s mandate. KEDO will need to coordinate its cessful member of the international economic commu- plans and activities closely with whatever organiza- nity, and by helping the two countries address policy tions are given the responsibility to address these larger and technical issues in economic integration. energy system issues. The most likely partners will be the Multilateral Development Banks (MDBs) and the New Mandate for the UN: Capacity Building and European Union, but coordination with bilateral Governance donors to the energy sector, including China and most probably Japan, will be highly desirable. Such coop- The UN has performed admirably in coordinating the eration is needed to ensure that the political achieve- international humanitarian response to North Korea’s ments of KEDO are not threatened by the absence of a food crisis. This should continue and expand, especially sustainable economic and financial framework for the in the area of agricultural rehabilitation. The economic energy sector, and to avoid the potential for incompat- agencies of the UN have had less success in their ini- ible advice and investments. Expanding multilateral tiatives to help North Korea with the Rajin-Sonbon cooperation in this area is a high priority. Free Enterprise Area and to introduce market concepts inside North Korea. As the focus shifts to expanding Importance of Aid Coordination economic relations with the international community and deepening economic integration between the two As more countries engage in educational and economic Koreas, the United Nations Development Programme activities with North Korea, as more nongovernmen- (UNDP), and other UN agencies should be given a tal organizations become involved in an increasingly new mandate and resources to help in the capacity diverse range of projects and topics of concern to in- building dimension of the future agenda. Technical ternational civil society, and as more international assistance to help North Korea in introducing new organizations initiate relations and programs, it will management mechanisms and institution building will become increasingly clear that coordination mecha- play an increasingly important role in the future in nisms will be needed to keep the larger number of do- supporting the inter-Korean reconciliation process and nor organizations informed about each other’s activi- the opening up of North Korea more generally. Many ties and to learn from one another. A coordination of the technical and governance issues needing to be mechanism already exists for humanitarian aid, with addressed can be more effectively addressed through the UN in the lead role. As the agenda broadens, the

NORTH-SOUTH ECONOMIC COOPERATION 61 North Korean government will need to build up its in- economic discussions have been conducted on a bilat- ternal coordination mechanisms in order to ensure eral rather than a multilateral basis. The informal efficient intra-agency coordination in decision making Northeast Asia Economic Forum has provided a use- and implementation support and to make best use of ful opportunity for new ideas to be presented and dis- resources and advice being offered by a growing num- cussed, but it has not enjoyed official standing, and ber of partners which do not always share the same there has been little followup to its deliberations in re- objectives or priorities. To support the inter-Korean cent years by governments in the region. reconciliation and economic integration objectives, aid coordination mechanisms for the international commu- There are, however, a number of possible areas where nity will also have to relate to the machinery for inter- multilateral economic cooperation in the Northeast Asia Korean economic cooperation that has already been subregion could be pursued in the coming years: put in place. The task of aid coordination will become increasingly important but also challenging in the years Future of Tumen River Area Development Program ahead. (TRADEP)

Typically, the UNDP and the World Bank play lead The TRADEP initiative led by UNDP throughout the roles in building and leading multilateral aid coordi- 1990s was an important, if little noticed, mechanism nation mechanisms, and this should be an explicit to engage North Korea in regional economic coopera- expectation of their future contribution by both Koreas tion. China has been a strong supporter of this pro- and by the international community as a whole. Be- gram. The failure of the Rajin-Sonbon Free Enterprise cause of China’s special relationship with both Koreas, Area to live up to the original expectations was due in a question for China is whether it should play a more large part to North Korea’s lack of resources to make active and vocal role in these arrangements than it has the necessary infrastructure investments, lack of in other neighboring countries, such as Vietnam and understanding of market principles, and cumbersome Mongolia. internal decision-making process. Difficulties in attracting significant volumes of foreign investment were due Regional Economic Cooperation partly to the continuing political tension on the Korean Peninsula and partly to lack of incentives for investors Looking ahead to a time when tensions on the Korean to come to this region, despite good faith investment Peninsula have been reduced, there will be increased promotion efforts led by UNDP. potential for regional economic cooperation that can benefit third countries.1 While APEC and the ASEAN Reconciliation on the Korean Peninsula has three plus 3 forum already provide a partial framework for implications for the future of TRADEP. First, its role regional economic dialogue, both presently exclude as a means of engaging North Korea will become less North Korea and both focus on issues not of direct rel- important as the center stage for managing external evance to the Northeast Asia subregion itself. Bring- economic relations shifts from the Tumen area to ing North Korea into these organizations and includ- Pyongyang and as other areas of the country are opened ing in their future agenda issues that promote expanded up for investment. To a large extent this has already economic relations with the Northeast Asian region as happened, and some are questioning the need for con- a whole would be worthwhile steps. A forward-look- tinuation of the program. The second implication is that ing agenda will also require increased subregional the original logic of creating access for China to the cooperation between China, the two Koreas, Japan, port at Rajin-Sonbong remains valid, and the objec- Russia, Mongolia, Canada, and the United States. There tive may be more attainable in the future as North Korea have been few mechanisms established for economic is able increasingly to mobilize resources for infra- dialogue among members of this group, and most structure investment and develops improved economic

1. A particularly good assessment of the problems and prospects for regional cooperation is provided by Gilbert Rozman in his paper “Restarting Regionalism in Northeast Asia” in North Pacific Policy Papers, Institute of Asian Research, University of British Columbia, 2000.

62 THE KOREA ECONOMIC INSTITUTE OF AMERICA management and decision making capacities. The A gas pipeline across the Korean Peninsula could of- focus should be on completing the projects that are fer a new solution to North Korea’s energy problems essential to realizing the original concept and on dem- while satisfying South Korea’s desire to tap into onstrating its viability. Agreement on normalization of Russian gas supplies for its already highly developed relations between Japan and North Korea would fur- national gas distribution system. Not only could North ther improve the prospects of attracting more invest- Korea earn revenues from the transport of gas across ment and trade through the Rajin-Sonbong port in the its territory, but gas could become a major fuel source Tumen area. The third implication is that the potential for North Korean power generation and industry, agenda for regional economic cooperation will increas- making less attractive the current reliance on heavy ingly be broadened beyond the original TRADEP fuel oil and the nuclear plants currently under construc- concept to address possibilities such as energy and tion by KEDO. The gas option deserves serious con- transport investments and linkages between the econo- sideration. mies of Northeast Asia, and that this widening agenda will require new forms of cooperative information shar- Transport Links ing and problem solving that the TRADEP program cannot satisfy in its current form. To be successful, it A railway link between the two Koreas is already a is critical that Japan be an equal partner and partici- top priority, and discussions with Russia have also high- pant in future regional cooperation mechanisms; lighted the possibilities of building an economically Japan’s willingness to join TRADEP or a successor attractive rail transport link between Northeast Asia organizational arrangement would constitute an impor- and Europe. Improved sea transport and road links tant step towards realizing this objective. between the economies of Northeast Asia would facilitate investment and trade. China has already in- Gas Trade vested heavily in building a road to the North Korean border to take advantage of access to the Rajin-Sonbong The energy sector probably offers the greatest poten- port. A high priority should be to find a way to com- tial for expanded regional economic cooperation. For plete the remaining segment and to demonstrate the over a decade, studies of possible gas pipelines from realization of the long-awaited dream. Eastern Russia to Korea, the Eastern Seaboard of China, and Japan have been undertaken by various Investment and Trade Potential groups, and there have been a number of seminars and conferences at which the potential for expanded en- Barriers to investment and trade in Northeast Asia ergy cooperation has been discussed. Gas is attractive include political, administrative, and legal issues that because it is a fuel of choice for power generation— stem in part from historical conflicts and in part from for economic and environmental reasons—and is in the very different organization of the economies and growing demand among all the industrialized econo- political systems in the region. The TRADEP program mies of the region. Increasing energy interdependence made useful progress in identifying and beginning to in Northeast Asia would make an important contribu- resolve many of these nonfinancial barriers, and these tion to long-term regional stability, as it has in Europe, efforts should be reinvigorated in the future. To be suc- where there is now an extensive network of gas pipe- cessful, this agenda would need to be supported by some lines across the continent, contributing importantly to financial and organizational mechanism. If this is not European economic integration and stability. Yet, built into the future of the TRADEP program, then a progress in advancing this agenda has been minimal. new multilateral arrangement will be needed. Part of the reason is that most studies have focused on technical aspects and have not addressed the underly- There have been proposals floated for a number of years ing economic, environmental and institutional issues concerning the merits of establishing a Northeast Asia that must also be worked out in order to make progress. Development Bank. It is not necessary to create a new The World Bank is considering undertaking a regional financial organization given the existing capabilities study on these issues in cooperation with the countries of the World Bank, Asian Development Bank, and pri- concerned. vate commercial banks that can easily be expanded to support development in Northeast Asia if there is a

NORTH-SOUTH ECONOMIC COOPERATION 63 political will among the concerned countries and an major challenge for this new century, requiring a for- attractive environment for investment and trade. North ward-looking policy and a willingness to enlist new Korean membership in the MDBs would be necessary forces for change. Prospects for enlarging multilateral for their being able to play a catalytic role in helping mechanisms and activities in Northeast Asia deserve to improve the investment environment and stimulat- more attention among policy makers in the region. ing new investment. Russia would also need to join the Asian Development Bank to achieve full regional participation. But these steps would be much less costly Mr. Babson is an independent East Asian specialist than the effort of establishing a new subregional insti- and advisor to the World Bank on North Korea. tution such as the proposed Northeast Asia Develop- ment Bank. Creating a subregional investment promotion organization, as recently proposed by UNDP, would seem to have merit.

Need for Policy and Investment Coordination Mechanisms

The potential for expanded economic cooperation in Northeast Asia cannot be realized without institutional support. Ultimately, the countries of this region will need to consider the idea of creating a regional organization modeled on ASEAN or the European Union to create the political and administrative foundation for genuine regional development that has been elusive for so long. An Association of Northeast Asian Nations (ANEAN) or similar concept could address economic, social and environmental issues of common interest. Like the Asia Regional Forum of ASEAN, it might eventually be worth considering a Northeast Asia security forum as well. In addition to the countries in the subregion, membership could include representatives of others who have a great interest in the region, such as the United States, Canada, ASEAN and the European Union.

Conclusion

Expanded use of multilateral mechanisms would make a significant contribution to the inter-Korean reconciliation process by fostering a supportive external environment, promoting objective evaluation of problems and ways to overcome them, and broadening the base of technical and financial assistance. Reconcilia- tion on the Korean Peninsula would not only benefit the Korean people, but also have the potential for benefitting all of the people of Northeast Asia. A reduction in tension would lead to a more stable environment that would also encourage expanded regional economic cooperation. Realizing these possibilities is a

64 THE KOREA ECONOMIC INSTITUTE OF AMERICA EXPANDING INTERNATIONAL ECONOMIC COOPERATION ON THE KOREAN PENINSULA by Yu Xintian

at the margin of the Cold War, but the two wars—the Introduction Korean War and the Vietnam War—occurred there. The divisions between North and South Korea and In contrast to dynamic economic cooperation taking between the Chinese mainland and Taiwan are the fi- place in other parts of the Asia-Pacific region, histori- nal remnants of the Cold War, the gravity and lasting cal and practical factors, as well as political and eco- duration of which cannot be underestimated. nomic obstacles, have directly or indirectly hindered international economic cooperation on the Korean Pen- After coming to power in February 1998, President insula. In recent years, hope has dawned on the Kim Dae-jung concluded from these experiences and Peninsula. However, the obstacles will not disappear the lessons of history that North-South reunification immediately. Thus, it is essential to think ahead and to could not be realized in the near future. The critical be fully prepared to deal with eventualities so we do need was for coexistence between the two sides. To not become panic-stricken and lack the patience needed this end, Kim Dae-jung put forward the “Sunshine to promote economic cooperation. Policy” of overall engagement with the North entail- ing three principles: first, South Korea would not tol- Impediments to Cooperation erate any armed provocation by North Korea; second, South Korea would not seek to absorb the North; and Inter-Korean Relations third, South Korea would make every effort to promote reconciliation and cooperation with the North. The confrontational nature of relations between North As far as specific policies were concerned, South Korea and South Korea has not only made peaceful Korea advocated “separation of politics from econom- reunification impossible, but has posed a severe chal- ics” to promote economic, cultural, and academic lenge both to daily life in the North and the South and exchanges between the North and the South. It liberal- to stability in the Northeast Asia region. ized rules on investment in the North, encouraged investments by large enterprises, simplified the formali- In the 1970s, North Korea and South Korea began to ties of trade between the two sides, and allowed busi- talk with each other. Because of sharply contrasting ness CEOs and other leading figures to visit the North strategic objectives and a lack of trust, however, bilat- without prior approval. eral relations failed to develop positively. After the end of the Cold War, inter-Korean relations temporarily Between March and August 1998, the South Korean improved. The two sides signed the Declaration of government and public provided $20.5 million in hu- Denuclearization on the Korean Peninsula and the manitarian aid to the North through various channels. Agreement on Reconciliation, Nonaggression, Ex- Chung Ju-yung, President of the Hyundai Group, changes, and Cooperation in 1991. However, the entered North Korea four times, delivering 1000 head nuclear crisis two years later and the hostile attitude of of cattle and 100 cars. He also reached agreement with South Korean President Kim Young-sam after the death the North on nine projects of economic cooperation, of Kim Il-sung caused a deterioration in inter-Korean particularly the joint development of Mt. Kumgang relations. This background, together with other inci- tourism facilities and procedures for conducting tours. dents, brought the Peninsula to the brink of war. Chung and his party were received by Kim Jong-il. Although the Cold War was primarily a confrontation between the respective alliances led by the United Inter-Korean trade declined significantly in 1998 States and the Soviet Union, the two countries never because of South Korea’s financial crisis, but South had direct military conflict. On the surface, Asia was Korea promoted some direct trade, such as its partici-

NORTH-SOUTH ECONOMIC COOPERATION 65 pation in the projects of the Korean Peninsula Energy tries on credit, and it owed over $6 billion at the end of Development Organization to help North Korea build the 1980s. In the early 1990s, North Korea expanded light water reactors. Despite its difficult economic cir- its trade with western countries, but it lacked the abil- cumstances, South Korea still bore 70 percent of the ity to pay. Its external debts reached $12 billion, and cost. In June 2000, the two Kims met in Pyongyang, western countries declared North Korea in default, se- which improved relations between the North and the verely damaging its international image. South dramatically. South Korea has appropriated $450 million to aid North Korea, but inter-Korean relations Faced with these difficulties, North Korea began to have not yet fundamentally improved, and crises have institute reforms and open up to the outside world, but frequently occurred. There have been more than a few on its own terms. It indicated that competition would disagreements in South Korea over the Sunshine Policy, be permitted, public and private ownership allowed to which may affect its implementation. More important, coexist in local trade and exchange of goods, and the economic ties between the South and the North diversification permitted in the distribution and con- remain very limited. In 1995, only 20 percent of North sumption sectors. In 1998, North Korea amended its Korea’s exports went to the South, and imports from constitution and worked out many new economic regu- South Korea accounted for only 4.3 percent of total lations, showing signs of reform and opening up. It imports. As for South Korea, the proportion of trade allowed industrial, agricultural, and social organiza- with North Korea in its total trade is negligible. tions—and even individuals—to “do their best” to overcome economic difficulties. It allowed home North Korea’s Economic System garden plots and incomes earned from other legal business activities to belong to individuals. It also allowed North Korea’s economic system is not compatible with “social cooperative organizations to conduct foreign the world market. This incompatibility is another ob- trade.” Citizens now are able to relocate and travel stacle to international economic cooperation on the around the country. Markets where individuals and Peninsula. collectives can do business are now permitted. For the first time, enterprises are required to institute indepen- The North Korean government announced that it failed dent accounting—accurately recording cost, price, and to attain the targets set in its Third Seven Year Plan profit—making them solely responsible for their own (1987–1993). Then it did not put forward a new eco- profits or losses. To encourage establishment and nomic plan after the following three year “buffer operation of various enterprises in specified economic period,” because the economy encountered major prob- regions, more special economic zones were established lems after two years of serious floods (1995–1996) and opened to the outside world. In rural areas, the and a one-year drought. The North Korean economy authorities experimented with the contract and account- declined continuously from 1990 to 1998. Overall eco- ability system, dividing farmers into smaller groups nomic activity dropped from $24 billion at the end of with the aim of enhancing their production incentives. the 1980s to $10.5 billion in 1996, and per capita GNP In the Rajin-Sonbong Free Economic and Trade Zone, declined from about $1,000 to $481. Because of a se- policies are more liberal and preferential. Preparations rious shortage of raw materials and energy, industrial are underway to set up free processing zones at the capacity utilization dropped to only 20 to 30 percent, ports of Wonsan in the east and Nampo in the west. and many factories stopped production. As a result of The North has established a number of joint ventures the series of natural disasters, output of grain also and cooperative enterprises. These changes are notable, dropped in successive years, causing famine. but the process will take time.

North Korea used to conduct foreign trade mainly with Relationships Among Major Powers other socialist countries such as the Soviet Union and East European countries. After the Cold War, it lost The Korean Peninsula region involves extremely com- many trade partners and markets. Its foreign trade vol- plicated relations among the major powers. The rise of ume slumped from $4.8 billion at the end of the 1980s a new U.S. posture of hegemony and the strengthening to less than $2 billion at present. Moreover, North of the U.S.-Japan alliance have prolonged the tensions Korea used to conduct trade with the socialist coun- on the Peninsula, affecting the atmosphere of interna-

66 THE KOREA ECONOMIC INSTITUTE OF AMERICA tional economic cooperation. The duration of tension and North Korea signed the Treaty of Friendship and has inevitably made international economic coopera- Cooperation, marking a new phase in their bilateral tion give way to security considerations. relations. In 2001, Russian President Putin visited North Korea, promising to help build a railway con- The U.S. role is the most important. After the disinte- necting Russia and the Korean Peninsula and offering gration of the Soviet Union and the end of the Cold new cooperative economic projects. Russia has advo- War, the United States, as the sole superpower, has cated 2+4 talks on the future of the Peninsula and is indicated its intent to maintain its dominant position in not satisfied with the 2+2 (Four Party) talks. It will the world. It has over 100,000 troops in East Asia, of not support reunification. It wants the major powers to which more than 30,000 are stationed in South Korea. guarantee peace and dialogue on the Peninsula and to The United States has strengthened the U.S.-Japan aid North Korea. Russia favors maintaining the state alliance. It has even gone so far as to expand the scope of division on the Peninsula and wants to keep its in- of their military cooperation to the whole Asia-Pacific terests through cooperation with North Korea. Further- region—including the Korean Peninsula, China’s Tai- more, Russia has its own means of influence, as North wan, and Russia—through Japanese legislation relat- Korea uses Russian weapons and needs the spare parts ing to the new U.S.-Japan defense cooperation guide- supplied by Russia. Russia’s intention to play a greater lines and joint research and production of the Theater role on the Peninsula is clear-cut. Missile Defense system. The purpose of strengthening the U.S.-Japan alliance is to serve the U.S. Asia-Pa- Creation of a good atmosphere on the Peninsula de- cific strategy and regional military strategy. The United pends not only on North and South Korea, but also on States has labeled North Korea a “rogue state” and the policies and interactions of all the major powers. has posed a threat to it via nuclear inspections, thus Easing tensions is the most important prerequisite to causing repeated crises. Within an area of only 220,000 international economic cooperation. square kilometers, North Korea, the United States, and South Korea concentrate over 1.8 million troops, of Ways to Promote Cooperation which 70 percent are deployed along the Demilitarized Zone. The two sides often have confrontations. The Political Prerequisites possibility of a large scale conflict cannot be ruled out. The key to international economic cooperation on the While relying on the U.S.-Japan alliance, Japan is also Korean Peninsula is determining an effective policy holding talks on establishing diplomatic relations with toward North Korea. At the time of the disintegration North Korea. But it remains hard for Japan to make of the Soviet Union and the end of the Cold War, west- any concession on issues such as compensation for ern countries predicted the collapse of North Korea. wartime actions. However, economic ties between Ja- Tempted by the reunification of the two Germanies and pan and North and South Korea are quite close, and safe- influenced by the illusions of a bubble economy, South guarding its economic interests is important to Japan. Korea once pursued the misguided policy of “absorptive reunification.” However, despite suffering from During the Cold War, the Soviet Union was the most severe natural disasters, the North Korean economy effective supporter of North Korea, but, after the dis- did not collapse but instead recovered in 1999, thus integration of the Soviet Union, relations between showing that Cold War thinking can result in poor judg- Russia and North Korea became cool for a consider- ments. Using hegemony and power politics to deal with able period of time. In recent years, Russia has any country will meet with opposition of its people and adjusted its foreign policy, causing Russia-North will not get the desired result. On the contrary, South Korea relations to recover. Trade between Russia and Korea has adopted a new attitude towards the North in North Korea has increased, even after the Russian politics and economy via its Sunshine Policy, making financial crisis in 1998. Russia has also strengthened possible the summit meeting between the two coun- its military technical cooperation with North Korea. tries’ leaders. In August 1998, North Korea announced the launch of a satellite, of which Russia was the only country to Taking a distorted view of North Korea from an ideo- receive advance notice. On 9 February 2000, Russia logical perspective will certainly lead to a negative

NORTH-SOUTH ECONOMIC COOPERATION 67 result. After a three-year “painful march” and a one- Infrastructure Prerequisites year “forced march,” what North Korea most needs is a period of stability and recovery of production. If North Improvements are needed in North Korea’s infrastruc- Korea did not feel threatened by pressure from the out- ture for railways, roads, aviation, communications, and side world, it would certainly give priority to keeping energy, particularly electricity. Railways from China’s the peace, alleviating crises and promoting economic Hunchun to Russia’s Zarubino, from China’s Hunchun activity. After initiating reform and opening up, it would to North Korea’s Hunyung, and from China’s Yirshi focus on creating an international environment for to Mongolia’s Tamsagbulag, linking Korea to the rest peace and development rather than on confrontational of Asia and Europe, should be completed as soon as policies. Although some foreigners still have doubts, possible. Road construction in China, Russia, Kim Jong-il’s visit to Shanghai in 2001 demonstrated Mongolia, and North Korea should be expanded. Mod- his intention to pursue a policy of reform and opening. ern freeways should be established, forming a high Removing economic sanctions on North Korea, chang- speed international road transport network. Port con- ing the uncompromising attitude towards it, support- struction in North Korea’s Chongjin and Rajin should ing exchanges and dialogues between the North and be intensified. Regular airline service between North the South, striving to establish long-term, stable, and Korea, South Korea, China, Russia, and Japan, and peaceful relations between them, alleviating the ten- regular land and sea transport among them via China’s sions on the Peninsula, and making it a nuclear-free Hunchun, should be established. On 30 April 2000, a zone are objectives to which the international commu- sea lane from China’s Hunchun to Russia’s Port nity should devote itself. This would create the condi- Zarubino and South Korea’s Sokcho was opened, the tions required for international economic cooperation. first sea lane linking China, Russia, and South Korea through the Sea of Japan (East Sea). China’s Yanji Policy Prerequisites Airport and North Korea’s Chongjin Airport should be expanded into international airports. The fiber op- Northeast Asia, including the Korean Peninsula, lacks tic cable linking North Korea’s Pyongyang and Rajin a multilateral economic cooperation mechanism, and and China’s Hunchun has been laid. Fiber optical com- bilateral economic contacts are imperfect and not fully munication, mobile phone, and electronic data deliv- developed. Of course, the Asia-Pacific Economic Co- ery systems should also be set up on the Peninsula. operation (APEC) group includes the United States, China is accelerating the construction of the Hunchun China, Japan, Russia, and South Korea. If North Ko- power plant with a capacity of 1.4 million kilowatts. rea improves its relations with South Korea and fur- The first phase construction of the Mt. Kumgang hy- ther pursues reforms and opening up, it should be able droelectric power station, North Korea’s large scale to join APEC. At the Asia-Europe Meeting in 2001, hydroelectric power project, has been completed, China, South Korea, and Japan established closer eco- greatly increasing North Korea’s supply of energy. The nomic ties with ASEAN. Strengthening cooperative country is expanding the handling capacity of the ports mechanisms in these economic organizations may at Rajin, Chongjin, and Sonbong. It is estimated that gradually bring about the formation of an economic the combined annual capacity of these three ports will cooperation mechanism in Northeast Asia, thus reach 130 million tons in 2010. strengthening economic links within this important region. China, Russia, North Korea, and South Korea Internationally-supported Projects should constantly improve their own laws and regulations on foreign trade and economic cooperation, Between 1996 and 1998, North Korea’s Rajin-Sonbong making them conform to relevant regulations of the Free Trade Zone held two rounds of talks on introduc- World Trade Organization (WTO) and international ing foreign investment. The second meeting was held practices. They should unify tariffs, transport fees, and jointly by the DPRK government and the UN Indus- service fees, reduce tariff barriers, and promote free trial Development Organization (UNIDO). The pro- movement of labor, money, materials, and technology. posals for foreign investment in North Korea’s “in- They must also strengthen training of experts in sci- dustrial investment proposal” for this zone numbered ence, technology, the economy, trade, finance, and 117 and amounted to $960 million. The construction foreign languages.

