the North Korean Threat:
Can South Korea’s Economy Bloom and Entice Investor Bees?
Institute for Defense Analyses
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
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
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
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