Under the North Korean Threat:
Can South Korea’s Economy Bloom and Entice Investor Bees?

Kongdan Oh
Institute for Defense Analyses

Introduction

I am delighted to be a part of this conference, held in my hometown of Seoul. And as a kind of informal advisor on Northeast Asian affairs to the Asia Society, I am happy to support its work.

My delight is somewhat tempered by the realization that I must talk about North Korea, which always seems to be associated with trouble, at least insofar as the United States is concerned. The recent train accident at Yongchon is but another reminder that North Korean officialdom remains committed above all to protecting its interests and in the service of that goal prefers to keep what happens inside its borders as secret as possible. That said, here are some of my personal thoughts about the impact of North Korea on South Korea and the region.

Near-Term Prospects for US-DPRK Relations

The near-term prospects for US-DPRK relations are not good, because the two sides have taken virtually irreconcilable positions. Under the second Bush administration, the key US foreign policy is counter-terrorism and non-proliferation. As applied to the DPRK, this policy has become known as CVID: complete verifiable and irreversible dismantlement of Pyongyang’s nuclear programs. Given the DPRK’s history of nuclear evasion, this policy provides the only means of preventing a re-appearance of yet another nuclear threat from the Kim Jong-il regime. But no one who is familiar with North Korea can imagine how the necessary verification could ever be carried out.

The United States wants the DPRK to take the first step by freezing its nuclear program. (One would like to say “refreezing, ”but that would hardly be accurate considering Pyongyang’s clandestine uranium enrichment program, which was never subject to a freeze.) On the other hand, the DPRK demands “reward for freeze”: firm promises of incentives in return for a freeze of its known nuclear weapons program. Such an offer would not have played well in Washington in 1994, and ten years later it is even less acceptable. For want of a way out of this apparently irresolvable dilemma, both sides are playing for time, probably at least until after the US elections in November.

In the meantime, when it can divert its attention from Iraq, the United States is trying to contain or thwart the DPRK militarily, politically, and economically. The DPRK, to force the issue, boasts of the strides it is making in building a nuclear deterrent, and takes every opportunity to provoke the United States. The result is a widening gap between the negotiating positions of the two sides.

The only light in the tunnel is the six party talks, which China manages to keep alive. The talks are something of a victory for the United States, which wanted to convene a multilateral forum of states to pressure North Korea into abandoning its nuclear program, whereas the DPRK has always declared that its nuclear program is a subject for discussion only with the United States. Yet at the talks, China, Russia, and the ROK are pressuring both the DPRK and the United States to modify their positions, so the original intention of applying coalition pressure on North Korea hardly seems to be working. In any event, the talks provide China with a means of practicing its diplomacy and elevating its diplomatic stature in the region. Often when governments are faced with more responsibility, they rise to the occasion and become more responsible. A more internationalized and responsible China would be boon for all of Asia.

Long-Term Prospects for Peace and Security on the Korean Peninsula

All participants in the six party talks agree that a diplomatic solution to nuclear proliferation on the Korean peninsula is desirable, but whereas North Korea’s neighbors seem to limit themselves to only a diplomatic solution, the United States has insisted that all options, including presumably the military option, must stay on the table. In any case, a continuation of the US containment policy—for example in the form of PSI—coupled with North Korea’s self-proclaimed enhancement of its nuclear weapons arsenal, create preconditions for a conflict that could flare up at any time.

To forestall such an eventuality, the ROK has been working assiduously to promote peaceful initiatives with North Korea and among the regional powers, and this effort is welcomed by its neighbors. Seoul’s relations with Beijing, Moscow, and Tokyo have never been better. Relations with Pyongyang, while they may not be as good as many South Koreans would like to believe, have improved. Political relations with Washington remain good—certainly closer than social relations—but the political trends suggest that the two governments may grow apart in the future, which is not necessarily a bad thing. An obvious disparity between US and ROK policies toward the DPRK is that whereas the US favors some form of containment, the ROK is pursuing an engagement policy that works against containment.

Long-term peace and stability will not come to the Korean peninsula until North Korea reforms its political and economic systems and becomes a “normal state.” Throughout history Koreans have lived with the uncertainties of a precarious security environment, with their fate tied to the policies of bigger powers, and in this respect the present is not so different from the past. In South Korea, younger generation people are less tolerant of accepting this situation, and are demanding that Koreans take a more active role in defining their future, even while older Koreans continue to value their Cold War security reliance on the United States. Thus even within South Korea, political tensions will continue.

Business Relations between South and North Korea

Let me touch on this topic only lightly, because my specialty is security rather than economic affairs. It could be argued that economic relations between the two Koreas have gotten off on the wrong foot because politics has guided economic considerations. In this sense, true economic relations have yet to be established between North Korea’s authoritarian socialist economy and South Korea’s increasingly democratic market economy. In the minds of many people, fund transfers rather than true investment or trade have created a suspicion that North Korea’s unworkable economic system is being supported, and that the Kim Jong-il regime’s attitude of entitlement is being reinforced rather than discouraged. This attitude has been expressed by the North Koreans in their call for Koreans everywhere to “distinctively contribute to the cause of the fatherland's reunification with power, if one has power, with knowledge, if one has knowledge, and with money, if one has money” (to cite a party central committee slogan released in 2000). The North Koreans have already claimed they are an “ideological power,” and they may wish to tap South Korea’s economy in order to become an “economic power” as well.