68 THE KOREA ECONOMIC INSTITUTE OF AMERICA of needed infrastructure requires substantial investment Korea, the TRDP Bureau under the UNDP launched a and international economic cooperation. new appeal to Japan.1 It has maintained contacts with Japan and invited Japan to cooperate with the invest- The Tumen River Development Project (TRDP) is ment consortium, which was set up with the informal worth particular attention. The United Nations Devel- assistance of multilateral development institutions. opment Programme (UNDP) in October 1991 desig- Various countries place great hopes on Japan’s finan- nated the TRDP as a key multinational cooperative cial and technical strength. So far, foreign countries development project, with the aim of developing North- have offered only limited financial support, but invest- east Asian resources and economy, stabilizing its po- ment by private enterprises in this region has increased litical environment, and benefitting 300 million people. rapidly. By the end of 1997, about $950 million in for- At a meeting on 6 December 1995, China, North eign direct investment had entered this region, of which Korea, and Russia signed an agreement establishing a $410 million in China’s Yanbian, $450 million in Rus- development coordinating committee. China, North sian Primorskiy Krai, and the rest in North Korea’s Korea, Russia, Mongolia, and South Korea also signed Rajin-Sonbong zone. Cumulative foreign direct invest- an agreement establishing a development coordinating ment has reached about $1.2 billion. committee, plus a memorandum of understanding on environmental protection, laying the foundation for The TRDP is large in scale and rich in content, but development and cooperation in the Tumen River cannot be completed in a single stage. A pragmatic region. But, after the outbreak of the Asian financial attitude must be taken to push it forward step by step. crisis in 1997, cooperation and development in the The comparative advantages of this project are in re- region were greatly impaired, largely because South gional economic cooperation. The road from China’s Korea was the main investor and the main source of Hunchun to North Korea’s Rajin was finished in 2000. tourists. The Russian financial crisis magnified the The governments of the participating countries have problem. Japan’s economy shrank in the 1990s, reduc- revised the aviation services in the whole Northeast ing imports from East Asia by 25 percent and its over- Asian region with respect to regulation of entry, ticket seas investment by a large fraction. North Korea has prices, and the scale and structure of aviation networks.2 suffered from natural disasters from which it still has not recovered. Political uncertainties and funding short- However, construction of the infrastructure requires ages are the fundamental impediments to development substantial investment, which will be difficult without of the Tumen River region, and these factors are international economic cooperation. The Tumen River related. project will set up an investment company and combine private funds with public funds, helping small and The TRDP originally envisioned a total investment of middle-sized enterprises with their commercial financ- $30 billion over 20 years to establish an economic ing, managing funds for special purposes, and conduct- development zone which could become a “Hong Kong ing training in finance and environmental protection. in Northeast Asia” in the Tumen River delta, where China, Russia, and North Korea meet. Japan did not The proposed Northeast Asia Pipeline Project is also directly participate in this plan, on the grounds that it promising and could resolve the region’s need for clean had no diplomatic relations with North Korea and that and efficient energy in the 21st century. It could lead to relations between the countries participating in the plan the formation of a multinational organization of coun- were unstable. As North Korea has recently improved tries with common interests. The abundance of natural its relations with the United States, Japan, and South gas in the region and increasing demand should stimu-

1. The Director of the Bureau visited Japan at the end of 1999.

2. Japan and South Korea signed a bilateral agreement allowing flights between any two cities and freely determined flight times and ticket prices. The agreement provides for the possible accession of China, Russia, and North Korea. It thus provides for internationalizing small cities in Japan and South Korea through aviation services.

NORTH-SOUTH ECONOMIC COOPERATION 69 late foreign investment, particularly from Japan, which China’s Role has large energy needs and wants greater security of supply. If this project comes to fruition, the pipeline General Factors will pass through Russia, Mongolia, China, and North Korea, and would be linked to Japan. Previously, some China has a key role in maintaining peace and stabil- analysts viewed the TRDP as mainly benefitting China, ity on the Korean Peninsula, a prerequisite for interna- providing its Jilin Province access to the sea, and thus tional economic cooperation. For some time, China has some countries were unenthusiastic. In fact, the project been the only country maintaining good relations with is beneficial not only to China, but also to Russia, both North and South Korea. China is one of the par- Mongolia, North Korea, Japan, and South Korea, as it ticipants in the Four Party talks. Of course, good rela- links these countries. The proposed pipeline is even tions between China and North Korea are a natural more beneficial, as it would foster development of the consequence of their historical friendship and coop- far eastern region of Russia (the supplier) and also be eration, reflected in their geographic proximity (“as of the utmost importance to Japan (the buyer). If par- close as lips and teeth”) and their common interest in ticipating countries all obtain clean and efficient en- stable borders. After 1990, Russia’s ties with North ergy, environmental protection and sustainable devel- Korea deteriorated sharply, and China became North opment would be boosted. Moreover, closer economic Korea’s largest supplier of oil and grain, as well as cooperation would greatly improve the prospects for providing a security guarantee. For a while, China’s economic prosperity, peace, security, and political sta- policy aroused misunderstanding in the international bility in the region. community, as it was seen as justifying the view of China as a great threat, determined to define its own The TRDP is just one way to realize international eco- sphere of influence. South Korean scholars questioned nomic cooperation on the Peninsula. Although the whether China’s support of North Korea would ob- United States and Japan have political, strategic and struct Korean reunification. economic interests on the Peninsula, and in the North- east Asia region more broadly, their actual involve- In fact, China, which is giving priority to economic ment in regional economic cooperation is limited. The development, with the aim of building a modernized Russian Far Eastern region is rich in resources such as country, urgently needs a peaceful and stable interna- oil, natural gas, and wood, but these resources cannot tional political environment, especially on its borders. be developed and utilized without investment. The China has improved its relations with all its neighbors Northeast China Plain is a world famous granary. North and has made considerable concessions, strengthening Korea has rich mineral resources. It accounts for 50 cooperation and promoting common prosperity. How percent of the world’s total reserves of phosphorus and could it be a “threat” to neighboring countries? North magnesium. It ranks among the top ten countries with Korea is an independent country. China has never in- the largest reserves of seven different minerals, includ- fringed on North Korea’s sovereignty in the context of ing gold, copper, zinc and bauxite. But North Korea is offering aid. Among the United States, China, Japan, very mountainous, which impedes the production and and South Korea—the four countries offering food aid transportation of ore. China and North Korea have large to North Korea—China is the only one providing aid numbers of well-educated workers. The United States without any prerequisites. Reunification is a matter for and Japan have investment capital. If the various coun- the people on the Peninsula and should be decided by tries combine their comparative advantages, all con- the people of the two Koreas. China has played a help- cerned will benefit.3 ful role in the talks between the North and the South

3. Several European countries have also expressed interest, but have not actively participated. After the Asia-Europe Meeting in 2001, the scope for economic cooperation between Europe and East Asia is increasingly obvious, but there are few actual projects. Participation in the TRDP is Europe’s best opportunity to participate in the region.

70 THE KOREA ECONOMIC INSTITUTE OF AMERICA and facilitated the inter-Korean summit. The talks be- Two recent changes in China’s economy are relevant. tween North Korea and Japan on establishing diplo- One is China’s development of its western regions. The matic relations were initially held with the help of other is its policy of encouraging Chinese enterprises China. South Korea and the international community to expand abroad, especially in developing countries. increasingly realize that a prosperous and stable North These will give Chinese enterprises increased motiva- Korea is of vital importance to East Asia, and more tion for economic cooperation with North Korea. broadly to the Asia-Pacific region. In today’s increasingly interdependent world, the “collapse” of North China and South Korea Korea would likely bring great turbulence to the whole region. Insightful people should recognize that China’s Since the establishment of diplomatic relations in 1992, policy is wise, not only safeguarding China’s national Sino-South Korean political and economic relations interests, but also enhancing the peace and prosperity have grown deep and at a rarely seen pace. In Novem- of the whole region and the world at large. As its ber 1998, the leaders of the two countries decided to economy grows, China will play an increasingly posi- establish a cooperative partnership oriented toward the tive role in peace and security on the Peninsula. 21st century, setting up a framework for development of political and, especially, economic relations. In 1998, China and North Korea Sino-South Korean trade volume reached $21.3 billion, of which China’s exports to South Korea were The economies of China and North Korea strongly $6.3 billion and China’s imports from South Korea complement each other, and their economic ties are very were $15.0 billion. By September 1998, the number close. China’s Jilin and Liaoning provinces face North of South Korean investment projects in China had Korea across a river. Border trade is very brisk. The reached 10,817, with a contractual value of $14.3 commodities North Korea exports to China are mainly billion and realized value of $7.1 billion. China has wood, steel and crude iron products, semimanufactured become South Korea’s most important investment goods, ores, traditional Chinese medicines, and ma- destination. Bilateral cooperation has grown in fields rine products. China’s exports to North Korea are such as industry, finance, science, technology, bank- mainly commodities such as cereals, fertilizer, edible ing, and services. Generally speaking, economic oils, coal, and sugar. North Korea’s demand for China’s cooperation between the two countries has moved from synthetic fibers and textiles has been increasing. the explorative to the practical stage. By November Dandong in China’s Liaoning Province and Sinuiju in 1998, China and South Korea had signed 28 agree- North Korea are only separated by a river. Dandong ments, including trade, scientific, technological, and has hundreds of enterprises of various kinds that take cultural ones. Fisheries and aviation agreements are part in border trade through processing on commis- under active consideration. Existing issues concern the sion. Dandong has over ten joint ventures in North still low level of economic cooperation between China Korea with investment of millions of dollars. The and South Korea and the concentration of South continuous development of Sino-North Korean eco- Korean investment in China mainly in labor intensive nomic and technical cooperation has caused tourism to industries rather than in the basic and high-tech indus- flourish. Since 1998, international tours from Dandong tries which China urgently needs. Most of the South to Pyongyang, Myohyangsan, Kaesong, and Mt. Korean enterprises investing in China are small or Kumgang have been successively opened. Over 17,000 medium size and are dispersed, so it is hard for them to Chinese and foreign tourists went to North Korea’s achieve economies of scale. Dandong in 1997, and the number of companies participating in international tourism reached 36. Of China has just begun to invest in South Korea. Ac- course, the volume of trade between China and North cording to China’s customs data, while Sino-South Korea is still relatively low, mainly because North Korean trade is developing rapidly, China’s bilateral Korea’s economy remains weak. As its economy trade deficit has grown exponentially. It was $0.2 recovers and internal reform and opening up proceeds, billion in 1992, $2.6 billion in 1993, $2.9 billion in North Korea’s external economic relations will expand. 1994, $3.6 billion in 1995, $5.0 billion in 1996, $5.8

NORTH-SOUTH ECONOMIC COOPERATION 71 billion in 1997 and $8.7 billion in 1998. The Chinese ing oil and natural gas pipelines will benefit many coun- government advocates expanding the volume of trade, tries and will create many downstream industries. while seeking a rough trade balance in the context of Production in Northeast China or North Korea will be economic development and effectively resolving the cost effective. trade deficit issue. The South Korean government should further reduce its limits on imports of China’s Preventing pollution of international waters and products, especially agricultural goods. China should protecting biological diversification are also major con- further enhance its policy transparency to ensure fur- siderations of international cooperation. In Northeast ther cooperation. The two countries need to develop China, most people use coal for cooking, causing greater understanding and give priority to cultivating severe air pollution. If international cooperation can prospects for economic cooperation. help China develop the technology for gasifying and liquefying coal and help China change from transport- International Cooperation and the Evolution of ing and burning coal to transporting and burning natu- China’s Policy ral gas, it would reduce air pollution and the impact on neighboring countries. In addition to expanding bilateral relations, China is taking a more positive attitude toward participation in Although an institution and other mechanisms for multilateral economic cooperation on the Korean international economic cooperation on the Koream Peninsula and in Northeast Asia. This is in the context Peninsula and in Northeast Asia have not yet taken of establishing the framework of a market economy by shape, China is willing to make a contribution to es- 2010, which will bring the Chinese economy in line tablishing them. Specifically, establishment of a North- with the outside world to a greater extent. Prospective east Asian Economic Cooperation Committee or a entry into the WTO and the 2001 APEC meeting in Northeast Asian Economic Cooperation Forum simi- Shanghai have required the Chinese government to lar to APEC, in which authoritative persons from gov- think about these issues. In April 1999 the Chinese ernment, business, and academia take part, should be government approved establishment of the China considered. The establishment of a Northeast Asian Coordination Group of the TRDP. The State Develop- Economic Research Center and a Talent Training Cen- ment Planning Commission is responsible for the group, ter should also be considered. The Northeast Asia which consists of 14 departments, including the minis- region could consider establishing a Northeast Asian tries of Science and Technology, Foreign Trade and Cooperation Fund, and begin planning for a Northeast Economic Cooperation, Foreign Affairs, Finance, Land Asia Development Bank in the future. In the 21st cen- and Resources, Construction, Railways, and Commu- tury, the Korean Peninsula and the Northeast Asia nications, plus the General Administration of Customs, region will be able to beat their swords into plowshares the State Environmental Protection Administration, and and reap the fruits of economic development. the Jilin Provincial Government. The main tasks of this group are to: organize research on important issues in the TRDP and related international economic coop- Ms. Yu is Professor and President of the Shanghai eration; work out China’s medium- and long-term Institute for International Studies development strategy for this project; coordinate China’s participation in UN international meetings and activities related to the TRDP; and staff preparations for talks with foreign countries.

The Chinese government has decided to make significant investments to improve the weak infrastructure in Northeast China and the Tumen River region. These giant construction projects need very substantial investment. Domestic inadequacies of funds, engineer- ing design, technology, and equipment need to be com- pensated through international cooperation. Construct-

72 THE KOREA ECONOMIC INSTITUTE OF AMERICA THE LOGIC AND UNDERPINNING OF REFORM

RECONSTRUCTING NORTH KOREA’S ECONOMY by Sri Ram Aiyer

Introduction The Long Wait

The rise in interest in the Democratic People’s Repub- The historic summit of June 2000 in Pyongyang be- lic of Korea (hereafter DPRK or North Korea) is out tween South Korea’s President Kim Dae-jung and of proportion with the size of its economy, its share in North Korea’s Defense Commission Chairman Kim world trade or other similar indicators. Why? Because Jong-il—the culmination of President Kim’s bold but it is perceived in most circles as a maverick or ren- risky “sunshine policy”—seemed to trigger a new egade state, largely because of its missile development beginning. Many South Koreans saw it as signaling and export activities. Korea was one country for cen- the end of the North’s self-imposed isolation, and the turies, but since 1945 the North has chosen the path of potential start of a process of genuine cooperation and isolation. The North Korean economy has suffered a reconciliation. The gregarious personality of Chairman number of setbacks since the breakup of the Soviet Kim, visible during the whole summit, was in stark Union, its former benefactor. Moreover, the collapse contrast to earlier media descriptions of him as a re- of agriculture, exacerbated by droughts, has led to fam- clusive, unpredictable character, giving optimists hope. ines and widespread problems of undernourishment in Family reunions began, as did monthly Cabinet-level North Korea. meetings followed by economic talks on other issues, including restoration of the rail link between Munsan This article reviews the experience of selected coun- in the South and Pyongyang via Jangdan in the De- tries in Eastern Europe in transition from a centrally militarized Zone. The South Korean media, no doubt planned economy (CPE) towards a market oriented hyped by the authorities, forecast a return visit of Chair- system. The lessons illustrate the need for realism in man Kim to Seoul by September 2000. President Kim expectations of the length of time needed to achieve was awarded the Nobel Peace Prize in recognition of sustained and stable economic growth in these situa- his contributions to peace on the Peninsula. Sensing tions. The costs of restructuring these economies in the strong public support for the proposed monthly family form of official and private capital has varied. Each of reunions at least, the opposition Grand National Party these reform situations remains “work in progress.” (GNP) in the South became grudgingly supportive of The cost of restructuring the North Korean economy is President Kim’s stance towards the North. In a good- an unknown. However, it is clear that, in its present will gesture, Seoul sent 200,000 tons of fertilizer as a state, the South Korean economy will not be able to gift to Pyongyang to aid farmers. provide significant financial resources towards the North’s reconstruction. Nevertheless, there are many There has been no return visit to Seoul by Chairman other contributions that the South is well placed to Kim despite public pleas by President Kim. Only four make. The article draws liberally on work done at the family reunions have occurred so far. Work on the rail World Bank, and that of Marcus Noland in his book link has stopped. Contact between the two sides broke Avoiding the Apocalypse on North Korea.1 off for several months. Given the North’s cold shoul-

1. Noland, Marcus. June 2000, Avoiding the Apocalypse—The Future of the Two Koreas, Institute for International Economics, Washington D.C.

THE LOGIC AND UNDERPINNING OF REFORM 73 der treatment of the South, combined with the slow- the North. On the other hand, some qualitative informa- down in the South Korean economy, the opposition tion and observations by international agencies actually GNP, sensing lack of support for him in general among working in North Korea tend to be more reliable. the public, has become more shrill than ever in its criticism of President Kim and his policies. While South The World Bank’s World Development Report Korean Government announcements remained optimis- (WDR),2 arguably the most comprehensive source of tic on the opening to the North, much remained to be global data on development, classifies North Korea as done to institutionalize the dialogue with only some a “low income country,” a group with an estimated per 18 months left in President Kim’s term. The announce- capita income of below $755 in 2000 (World Bank ment in early September by Pyongyang about its readi- Atlas methodology, the average for 1998, 1999 and ness to resume talks was welcomed warmly in Seoul. 2000). The only other information listed for the year That the talks actually took place was another wel- 1999 on North Korea is: Population—23.62 million; come surprise. Average Annual Growth—1.4%; Density—196 people/sq. km.; Life expectancy at birth—60 years; Nonetheless, since the June 2000 summit, there has Infant mortality for under 5—93 per 1000 (vs. 9 per been no significant change in North Korea’s stance 1000 in South Korea). Assuming a per capita income towards the international community except for its re- of $750, the GDP of North Korea would be $17.7 bil- ciprocation of diplomatic ties to countries that initi- lion; if the per capita income is assumed at $500 then ated them. Approaches for membership in the interna- the GDP would be $11.8 billion. But these figures are tional financial institutions, first mentioned in 1998, clearly guesses. The WDR, which is replete with data seem to be on hold. Meanwhile, North Korea has on almost all countries, lists South Korea’s 2000 GDP worked to further cement ties with its historic allies, as $457.2 billion. Russia and China. Observers note that, because of the successful management of its economic transition and Based on North Korea’s submission of economic data its growing political clout in and outside the region, to the IMF in 1998, its GDP is given as $10.6 billion China is likely to have a larger influence on the North’s for 1995, having dropped from $20.9 billion in 1992 future moves, as evidenced by the announcement in (using an exchange rate of NK won 2.15/$1). Agricul- early September on resuming talks. When the North ture, industry, and construction accounted for 45 will initiate a sustained and serious opening is anyone’s percent, 15 percent, and 5 percent, respectively, of out- guess, but, given the government’s track record, when- put. Government revenues, which amounted to some ever it happens it is still likely to come as a surprise. 20.3 billion NK won for 1996, show turnover taxes as the largest single source, with profits of state owned North Korea’s Economy—How Much Do We Re- enterprises coming next, typical in centrally planned ally Know? economies (CPEs). The share of the government sector in all activity is about 90 percent. These figures do Little is actually known about the North Korean not apply to the military sector. economy. Although information on North Korea’s political system and its economy is sparse by any defini- The organization of North Korea’s economy is similar tion, this has not impeded research on the country by to that in other CPEs, with property rights vested in South Korean scholars and others. Among these works, the state, and resources being allocated through plan- the recent book by Noland stands out as the most com- ning rather than markets. The role of prices is nonex- prehensive. But even he is at pains to explain that the istent. The juche philosophy which guides the economy economic data and indicators are inconsistent and un- emphasizes self-reliance, leading to a highly autarkic reliable. Notwithstanding valiant efforts by many ana- structure, with the share of trade being only some 12 lysts and their bold assertions, this is the case for prac- percent of GDP (compared with over 60 percent for tically all quantitative conclusions based on data from South Korea). Its main trading partners have been

2. World Bank. World Development Report 2001— Building Institutions for Markets, September 2001, Washington D.C.

74 THE KOREA ECONOMIC INSTITUTE OF AMERICA China, Japan, South Korea, and Russia, in that order. while the transition was underway in each country, but Agriculture is in state farms or collectives; the former these are rich experiences and offer valuable lessons offer salaries to farmers while the latter provide mem- for North Korea. It is recognized that the choice of any bers equal shares of the output, with a bonus for ex- country for comparison is open to criticism about its ceeding plan targets. Noland concludes that “like other relevance, e.g., on grounds of North Korea’s unique- CPEs North Korea initially achieved some success in ness; nevertheless, there are serious lessons in these mobilizing resources for development, but began to attempts at systemic change. stagnate when opportunities for extensive development were exhausted,” requiring a shift to technological The experience of three countries which began reforms upscaling. Evidence as recent as August 2001 from a decade ago are presented below—Armenia, Roma- visitors and those from international institutions work- nia, and Poland. Armenia was selected because it is a ing in North Korea, such as the World Food Program, country with limited natural resources but relatively confirms that its economy collapsed some years ago better level of human capital among the republics of and is in need of major reconstruction. A shift from the FSU, features common to North Korea, which, autarky towards greater use of prices and markets however, has a much larger population. Armenia has a would clearly be more efficient than the present sys- large number of displaced persons living in extreme tem in stimulating an output response. The pace of such poverty, while many North Koreans suffer hunger and a shift will depend on the government’s ability to undernourishment. Analysts have often maintained that, manage the transition without undue social and politi- among authoritarian regimes, Romania’s cult of per- cal disruption. Educational achievement rates in the sonality under Nicolae Ceausescu was most akin to North seem to be quite high for a country with a low North Korea’s political system during Kim Il-sung. per capita income. Noland notes that some 14 percent Both countries’ economic systems adhered to strict of the adult population over 16 years of age were said central planning. These two countries also share other to be graduates and attendees of tertiary schools in common experiences. Poland is regarded as having 1987/88, which would be comparable to East Germany made a successful transition from a CPE to markets and close to Japan in 1980. This bodes well for the after over ten years of relatively bold reforms on both country if and when it launches economic reforms. the economic and political fronts, albeit with a remaining agenda. This makes it a case worth reviewing. Three Transition Tales While Romania is most relevant in terms of initial conditions, Poland offers lessons about ways to avoid Noland presents a detailed simulation of the benefits Romania’s poor choices as it went down the reform of reform in North Korea along with scenario analyses path. of i) successful reform, ii) muddling through, and iii) a collapse. The unification experience of West and East Armenia Germany beginning in 1989 has already been well researched and documented, by Noland among others, Armenia, a small landlocked country, faces many dis- making its review unnecessary. Suffice it to say that advantages compared with its neighbors, Georgia, any analogy between the South Korea of today and the Azerbaijan, Iran, and Turkey. Its population is esti- West Germany of the late 1980s or early 1990s in the mated at 3.8 million people, with a GDP per capita of context of the potential opening of North Korea is far- $490 in 1999.3 It has benefitted from generous official fetched. On the other hand, considerable experience development assistance of about 11 percent of GDP has been gained since 1991 on managing the transition over the previous five years. Following the breakup of from central planning to markets in countries ranging the Soviet Union in 1991, Armenia’s economy suffered from China and Vietnam to those in the Former Soviet one of the sharpest contractions among transition Union (FSU) and Eastern Europe. The degrees of suc- economies. The contributing factors were: the Nagorno- cess vary, as do the political systems that prevailed Karabakh conflict and the blockade of transport routes;

3. Source: World Bank and IMF Reports, Washington D.C.

THE LOGIC AND UNDERPINNING OF REFORM 75 an economic structure which proved to be which peaked in 1998 at $221 million, dropped to some uncompetitive; hyperinflation in 1992–3; and the con- $122 million in 1999 and has not recovered. Govern- tinuing effects of the 1988 earthquake. The country ment revenues, which stood in 1999 at 19.3 percent of had over 300,000 refugees and displaced persons, elec- GDP, were below the peak of 19.7 percent in 1997. tricity was available for no more than three hours a The growth in the consumer price index, however, day, if at all, and over 60 percent of the population dropped to below 1 percent in 1999. Overall, while relied on humanitarian assistance. Since that time the Armenia’s macroeconomic performance has been economy has recovered significantly. But output in strong, it has not benefitted from job creation or pov- 2000 was still below 70 percent of the pretransition erty reduction, with 55 percent of the population living peak. Poverty and unemployment remain extremely below the poverty line in 2000! Among the reasons high, leading to substantial emigration by the young are the lack of large-scale entry of private enterprises, and better educated. The economy grew for each of the and little restructuring of existing enterprises. New last seven years, at an average annual rate of 5.4 per- investment has been limited by interference of govern- cent. In 1998, GDP grew by over 7 percent, the budget ment officials, a serious shortage of relevant skills, and deficit fell to 4.8 percent, and inflation fell close to investors’ perception of high political risks. To address zero by year-end. The macroeconomic stabilization these problems, after several years of focusing on mac- program begun in 1994–5, the commitment to struc- roeconomic issues, the Government has shifted its tural reform, an increase in private transfers from the attention to microlevel reforms in three key areas: Armenian diaspora, and generous international assis- improving the business environment by i) reducing bar- tance contributed to this result. Although the macrolevel riers to entry, especially of foreign firms, and enforc- reforms paid off in some measure, they were not suffi- ing a level playing field for new and existing enter- cient for a successful transition. prises, ii) strengthening the public sector so as to improve provision of public services and the conditions Gross investment in Armenia in 1999 was still below for private sector growth, and iii) rebuilding human the level in 1996, and net private foreign investment, and physical capital, covering school education, basic

Table 1. Armenia: Selected Economic Indicators4

1996 1997 1998 1999 2000 (est) Share of Gross Domestic Product (at factor cost - %) Agriculture 37 32 34 29 29 Industry 33 33 31 33 35 Services 30 35 35 38 36 TOTAL 100 100 100 100 100 Real Annual Per Capita GDP Growth Rates (%) (Calculated from 1994 prices) 5.5% 3.0% 6.9% 2.9% 5.7% Current Account Balance ($ millions) -291 -307 -403 -307 -276 Net Private Foreign Direct Investment ($ million) 18 52 221 122 122 Long Term Loans, Net ($ million) 173 184 34 85 69 Of Which, Official 113 101 34 85 69 Real Exchange Rate (local currency unit per $) 180.0 169.2 176.0 163.6 157.2 Consumer Price Index (% change) 18.7% 14.0% 8.7% 0.7% -0.8%

4. World Bank and IMF Reports, Washington, D.C.

76 THE KOREA ECONOMIC INSTITUTE OF AMERICA health, and infrastructure maintenance. How long these experienced stabilization, accompanied by rapid growth efforts will take to yield results will depend on effec- averaging 6 percent p.a. from 1994–96. Growth re- tive implementation in each of these areas. That, in mained high compared with other countries in the return, will be a function of political commitment to these gion. Other key indicators were a declining inflation goals and to overcoming resistance to the goals. Be- rate, a gradually rising current account deficit, and sat- sides the risk of conflict with neighbors, the internal isfactory progress on structural reforms. It saw incomes risks are mainly political. rise well beyond 1990 levels. Although the 1998 Rus- sian crisis had significant impact on Polish manufac- The experience of Armenia shows that, for an economy turing and trade, growth remained positive, foreign in transition from central planning, macroeconomic investment continued to flow in, and Polish risk pre- reforms are necessary, but not sufficient, to achieve miums on international markets returned quickly to pre- balanced growth. It illustrates that, even in a reform crisis levels. environment, capture of institutions by vested interests can take place and frustrate progress. Microlevel Poland has been transformed in ten years. Democracy, reforms are essential to remove obstacles to new entry a free press, and the role of civil society are seen as and investment and create the enabling environment irreversible, and decentralization to local governments for private investment. After over ten years of reforms is underway. A large new middle class has emerged, supported by generous official and private assistance, with consumption patterns as seen in Western Europe— sustainable growth led by new private investment with automobiles, holidays abroad, consumer durables pur- increasing employment has eluded Armenia. This il- chases, and home remodeling. Transparency and dis- lustrates that successful transition is not a function of closure of institutions’ transactions, public and private, external financial support but of bold and sustained were pursued to good effect. Gross fixed investment in internal reform. Poland experienced sustained growth from 1995 to 1999, led by private investment, which rose from 16.3 Poland percent of GDP in 1995 to some 25 percent in 1999. Real annual per capita growth rates have risen from Unlike Armenia, Poland is not landlocked and has sea 4.9 percent in 1994 to 6.7 percent in 1997, dropping to access through ports in the Baltic sea. It has a popula- 4.7 percent and 3.4 percent in 1998 and 1999, respec- tion of some 39 million (1998) and a GDP per capita tively, in the aftermath of the Russian crisis of 1998. of $4,060 (compared with $2,460 in 1994). Poland has The current account deficit, 2 percent of GDP in 1994 followed a reform path for over ten years. Its economy and 1995, narrowed in 1996 but then widened over the

Table 2. Poland: Selected Economic Indicators

1995 1996 1997 1998 1999 GDP at factor cost ($ billion) 268.3 336.9 412.9 485.2 536.6 Agriculture ($ billion) 18.5 21.7 22.8 23.1 21.0 Industry ($ billion) 104.5 126.3 153.8 176.0 192.3 Services ($ billion) 145.3 188.9 236.3 286.1 323.3 Real Annual Per Capita GDP Growth (1990 prices) 6.9% 5.9% 6.7% 4.8% 4.1% Current Account Balance ($ mil.) -5,310 -1,371 -4,312 -6,858 -11,558 As % of GDP -2.0% -0.4% -1.0% -1.4% -2.2% Net Private Foreign Direct Investment ($ millions) 1,134 2,741 3,041 4,966 6,348 Long Term Loans ($ millions) -11 -5,963 334 1,587 2,045 Of Which, Official -84 248 -140 -487 -441 Real Exchange Rate (1995=100) 100.0 108.8 111.4 117.1 112.0 Consumer Price Index (% change) 27.8% 19.9% 14.9% 11.8% 7.3%

THE LOGIC AND UNDERPINNING OF REFORM 77 next three years, exceeding 2 percent in 1999. The capital markets, for Poland to be regarded as an ex- growth in the consumer price index dropped from over ample of a successful transition from a CPE to a mar- 32 percent in 1994 to below 8 percent in 1999. ket economy. It was the bold and sustained reform policy path that Polish governments adopted and imple- The consensus on the reasons for Poland’s success mented that were the central determinant of Poland’s seems to be that the early reforms, which were fast- successful transition. It was the quality and continuity paced, became the basis for rapid growth of private of the reforms that enabled access to official and pri- small and medium enterprises in manufacturing and vate capital—it is important to recognize the cause and services; even under communist rule, Poland had al- effect in this regard. Poland’s membership in the EU is lowed small scale private sector activities in agricul- anticipated in a few years. ture. This pace—combined with the outlook for a growing domestic market, an educated labor force, a loca- Romania tion between Eastern and Western Europe, adequate infrastructure, and political and social stability—made Romania, like Poland, is not landlocked, and enjoys it attractive for foreign investment. The growth in the an outlet to the Black Sea. Its 1999 population was tax base enabled the financing of a social safety net 22.5 million, with a per capita GDP of $1,470.5 The for those who did not benefit from the changes. Also, starting point for the transition process in Romania was concentration of economic power (as seen in state en- more difficult than in other countries in Central/East- terprises “purchased” by former bureaucrats and offi- ern Europe. Pre-transition governments emphasized cials in other transition countries, Korean chaebol, self-reliance, resulting in undue concentration on heavy etc.,) was avoided, thereby reducing impediments to industry and large infrastructure investments. This entry and competition. The underlying reasons for this policy resulted in depletion of domestic energy sources, are not clear. Transforming the role of the State to re- leading to dependence on costly imports of energy and shape the structure of government, its roles, and its raw materials. In the 1980s, rapid repayment of for- financing to suit a market economy with a democratic eign debt, equivalent to $11 billion or some 25 percent framework are the issues that now occupy the Polish of GDP,6 imposed serious burdens on the population— government and intellectuals. This transformation, with no growth in exports. Imports were cut in half to which could take several years, involves the rest of the repay the debt. This increased the country’s techno- privatization and enterprise restructuring agenda (the logical deficit. At the end of the 1980s Romania was pace of which was slower in the early years than it on the verge of collapse. could have been), the reforms in social security, health, and education to combine fiscal sustainability with Gross domestic fixed investment in Romania fell from appropriate benefits and quality of service delivery. 23 percent of GDP in 1996 to 18 percent in 1999. Net Additional agenda items include the soundness of public private foreign direct investment dropped from a high finances, including tax reform and administration, of $2,040 million in 1998, compared with $263 mil- strengthening public administration, reducing corrup- lion in 1996, to $1,007 million in 1999. Government tion, and poverty alleviation in the countryside. Po- revenues as a share of GDP were 28.6 percent in 1996, land provides ample evidence that, even in successful and 33 percent in 1999. The growth in consumer prices, transitions, building institutions for markets is a time- which was 38.8 percent in 1996, was about 45.8 percent consuming process. in 1999. These indicators show the volatility in the Ro- manian economy, even after several years of transition. It took a decade of relatively sustained reforms, with strong international official assistance and support, Seeking to protect vested interests and minimize the combined with increasing access to private debt and social costs of the transition to a market economy, in

5. Source: World Bank and IMF Reports, Washington D.C.

6. Contrary to North Korea, which decided not to repay on its foreign debt, first in 1975, and on subsequent occasions.

78 THE KOREA ECONOMIC INSTITUTE OF AMERICA the 1990s Romania followed a piecemeal approach to tion. The Romanian example underscores the impor- reform. The imposition of hard budget constraints on tance of political commitment and sustaining policy state enterprises and privatization was delayed, osten- continuity to gain confidence of domestic and foreign sibly due to social concerns. The strategy yielded nei- investors, and official donors. Of the three countries ther economic nor social gains. Romania’s experience reviewed, Romania is clearly most comparable to North over the last decade shows that the costs of a slow re- Korea, in more ways than one. form route have been higher than if a bolder structural transformation had been targeted from the beginning. How Can South Korea Help North Korea’s Re- The share of the population living below the national construction Effort? poverty line (60 percent of the average adult equivalent consumption) doubled in the second half of the There are many ways in which the South can play a 1990s to 41 percent. An ambitious program of macro- supportive role in the reconstruction of North Korea. economic stabilization measures and structural reforms South Korea’s private sector can be expected to invest adopted in mid-1999 included strong fiscal correction, in the North, but like other investors they have choices, supported by tight monetary policy, an exchange rate and over the last few years the preferred destination of policy aimed at restoring competitiveness, improve- South Korean capital has been China. Furthermore, ments in the tax regime and legal framework for finan- given the increasing pressure for profitability in South cial transactions, and closure of the country’s major Korean firms, expectations of foreign direct investment bank, which was riddled with poor assets. The economy from the South into the North should be tempered with began to recover in 2000, with a growth rate of 1.6 realism. On the other hand, South Korea’s GDP is be- percent, which might have been higher but for a tween 25 and 40 times higher than that of the North, drought. However, the government was not able to sus- making it an attractive market for the North’s exports. tain this progress for a variety of reasons, including Their absorption is unlikely to cause a major problem the rise in energy prices and preelection pressures. Lack to producers in the South. Since it has well developed of political will and limited institutional and gover- export marketing institutions and infrastructure, the nance capacity are at the heart of Romania’s subpar South probably also offers the best channel for export- performance and social conditions. It is an example of ing North Korean output to other markets. More im- halfhearted reforms exacting a high toll on the popula- portantly, the South has a network of government

Table 3. Romania: Selected Economic Indicators

1995 1996 1997 1998 1999 2000 (est) Share of Gross Domestic Product (at factor cost - %) Agriculture 20 19 18 15 14 13 Industry (incl. Constr.) 39 40 36 33 33 35 Services 41 41 46 53 53 52 TOTAL 100 100 100 100 100 100 Real Annual Per Capita GDP (%, 1993 prices) 7.1% 3.9% -6.1% -5.4% -3.2% 1.6% Current Account Balance ($ millions) -1,774 -2,571 -2,137 -2,918 -1,288 -1,400 Net Private Foreign Direct Investment ($ millions) 417 263 1,224 2,040 1,007 1,009 Long Term Loans, Net ($ millions) 783 628 980 108 -45 1,100 Real Exchange Rate (1993=100) 111 99 106 134 110 111 Consumer Price Index (% change) 32.3% 38.8% 154.8% 59.1% 45.8% 45.7%

THE LOGIC AND UNDERPINNING OF REFORM 79 research institutions that are considered world class,7 in the medium term will depend on the speed of re- besides arms of the government such as the Bank of structuring of its own corporate and financial sectors Korea and the National Statistics Organization, which and hence its resilience to external shocks, and on are as efficient as their counterparts in the West in domestic pressures on its fiscal resources such as from monitoring, collecting and processing data on the the health care and pension systems. economy, thus helping to inform policy. The South is also endowed with universities which enjoy a high repu- To Conclude, There Are No Easy Fixes, and Fi- tation for the quality of their academic staff and re- nancing Is Not the Issue search capacities. As the 2001 WDR documents con- vincingly, building institutions for markets is the key Information on North Korea’s economy remains noto- challenge for developing countries. This is a matter of riously unreliable. However, casual observation by great urgency for economies in transition. The North representatives of international institutions unambigu- would have to draw upon institutions from abroad for ously suggests an economy in collapse and in need of capacity building. South Korea is uniquely placed reconstruction. The only option available to stimulate among all countries in the world to assist in the short an output response in North Korea is to move towards and medium term in institution building in the North, a market oriented economy, the best known route to because of its enormous success with economic devel- increase efficiency of resource use. President Kim Dae- opment over the last four decades and the common lan- jung continues his valiant attempts to engage the North guage, culture and Confucian values. Together, these in a dialogue aimed at cooperation and reconciliation, are the best ingredients for sustained medium-term in- and its joining the international community. Assuming stitutional development in the North. that North Korea confirms its readiness to cooperate with the international community in the near future, In the medium term, the South Korean private sector given the shared language and culture, the South could can also be an important change agent in terms of tech- play a major role through institutional twinning for nology transfer to the North as its indigenous private building capacity in a number of essential areas. This sector grows. On the official side, South Korea first could arguably be its most significant contribution to became a contributor alongside other OECD countries the North, which will need such assistance from out- in 1975 to the World Bank’s soft loan window, the In- side anyway. In the medium term, the South could also ternational Development Association (IDA). This was extend some financial assistance, and its private seen as a gesture of its appreciation for aid it received sector could be a source of technology transfer. in its early development from IDA, and as a step towards its playing a role in international fora. It remained Based on the experience of other former CPEs, many a donor to IDA, and began its own bilateral aid proof the enterprises’ assets in the North are likely to have gram. In the case of North Korea, it seems likely that little value in a market system because of their obso- the South may be forthcoming with generous assistance. lescent technology. Former U.S. Secretary of State The current fiscal situation of the South, with public Henry Kissinger told the author in November 1999 in debt at about 35 percent of GDP,8 and foreign exchange Seoul of his first visit to Korea in 1951, adding that, of reserves at over $100 billion, or about 20 percent of all Korean qualities, tenacity was arguably the central GDP, provide the South with some room for maneuver explanation for South Korea’s success. The people of in terms of its overall external assistance, if the North the North do not seem to lack in this endowment. The were to require support in the short term. The ability experience of South Korea—which had a well edu- of the South Korean government to be more generous cated population relative to its income level in the early

7. Such as the Korea Development Institute, Korea Institute for International Economic Policy, Korea Institute of Applied Science and Technology, Korea Institute of Health and Social Affairs, Korea Labor Institute, and others in the public sector, besides several in the private sector.

8. Source: Ministry of Finance and Economy, Gwachon.

80 THE KOREA ECONOMIC INSTITUTE OF AMERICA 1960s when it started on its current development tra- jectory—amply demonstrates the value of human capital, which North Korea apparently possesses. This is a key source of optimism for the North’s development, since the interest of the government in moving towards a market based system and the political vision that would lie behind any such reform are unknowns.

The transition from CPEs to market oriented systems in three countries of Eastern and Central Europe since the early 1990s demonstrates the importance of bold early reforms as the central basis for inspiring confidence in domestic and external markets. Stronger reform packages make capital more easily available, but the infusion of capital is less important than the quality of the reforms and their continuity. Even with a strong start along the reform path, and resulting generous support from official and private sources of capital, the transition takes at least a decade before a new set of incentives, values and institutions become entrenched. These transitions have not been uniform, as they are affected by initial conditions. Unforeseen impediments, including capture by existing vested interests, can delay the process and thwart the objectives. When this happens, the burden is borne by the poorer segments of the population, and can lead to loss of public confidence in the reform process. These experiences underscore the importance of sustained political commitment to reform in order to achieve results as quickly as possible—but even then we are talking of at least a decade, if not longer.

Dr. Aiyer is a consultant and was formerly the World Bank’s Country Director for Korea.

THE LOGIC AND UNDERPINNING OF REFORM 81 THE CULTURAL IMPLICATIONS OF IMF CONDITIONALITY FOR SOUTH KOREA by Theresa Y. Shim

Introduction bankruptcy procedures—were based on the U.S. experience. The IMF’s objectives reflected its concerns The three-year period of the IMF financial assistance about the stability of the international market, but they program for the Republic of Korea (hereafter, Korea), also related to the U.S. ideological emphasis on a “level which was conditioned on a number of financial re- playing field” for free-market capitalism and democ- forms, expired in December 2000. In the months lead- ratization. The globalization trend had accelerated U.S. ing up to the new millennium, President Kim Dae-jung cultural beliefs in the need for measurement by objec- triumphantly declared that Korea had pulled itself out tive financial practices. of its economic crisis. Many economists, however, questioned whether Korea’s banking system had suc- At the same time, Korea, where democratic capitalism cessfully transformed its corporate governance and is still considered somewhat foreign, has a long his- practices in the manner in which the IMF had intended tory of practicing Confucian teachings focusing on the and whether the structural problems that triggered the importance of a person’s surrounding relations, mak- crisis had been fully addressed. Certain Korean politi- ing a sharp distinction between in-group memberships cal and cultural contexts influenced Korean interpre- and outsiders. Hence, the traditional, fundamental tations of how capitalism and social relations work, concept of power in Korea of “the sense of belonging” and thus may have prevented the government from fully and/or of “achieving status” are quite different from addressing the correction of the structural problems. the American concept of “achieving” on a “level playing field.” In the process of learning imported capital- Soon after the IMF program was approved, an official ism, Koreans’ interpretation of practicing capitalism of the World Bank stated that the requirement that South and democracy became indigenized. Korea restructure its financial institutions amounted to asking Korea to change its whole cultural system. At the beginning of the IMF program, analysts pointed This article seeks to identify the political and cultural out that Korean banks were both a cause and a casu- elements that created two different patterns of legiti- alty of the nation’s economic crisis. It is easy to blame macy in financial practices, especially in lending prac- the financial sector, or the government, or the conglom- tices, between Korea and the IMF. It examines the erates (chaebol). Many of the problems, however, seem financial practices of the United States, as a proxy for to be due to Korean understandings of the nature of the IMF culture, and discusses how subtle differences power and the subtle interpretations of imported in political and cultural contexts have played an im- capitalism existing within Korea’s own political and portant role in the separate development of the bank- cultural frames of reference. This article’s proposition ing systems in the United States and Korea. By identi- is that banks are neither the cause nor the casualty of fying the different underlying cultural meanings exist- Korea’s 1997 crisis, but rather the victims of Kore- ing within their respective banking structures, the ar- ans’ interpretation of their culture within their politico- ticle endeavors to show to both the IMF and Korea, economic system. In this context, the crisis in Korea but especially Korea, what the banking reform changes was not a structural banking problem, but rather a required by the IMF actually mean in daily life. Korean system problem.