Dedicated work by the South Korean government and business over the last several years has created the most relaxed inter-Korean relationship since the beginning of the Korean War, but in the future the bilateral business relationship should be handled by people in the private sector using their own business principles and acumen. Where profit exists, business will work; where it doesn’t, business will not work. Dreams of the future should be appraised with a realistic eye. The South Korean government should think carefully before interfering with and distorting inter-Korean business relationships. The goal is mutual profit based on compatible business principles, not subsidy and bribery. South Korea, after all, is a member of the WTO and should promote its principles.

Foreign Investment and Security on the Korean Peninsula

From a foreign investment perspective, valuations of the South Korean market will depend more on the performance of South Korean industry than on regional security concerns, which are notoriously difficult to value, although North Korean provocations, such as the testing or sale of missiles or nuclear weapons materials will obviously tarnish South Korea’s reputation as an attractive business environment. South Korean industry possesses competitive advantage compared to, say, China or Japan. Korea has lower labor costs than Japan, but a more advanced technology base than China. South Korea’s economic advantages should be cultivated by government and business leaders, not watered down. There is still much that can be down within South Korea to make itself more attractive to investors, including reducing government regulation and red tape, fighting corruption, and making business practices more transparent. In regard to the security problem with the DPRK, the South Korean government should debate and then clearly enunciate its position on such tough issues as the US-ROK security alliance and nuclear non-proliferation on the Korean peninsula in order to make them consistent and credible, rather than trying to gloss them over.

Regional Security Cooperation

Can uncertainties about security on the Korean peninsula help foster greater regional cooperation, which could in turn spread to the economic sphere? In short, can a weakness be turned into a strength? It is easier to make fiction from fact than fact from fiction. Engaging in optimistic fantasies about China’s ability to peacefully pressure North Korea into abandoning its nuclear weapons program and adopting economic reforms should be avoided. Nor is deep pessimism warranted. China’s central diplomatic role in resolving the regional non-proliferation conflict is promising, and as suggested earlier, may enhance China’s value as a strategic partner for the ROK and other regional states. As in historic times, China is still the center of Asia, and a greater Chinese role should be welcomed by other nations.

Lively and profitable international trade and investment already exist in East Asia, and will surely grow stronger. East Asia is the third largest economic trade bloc, after the EU and NAFTA. An upgrade of such cooperative structures as APEC, with agreements on trade and the migration of labor, can immeasurably strengthen the Asian economic community, but progress is more likely to come from economic cooperation than as a consequence of security cooperation.

Bringing North Korea into the International Community

History teaches that it pays to be cautious about predicting change in North Korea. From a historical perspective, the North Korean economy has changed greatly in the last few years, but this change has hardly begun to make North Korea a well-functioning economic state. North Korea is still better characterized as a military-first state than a business-first state. Much of the private enterprise that has recently surfaced is unregulated and chaotic, firmly embedded in an environment of corruption. For North Korea, the most likely alternative futures are slow and incremental economic changes under Kim-first, military-first policies, or political, social, and economic chaos. Kim Jong-il has yet to prove himself a reformer: significant changes, and pressure for changes, have come from the bottom up, not the top down.

If pressure finally succeeds in displacing the Kim regime, South Korean businesses will be in a good position to capitalize on the new environment. Small and medium-sized businesses, which have gone into North Korea with profit on their mind, provide a better model for investment in North Korea than do the more political activities of some of the larger South Korean conglomerates. South Korean companies, with their practical inter-Korean business experience, can also offer strategic partnerships with foreign companies interested in investing in North Korea.

Economic Developments in Korea and the Northeast Chinese Economy

The northeastern part of China has always enjoyed economic ties with the Korean peninsula. Today, Chinese traders are active in both Koreas, and over a million Koreans live in northeastern China. China should not fear a unified Korea or Korean economy, either in terms of changed political boundaries or fear of losing its Korean population to a unified Korea. North Korea today is a serious headache for China, both politically and economically, whereas a unified Korea will open one more international channel to China’s economy.

Greater inter-Korean cooperation, or better yet, a unified Korean economy, can create a triple-win situation for China and the two Koreas (not to mention eastern Russia). South Korea can profit from less expensive North Korea labor, and export its technology to North Korea and China. China can gain access to a North Korean market that desperately needs its products. And North Korea can get investment from South Korea with which it can buy those Chinese-made products. The IT sector is an obvious place to begin this kind of economic cooperation, because South Korea and China both have strengths in that sector, and North Korea has strong desire. Moreover, the development of Northeast Asian economic cooperation will increase competition with business in the United States, Japan, and the EU.

Like the pieces of a puzzle, the components of a Northeast Asian market are just waiting to be put into place. It will take some time, and some changes in thinking on the part of all the Northeast Asian states, but if these governments take responsible leadership roles, they have it within their power to transform the current uneasy political environment into a more peaceful and profitable economic environment.