Looking back, the principles of reform the IMF sought Looking back at Korean industrialization from the to apply to the Korean banking system to meet inter- 1960s to the present, there has always been a govern- national lending standards—such as transparency, ment-centered, triangular structure in which the state, accountability to shareholders, establishing the clear the chaebol, and banks were functionally connected. authority of supervisory agencies, and streamlining The actors involved—political leaders, chaebol own-

82 THE KOREA ECONOMIC INSTITUTE OF AMERICA ers, and bankers—were continuously searching for American and Korean Concepts of Power meaning in the banking structures and through the human interactions imbedded in the banking system. They It is useful to consider how the fundamental differences acted within the cultural contexts they had constructed in assumptions about the nature of power and human and shared. For example, if we compare banking struc- interactions between Korea and the United States tures in the United States and Korea, they turn out to shaped different paths to economic development. Lucien be remarkably uniform by such criteria as number of Pye maintains that the nature of power is something functions, levels of hierarchy, and degree of special- that differs profoundly from culture to culture: ization. But each country, in its banking practices, is making its own interpretations in terms of who has Of all social phenomena, power is one of the power in loan decision making, and each is acting on most sensitive to cultural nuances; its potenti- its own version of what constitutes legitimate banking alities and its limitations are always constrained practices. by time and place…so the phenomenon of power cannot be understood without reference The article’s first assumption is that the fundamental to the cultural context within which it exists.2 changes in social relations between the state, the chaebol, and banks in Korea may not come as a result Americans have generally conceived of power as a of the U.S. push for democratization and structural universal phenomenon, operating under a universal set adjustments for objective lending. To establish a new of principles with certain properties that they have tried paradigm of objective lending practices and/or corpo- to identify objectively. Authorities tend to search for a rate governance requires more than just simple struc- universal set of principles, regardless of time, place, tural changes. It demands that Koreans transform the and culture, to achieve external objective purposes or meaning of social relations at the societal level and goals in concrete ways. Americans feel in control and adopt a new subjective understanding of the nature of safe in making choices through the calculation of ad- power. vantages versus disadvantages, benefits versus losses, and priorities. They believe that power should be The second assumption is that the transformation of achieved by generated and accumulated performance, traditional political and cultural meanings is a work of and thus they have placed great value on progress. art that demands the articulation of a process. This will be a painful process that requires a collective under- With a legacy of being more Confucian than the Chi- standing of what to give up and what to maintain in nese, Koreans see the nature of power as coming prin- order to continue meaningful relations. The director of cipally from social status and hierarchy. Power is seen the Economic Studies Office of the Bank of Korea in personal terms rather than in institutionally defined predicted that it may even take longer than a genera- offices. Koreans in general believe that power can be tion to establish a new paradigm because the Korean achieved by education, wealth, and in-group member- financial crisis was the result of complex political and ship. The basic Confucian motivation of power as cultural roots which have been developing for decades.1 status is still alive.

Power and Authority The use of power and subjective cultural differences among countries shape their overall outlooks on politi- Power and authority are critical cultural variables when cal and economic systems, and thus shape different studying the policies and politics in the lending prac- paths on how to achieve economic development. The tices of the United States and Korea. U.S. Constitution was based on valuing the individual and equal opportunity. Power is shared between the

1. Lee, C. 1999. Wanted, a “New Vision.” in Far Eastern Economic Review (June): 10–11.

2. Pye, Lucien W. 1985. Asian Power and Politics: the Cultural Dimensions of Authority. Cambridge: Harvard University Press: viii.

THE LOGIC AND UNDERPINNING OF REFORM 83 state and society under rules, principles, and regula- financial markets and corporate organizations to tions that spell out rights and responsibilities. As a achieve common goals. The idea of state-business ties consequence, the operational boundary of power is rela- in Korea for common benefits can be traced from the tively well defined. Another government role is to “level early 1900s. the playing field” for competition among financial institutions both domestically and internationally. In The foundation of the close relationship among the state, society as a whole, progress should result in an ever the chaebol, and banks began during the regime of greater scope for autonomy. Banks are free and com- President Park Chung-hee (1961–1979). His economic pletely independent from the state. Banks set the guide- development system was structured to tie the state to lines for lending practice based on compliance and society. The state role was at the top of a triangular profit calculations. structure in the developmental process. The state-directed chaebol bridged public and private interests, and The State as a Center of Power banks served as civil servants. The interplay of relationships among the three parties—the state, chaebol, The first and most distinctive characteristic of the and banks—created a unique lending practice, hence- Korean approach to economic development is the prac- forth referred to as “third party lending.” Until the 1997 tice of placing the state as the center of power. Korea IMF program, Korean commercial banks operated as was probably the most centralized and uniform admin- development banks and were used as a vehicle to istrative state in traditional Asia. Having an authori- achieve the nation’s collective economic development. tarian government with the political leader as an omnipotent power can be traced to the five hundred- In-group Membership year history of the Chosun dynasty. The practice continues today. There were few differences in the per- The third cultural characteristic one can identify in the sonalities of the past five Korean presidents, and one Korean economic development model is Koreans’ can see the continuity of the state as an imperious, strong desire for in-group memberships. Regionalism omnipotent power with a top-down management style. has had a strong impact on the personnel policies of The state penetrated into business associations and used past presidents in making appointments both in gov- its authority to intervene in credit allocations and lend- ernment administration and public organizations. In- ing decisions to the privileged few. group memberships are used by the inner power circles to make connections with the president and govern- From the mid-1980s, the chaebol either complemented ment elite. Chaebol are family-operated businesses. or negotiated with state interests, and in the process In the 1990s, each of the top 30 chaebol expanded to established a powerful new social status. The family- include on average between 30 to 50 subsidiaries. owned chaebol stretched their boundaries to the capi- Executives of these subsidiaries were brothers, sisters, tal market through a web of in-group memberships with and in-laws of the chaebol owner’s family and mem- family members and the elite. Whenever the chaebol bers of the in-group circle. At the same time, presi- faced a change in their economic environment, there dents of the banks were also brothers, sisters, in-laws, has been a power struggle for control between them and members of in-group circles. and the state. Between these two powers, banks have never functioned as independent entities, but rather have The Cultural Environment of IMF Conditionality served the chaebol under government authority. This command structure accelerated Korea’s early devel- The IMF is an independent organization based on the opment, so that it became one of the fastest growing free participation of the member countries. Its lending new capitalist nations. conditions are largely controlled by the seven wealthi- est countries and therefore largely based on what works The Ties between State and Society in these economies, particularly in the United States. If one identifies categories of American national Another set of cultural characteristics of the Korean culture that affect the relationship between state and approach to economic development are the ties between society and the behavior leaders demonstrate, one can the state and society and between the state-directed examine the characteristics of IMF lending policies in

84 THE KOREA ECONOMIC INSTITUTE OF AMERICA order to understand the cultural implications of IMF The Cultural Environment of the Korean Banking conditionality. System

Relationship Between Government and Society Korea’s financial crisis was closely connected to its cultural characteristics, which differ profoundly from The United States was founded as a capitalist democ- those of the United States. Korea has undergone re- racy based on the values of individualism, laissez faire, markable industrial development in the past 40 years initiative, and responsibility. Capitalism has flourished, based on a peculiar combination of business conglom- not through government directed economic planning, erates, a strong central government, and a subservient but through a remarkable democratic sharing of power role for financial institutions. While Korea’s industri- between government, business, and an independent alization process was on the surface like that of the banking system. The marketplace sets prices and wages, United States, it was profoundly influenced by the not the government. The government does not direct Asian cultural conception of power and the nature of markets, but only regulates them after identifying prob- Confucian relationships that had developed over the lems or abuses. centuries.

The Characteristics of IMF Loans From the 1960s to the present, state-society ties have been continuously exercised, either for the purpose of IMF conditions for lending vary, depending not only the nation’s autonomy and prosperity or to exchange on the objective needs of the borrower, but also on the interest between the state and big business. Over time, decisions (and interests) of the members with the most one can identify the institutionalized lending practices voting power. When a member requests a significant and the authority used to maintain state control. amount of assistance in proportion to its quota, the IMF requires policy reforms on the part of the borrower as The Authoritarian System a condition of lending. The Korean industrialization process began with Presi- International Lending Practices dent Park’s regime. As the country needed to industri- alize quickly, the key ingredients were the combined International banking is an ad hoc business coalition; power of government and citizens and the combined it is a pragmatic form of interest exchange through power of state and business under an authoritarian state developed structures. In most cases, it promotes glo- leadership. The government developed a well-struc- bal competition for credit and mobility of international tured system for the situation Korea faced at that time. resources. Hence, international banking is concerned Five-year development plans were established and mostly with transparency and accountability. carried out by the Economic Planning Board, which President Park created by merging several International lending practices stress knowledge policymaking functions of different ministries. The acquired through credit analysis that is subsequently commercial banks were nationalized, and various applied objectively. The method of analyzing a credit specialized banks were established. The banks’ role proposal is standard in most commercial banks. In was to provide payment guarantees for foreign bor- international lending, it is particularly important to rowing, to supply working capital loans, and to grant gather and analyze relevant information in order to long-term loans to the government. achieve effectiveness. Hence, the process demands skillful specialists in specific industries. The bank Bank regulations and supervision were designed to accountability and transparency aspects of IMF con- provide a favorable environment for political favors in ditionality replicate the norms of these international order to maintain the tripartite relationship between lending practices. From the inception of the IMF pro- the state, businesses, and banks, and for checking the gram, transparency and accountability became the most progress of the national priorities. Credit analysis and controversial issues between the IMF and the Korean capital adequacy were not required banking practices. government, and between the government and society Under this planned industrialization, state leadership as a whole. controlled rather than supported or regulated business

THE LOGIC AND UNDERPINNING OF REFORM 85 and the capital market. The third party lending system ers, and expanded their business boundaries. In most was the dominant lending practice (Figure 1). economies, banks are the main financial intermediar- ies, and NBFIs play only a small role. In Korea, how- Particularism ever, the NBFIs were often key players in financial markets. Korean NBFIs and foreign banks are not re- Unlike in U.S. banks, Korean banking credit policy quired to extend policy-based loans, and they mostly was formulated as part of the government’s develop- provide short-term financing. The dominance of the ment strategy. As such, its efficiency was determined NBFIs is also the result of the interaction between the within the country’s overall macroeconomic policy. state and business in exchange for favors. The NBFIs Capital allocation or distribution was part of the plan- have long been controlled and owned by the big busi- ning process. Hence, banks were not given a chance to ness groups. Government intervention, or policy loans, become independent. Under such circumstances, nei- is a rather common practice in countries such as Japan ther transparency nor accountability was considered and Taiwan; however, in Korea, there is no consistency at the organizational level. Historically, Korea has been or institutionalized discipline in terms of reward or heavily dependent on foreign loans at various times. punishment because of the subjectivity of the relation- For example, in the 1960s, the state did not have capi- ships between state, chaebol, and banks. In this envi- tal to accomplish its economic plans. As such, the al- ronment, the institutional arrangements and practices location of foreign loans was a large part of the in banking resulting in third party lending flourished. government’s total loan and credit policy. The government wanted to maintain authority, and was therefore Under Roh’s presidency, political democratization be- reluctant to liberalize the financial practices that were gan to erode the government’s supreme authority. The fueled by the traditional interest exchange between the triangular structure of government, chaebol, and banks authoritarian government and business. The debt-laden in banking policy and practice was maintained, but the chaebol needed government support to negotiate for- roles of the government and chaebol in policy making eign restructuring loans and obtain more import li- were altered due to the rise of chaebol economic power censes. The government needed political contributions and status. However, there is no evidence of liberal- from the top chaebol. ization of banks as independent entities. Authoritarian cultural attitudes in banking practices continued. In the 1980s, during the presidency of Roh Tae-woo (1988–1993), the government liberalized imports, Another critical reason for the growing power of the gradually reduced regulation of Non-Banking Finan- chaebol was their ability to play both sides in exchang- cial Institutions (NBFIs), relaxed NBFI entry barri- ing interests between the chaebol and banks. Govern-

Figure 1: Triangular Dependency among the State, Chaebol, & Banks before 1988

GOVERNMENT

Selection Commitment & Political Contributions Directives

Commitment

BANKS CHAEBOL Project Loans

86 THE KOREA ECONOMIC INSTITUTE OF AMERICA ment intervention was maintained even after Roh par- chaebol interests, he enforced a financial accounting tially liberalized the banking industry, but there was system to cut off channels for bribes to officials. With no rational supervisory system. The chaebol expanded this abrupt shift from a long history of military rule their control over the NBFIs and were able to mobilize and authoritarian governments to a more democratic a substantial amount of funding. government, however, the authorities needed to prepare for the state’s new role and responsibilities. The Traditional economic theory justifies expansion on the government was under pressure to provide cheap loans basis of greater productivity and profitability. The to the corporate sector and to contain bank interest rates Korean chaebol, however, seek to expand production while further liberalizing NBFI interest rates. The in- so that they can maintain their privileged status. Thus, teraction of the three parties in third-party lending neither the chaebol nor the NBFIs favored changing weakened as a result of financial liberalization, but banking practices, and neither paid any attention to chaebol control over the NBFIs expanded. Past expe- developing institutional accountability. Korean credit rience in third-party lending did not give banks or programs became more politically oriented and more NBFIs the ability to conform to standard international relationship oriented during this period of transition, banking practices such as transparency of accounting, when the channels of direction changed from sole gov- audits, and adequate capital. Figure 3 shows the char- ernment control to comparable power between gov- acteristic interactions among the state, chaebol, and ernment and business (Figure 2). banks in third-party lending between the early 1990s and the IMF bailout in Korea in 1997. There was no difference in the functional role of banks before and after this partial liberalization. In the early In the trial-and-error globalization learning process days of industrialization, before liberalization began, during President Kim Young-sam’s administration, the banks followed the directions of the government. Af- chaebol became more powerful and independent at the ter liberalization, banks and NBFIs were directed or expense of the state and public funds. “Deregulation influenced by the government or by a chaebol. without state monitoring and supervision led to a dramatic increase in foreign indebtedness as well as a President Kim Young-sam (1993–1998) recognized the massive domestic lending spree that encouraged fur- need for fairness in interest formulations. Challenging ther investment in risky and speculative ventures.”3

Figure 2: Third Party Lending between Chaebol, NBFIs, and Subsidiary companies

CHAEBOL Demand Increased Production

Request Capital ent ittm m

Directives & Cross-EquityCom Guarantees

NBFIs SUBSIDIARY Expansion Loans COMPANIES

3. Kim, J.D. 2000. The Future for the Korean Economy and the Transition to a New Development Paradigm. In Korea’s Economy 2000. Washington, DC: Korea Economic Institute of America. 16:31.

THE LOGIC AND UNDERPINNING OF REFORM 87 Cultural Limitations on Implementing Reforms Korean understanding of legitimacy as order. Hence, from some outsiders’ viewpoints, progress in improv- Any implication of a change can be misleading, espe- ing banking governance has just begun. cially if it involves the multiple layers of traditional political or cultural transition or the infrastructure of an The financial restructuring measures that have been economic system. From the economic crisis of Novem- undertaken so far are primarily for short-term recov- ber 1997 to 2000, one can see that Korea consistently ery and provide a necessary framework to prevent pa- chose familiar banking practices. We need to ask: (1) ralysis of the overall financial system. Unfortunately, what political and cultural phenomena informed Korea’s it is not a time to be complacent but to pursue the fi- course of action? and, (2) what cultural elements com- nancial inter-mediation process if Korea is to achieve plicated implementation of the demand for transparency? a reinterpretation of lending cultures. Korea has made progress in cleaning up the financial system and now The evaluation of progress in the restructuring of has an institutional framework for re-balancing the Korean financial institutions varies depending on which relationships between state, finance, and business. side of the lens is used to examine progress. For ex- Korea’s economic recovery in 1999 was remarkable, ample, the Korean government in February 2000 but corporate and financial governance reforms that announced that the next stage of its corporate restruc- are related to reorganizing relationships between the turing program would be focused on corporate gover- state and society, and between the state, chaebol, and nance, based on their assumption of completion of the banks have not been completed. initial stage of financial sector restructuring. Indeed, what the Korean authorities have done during the past Political and Cultural Phenomena Informing three years was unprecedented in the financial history Korea’s Course of Action of Korea. However, the profile of restructured banking institutions for objective lending in response to the Strong Authoritarian Government IMF intentions—including structural adjustments for reorganizing the interwoven cultural and contractual Making the necessary changes from the third party lend- relationships between state, business, and banks— ing system to direct lending practices and changing remains unclear. Other concerns, such as the need to bank policy from relationship lending to objective lend- increase transparency, might be questioned to some ing are susceptible to new forms of control, especially degree because of Korea’s past cultural and economic between the state and the chaebol and between the experiences. These include in-group dependency, no chaebol and banks. In the economic development of sharp boundaries between family groups and business Korea, power was individual-centered and personal- institutions, and still, to some degree, the age-old ized. Authority flowed downward, and it originated

Figure 3: Chracteristics of Third Party Lending between Early 1990 and 1997

Favors

GOVERNMENT Political Contribution CHAEBOL

Influence

Expansion Loans

BANKS

88 THE KOREA ECONOMIC INSTITUTE OF AMERICA from Koreans’ cultural understanding of the function both financial institutions and the political system. The of power. President Kim Dae-jung has continued to challenges that Korea now faces seem to be “the inter- place the administration at the center of the reform play of power and values, and precisely the question process, guided and commanded the banks, and ordered of what should be done about power.”4 the chaebol debt restructuring process. Cultural Elements That Complicated Implementation Blurred Boundary Between Government and Banks The Traditional Korean Way of Exercising Power Another pattern of Korean cultural behavior is that the boundary between the roles of government and the Transparency and open markets were at the heart of banks is blurred. When we recall the interactive, in- the IMF conditions, as they go together in the cultural terconnected relationships in third-party lending, it is and economic mind-set to promote a level playing field. critical to clarify the boundaries among regulatory units However, two cultural elements complicated the imple- and their roles. mentation of transparency—traditional Korean ways of exercising the power that is embedded in the eco- As banks remain the main source of credit for large nomic system, and the attachments of in-group mem- businesses, the government can exert substantial berships. From the beginning of economic development influence over the corporate sector by controlling the in the 1960s to the crisis, and even now, banks have credit pipeline from the banks to the corporations. never been completely independent and free from the Because of the high priority given to effective corpo- influence of power. Even the supervisory agencies had rate restructuring, government interventions in the interwoven relationships with the power structure. banks may be viewed as an inevitable transitional step. Under these circumstances, transparency was not le- However, there is no evidence of a government effort gitimately institutionalized. Demand-based lending to articulate a hierarchy between the state and the required neither the borrowers (especially the chaebol) banks. Successful corporate and financial restructur- to provide financial statements and profit and loss bal- ing as such will not produce a resilient financial ance sheets, nor banks themselves to disclose much system. With the government as the owner of the ma- information about their loans. Most Korean banks still jor banks, there is a good chance that the relationship publish colorful reports with general financial outlooks between banks and the regulators (more broadly the or product information but with little detail that would government) may remain tight in the future. permit analysis of their financial health.

Politics of Status: the Chaebol and Banks The blurred boundary between ownership and management in the chaebol makes it difficult to establish objec- The third cultural phenomena one can identify in the tive lending, especially in NBFIs such as Investment Trust IMF implementation process is that the politics of sta- Companies. The chaebol are the decision-makers for what tus is still alive in banking practices. The change asked is the best investment, or the best use of funds. for by the IMF from third party lending to objective direct lending involves multiple layers of Korean Family and In-group Memberships cultural transitions, such as the recognition of individual social identity and the politics of status. However, given The durability of family and in-group membership dur- Korea’s economic structure and social relations, these ing past economic development has also inhibited trans- changes seem characteristically radical, even revolu- parency. The age-old psychological sensitivity of in- tionary. group attachment is so strong that, whenever significant opposition elements want to challenge the exist- The giant conglomerates have been able to establish ing authorities’ legitimacy, they seek dependency on culturally and politically interwoven connections with the in-group as a safety net.

4. Pye, op. cit.

THE LOGIC AND UNDERPINNING OF REFORM 89 Korea’s Confucian past is often blamed for the busi- The author’s sense is that Korea will probably lose ness practices that led to the 1997 financial crisis. more in terms of culture, heritage, and traditional pride However, divisive regional factionalism, elitism, and than it will gain in economic stability. While the coun- family ties blended with the need for interdependent try is already relatively well on the road to economic solidarity. These cultural elements have played essen- stability, and the IMF loans have been repaid ahead of tial roles in Koreans’ need to be connected to power or schedule, the hidden cost in terms of “articulating belong to a group with status. Consequently, the dis- cultural identity” is enormous. The IMF has called into tinctions between in-groups and out-groups have be- question the traditional cultural practices of particu- come sharp, and these boundaries deeply affect eco- larism, communitarianism, and diffuse relationships, nomic development. Regional, elite, and kinship rela- as well as the concept of power, that have character- tionships have all contributed some motivation as well ized Korean business practices for decades. To be sure, as discipline, but these same relationships have also there was need for structural and systemic reform in been responsible for inconsistency in interest distribu- Korean banking. However, the reform was imposed tion and troublesome products such as the third party from the outside and was not culturally compatible with lending practice. The culture also values cooperation the culture of the host nation, especially in terms of the with in-group members. This cultural tradition deep- time frame the IMF suggested. ened the problem of achieving transparency. In the end, Korea will change, but it will not become At the societal level, transparency means actors who like the United States. Rather, it will chart a third path, are involved in the banking practices need to overcome different from the United States and not entirely like emotional barriers between in-group and out-group. the path it has been on. Cultural resources such as the Characteristically, this process is not one of simply meaning of in-group memberships and the concept of replacing the old way of handling in-group relations power as status in Korea will change in ways that we with a new way. It rather demands the reconciliation cannot foresee. The reforms will take time, and Kore- of in-group memberships through a pervasive and in- ans will need to buy in at a deeper level of reconcilia- sistent process of negotiation in terms of defining tion. Over time, an amalgamation of cultural values boundaries between objective responsibility and emo- will emerge. Would that the IMF staff, skilled in eco- tional attachments. nomics and finance, also have training in the cultural and historical perspectives of the countries they deal Conclusions and Recommendations with. Such an approach might effect economic change without disrupting the culture. Unfortunately for The Korea-IMF interactions can be analyzed in terms Korea and the IMF, there seems to be a lack of under- of intercultural relationships. The IMF wanted to standing that the IMF program involves a change in change Korea, in particular to reform its traditional cultural values. The process demands pervasive and banking practices. The IMF’s position was one of uni- persistent negotiations among the parties who are in- versalism, versus the particularism of the Korean bank- volved in the change process. In this case, it seems that ing system. political and business leaders are not the only actors; Korean society as a whole needs to understand that the In formulating its conditions, however (and they were change process is everybody’s responsibility. It is time accepted because Korea had no other real option), the for Koreans to exercise their cultural strengths of IMF’s agenda was one that went beyond only economic communitarianism and national pride and their “can- change. The reforms were an attempt at social change do-spirit” through rational articulation of the process as well. The results can be seen as a major intercul- rather than with emotional abruptness in a forced tural clash between a proud traditional country and the atmosphere. IMF, which represents modernity and western ideas of capitalism. The question is how much of its cultural heritage did Korea have to compromise in order to meet Ms. Shim is Associate Director of the Center for Asian such conditionality? A further question is how much Business at Loyola Marymount University in Los will Korea change because of this interaction with the Angeles. IMF?

90 THE KOREA ECONOMIC INSTITUTE OF AMERICA STRONG PRESIDENTS, WEAK DEMOCRACY? PROBLEMS OF DEMOCRATIC CONSOLIDATION IN SOUTH KOREA by Aurel Croissant

Introduction solidation. Philippe Schmitter recently made the ironic statement: “The Holy Grail for the success of the This paper analyzes the process of democratic consoli- protoscience of consolidology would be irrefutable dation in South Korea between 1987 and 2000 in three proof—hopefully, in the form of an impressively math- steps. First, it develops a concept of democratic con- ematical algorithm—of the optimal sequence of re- solidation. Second, it analyzes the process of demo- forms that would lead any polity out of autocratic cap- cratic consolidation within three dimensions of the tivity to the promised land of democracy” (Schmitter democratic system: constitutional consolidation; the & Santiso 1998, 78; italics original). Unfortunately, party system; and civil society and political culture. transition studies are far away from such an ideal sce- Finally, it presents some conclusions and a short prog- nario. On the contrary, the boom of theoretical and nosis of future democratic consolidation in South empirical contributions have made this field even more Korea. diverse and diffuse (see Shin 1994; Plasser, Ulram & Waldrauch 1996). The missing consensus about Terms and Concepts of Democratic Consolidation theoretical concepts and terminology recently even caused warnings that democratic consolidation is about At the beginning of an analysis of democratic consoli- to degenerate to a “catch all” or even to a “garbage dation, two conceptual questions have to be answered: can” concept (Schedler 1997, 101). (1) what is a democratic regime; and (2) how can consolidated democracies be differentiated from However, a consensus seem to have been established nonconsolidated democracies? within the research community that at least three different meanings of the term “consolidation” can be Regarding (1), undoubtedly the most influential defi- identified: as a time-phase (chronological aspect); as a nition of democracy in the past three decades was set sequence of processes (dynamic aspect); and as a qual- out by Robert Dahl in his work Polyarchy (1971). ity of democratic regimes (qualitative aspect). Follow- According to his definition, polyarchy is the realistic ing Guillermo O’Donnell and Philippe C. Schmitter variant of democracy. Understood as contestation open (1986), democratic transformation can be divided into to participation (Dahl 1971, 5), polyarchy is defined two sequences, transition and consolidation. The term by two interdependent dimensions—political partici- “transition” refers to the first phase of transformation, pation and political competition. Dahl’s definition is in which the basic democratic institutions are agreed concise and elegant, but it catches only the vertical upon and established—basic civil rights, core institu- dimension of legitimacy and control between the demos tions of the system of government, constitutional rules and democratically elected officials. I suggest the in- and regulations which bind the executive and the leg- clusion of two more dimensions: first, the extent of islative branch of government to the principles of the effective monopoly on government by democratically rule of law, and a set of institutions to hold free and legitimated representatives; and, second, the extent of fair elections. The transition ends with the first demo- liberal constitutionalism and rule of law (see Schmitter cratic elections and the assumption of power by a demo- & Karl 1991; Lauth 1997; Merkel & Croissant 2000). cratically elected government. These three dimensions together form the liberal democracy which is the starting point of my further While the transition focuses on the replacement of non- elaboration of the term of democratic consolidation. democratic and the introduction of democratic institutions and procedures, consolidation means that the in- Regarding (2), based on the definition of liberal de- stitutions and political procedures that have been mocracy it is possible to focus on the aspect of con- established during the transition are going to be “ef-

THE LOGIC AND UNDERPINNING OF REFORM 91 fective,” and the political action of the relevant politi- Institutional autonomy has a horizontal as well as a cal, social, and economic actors are going to be tied vertical component. Institutions are consolidated ver- lastingly to these regulations of the new democratic tically to a greater extent, the longer they exist without order (Merkel & Puhle 1999, 104f.). In this sense, suc- major changes (chronological age) and the more fre- cessful consolidation can be understood, as suggested quently they solve their problems of succession accord- by Leonardo Morlino, as adaption of democratic rules ing to their prescribed rules (generational age). They and procedures by the relevant actors of a democratic are consolidated horizontally when they are able to order which leads to “persistence and a stable democ- fulfill their prescribed prerogatives according to their racy” (Morlino 1998, 15). Or, as Elster et al. write: own specific functional logic and without interference “. . . in consolidated regimes the defining presence of by other “competing” institutions. Consolidation within a robust hiatus between rules and decisions means that this first dimension influences the process of demo- virtually all decisions take place ‘under’ accepted rules cratic consolidation within the other two dimensions and in accordance with the domains of action assigned through their normative and structuring properties as through such rules to private and public actors . . .” well as their ability to limit the range of possible ac- (Elster et al. 1998, 29). tion of political actors and politically relevant segments of the population. Success or failure of constitutional With reference to Wolfgang Merkel and his multilevel consolidation, with its positive or negative effects on model of democratic consolidation (1996) and the democratic system as a whole, depends decisively Leonardo Morlino, three dimensions of consolidation on the degree of its social and political inclusiveness can be distinguished: constitutional consolidation; rep- as well as its political efficiency and institutional resentative consolidation; and attitudinal and associa- effectiveness (Merkel 1995, 5).2 The more institutions tional consolidation.1 On the one hand, consolidation fulfil these capacities, the more they make sense for refers to a process within each single dimension and political agents and the higher is their positive impact describes the consolidation of the three dimensions of on democratic consolidation. a democratic system. On the other hand, consolidation is also a given quality of the democratic system. Representative dimension

Constitutional consolidation Within empirical democratic theory there is a consensus that, besides the fundamental constitutional organs This dimension refers to the consolidation of central and political institutions, great significance has to be constitutional organs and political institutions (such as given to the party system as the structural sum of the the head of state, government, parliament, judiciary and political parties within a democratic system. As vote- electoral system). Here, consolidation is complete when seeking, office-seeking, and policy-making organiza- the ability of these organs and institutions to act is fully tions, parties perform a variety of key functions in institutionalized. The crucial criterion for this is “in- democracies: articulation and aggregation of societal stitutional autonomy” (Rüb 1996, with reference to interests; recruitment of political elites; formulation of Huntington 1968; also Morlino 1998, 51–53). political programs and alternative public policy options;

1. Following Juan Linz and Alfred Stepan, Wolfgang Merkel introduces a fourth level of consolidation, behavioral consolidation. This “refers to reducing the attractiveness for powerful actors (i.e., the military) to pursue interests outside the democratic institutions and against the democratically legitimated representatives” (Merkel 1998, 40). However, one has to note that constitutional structures cannot be consolidated if any powerful agent acts outside of them; at the same time, it is hard to imagine that a democracy-supporting party system can be established if relevant parties choose a “semiloyal” or “disloyal” (Linz 1978) stance toward the democratic government and support military intervention in civilian politics. Therefore, behavioral consolidation in the meaning of Linz and Stepan or Merkel is a phenomenon which can be detected in all three dimensions of consolidation.

2. “Inclusiveness” means the capability of institutions to deliver in principle free access for all politically relevant elites and social groups to the realm of political decisions and positions of political power. Institutional “efficiency” means their capacity for decision making and implementation of political decisions. Political institutions are “effective” when the political decisions that were made and implemented help to solve social problems.

92 THE KOREA ECONOMIC INSTITUTE OF AMERICA and elite level intermediation with the bureaucracy, the veloped. Indicators here are the chronological age of military, and the judiciary. From the perspective of so- parties, their degree of internal cohesion, and their ciety, parties can be considered as a “transmission belt” degree of organizational stability and professionalism. for societal demands. They channel social demands and transfer them to those institutions where the authorita- Attitudinal and associational consolidation tive political decisions are made, e.g., parliament, government (Almond/Powell 1978, Morlino 1998, 169). A democratic political culture and a vibrant civil soci- Therefore, “party organizations and elites are in a ety are not prerequisites for establishing a democracy. position to most powerfully facilitate consolidation or, A sufficient reservoir of positive attitudes to the demo- conversely, to bring about a regime crisis. They are cratic system and an autonomous civil society which the social actors most capable of forming, maintain- is able to articulate and assert itself, however, are of ing, expressing, and deepening attitudes relating to great significance for the long-term stability of the regime legitimacy or illegitimacy” (Morlino 1995, 315; democratic order.3 Based on David Easton’s theoreti- see also: Mainwaring/Scully 1995). Only when demo- cal elaborations (1965) and especially on Juan Linz’s cratic parties perform effectively as “gatekeepers” of seminal work, The Breakdown of Democratic Regimes the political system, i.e., transforming social demands (1978), this refers to the assumption that consolida- in policies and offering alternative and effective policy tion and stability of democratic systems depend to a options to societal problems, can citizens be prevented large extent on the belief in the legitimacy of the from becoming disappointed and shifting their explicit democratic structures by political and social elites as and general support away from democratic institutions well as by the citizens. In recent times Larry Diamond towards populist movements and authoritarian leaders. was in vehement support of this argument: “In essence, consolidation is the process of achieving broad and deep Democratic consolidation requires a minimum of legitimation, such that all significant political actors, socially embedded, competitive mass parties, because at both the elite and mass levels, believe that the demo- they are the basis for durable patterns of peaceful and cratic regime is the most right and appropriate for their stable shifts in power to emerge (Pasquino 1990). For society, better than any other realistic alternative they this, parties have to develop and cultivate their repre- can imagine” (Diamond 1996, 37). sentational capacities while at the same time stabilizing their basis of support within the electorate. The The relevance of civil society for the consolidation of establishment of stable ties among the electorate, civil a democracy was already emphasized by Robert Dahl society and political parties depends on the ability of (1971). Dahl correctly argued that democracy is based parties to fulfil their core functions of aggregation, on a multitude of collectively organized organizations organization, and articulation of political interests as which compete with each other for the representation well as recruitment of political elites. A system of of social interests within the legal and institutional representative, socially embedded, responsive, and boundaries of the democratic system. Parties and soci- functional parties itself helps to improve the efficiency etal organizations constitute ideally a net of interme- and political effectiveness of democratic institutions diary structures that are based not only on the legiti- with regard to the formulation and implementation of macy of social conflicts, but also on overlapping inter- policies. ests which are the result of multiple memberships in voluntary groups and associations. Furthermore, a On the macrolevel, consolidation is achieved when strong civil society, characterized by democratic tra- the fragmentation of the party system and the degree ditions, can serve as a buffer and bulwark against a of volatility between the parties are stable, and when strong state. Especially in postauthoritarian societies the level of ideological polarization of the party sys- with consolidation flaws at the level of the party system is relatively low. On the microlevel, consolida- tem, civic organizations serve as alternatives for so- tion is achieved when stable party structures have de- cial and political participation, as actors of democratic

3. See Schmitter 1997; Linz and Stepan 1996, Diamond 1999; Croissant, Merkel and Sandschneider 2000.

THE LOGIC AND UNDERPINNING OF REFORM 93 self-organization of a society, as accumulators of so- been unable to find sufficient common ground due both cial capital, and as propagandists for the enforcement to an atmosphere of personal animosity between their of social demands and interests which are of special leaders and an inability to learn from mistakes, and interest for the realization of a democratic public, as had entered the elections with three candidates. the institutionalized opinion-making process is in this area even more dependent on informal communications Roh’s election victory was by no means a bad omen of the public, the associational system, and the private for the continuation of the transformation process. With sphere (Habermas 1992, 426). Especially when the a representative of the old regime in the top position, party system is weak and when it fulfils its functions the military forces were rapidly integrated into the only partially, a vibrant civil society is of high signifi- democratic system. The moderate reform policies cance for the consolidation of democracy and for pursued by Roh proved compatible with the self inter- building public support for the democratic system. est of the main body of the old regime’s supporters. The defeat forced the opposition to reform their own Democratic Consolidation in South Korea confrontational strategies. In the early 1990s, this resulted in a reorganization of the party system and a The roots of the democratic transformation of South significant moderation of the opposition’s proposals. Korea lie at the beginning of the 1980s with the trans- The resulting situation provided a fruitful basis during fer of power from President Park Chung-hee (1961– the initial years of democratic rule for creation of a 1979) to the clique of generals surrounding Chun consensus among the relevant political parties and in Doo-hwan and Roh Tae-woo. Despite their success at the mainly conservative populace of the country that a mastering an economic crisis at the beginning of the return to an authoritarian regime was not the road of 1980s, the regime soon began to feel internal political the future. pressures. An attempt to cripple opposition strength by means of the semicompetitive elections held in the The specific path taken by the transformation process spring of 1985 was a failure. Opposition leaders Kim and transformation strategies of the relevant decision Young-sam and Kim Dae-jung succeeded in mobiliz- makers thus had a stabilizing effect on the basic demo- ing the urban middle-class vote and in creating an ac- cratic institutions and procedures in the country. This tive extraparliamentary coalition including student was seen clearly when Kim Young-sam, who had now opposition groups, churches and NGOs. become a candidate of the governing party, in 1992 became the first civilian to assume the country’s The country’s domestic policy crisis escalated in the highest national and governmental office after a pe- summer of 1987 as a result of skilled political maneu- riod of over 30 years during which national politics vering on the part of the opposition leaders, strategic had been dominated by the military. His term of office errors by the ruling elite, and external influences (pres- (1993–1998) saw the conclusion of, or progress in, sure from the United States, the upcoming Olympic the most important reforms—in the areas of the mili- Games). The country’s major cities saw mass protests. tary forces, the intelligence agencies, laws governing Faced with the choice of using military force and put- elections and political parties, and the justice and ting at risk the already strained relations with the administrative systems. Finally, the inauguration in country’s most important political, military and eco- February 1998 of the newly elected President Kim nomic partner (the United States) or of giving in to the Dae-jung, a dissident for many years, demonstrated opposition, the moderate forces in the Chun regime that all the country’s relevant forces had been integrated acceded to the second option. Democratization began into the political system. in the summer of 1987. Constitutional consolidation The “doves” in the regime calculated that they could, by means of these concessions, give the divided oppo- If one looks at the vertical autonomy of the constitu- sition a run for their money in the upcoming elections, tional organs and institutions, the constitutional con- and they turned out to be correct. In free and suffi- solidation of democracy in South Korea seems prom- ciently fair elections, Roh Tae-woo won the presiden- ising. Measured by the criteria of chronological and tial election of December 1987. The opposition had generational age of the institutions, it seems that South

94 THE KOREA ECONOMIC INSTITUTE OF AMERICA Korean democracy has achieved a high level of demo- This alignment paralyzed both government and parlia- cratic consolidation. In a country which has had a total ment. Although the election victory of the opposition of six constitutions, with frequent arbitrary changes, alliance led by President Kim Dae-jung in December and in which no president left office peacefully until 1997 led to a shift in power between the two major 1988, the past fifteen years mark an unprecedented political blocks, which marked a new step in demo- period of democratic continuity. Nevertheless, the in- cratic development, the new President did not have the dicator of vertical autonomy measures only the chro- support of the parliament. The Grand National Party nological stability of political organs. Much more of the runner-up, Lee Hoi-chang, still held a plurality relevant is whether the central political institutions have of seats. been able to obtain horizontal autonomy. This is especially true for the relationship of the executive Such competing executive and legislative majorities (President), legislative (National Assembly) and judi- have created institutional gridlock. From the standpoint cial (Constitutional Court and other organs) branches of institutional efficiency and political effectiveness, of government. Only if the parliament and the judi- this situation has to be judged very critically—the ciary are able to exercise their prerogatives within their actors are forced to show a high degree of willingness own political domains, according to their own specific to compromise and mutual trust, conditions which were rules and without any interference from other organs obviously missing on both sides. As the first months of (especially from the executive), can one speak of suc- the new government showed, these preconditions could cessful consolidation of liberal democracy in this first hardly be expected in a political environment in which dimension. Two aspects are of special significance: the actors were accustomed to zero sum political games. During the peak of the so-called IMF crisis (1997/98), • the relationship of the parliament with the executive. the gridlock between the President and the opposition Is the parliament able to fulfil its legislative preroga- legislature led to a potential constitutional crisis, as tives, and does it control the government? the election of a new prime minister by the National Assembly was on the agenda. Without any chance to • the relationship of the judiciary with the executive get its favorite candidate elected, the President was and the legislative branch. Is there judicial indepen- forced to overcome the gridlock by using political tac- dence, and is the judiciary in principle able to control tics, which Guillermo O’Donnell has called the executive as well as other public offices (judicial “(g)overning on the edge of the constitution” review). (O’Donnell 1994).

Within these areas of horizontal accountability Such competing majorities have been a chronic prob- Korean presidentialism has been characterized by lem of presidentialism in South Korea. However, the frequent transgressions of the limits placed on govern- resultant crises have often been solved through the mental powers. The relationship between the Korean “flexibility” of the party system, albeit with severe po- President and the National Assembly generally oscil- litical costs. The flexible party system offered the Presi- lates between the two extremes of hyperpresidential dent the opportunity to construct a majority in parlia- dominance on the one hand and institutional gridlock ment by allying his own party with one or more parties on the other. Both scenarios have a negative impact on from the opposition and/or by coopting independent democratic consolidation. Three times—from 1988– representatives or opposition members of parliament 90, 1998 and again in 2000—the government faced an into one of the governing parties.4 However, this pat- opposition majority in the National Assembly. In par- tern of constructing parliamentary majorities has to be ticular, President Roh Tae-woo (1988–1993) was con- analyzed for its impact on the horizontal autonomy of fronted with a parliament dominated by three opposi- the parliament, as well as for its ambivalent impact on tion parties (RDP, PPD and NDRP), which were the consolidation of the party system. unable to act in a unified way against the government.

4. For example, during the 14th National Assembly, the share of representatives who changed their party affiliation one or more times during the parliamentary term was nearly 20 percent (see Kwon 1995).

THE LOGIC AND UNDERPINNING OF REFORM 95 Since the party founders maintain strict control over branch and minimizes the participation of parliament the internal process for selecting candidates as well as in political decision-making processes. The image of a over financial resources, the political careers of repre- legislative branch dominated by an executive branch sentatives depend very much on the personal support that discriminates massively against the opposition in of the founder. This feature gives a President a strong its internal procedures is confirmed and underlined by instrument to discipline his party in parliament. Strict a look at how the President makes use of delegated discipline within parliamentary groups is further safe- legislative competency. The influence of presidential guarded by the nomination of a large number of fresh executive powers on legislative procedures in parlia- candidates for seats who, when and if elected, are ment is already considerable, and it is bolstered by a placed around a core of very experienced parliamen- pronounced tendency of the President to issue decrees tarians by whom the work in committees and in the (Croissant 2000b). party’s “Negotiating Group” is conducted according to the guiding lines of the party leader. While these The following tables provide data which show that, experienced parliamentarians are often bound to the between April 1988 and February 1990, the first long party leader by decades long political loyalty, the newly period of confrontation between the President and the elected deputies are normally inexperienced, do not opposition-dominated parliament (yeosoyadae), the have their own political networks, and depend very relationship between government and legislature in much on the support of the party patron when it comes South Korea was characterized by mutual resistance, to their political career. The President’s control over low efficiency of the National Assembly, and the fre- “his” party in parliament and the control the majority quent reactive use of decree power by the President. In party exercises in the National Assembly are also just the first twelve months after the 13th election, seven strengthened by a number of formal and informal rules bills passed by parliament were blocked by the and procedures that limit the influence of individual President’s veto. (Kang 1998, 106). deputies of the (opposition) minority to a large extent (see especially National Assembly Act: Art. 33, 51, 79 and 85; Shin 2000; Park 1996, 1998). The interac- Table 1: Legislation during the first phase of divided tion of these formal and informal rules and the exist- government ence of a dominant, coherent, and disciplined govern- 13th National Assembly ment party secure solid parliamentary support for the 1988–90 1990–92 Total President in times of noncompeting majorities. South Initiated billsa Korean Presidents were, accordingly, able to organize President’s Party 14.3 39.6 19.4 a voting block in parliament for the bulk of the 1990s Opposition 65.6 32.7 58.9 that was not only stable but also able to make decisions. Passedb President’s Party 13.1 43.8 23.3 Given that the government’s well-disciplined parlia- Opposition 12.2 1.8 8.8 mentary group dominates the National Assembly and Share of passed initiativesc that both the government and opposition parties for the President’s Party 23.0 54.3 36.0 most part pursue confrontational strategies, the atmo- Opposition 4.7 2.6 4.5 sphere of the decision-making process is typically uncooperative. The “majority terror” exercised by the a Bills initiated by the government party or the opposition as government parties in parliament is manifested above percent of all bills all in the exclusion of the opposition from relevant com- b Approved bills initiated by the government party or the op- mittee posts and in the practice of forcing government position as percent of all approved bills draft bills through the plenum in a matter of minutes, c Approved bills initiated by the government party or the op- without previous discussion and en bloc, thus depriv- position as percent of all initiated bills ing the opposition of its right to codetermination (Park Percentages do not add to 100 because of exclusion of bills 2000, 87). Together with the way executive power is introduced by committees and joint initiatives of government distributed, these practices inhibit the development of and opposition parties. the parliament as an independently positioned instru- Source: Author’s calculations based on information from the ment in the balance of power vis-à-vis the executive Ministry of Legislation 1999, Shin 2000.

96 THE KOREA ECONOMIC INSTITUTE OF AMERICA The data for the first phase of yeosoyadae, from 1988 process of legislation is bolstered by additional pre- to 1990, show that the Korean President can only use rogatives of the President in the area of delegated his position to exercise his legislative prerogatives legislation. during periods of noncompeting majorities. During the long phase of majority dominance (1990–1997; 1999– The extensive use of presidential decree authority is 2000), the Korean presidency is characterized by also the result of the “paraconstitutional” delegation excessive legislative activity of the government. of decree authority to the President by the National Assembly itself. Because the delegating legislation However, the legislative process is usually dominated often lacks essential elements and sufficient specifica- by the President (see Table 2). Initiatives of individual tion of the conditions for the formulation of decrees, it deputies have only a small chance to be realized. The leaves the President an open field for frequent use of legal constraints on their ability to play an active role decree authority (see Kim C.Y. 1995). This practice in legislation resulting from internal regulations of the allows a presidentially dominated legislature in prac- National Assembly are augmented by insufficient moni- tice to delegate its prerogatives to the executive with- toring of the government in the context of annual au- out overtly violating the constitution. The President is diting (Park S. C. 1999, 93) and inefficient, sporadic thus able to refer to the legal and democratic legiti- investigating committees. macy of parliamentary action which allows him to use those prerogatives. Table 2: Presidential Dominance in Legislation (1988–1995) Because of these flaws in parliamentary control of the th th 13 Assembly 14 Assembly process of presidential legislation, the decision-mak- Initiatives ing capacities of the President remain unconstrained, President 39.2 62.2 especially since the National Assembly is able neither President’s Party 11.8 8.7 Presidential Block 51.0 70.9 to exercise a veto against his recourse to these rights nor to request the presentation of these decrees before Passed Bills President 65.2 81.8 they come into existence (Lim 1996, 250). Decrees President’s Party 8.1 6.1 enter directly into force. The only means of control is Presidential Block 73.3 87.9 the formulation of delegation rules within the respec- Share of passed initiatives tive law or the restriction of decrees by changing their President 87.2 90.4 actual legal basis. But, as long as the President can President’s Party 36.0 50.6 count on the majority in parliament, the use of these Presidential Block 75.4 90.1 devices is unlikely. Source: see Table 1. All figures in percent The success of such presidential strategies, already of The image of a presidency-dominated National Assem- borderline constitutionality, is further facilitated by the bly that discriminates against the opposition is en- unobtrusive nature of the South Korean Constitutional hanced by a look at the use of delegated decree author- Court. With regard to the number of cases or decisions ity by the President. The great influence of the presi- of the National Assembly or state organs, the Consti- dential executive within the regular parliamentary tutional Court seems to be independent, seems to get

Table 3: Decrees and Parliamentary Laws (South Korea, 1988–1999)

Year President Parliamentary Laws Presidential Decrees Ministerial Decrees 1988–1993 Roh Tae-woo 541 1,449 1,170 1993–1998 Kim Young-sam 954 1,780 1,585 1998–1999a Kim Dae-jung 538 988 957 Total 2,033 4,217 3,712

Source: author’s calculations based on information from the Ministry of Legislation 1999. a Through October 1999

THE LOGIC AND UNDERPINNING OF REFORM 97 more and more active over the course of time, and seems The Court argued that in contrast to the minority party, to be a locus of control and review that is accepted by the right of the majority party to take legal actions could all politically relevant players (Yang K. 2000). Nev- not be recognized, because the majority party is in a ertheless, tendencies can be identified in the case of position to assert its political will within the National some key decisions of the Constitutional Court which Assembly anyway. With this decision, the Court de- have a strong impact on the political process and which liberately ignored the circumstances that caused the indicate a readjustment of the balance between the state dispute. Furthermore, it deprived not only the opposi- powers. The Constitutional Court seems to lose influ- tion, but also the National Assembly as a constitutional ence vis-a-vis the political players in the executive or body, of one of its most powerful instruments for ful- legislative branch of government. This leads in turn to filling its obligation to oversee the legality of govern- the reduction of its oversight function. One key deci- ment action. Because of this and further rulings during sion seems to be especially problematic— the rejec- the second half of the 1990s, one influential expert in tion of a case in the context of the institutional dispute constitutional law in Korea argued, the Court, without between the opposition majority in parliament and (politically) wanting it, could not find a way to put the President Kim Dae-jung in July 1998.5 In December fight for political power on a constitutional track (Huh 1997, during the peak of the South Korean financial 2000, 484f.). Nevertheless, this judgement does not crisis, the opposition for the first time won election to indicate a general breakdown of judicial independence the highest state office. The coalition agreement, made and judicial review. No general disablement of the in advance of the election, between the subsequent monitoring and verification activities of the courts has winner, Kim Dae-jung, and Kim Jong-pil, founder of taken place. The apparent lack of will to enforce legal the United Liberal Democrats (ULD), included as the standards is less a result of political pressure and more price Kim Dae-jung had to pay for his support the a consequence of the judges’ concept of the rule of election of Kim Jong-pil as Prime Minister. law. The flaws cited reflect the restrictions on legal oversight of state action vis-a-vis the citizens. This is Since the coalition partners did not have a majority in expressed in the form of a lack of holding state action parliament, the election of the Prime Minister by the to legal norms which is caused by the administration’s National Assembly required the support of the opposi- arbitrary interpretation and selective application of its tion (Constitution of the Republic of Korea, Art. 86, powers. On the other hand, individual judicial organs— Sec. 1). When President Kim Dae-jung requested it, especially the public prosecutor’s office—are utilized the opposition majority refused. In the following bal- to fight political opponents. The lack of independent lot, the members of the government party prevented judicial bodies and their use as an instrument for po- opposition representatives from voting (Korea Herald, litical confrontation and control were apparent at the 3 March 1998, 1). As a result of this gross interfer- end of the 1990s after the first democratic change of ence, it was impossible to bring the ballot to a regular government (Steinberg 2000; Yoon et al. 2000). end. The sitting of parliament had to be broken off before about a third of the deputies had an opportunity Representative consolidation to vote (Huh 2000a, 483). In the aftermath, President Kim Dae-jung appointed—an unconstitutional act ac- Within the context of party and transformation research, cording to the dissenting votes of judges Kim Moon- low levels of fragmentation and electoral volatility are hee, Lee Jae-hwa and Han Dae-hyun—his coalition seen as a sign of a stabilized party system (Rae 1967; partner Kim Jong-pil as Acting Prime Minister with- Sartori 1976). Together with a low level of ideological out obtaining the required approval of the National separation between the parties and the nonexistence of Assembly (Korea Herald, 4 March 1998, 1, 3). A to- relevant antisystem parties, such party systems are seen tal of 150 deputies asked the Constitutional Court to as having positive impacts on the consolidation of decide the constitutionality of this action. In July 1998 democratic regimes (Morlino 1998, 85–103, 210; the Constitutional Court decided to reject all these cases. Merkel 1999b, 155). The degree of parties’ institu-

5. Korean Constitutional Court Decision, 29 KCCG 583, 98 HunRa.

98 THE KOREA ECONOMIC INSTITUTE OF AMERICA tionalization, of their ideological polarization, and of rea—the difficulty of establishing a workable and their programmatic capabilities, as well as the patterns cooperative relationship with the majority in parlia- of contestation between them, also influence the con- ment. The causes for this are mainly to be found in the solidation of the constitutional organs, especially re- different formulas of the electoral systems for the presi- garding horizontal accountability and the efficiency and dency and for the parliament. This effect is reinforced effectiveness of core institutions such as parliament. by insufficient integrational effects of the electoral system on the party system, the cleavage structure of While a large ideological separation of the parties Korean society that is reflected in the party system, increases the intensity of political confrontation and and the organizational flaws of the parties, which lead therefore influences the patterns of exchange between to a continuous reshuffling of the configuration of the government and parliament (see Mainwaring & Scully party system due to numerous secessions, alliances, and 1995; Levitsky 1998), the criteria of volatility and frag- rebuilding of party organizations. Together, these factors mentation affect directly the cohesion and stability of lead to a moderately fragmented party system, in which the configuration of a party system, and the working of absolute majorities in parliament are hard to achieve. the system of government. Klaus von Beyme correctly argues that democracies can survive several shortcom- To evaluate the integrational and majoritarian effects ings, but not the lack of an effective political system. of the South Korean electoral system (as it applies to However, “a prerequisite of government effectiveness, parliament), several indicators developed in research which has to be delivered by the party system, is coa- on the party and electoral system can be used. The most lition formation” (von Beyme 1997, 48). Rapid and widely used one was introduced by Arend Lijphart stable formation of governments is very hard to real- (1984). He measures the majoritarian effects of elec- ize in those cases where the party system is character- toral systems “indirectly” via the degree of proportion- ized by high rates of volatility, high fragmentation, and ality of the electoral system. An alternative method is large ideological distances between the parties, as these proposed by Timm Beichelt (1998). While Lijphart’s characteristics usually lead to heterogenous and index measures the overrepresentation of the two conflictual multiparty coalitions (ibid.). This is very biggest parties in parliament, the indicator developed plausible for parliamentarian systems of government. by Beichelt measures the overrepresentation of the But presidential systems with cabinets independent strongest party in the context of the general propor- from the parliament also have problems if the party tionality of the electoral system. In order to measure system has such characteristics, as political bargain- the proportionality of an electoral system, Beichelt ing and negotiating in the parliamentary arena is more develops as a first step the indicator Erep (for complex and less predictable. Political majorities for ELECTIONRepresentativeness). decisions are more difficult to find, and the prospects for the President to get a supportive legislature are slim. The proportionality of an electoral system is measured by the sum of the difference between the proportion of One common argument against presidential systems is seats and votes of each party. This sum is divided by that they tend to produce competing majorities in ex- the factor 2 (to balance over- and underrepresentation) ecutive and parliament. The probability of competing and subtracted from 100 (ibid., 609). The closer the majorities is especially high under a staggered system indicator is to 100, the more proportional is the elec- of elections. Competing majorities can lead to institu- toral system. Based on this indicator, the majoritarian tional gridlock and, in the worst case, to the break- effect of electoral systems can be measured in a sec- down of the constitutional system (Ackerman 2000, ond step. Beichelt does this with a second indicator,

645ff.). We have already shown that competing ma- Erep1 (ELECTIONRepresentativeness of strongest party), which is cal- jorities in South Korea are frequent. A comparison of culated like Erep by adding the differences between the the results of presidential and parliamentary elections strongest party’s share of votes and share of seats. Once in Korea shows that the party of the President has never again the sum is divided by two, to balance over- and won a majority of 50 per cent or more of the seats in underrepresentation. The difference Erep1-Erep indicates the National Assembly. The average share of seats has the seat bonus for the strongest party (Beichelt 1998, only been about 45 percent. This result highlights one 611), which measures the majoritarian effects of a given of the most serious problems of the presidency in Ko- electoral system. The following table shows to what

THE LOGIC AND UNDERPINNING OF REFORM 99 extent electoral systems help to produce political flects the regional cleavage among political elites, emo- majorities in parliament by overrepresentation of the tional identities, historical grievances, and uneven eco- strongest parties. Overrepresentation of the strongest nomic development. Regionalism is older than the tran- party tends to rationalize government formation, since sition to democracy during the 1980s. However, as a it helps single parties or minimal winning coalitions to political phenomenon it had nearly vanished and was win the majority of seats. To get a better impression of masked by the conflict between the democratic oppo- the effects of the electoral system in Korea, it is con- sition and the authoritarian regime since the 1950s. trasted with those of other new Asian democracies. But it suddenly reemerged with the 1987 presidential election and continued to be salient throughout all the

The average difference Erep1 - Erep since the founding parliamentary elections in the late 1980s and 1990s. elections of the democracy indicates for each country Today, the political mobilization of communal groups to what extent the democracy has been able to profit corresponding to their regional background is the most from the overrepresentation of its strongest party. The influential variable for the explanation of voting be- figure in the fourth column of Table 4 indicates for the havior in South Korea (Dong 1995, Croissant 1998b, segmented system in Korea a high overrepresentation 138). As a partly ascriptive and recently manufactured of the strongest party. South Korea is in third place, cleavage (uneven economic development during the au- behind only Nepal and Bangladesh, which both prac- thoritarian period, clientelism, patronage) it has frag- tice the British model of a relative plurality system in mented and shaped the electoral competition ever since. single member constituencies. As the following comparison of the fragmentation degree shows, the The rationalizing effects of the electoral system are integrational effects of the electoral system in South encountered additionally by structural flaws of the par- Korea also help to produce a moderately fragmented ties that lead to permanent changes in the configura- party system: tion of the party system. In particular the attachment of political loyalties to individuals, factionalism, and The declining (since 1988) fragmentation and the the weak organization of parties are responsible for smaller number of effective parties in parliament are the volatile character and the fluid structures of parties at first sight signs of a rationalization of the party in South Korea. Their ideological and programmatic systerm. However, it is surprising that the high seat principles are developed only rudimentarily and dif- bonus for the strongest party did not lead to single party ferences between parties are very small. The low level majorities. The reason for this is the prevalent party of institutionalization of party structures is obvious in cleavage that originates from regional conflicts. In al- the short lifetime of party organizations, a high share most all analyses of the South Korean party system, of independents in parliament and an exceptionally high regionalism is highlighted as the most salient cleavage rate of volatility. If only those parties that obtained at (Dong 1995; Cho 1996; Chung 1997). It basically re- least three percent of the seats or the valid votes in

Table 4: Average Majority-building Effects of Electoral Systems (primary or only chamber of parliament)a

Average Erep Average Erep1 Average Erep1-Erep Erep1-ErepLatest Election

Nepal (1991-1999) 82.88 92.98 10.10 10.60 South Korea (1988-2000) 88.16 94.97 6.81 6.40 Bangladesh (1991,1996) 86.50 93.20 6.70 9.20 Japan (1947-2000) 91.77 96.17 4.40 6.86 Philippines (1995,1998)a 94.25 97.55 3.30 2.35 Thailand (1992-2001) 91.42 94.79) 3.37 6.34 Taiwan (1992-1998) 95.51 96.78 1.27 2.84 Geometric Mean 89.97 95.19 4.33 5.63

Source: Author’s calculations based on information from Ahmed 2001; Croissant 2001; Hartmann et al. 2001; Kramer 2001; Nelson 2001; Tien/Chu 1998, 114; Elections around the World http://agora.stm..it/elections/election/taiwan.htm.. a Taiwan: only Legislative Yuan

100 THE KOREA ECONOMIC INSTITUTE OF AMERICA parliamentary elections are taken into account, between At the same time, it covers the phenomenon mentioned 1987 and 2000 political parties had an average life above of representatives who are “floating” between expectancy of 31.5 months. Since the first free elec- parties. This is not only an informal mechanism for the tions of 1988, no party has contested parliamentary recruitment of candidates and representatives for the elections twice. The share of independent candidates party but also gives the patterns of party competition of the valid votes and seats during the four elections in South Korea a personalized motive of continuity. that have been held (1988, 1992, 1996, 2000) aver- This in turn relativizes the high rate of volatility of the aged 9.4 and 4.3 percent, respectively. party system. The latter can largely be explained by the fact that no party has run for elections twice under As suggested by Steven Levitsky (1998) and Scott the same name and with the same leadership since the Mainwaring (1998), the volatility rate of a party’s sys- four parliamentary elections since 1988. The high vola- tem can be used as another indicator of the institution- tility is more the artificial product of unstable party alization of a party system. With almost 33 percent, organizations and less an expression of strongly fluc- the average volatility in South Korea indicates very tuating voter preferences. A look into a regional pro- strong voter fluctuations. As the following table shows, file of volatility shows that the loyalty of the voters is with the exception of the Philippines this rate is sig- not directed to the parties as organizations, but to the nificantly above the rate in other new democracies. leading political figure of the respective parties. If the Even Thailand with its chronically unstable party or- parties are identified on the basis of the regional ganizations shows a lower rate. background of their founders and leaders, it becomes obvious that, in spite of frequent party splits, dissolu- tions, mergers and name changes, a stable voting Table 5: Mean Effective Number of Partiesa pattern can be identified on the regional level (see also Kim/Kim 2000). The high rate of volatility of the South Effective number Effective number of of electoral partiesc parliamentary parties Korean party system therefore indicates an unstructured and fluid landscape. But below the organizational level a South Korea (1988–2000) strong loyalty of the voters to certain party leaders and Average 3.99 2.95 groups organized around these figures can be identified. Thailand (1992–2001) Average 5.64 5.03 Dimension of attitudinal and associational patterns Philippines (1987b–1998) The development of a political culture that supports Average n.a. 4.36 democracy and a vibrant civil society completes the Taiwan consolidation process. As we know through Gabriel (1992–1998) Average 2.94 2.43 Almond and Sidney Verba’s seminal work Civic Cul- Bangladesh ture (1963), this process may last for decades and only (1991–1996) be complete after a change of generations. In the post- Average 4.07 2.79 war democracies of Germany, Austria, and Italy, sev- Nepal eral decades had to pass before this process was com- (1991–1999) Average 3.89 2.48 pleted. But in the long run, broad political support for Japan democracy and democratic institutions and an orga- (1947–2000) nized civil society are of fundamental significance for Average 3.30 2.82 the stability of a democratic order (Friedman 1994; Linz/Stepan 1996). In Southern Europe—in Spain for a First or only chamber of parliament, no independents or par- instance—the first two dimensions of democracy were ties with less then 3 percent of votes/seats consolidated before a political culture was established b The Philippine election commission COMELEC only pro- that supported democracy. A stable party system in vided data for the share of votes of each candidaate on the level of constituencies (1987), or incomplete data (1992) Portugal emerged more rapidly, along with adaption of the attitudes of the citizens. Greece can serve as an c For computations, see Laakso andTaagepera 1979 example of the possibility of a successful consolidation Sources: see Table 4. in spite of weak civil societies (see Sotiropolous 1995).

THE LOGIC AND UNDERPINNING OF REFORM 101 Consolidation in Korea follows another route. Not sur- Table 7: Support for Democracy prisingly, the flaws of consolidation in the first two Country Support for Democracya dimensions influence negatively the emergence of a South Korea (1997) 92 strong civil society and civic culture. Several cultural Philippines (1995) 89 studies show that the political attitudes of a large seg- Latin American: Average of 9 ment of Korean society correspond to the category countries (1996) 61 “critical democrats” (Shin 1999)—i.e., broad accep- South Europe (1992) tance of democracy and broad rejection of authoritar- Greece 90 ian alternatives are accompanied by critical evalua- Portugal 83 tions of the daily performance of the democratic sys- Spain 78 tem and by a low level of trust in parliamentary insti- EU: Average of 12 countries 78 tutions, political parties and the government. The degree of conventional participation (voting, participa- a Percent of those surveyed who said they prefer to liven in a tion in political parties) is declining from an already democracy. low level. On the other hand, surveys show a rapid Source: Data for South Korea based on Shin 1999, 40; Rose expansion of prodemocratic attitudes and orientations. et al. 1998, 103. The vast majority of the population share the view that a return to authoritarian rule is not desirable. Approval Given the political past of South Korea one more rel- of the democratic system is broad and stable. Also, evant question is whether a “civilian ethos” has been satisfaction with the everyday working of the demo- established in society. As data taken from the New cratic regime is at a level which can be described as Korea Barometer shows for the late 1990s, only a very high compared to that in other new as well as estab- small segment of society supports the idea of a new lished democracies. Even at the peak of the so-called takeover of power by the military. Conversely, it has “Asian Crisis,” the preferences for nondemocratic re- to be emphasized that the disapproval of this option is gimes did not increase.

Table 6: Volatility Rates in Comparative Perspective

Number of analyzed elections Average rate of volatility

South Korea (1988–2000) 4 32.86 Philippines(1995–1998)a 2 43.15 Thailand (1995–1996)b 2 28.65 Taiwan (1992–1998)c 3 9.6 Average of 12 Latin American countriesd 58 22.6 Average of 3 South European countriese 6 12.15 Average of 5 East European countriesf 10 23.6 Average of 7 East European countries g 13 29.1 a Figures only for the House of Representatives; Data were only available for 1995 and 1998. For this reason the rate of volatility indicates only the change of vote proportions between parties/party alliances from 1995 to 1998. b Figures only for the House of Representatives; Data were only available for 1995 and 1996. For this reason the rate of volatility indicates only the change of vote proportions between parties from 1995 and 1996. c Only for the legislative Yuan d Uruguay 1971–94 (3 elections); Columbia 1970–98 (8); Costa Rica 1970–98 (7); Chile 1973–97 (3); Argentina 1983–97 (7); Paraguay 1983–98 (3); Venezuela 1973–98 (5); Mexico 1982–97 (5); Bolivia 1979–97 (5); Ecuador 1978–92 (5); Brazil 1982–98; Peru 1978–95 (3) e Greece 1974–81 (2); Portugal 1976–83 (2, excluding 1980); Spain 1977–82 (2) f. Bulgaria 1990–96 (2); Rumania 1990–96 (2); Slovakia 1992–94 (2); Czech Republic 1992–96 (2) Hungary 1990–94 (2) g In addition, Poland 1993 (1); Russia 1993 (1) Sources: Table 6 as well as Inter-American Development Bank 2000, 180; Morlino 1998, 86–88; Merkel 1997b, 369.

102 THE KOREA ECONOMIC INSTITUTE OF AMERICA very stable. Regardless of the economic crisis, the pro- Table 9: International Comparison of Satisfaction with portion of those people in favor of a military takeover Democracy as a means of solving economic and political problems remained low. In spring of 1999 the value slipped down Country Satisfied with the functioning of democracya even below the level of the year before the crisis. South Korea 1991 35 Table 8: Support for a Military Government 1996 50 (South Korea, 1997–1999) Philippines (1995) 58 Latin America (1996) Argentina 34 Military Government Summer 1997 Fall1998 Nov 1999 Brazil 20 Strong Support 2 3 1 Chile 27 Little Support 14 11 7 Uruguay 52 Weak Rejection 20 28 25 Southern Europe (1993) Strong Rejection 65 57 62 Greece 34 Portugal 54 May not sum to 100 because of rounding or response of “No Spain 41 opinion” Eastern Europe (1993) Hungary 36 Source: New Korea Barometer 1997–1999. Czech Republic 65 Slovakia 33 At the same time, the trust of South Korean citizens in Poland 43 the military as an institution is high compared to other Germany (1993) countries (see Munro 1998, 49). Therefore, the data West 55 presented above cannot be taken as a sign of broad East 36 mistrust of the military by civilians. Rather, a generally high level of social trust in the military corresponds a Percent of those surveyed who are overwhelmingly or very with a broadly shared view in Korean society that the satisfied with the everyday functioning of democracy military does not have the capabilities to solve non- Source: Data for South Korea based on Kim K. W. 1993, 11 military, i.e., political and economic, problems. In other (1991) and Shin 1999, 37 (1997); Data for the Philippines based on Arroyo 1995, 2; Data for Latin America according to words, while the military is seen as trustworthy by the Latino Barometer 1996, cited in Shin 1999, 37; Data for East- vast majority, confidence in its ability to govern is low. ern Europe based on Plasser/Ulram 1994, 19; Data for Ger- It can be argued that this indicates favorable condi- many according to Eurobarometer (March–April 1993), cited in Abueva 1997, 73. tions for the establishment of civilian control over the armed forces, as high societal reputation of the military as an institution counterbalances the separation of Europe as a “temporary delinking between the support the armed forces from other social segments. The broad of the citizens for the democratic political system on societal consensus about the undesirability of direct the one hand, and the specific, output-oriented legiti- rule by the military has created strong disincentives to macy on the other hand” (Merkel 1999b, 530; author’s political intervention by the military. translation). Provided that the dynamics of legitimiza- tion of new democracies in East Asia are comparable The more critical evaluation of the daily working of to those in Central and Eastern Europe, this can be democracy is not surprising in light of the problems of taken as an indicator that citizens do not evaluate a democratic consolidation in Korea. Nevertheless, sur- given regime solely on the basis of the subjectively vey data show us that dissatisfaction with political in- perceived performance, but that they also take into ac- stitutions does not reach a level which would provide count the performance of the former regime (Rose et any reason for concerns about the stability of democ- al. 1998, 197f.). In the Korean context, surveys show racy in Korea. that at least the political performance of democratic regimes is perceived as being better than the political The data support the hypothesis that in Korea a pro- performance of the former authoritarian system (see cess has taken root which Wolfgang Merkel has de- Lee S. J. 2000). Regarding the future stability of described with regard to the new democracies in Eastern mocracy in Korea, the implications of this assumption

THE LOGIC AND UNDERPINNING OF REFORM 103 are clearly positive. It supports the view that Korean decade that the stance of government and administra- democracy is not subject to an imminent danger of tion changed substantially, so that the situation corre- breakdown. sponds now with the standard of liberal democracy. Nevertheless, union activism in particular was subject In addition to the first two dimensions of consolida- to multiple restrictions—such as the de facto suppres- tion, the process of developing a civil society is also sion of union rights, many arrests of union members, highly positive in Korea. After democratization began frequent use of physical force by the police against in 1987, a large number of civic organizations emerged, striking workers and the defamation of union mem- and many new and diverse groups started to use the bers as pro-North Korean activists—at least until the extended ideological space in Korean society for ar- registration of the KCTU, the alternative union asso- ticulating, organizing and representing social interests ciation that was only allowed in the fall of 1999. There which were repressed or unheard during the regimes are constraints on the right to strike in general as well of Park Chung-hee and Chun Doo-hwan. Since then, as restrictions concerning the right of unions to orga- this new type of civic organization increasingly nize the public sector, which are against the conven- replaced the “old” standard-bearer of civil society from tions of the International Labor Organization. the so-called Minjung movement, i.e., student groups and dissidents. At the same time, civil society became Conclusions stronger in the area of representing the interests of Korean workers. In sum, a picture of structural change This article has analyzed the democratic consolidation of civil society emerged. At the organizational level, process in South Korea. It has shown that democracy the number of interest groups increased from 1,322 in in South Korea cannot be regarded as consolidated, 1984 to 2,181 in 1996. At the end of the 1990s, over measured by the indicators developed in the first sec- 5,000 NGOs existed, of which almost 75 percent were tion. The consolidation flaws and problems are to be founded between 1987 and 1996 (Kim H. R. 1997, found especially within the first two dimensions de- 105f.). scribed, those of constitutional and representative consolidation. The analysis has shown that constitutional These organizations contribute to the deepening of consolidation and the way that the democratic institu- democratic attitudes and practices by building national tions work depend to a large extent on how party elites and local networks or by organizing public discourse. deal with these institutions. If the two indicators of Apart from their integrative function in bridging so- vertical and horizontal autonomy serve as a point of cial cleavages, this new type of civil NGO is a social reference for the evaluation of the consolidation pro- force of political moderation. Although they represent cess of the political institutions, it can be stated that some of the political demands and policies of the radi- they have reached a relatively high degree of vertical cal segments of the students and worker movements, autonomy. However, the situation is different on the they disassociate themselves in their rhetoric as well horizontal level of institutional autonomy. In this area, as in their actions from the confrontational and often flaws in the consolidation of democracy in Korea cor- illegal tactics and sometimes radical demands of the relate with the flaws that have been described by workers and students (Yoon 1997:47). Guilllermo O’Donnell with the term “delegative democracy.” During most of the 1990s, presidentialism Although the transformation of the relationship between in Korea was characterized by a clear shift of the bal- citizens and the state is visible in the area of societal ance of power between the President and National interest representation, which includes industrial rela- Assembly in favor of the President. At least with re- tions, the realization of the constitutionally guaranteed gard to the relationship between executive and legisla- rights of free association, free speech and information, tive branches, strong characteristics of a delegative de- as well as the more specific exercise of union activ- mocracy could be identified under the condition of ism, were hindered by the state until the late 1990s. noncompeting political majorities, which was the case The state resisted taking the changed political and eco- between 1990 and 1998 and again between 1998 and nomic circumstances into account and offering soci- 2000. The role of the parliament in decision making in etal organizations more say in matters of society and general, and in legislation in particular, is weak. The economic policies. It was not until the end of the last process of legislation is in large part taken away from

104 THE KOREA ECONOMIC INSTITUTE OF AMERICA the parliamentary arena and moved into the domain of the elites (not only in Korea) to learn is low. Based on the presidential executive. The usurpation of parlia- this, it seems doubtful that Korean democracy is going mentary prerogatives, although it appears at the edge to be consolidated soon. Rather, it is likely that the of the constitution, is facilitated by the distanced role flaws shown in this analysis will continue to block the of the Constitutional Court. In a series of highly rel- consolidation process for at least the near future. evant cases, the rulings of the Court have shown that it was not able to force the struggle for political power back within constitutional boundaries. However, there Dr. Croissant is a research fellow at the Institute of has not been a general suspension of judicial review Political Science, Heidelberg University. For German and independence. language references, the author may be contacted by e-mail, [email protected]. What are the reasons for the varying degrees of success in institutionalizing horizontal accountability of the executive against the other branches of government? Developments in South Korea serve as an example that a delegative democracy is not necessarily a result of constitutional misconstruction, but more a consequence of interactions between institutional design and party system. In South Korea, the latter shapes to a large extent the dynamic of consolidation flaws within both of the first two dimensions of consolidation. While in the case of competing majorities the scenario of institutional gridlock dominates, the power of the Presi- dent increases considerably under conditions of noncompeting majorities. Then the position of the Presi- dent is much stronger than was intended by the constitution and reaches a level which can be called a state of “hyperpresidentialism.”

The political reality of presidentialism in South Korea demonstrates the pitfalls of simplified and out-of- context generalizations about the working of presidential systems. How presidential systems work and whether presidentialism is really a threat to the consolidation of democracy depends to a significant extent on the dynamics and structure of the party system. And the party system and its competition dynamics are closely connected to the electoral system and the cleavage structure of a society.

The further development of South Korea in the direction of a consolidated liberal democracy will depend significantly on the ability of civil society to press for reforms in the constitutional system, the party system, and a change of political style in general. The debate on reform and the strong demands of civil society for political and social reforms show that the perceived flaws of democracy are not welcomed by large segments of society in Korea. It is rather the political elites who are responsible for this. But the political will of

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THE LOGIC AND UNDERPINNING OF REFORM 109 KOREA: THE POLITICS OF THREE TRANSITIONS by Kim Sun-hyuk

Introduction ward North Korea, dubbed “Sunshine Policy,” which led to the June summit meeting in 2000. These three Korea never ceases to surprise the world. In the 1960s policy initiatives of the South Korean government are and 1970s, South Korea rapidly arose from the devas- fundamentally shaping and characterizing Korean poli- tation of the Korean War and accomplished the “eco- tics today—the “politics of three transitions.” The first nomic miracle.” In 1987, a series of mass transition is a transition from a dirigiste economy to a prodemocracy protests compelled the authoritarian market economy. The second is a transition from a fledg- government of Chun Doo-hwan to adopt a direct presi- ling democracy to a consolidated democracy. And the dential election system and to guarantee broader civil third is a transition from an antagonistic North-South liberties.1 As a result, South Korea accomplished a Korean relationship to an amicable inter-Korean rela- democratic transition, emerging as one of the few na- tionship. scent democracies in East Asia and proudly joining what Huntington called the “third wave” of global Indeed, all three goals—economic prosperity, political democratization. In 1993–94, the detection of a clan- democracy, and national reunification—have consis- destine plan to develop nuclear weapons in North Ko- tently been on the national agenda of each of the previ- rea escalated tension on the Korean Peninsula and al- ous South Korean governments. This is why some most led to a war between North Korea and the United prominent Korean political scientists aptly point out States. In 1997, South Korea encountered an unparal- that major political “cleavages” in South Korea’s post- leled economic crisis and consequently received an war history have always revolved around and devel- unprecedented loan amount from the International oped along these three issues.2 This is also why, in the Monetary Fund (IMF). In the same year, South Kore- early 1990s, a theory of the “division of labor” among ans also witnessed the first election of an opposition South Korean presidents gained some popularity and candidate to the presidency. Since 1997, South Korea influence. According to this theory, Syngman Rhee has impressed the world by rapidly overcoming the (1948–1960) was a “nation-building” president; Park crisis and recovering its economic dynamism. Mean- Chung-hee (1961–1979) and Chun Doo-hwan (1980– while, the engagement policy of the South Korean gov- 1988) were “modernization” presidents; Roh Tae-woo ernment since 1998 culminated in June 2000 with the (1988–1992) and Kim Young-sam (1992–1998) were historic summit meeting between Kim Dae-jung and “democratization” presidents. Now, Kim Dae-jung Kim Jong-il in Pyongyang. To both its own people and (1998–present), the 2000 Nobel Peace Prize winner, foreign observers, Korea appears to be full of surprises. aspires to be remembered as a “reunification” president.

Since his inauguration in February 1998, President Yet, what qualitatively sets apart the present stage of Kim Dae-jung has pursued what he calls a “parallel Korea’s political development from the past is that these development (pyonghaeng palchon)” of democracy three transitions are taking place simultaneously. Dur- and a market economy. At the same time, the Kim gov- ing the preceding decades, crucial political, economic, ernment has also adopted an engagement policy to- and social transitions happened to a large extent se-

1. Kim, Sunhyuk, The Politics of Democratization in Korea: The Role of Civil Society (Pittsburgh: University of Pittsburgh Press, 2000).

2. Choi, Jang-jip, “Political Cleavages in South Korea,” in Koo, Hagen, ed., State and Society in Contemporary Korea (Ithaca: Cornell University Press, 1993).

110 THE KOREA ECONOMIC INSTITUTE OF AMERICA quentially. For example, during South Korea’s period sensus readily emerged regarding a dire need to carry of phenomenal economic growth in the 1960s and the out a comprehensive and fundamental reassessment of 1970s, the highly authoritarian regime of Park Chung- South Korea’s entire developmental experience. To both hee was more or less able to command the political ordinary citizens and policy makers, economic reform environment, conducting a “controlled experiment” of and restructuring loomed as an extremely urgent task economic growth without political liberalization. In the that could no longer be ignored or postponed. As a re- 1990s, despite occasional upsurges of the popular sult, the Kim Dae-jung government approached the reunification movement, the democratic regimes of Roh economic crisis in a very serious manner from the out- Tae-woo and Kim Young-sam focused on domestic set, trying to discover the fundamental causes of and issues—such as political democratization and economic cures for the crisis. In addition, the IMF, which gave a reform—without effecting dramatic changes in North- $57 billion loan package to Korea, shared this holistic South relations. By contrast, the most crucial charac- approach to the crisis. teristic of Korean politics today is the simultaneity of all three transitions, which renders the whole process of The IMF and the South Korean government shared the transformation highly complex, uncertain, and dynamic. view that one of the most important causes of the crisis was chaebol overexpansion, mismanagement, and in- The purpose of this paper is to present a conceptual efficiency during the 1980s and 1990s. Such an anti- and theoretical synopsis of the three transitions that chaebol tone was unequivocally pronounced in Kim are occurring in Korea today—simultaneous transitions Dae-jung’s inauguration speech. According to Presi- to a market economy, to a consolidated democracy, and dent Kim, “the economic crisis in South Korea was to an amicable inter-Korean relationship. The paper due to the collusive relationship between the govern- will first summarize and analyze what has happened ment and business, the state-controlled financial sec- in terms of the three transitions: What are the main tor, and the octopus-like overexpansion of the big busi- characteristics of the respective transitions? What has ness conglomerates.” Based on such a critical analysis been happening in terms of economic reform and re- of the chaebol, the Kim Dae-jung government gave structuring? What has been taking place in terms of particular focus to chaebol reform among the “four both political reform and the deepening of Korean de- major reform areas” (financial, corporate, labor, and mocracy? What have been the outcomes of the dra- public sector reforms). matic Korean summit meeting in June 2000? The paper then will explore and examine the interrelation- Specifically, the Kim Dae-jung government has con- ships and interactions between these three transitions: centrated on five core issues in chaebol reform. The How would economic reform and democratic consoli- first is to transform chaebol ownership structures, sepa- dation mutually affect each other? How would im- rating ownership from management. The second is to proved inter-Korean relations affect democratic deep- reform chaebol corporate governance through consoli- ening in South Korea? How would further consolida- dated financial statements, independent external au- tion of South Korean democracy influence the pros- dits, and the reduction of intragroup mutual payment pect of more cooperative North-South relations? What guarantees. The third is to streamline operations by would be the interactive dynamics between economic selecting three or four core business lines and cutting restructuring and national reconciliation? These are unrelated subsidiaries. The fourth is to decrease some of the issues this paper seeks to illuminate. chaebol debt-equity ratios. The fifth is to increase the transparency and accountability of the chaebol.3 The Three Transitions In terms of financial reform, the Kim government has The First Transition: From a Dirigiste to a Market carried out a series of important measures. First, the Economy government closed or merged insolvent financial insti- The economic crisis in 1997 was such a shock to most tutions and strengthened the capital base of viable ones, South Korean people that an extensive national con- writing off nonperforming loans and recapitalizing

3. Beck, Peter M., “Revitalizing Korea’s Chaebol,” Asian Survey 38, 11 (1998), 1025–1034.

THE LOGIC AND UNDERPINNING OF REFORM 111 financial institutions. The government also national- stabilizing wages and enhancing labor-employer co- ized several commercial banks and sold them to for- operation; 6) guaranteeing basic labor rights and es- eign investors, and asked those banks that had failed tablishing a democratic labor-employer relationship; to meet Bank for International Settlement (BIS)’s capi- 7) increasing the flexibility of the labor market; 8) en- tal adequacy requirements to submit restructuring hancing national unity; 9) creating a national move- plans. Throughout 1998, the government committed ment for increasing exports and improving the trade more than $50 billion in additional public funds to balance; and 10) other initiatives by the three parties recapitalization, deposit protection, and the purchase in overcoming the economic crisis.5 of nonperforming assets. The bailout of the banking system has already cost $100 billion, and some $25 On 6 February, 1998, the TC announced another im- billion more is estimated to finish the task. As a result portant agreement, entitled “Social Accord on Over- of all these efforts, South Korea is in much better coming the Economic Crisis,” reflecting a major com- financial shape than it was at the time of the crisis in promise between labor and business on difficult issues 1997; its foreign exchange reserves are now about $100 of layoffs and restructuring. This document lists the billion, compared to less than $5 billion in the fall of main reform goals and agendas in each reform area.6 1997. In both the “Joint Declaration” and the “Social Ac- cord,” labor agreed on more permissive rules on lay- The most noteworthy labor reform has been the for- offs and the employment of temporary workers, while mation and evolution of the Tripartite Commission (TC) the government pledged to improve labor rights and of Labor, Business, and Government (Nosajong combat unemployment. Management agreed to reform wiwonhoe). This is the first attempt in South Korean its corporate governance. As of the summer of 2001, history to formally establish and develop a pact among however, the two national labor confederations, i.e., major social actors through a form of societal FKTU and KCTU, are no longer participating in the corporatism. Also, as the second chairman of the TC Commission, complaining that the government had not emphasized, the Commission is a “condensed institu- consulted them adequately regarding structural adjust- tional expression of President Kim Dae-jung and his ment policies and also had not enforced many of the government’s philosophy of parallel development of agreed measures. democracy and a market economy.”4 The TC generated several important agreements and compromises The last major reform area—public sector or adminis- on economic restructuring and reform. Five days after trative reform—has so far focused on the reorganiza- its inauguration, the TC announced a “Joint Declara- tion and restructuring of the government. In late 1998, tion on Fair Burden-Sharing among Labor, Business, the Kim government restructured and reorganized the and Government to Overcome Economic Crisis.” In central government, streamlining, consolidating, and this document, the TC declared that “labor and busi- merging budget related agencies in particular. In addi- ness would maintain industrial peace and try their best tion, the government reduced local administrative per- to foster an environment hospitable to inviting foreign sonnel by ten percent. investment.” Ten items agreed upon in this declaration included: 1) guaranteeing the managerial transparency Overall, economic restructuring under the Kim Dae- of firms and promoting economic restructuring; 2) sta- jung government has been relatively successful. The bilizing prices; 3) stabilizing employment and dealing South Korean government has openly proclaimed that with unemployment; 4) expanding social welfare and the economic crisis is now officially over. The public guaranteeing the livelihood of low-income laborers; 5) appears to concur. The GDP growth rates for 1999 and

4. Kim, Won-ki, “Nosajong wiwonhoenun songgonghaeya handa (The Tripartite Committee of Labor, Business, and Government Must Succeed),” Tamron 21 (Discourse 21) (Summer 1999).

5. Ch’oe, Yong-ki et al., 1987 nyon ihu han’gugui nodong undong (Labor Movement in South Korea after 1987) (Seoul, Korea: Korea Labor Institute, 2001), 564.

6. Tripartite Commission, Wiwonhoe hwaltong charyo (TC’s Activity Report) (Seoul, Korea: TC, 1998), 45-81.

112 THE KOREA ECONOMIC INSTITUTE OF AMERICA 2000 were 10.9 percent and 8.8 percent respectively. progress in political reform. In general, South Korean Exports increased, led by semiconductors, automobiles, politics during the 1998–2000 period suffered from LCDs (Liquid Crystal Displays), and mobile phones. serious paralysis and immobility, primarily due to the Foreign investment exceeded the total of the previous profound distrust and intense confrontation between 40 years ($15.54 billion in 1999 and $15.69 billion in the ruling party (the New Millennium Democratic 2000).7 Party, MDP; formerly the National Congress for New Politics, NCNP) and the opposition party (the Grand Despite the overall success of economic restructuring, National Party, GNP). The Kim government and the unqualified optimism seems premature. The ultimate ruling party, often in conjunction with its on-and-off goal of economic restructuring has been a transition to coalition partner United Liberal Democrats (ULD), a market economy, but there is no clear indication yet criticized the opposition GNP and its leader Lee Hoi- that the developmental and interventionist state, which chang for obstructing and sabotaging numerous reform had been a hallmark of South Korea’s industrializa- initiatives. The GNP, in return, countered that the rul- tion process over the past few decades, has actually ing party consistently attempted to repress, weaken, weakened. Rather, many experts point out that the South subvert, and ultimately destroy the opposition. Since Korean state has become more powerful and more the first day of the Kim Dae-jung government, on which interventionist throughout the reform process. In par- the GNP refused to approve Kim Jong-pil’s appoint- ticular, the South Korean president still remains pow- ment as the new prime minister, the ruling-opposition erful, spearheading nearly all reform processes.8 On relationship has been characterized by intense antago- the other hand, economic reform has also augmented nism and profound hostility. the power of the chaebol, one of the major culprits of the economic crisis. The chaebol control of non-bank- In 1998, the ruling coalition of NCNP and ULD de- ing financial institutions—investment trusts and insur- voted their energy to expanding and augmenting their ance companies in particular—has been strengthened status in the National Assembly by recruiting new during the past two years. All of the top five chaebol lawmakers from the GNP. The GNP secured a parlia- now include financial services as one of their core busi- mentary majority (162 seats out of 229) in early 1998, nesses. Also, comparing the pre-crisis and post-crisis but the number of seats dropped to 136 in September levels, the stocks owned by chairmen of the ten largest 1998, as 27 GNP lawmakers defected to the ruling groups increased by 24.13 percent.9 Meanwhile, camp. The GNP claimed that the defections were co- further opening of the financial market and the large erced by the ruling camp’s pressure, appeasement, and influx of foreign capital will also reduce incentives for other questionable tactics. big companies in South Korea to restructure themselves. Along with the controversies and conflicts over mul- The Second Transition: From a Fledgling to a Con- tiple defections of GNP lawmakers to the ruling camp, solidated Democracy a series of scandals erupted from 1998–2000, all of which were used by either the ruling coalition or the Most of the politics during the first three years of the opposition party to make charges against the other. For Kim Dae-jung government focused on overcoming the example, on 31 August 1998, allegations swirled that economic crisis. Meanwhile, there has been little the GNP had illegally raised campaign funds for Lee

7. Beck, Peter, “Reviewing President Kim’s First Two Years: Building a New Economy,” Korea Times (24 February 2000); Hilton L. Root, Korea’s Recovery: Don’t Count on the Government (Santa Monica: Milken Institute, 2000), 1; KEI, Korea Insight, various issues.

8. Han’gyore 21 (Han’gyore Weekly), 14 January 1999; David Steinberg discusses the “imperial presidency” in South Korea in his “Korean Politics: The New and the Old,” in The Two Koreas in 2000: Sustaining Recovery and Seeking Reconciliation (Washington, DC: The Korea Economic Institute of America, 2000).

9. Choson Ilbo, 15 November 1999.

THE LOGIC AND UNDERPINNING OF REFORM 113 through the National Tax Administration during the opposition party to join the committee. The GNP did 1997 presidential election. As the prosecution began not accept the invitation, and the NCNP and ULD went its probe into the scandal, the GNP argued that the ahead with their own reform proposal focusing on: probe was a political plot to destroy the opposition 1) the reduction of the membership of the National party. In October 1998, the ruling camp claimed that Assembly (from 299 to 270); 2) a change in the elec- the GNP asked North Korea to make military provo- toral system (from a small district system to a medium cations at the truce village of Panmunjom during the district system); and 3) the prohibition of double 1997 elections in a bid to ensure victory for the party, candidacy in regional and proportional representations. accusing Lee Hoi-chang’s brother, Lee Hoi-sung, of However, even these relatively minor changes disap- being involved in the scandal. Lee Hoi-chang denied peared when a “political reform” bill was passed the allegations and characterized the charges as part immediately before the April 2000 National Assem- of a smear campaign to undermine and harm the mo- bly election—the electoral system basically remained rality of the GNP and himself. intact.

In May 1999, the “furgate” scandal, in which wives of The fact that it was so difficult for the three parties to the cabinet ministers allegedly received expensive reach a consensus on a political reform bill was very clothing from a jailed chaebol tycoon’s wife, was disappointing. What was even more disappointing, disclosed. Upon the GNP’s insistence, National As- however, was that the meaning of “political reform” sembly hearings were held on the scandal from ultimately became so narrow, reduced to a few cos- 23–25 August. In June 1999, a high ranking officer metic changes in the electoral rules. Such a technical from the Prosecutor’s Office revealed to reporters that and narrow interpretation of “political reform” by the labor strikes at a state mint factory were in fact pro- ruling coalition and the opposition party fell far short voked and induced by the government. The GNP of public expectations. Opinion leaders and civil soci- strongly criticized the ruling coalition and demanded ety activists in South Korea have long campaigned for another set of National Assembly hearings from 26 fundamental political reform that includes a set of struc- August to 3 September, 1999. In January 2000, the tural measures. In particular, they have emphasized People’s Solidarity for Anti-Corruption (Panbup’ae three issues. The first issue is the reduction of both kungmin yondae) demanded a thorough investigation formal and informal presidential power and concur- into the military conscription-related corruption involv- rent empowerment of the cabinet, the legislature, po- ing many GNP lawmakers. On the next day, in his litical parties, and other formal institutions. The sec- address to congratulate the inaugural ceremony of the ond is the formation and development of political MDP, Kim Dae-jung emphasized a thorough investi- parties that are not based on certain geographical gation into conscription scandals. To the dismay of the regions or individual politicians. The third is the iden- GNP, all of this reminded the South Korean public of tification of how to forge and nurture a political cul- Lee Hoi-chang’s two sons who were exempted from ture that appreciates trust, negotiation, compromise, military service because they were underweight. Both consensus, and civility. the ruling coalition and the opposition GNP capital- ized on these numerous scandals to criticize and Rather than reflecting and accommodating such exten- attack the other. sive public demand for political reform measures that could deal with these prominent and substantive Immediately prior to Kim Dae-jung’s inauguration, the issues, the three major parties in South Korea agreed ruling NCNP and its coalition partner ULD formed on a very narrowly conceived and cosmetic reform pro- the “Committee for Reforming the Political Structure” posal that only touched on technical aspects of elec- and held a few public hearings on political reform. In toral contestation. Ultimately, due to the vociferous July 1998, the ruling party further established the protest of civil society groups, the Kim government “Special Committee for Political Reform” to review had to retract the passed “political reform” bill. Now, various reform proposals regarding the legislature, with only one year remaining for the Kim Dae-jung political parties, and elections. In December 1998, the government, it appears virtually impossible for the three NCNP created the “Legislative Special Committee for parties to generate and legislate an acceptable politi- Reforming the Political Structure” and invited the cal reform bill.

114 THE KOREA ECONOMIC INSTITUTE OF AMERICA One political initiative that consumed much of the Kim deepening. The government’s failure to introduce an government’s energy in its initial years was the “Sec- agreeable political reform bill, its inability to create a ond Nation-Building Movement” (Che 2 kon’guk viable reform coalition in the legislature, its continu- undong). This movement was first proposed by Kim ing practice of regional patronage politics, and the re- Dae-jung himself in his speech on 15 August 1998. cent eruption of various scandals all overshadow and According to Kim, this movement is “a holistic and detract from Kim Dae-jung’s significant accomplish- comprehensive national campaign to reform the con- ments in human rights, such as amnesty and repatria- sciousness and mentality of the whole nation ... to tion of long-term political prisoners. realize a participatory democracy and to establish a market economy.” In essence, the “Second Nation- The Third Transition: From an Antagonistic to an Building Movement” is the Kim government’s cam- Amicable Inter-Korean Relationship paign to directly appeal to and mobilize civil society in order to support and reinforce its reform drive. Many Since its inauguration, the Kim Dae-jung government analysts in South Korea have pointed out that the “Sec- has carried out “Sunshine Policy” toward North Ko- ond Nation-Building Movement,” despite the initial rea, an engagement policy that aims to promote the claim to be bottom-up in nature, is another state-led economic (and subsequent political) opening of North social campaign. Moreover, several leading newspa- Korea and eventually a full incorporation of North pers have disclosed that numerous government offi- Korea into the global political and economic systems. cials and pro-government local leaders had joined, and Admittedly, “reunification” per se is no longer a prac- in fact, led the movement. tical goal for the South Korean government. Rather, a constructive and cooperative engagement with North Moreover, critics of the Kim Dae-jung administration Korea, improvement of North Korean economy, an have also taken issue with the continuation of regional extended period of peaceful coexistence between the patronage politics under the new government. The Kim two Koreas, cautious installation and development of Dae-jung regime filled the key positions in government a federal or confederal form of national government, ministries and agencies with officials either from Kim and an incremental merger of antithetical ideological, Dae-jung’s home region or sympathetic to his reform political, socioeconomic systems existing in the two programs. There have been criticisms that, just as pre- Koreas should be pursued step by step over a consid- vious presidents used their “hometown buddies,”10 erably long period. Kim’s regime has also filled key governmental positions with people from the Cholla province. The Presi- In his February 1998 inaugural address, Kim Dae-jung dent has repeatedly stated that he has no preferential fleshed out the three fundamental principles of his North policies toward people from particular regions. He has Korea policy. The first is the principle of intolerance also ordered the maintenance of regional balance in of military threats or armed provocation by North Ko- the composition of government personnel. However, it rea. The second is the official abandonment of the idea has become increasingly evident that Kim Dae-jung of reunification-by-absorption and the pledge of aban- has continued the practice of using regional patronage doning any measures to undermine or threaten North networks to strengthen his own power base.11 Korea. The third is the promotion of exchanges and cooperation through the resumption of the 1991 Basic In summary, in contrast to economic restructuring, the Agreement on Reconciliation, Nonaggression, Ex- Kim Dae-jung government has largely failed to make changes, and Cooperation. significant progress in democratic consolidation and

10. Chun Doo-hwan and Roh Tae-woo relied on people from the so-called TK (Taegu-Kyongbuk) region whereas Kim Young-sam used people from the so-called PK (Pusan-Kyongnam) region. Kim Dae-jung has been relying on people from the so-called MK (Mokp’o-Kwangju) region.

11. For an analysis of patronage networks in South Korea, see Kim Sunhyuk, “Patronage Politics as an Obstacle to Democracy in South Korea,” in Howard Handelman and Mark Tessler, eds., Democracy and Its Limits: Lessons from Asia, Latin America, and the Middle East (Notre Dame: University of Notre Dame Press, 2000).

THE LOGIC AND UNDERPINNING OF REFORM 115 What is particularly noteworthy in these three prin- Commission also began to resume the General Offic- ciples is the renunciation of the goal of reunification- ers’ Talks. Furthermore, the Four Party Talks made by-absorption. Since the Syngman Rhee government slow but steady progress by settling procedural differ- in the 1950s, reunification-by-absorption had been ei- ences and exploring substantive issues. On the front of ther implicitly or explicitly the official goal of South economic exchanges, the Hyundai Group’s project on Korean governments. There were instrumental varia- tourist development of Mt. Kumgang was the hallmark tions: earlier South Korean governments advocated of the Kim Dae-jung government’s engagement policy. military invasion and or takeover; later they eagerly More than 100,000 South Koreans have visited Mt. hoped for the collapse of North Korea as a result of Kumgang since the Hyundai Group signed the conces- economic difficulties, succession crisis, domestic tur- sion agreement with North Korea in November 1998. moil, or other cataclysmic changes. Against such a for- In addition to these tourists, 5,600 South Koreans mula of reunification-by-absorption, the progressives visited the North for various purposes between Febru- in South Korea—movement activists and opposition ary 1998 and June 1999. Two hundred separated fami- politicians, including then opposition leader Kim Dae- lies were able to reunite in China, and more than 700 jung—had consistently championed a reunification- separated families were able to verify the existence of through-negotiation. their relatives in the North as of June 1999.12

In South Korea today, this debate on reunification is All these scattered accomplishments of the Kim Dae- becoming rapidly obsolete. Even conservatives in South jung government’s engagement policy culminated with Korea have been puzzled and baffled by the excep- the epochal North-South summit meeting held on tional stability and resilience of the North Korean re- 13–15 June 2000. At the summit talks, the two leaders gime, despite an ever-worsening economy. The onset in effect agreed to terminate the existing state of hos- of a serious economic crisis in South Korea in 1997 tile confrontation and adopt a new paradigm for bilat- also cast serious doubts on South Korea’s ability to eral relations based on peaceful coexistence. The 15 “absorb” the problem-ridden North Korean economy. June Joint Declaration contained five main points: Therefore, the announcement of the “Sunshine Policy” 1) The North and South, as masters of national unifi- was met by an consensus on the necessity and effec- cation, will join hands in efforts to resolve the issue of tiveness of a reunification policy focused on engage- unification independently; 2) Acknowledging that the ment and cooperation, with the exception of some South’s unification formula for national confederation hardline South Koreans who support “benign neglect” and the North’s modified version of a federation for- of North Korea with a view to precipitating the “end” mula have common factors, the two sides will strive to of the country. Such domestic support, combined with work together to achieve unification in this direction; the engagement policy of the Clinton administration, 3) The North and South will exchange groups of sepa- greatly contributed to the persistent implementation of rated family members and their relatives around 15 Kim Dae-jung’s engagement policy. August, and resolve as soon as possible such humanitarian issues as the repatriation of communist prison- Even before the dramatic summit meeting between Kim ers who have completed their prison terms in the South; Dae-jung and Kim Jung-il in June 2000, there were 4) The North and South will pursue a balanced devel- several important achievements in North-South rela- opment of the whole Korean economy through eco- tions during the 1998–1999 period. First, channels of nomic cooperation, and will build mutual trust by dialogue, which were broken during the previous gov- accelerating cooperation and exchanges in various ernment under Kim Young-sam, were restored. Vice fields, including the social, cultural, sports, public ministerial-level talks were held in Beijing on fertil- health, and environmental sectors; and 5) In order to izer aid to the North, reactivating government-to-gov- put these agreements into practice, the North and South ernment dialogue channels. The Military Armistice will engage in dialogue between government authori-

12. Moon, Chung-in, “Understanding the DJ Doctrine: The Sunshine Policy and the Korean Peninsula,” in Moon, Chung-in and David I. Steinberg, eds., Kim Dae-jung Government and Sunshine Policy: Promises and Challenges (Seoul: Yonsei University Press, 1999), 48.

116 THE KOREA ECONOMIC INSTITUTE OF AMERICA ties at an early date, and Kim Jong-il will visit Seoul October, North Korean and South Korean banks agreed at an appropriate time at President Kim’s invitation. on a “loan contract” regarding provision of rice and corn to North Korea. Undoubtedly, symbolism was greater than realism in the historic summit between Kim Dae-jung and Kim All these positive developments slowed down when Jong-il. A series of criticisms have been made by vari- George W. Bush was elected to the U.S. presidency in ous conservative elements within South Korean soci- December 2000. The Bush administration decided not ety. Some questioned Kim Jong-il’s sincerity in agree- to immediately pick up the Clinton government’s North ing on the summit meeting. Others worried that the Korea policy, and instead underwent an extended summit meeting would just be a one-time event with- “policy review.” The March 2001 summit between out generating any durable results. Some others pointed Bush and Kim Dae-jung was extremely disheartening to the asymmetry in terms of military strategy and to Kim, who wanted strong support from the United foreign policy—after all, North Korea has yet to re- States for his “Sunshine Policy.” The Bush adminis- nounce its ultimate goal of communizing the whole tration was simply not ready—almost none of its Asia Korean Peninsula. team was in place, and it had not completed its policy review. The Koreans felt that the U.S. policy review Despite these criticisms and conflicting evaluations of let the momentum go from the North-South process. In the summit, several landmark events followed the June a newspaper survey taken in July 2001, when asked to summit. On 27 June, the representatives of the North identify the obstacles to Kim Jong-il’s return visit to Korean and South Korean Red Cross agreed to allow Seoul, more South Koreans (about a third) cited U.S. 100 separated families to reunite. On 26 July, the first policy toward the North than either North Korea’s meeting was held between the foreign ministers of unreasonable demands or its untrustworthiness.13 North and South Korea. At this meeting, South Korea’s foreign minister pledged to support actively North The death of Chung Ju-yung, founder and chairman of Korea’s admission to international organizations. In the Hyundai Group, in March 2001 and the bankruptcy the first ministerial talk on 29–31 July, both sides of some key North-South economic projects also cast agreed on reopening liaison offices at Panmunjon; doubts on future inter-Korean relations. When announcement of national reconciliation on the inde- Hyundai-Asan began the Mt. Kumgang tourism project pendence day of 15 August; economic, social, and in North Korea, it agreed to pay fixed royalties to the cultural exchanges; and the reestablishment of a direct North for the right to bring South Korean tourists to hotline between North and South Korea. In early this scenic region. By 2000, however, Hyundai-Asan August, a South Korean delegation of 46 presidents of was losing $100 million per year on the project—the newspaper and broadcasting companies visited North project was basically bankrupt. So far, the Kim gov- Korea. On 14 August, the liaison offices at Panmunjom ernment has avoided bailing out Hyundai-Asan. But were reopened. On 15–19 August, 100 separated fami- Hyundai-Asan formed a joint venture with the Korean lies from each side met with their families. On 2 Sep- National Tourist Organization to save the project, which tember, 63 communist prisoners in South Korea who does entail an indirect subsidy from the government. had refused to convert from communism and wished to Serious criticisms have been mounting about pouring return to North Korea were repatriated to North tax money into unprofitable North-South economic Korea. On 15 September, South Korean and North projects. Korean teams marched under one flag at the opening ceremony of the 2000 Sydney Olympic Games. On It is still too early to make any general assessment of 25–26 September, there was a meeting between the Kim Dae-jung’s engagement policy. Many factors North and South Korean ministers of defense. Also in remain uncertain in North Korea, South Korea, and September, the construction to reconnect the railway the United States. As has always been the case in the road between North and South Korea began. On 4 past, North Korean intentions and strategies are ex-

13. Joongang Ilbo, 12 June 2001.

THE LOGIC AND UNDERPINNING OF REFORM 117 tremely difficult to analyze ex post, not to mention to it difficult to forge and develop a political coalition or predict ex ante. Although the engagement policy has social alliance to continue and sustain reforms. been favorably received by the South Korean populace in general, there has been a vociferous criticism Income inequality, poverty, unemployment, and other of the policy because of its similarity to “appeasement possible results of structural adjustment can easily policy.” Another economic downturn or crisis in South alienate major potential allies of the Kim government. Korea could easily amplify such criticism of the en- Such alienation of diverse segments from the Kim gov- gagement policy and undermine the Kim Dae-jung ernment could eventually generate serious social and government’s policy of national reconciliation. The political instability, causing a “popular backlash.”14 In widespread consensus on engagement policy, in this particular, because the legitimacy and stability of the respect, is very much dependent on Kim Dae-jung’s Kim regime is so heavily dependent on its economic popularity and performance in the other two transi- performance, recurrence of another economic crisis tions—i.e., how successful he will be in economic could quickly upset these alienated social forces and restructuring and democratic consolidation. prompt them to increase resistance and opposition to any further reform efforts. Interactive Dynamics among the Three Transitions Next, the impact of “political reform” on economic Economic Reform and Democratic Consolidation restructuring is difficult to assess, primarily because of the absence of substantive political reforms. Politi- First, the impact of economic reform on democratic cal reform, as understood and interpreted by the ruling deepening is in large measure negative. Most of all, coalition, did not go beyond technical changes in elec- economic reform in the four key areas has been con- tion rules and procedures and did not have any pro- sistently initiated and spearheaded by the president. found impact on the ongoing economic restructuring. The state in general and the presidency in particular Meanwhile, the Kim government’s various political have been substantially strengthened during the pro- strategies to increase political stability and augment cess of economic recovery. One serious implication of its power base have had some positive impact on eco- such strengthened state and presidential powers is that nomic restructuring. Although the Second Nation- formal political institutions, such as the National Building Movement and governmental recruitment Assembly and political parties, are generally ignored based on regional networks have had largely negative and bypassed. Instead, informal and often ad hoc ar- implications for democratic deepening, they have rangements, such as the Tripartite Commission, assume increased the government’s ability to draft and carry greater influence principally because of their proxim- out diverse—and often controversial—reform policies ity to the presidency. and programs.

In addition, because of the nature of structural adjust- Democratic Consolidation and National Reconcili- ments, the Kim regime has unavoidably alienated sev- ation eral important segments of the South Korean population. Labor, one of Kim Dae-jung’s longtime support First, the impact of democratic deepening on national groups, has been disappointed by many of the neoliberal reconciliation is crucial. Designing and implementing reform measures. The chaebol, a major target of struc- substantive, systematic, and comprehensive political tural adjustment, cannot afford to serve as an ally of reforms in South Korea will reinforce democratic le- the president. Bureaucrats and public servants, deci- gitimacy of and popular support for the Kim Dae-jung mated by public sector reforms and still uncertain about regime, which would enhance South Korea’s ability to their future, will remain as opportunists at best, if not deal with North Korea. Meanwhile, there have been saboteurs of reforms. The middle class is rapidly di- considerable achievements during the Kim Dae-jung minishing in size and number. All these factors make government in terms of human rights and civil liber-

14. Hilton L. Root, The New Korea: Crisis Brings Opportunity (Santa Monica: Milken Institute, 1999), 19.

118 THE KOREA ECONOMIC INSTITUTE OF AMERICA ties. In particular, despite the vocal criticisms of con- National Reconciliation and Economic Reform servative politicians and other opinion leaders, the government has frequently expressed its strong intention National reconciliation would have several positive to revise the National Security Law. Revision of the effects on economic reform. First, the reduction of mili- National Security Law would not only significantly tary and political tension between North and South enhance human rights and civil liberties in South Ko- Korea and the resultant improvement of the investment rea but also contribute to the improvement of North- environment in South Korea would promote expanded South Korean relations because North Korea has long foreign investment, which is crucial to continuing and called for the repeal of the National Security Law as a institutionalizing economic reforms and restructuring precondition for national reconciliation. in South Korea. A return to heightened tension around the DMZ and military conflicts between the two Koreas On the other hand, progress in terms of national recon- could lead to a panicky withdrawal of foreign invest- ciliation can also have a favorable impact on demo- ment and result in another economic crisis, derailing cratic deepening. The confrontation between North and the ongoing economic restructuring and undermining South Korea has persistently been used, abused, and the economic recovery of South Korea. Reduction of misused by both Koreas to solidify their authoritarian military tension is essential for continuing economic political structures and to suppress political opposi- recovery and reform. tion. In the South, during the authoritarian regimes of Park Chung-hee and Chun Doo-hwan, the “North At the same time, continuing negotiations between Korean threat” to South Korean national security— North and South Korea regarding economic coopera- sometimes real, sometimes fictional—was a popular tion will also stimulate the economic recovery of South instrument to stifle civil society’s prodemocracy move- Korea. Considering the rudimentary level of economic ment. Progress in national reconciliation would pre- development and the inadequacy of legal, political, and empt such misuse of the national security argument and socioeconomic infrastructure in North Korea, the im- therefore reduce the likelihood of an authoritarian mediate benefits of increased economic exchanges retrogression or serious aggravation of human rights between North and South Korea might be negligible. in South Korea. Some projects, such as the bankrupt Mt. Kumgang tourism project, might even seem detrimental to the An interesting byproduct of improved North-South South Korean economy. Over the long run, however, Korean relations would be active discussions on alter- increased and expanded economic exchanges between native forms of constitutional structure. Leaders of both the two Koreas will contribute to not only the resusci- Koreas have discussed and, in principle, agreed on es- tation of North Korean economy but also the rapid and tablishing and developing some form of federalism or sustained recovery and development of the South Ko- confederalism in a reunified Korea. What kind of fed- rean economy. Increased economic interdependence eralism or confederalism is best for a reunified Korea? between the two Koreas, at the same time, is likely to What is the best way to avoid the “internal coloniza- lead to more stable and peaceful relationship between tion” of North Korea by South Korea? What could be them, too. done to allay North Korea’s fear of reunification-by- absorption during the federal or confederal phase? With respect to the impact of economic restructuring on national reconciliation, continued economic restruc- In a similar but slightly different context, the perennial turing and reform are essential to secure the steady debate on presidentialism vs. parliamentarianism in economic development of South Korea, which in turn South Korea could also be openly debated. Heretofore, constitutes a precondition for any kind of eventual the discussion of the constitutional structure has been merger of the North Korean and South Korean sys- monopolized by a small number of elite politicians, tems. One of the big headaches of the Kim Dae-jung primarily for their short-term political benefits and in- government is how to prepare for the astronomical cost terests. A nationwide debate should be encouraged with of reunification. It is essential for South Korea to cre- respect to the relative benefits and problems of differ- ate and expand investment funds for an eventual re- ent constitutional structures in connection with the pos- unification—not only in preparation for the unlikely sible constitutional structure of a reunified Korea. scenario of an immediate collapse of North Korea, but

THE LOGIC AND UNDERPINNING OF REFORM 119 also for the long term stabilization and resuscitation of North Korean economy. Ultimately, domestic funds will not be sufficient and therefore external funds (such as Japan’s Overseas Development Assistance or funds from the Asian Development Bank or IMF) will become necessary. However, in mobilizing domestic funds and soliciting external funds, it is essential for South Korea to complete its economic restructuring and install a more market-based economic system that is much less dependent on collusive state-chaebol relations. Meanwhile, economic restructuring in South Korea in the long run should also consider what type of economic system will be adopted in a reunified Korea.

This is an extremely critical and challenging time for Korea. Korea is currently undergoing multiple transitions: a transition from a dirigiste to a market economy; a transition from a fledgling to a consolidated democracy; and a transition from an antagonistic to an amicable inter-Korean relationship.

Only time will tell how these three transitions play out. But it is crucial to note that these three transitions are highly dependent on each other. Interdependence, not independence, characterizes the current politics of three transitions in Korea. At the same time, the three transitions are happening concurrently. Simultaneity, not sequentiality, characterizes the current Korean politics of three transitions. In an extraordinarily complex and highly uncertain politics of multiple, interdependent, and simultaneous transitions, what matters most is the imagination, determination, and capability of various political actors in South and North Korea. The eventual outcome of the politics of three transitions in Korea will principally depend on what kind of strategies Korea’s political actors decide to adopt, what kind of interactions they forge and nurture among themselves, what kind of policies they design and implement, and, most of all, what visions they hold for the future of Korea.

Dr. Kim is an assistant professor of political science at the University of Southern California

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