North Korea in the World Economy

Eun Kwan Choi, E. Han Kim, Yesook Merrill

• Publisher: Routledge
• Year: 2003
• Topic: Business
• eBook ISBN:
  9781134408696
• Subtopic: Business General
• Index: Business

Mention North Korea to people today and they will conjure up many unflattering images, particularly in the wake of George W. Bush denouncing the state as part of an "axis of evil". Despite this cold war type rhetoric, the state of North Korea has begun to recognise the difficult challenges that it faces and is now trying to get to grips with them systematically.
This book brings together a selection of many of the world experts on the North Korean economy and covers such important issues as:
*possible unification with South Korea
*the significance of China's economic success
*Europe and the United States' roles in North Korea
North Korea in the World Economy provides an accessible, well-written and comprehensive account of this unique country and its economy. It will be extremely interesting not only for students and academics with an interest in Korean studies, international finance and transition economies but also for anyone with an interest in international economics.

1 Progress on the Korean Peninsula

What are the prospects?

Kenneth Lieberthal

This is a broad overview of likely progress on reuniting the two countries on the Korean Peninsula. My basic thesis is that the key factors that produced forward movement over the past 18 months are no longer in evidence. I am therefore not very optimistic about progress in the next few years.

The final year of the Clinton administration saw considerable movement on the Korean Peninsula. It is worth considering the underlying forces at work: Kim Dae Jung possessed considerable political momentum and boldly moved to install a peace process that would prove irreversible. His Berlin speech played a major role, and the visit to Pyongyang was hugely important. His support for Hyundai’s initiatives provided concrete benefits to North Korea. His willingness to provide North Korea with direct assistance demonstrated goodwill. President Kim based these actions on the premise that the Republic of Korea (ROK) could afford to take the lead and be generous in order to change Kim Jong Il’s perceptions. But that in turn required that Kim Dae Jung maintain a strong political position in the South.

Former Defense Secretary William Perry, at the request of President Clinton, carried out a review of US policy toward North Korea and submitted a report with important recommendations. The Perry report offered the clear message to North Korea that relations with the United States could either improve sharply or become considerably worse. This process held out the prospect for real progress on dropping US sanctions, removing North Korea from our terrorism list, normalizing relations with North Korea, and giving North Korea access to help from international financial institutions. It also made clear that the United States was prepared to increase its military resources devoted to containing the North Korean threat if North Korea decided to move in the wrong direction. Perry made absolutely clear that a “steady state” was not tenable.

The Perry process also produced the Tripartite Coordination and Observation Group (TCOG), which produced unprecedented coordination of US, ROK, and Japanese approaches to dealing with North Korea. North Korea had in the past manipulated the differences among the US, ROK, and Japan to expand its own influence. The TCOG considerably reduced the room for North Korea to maneuver here. Unprecedented levels of ROK–Japanese amity in their broader relationship also contributed to the success of TCOG (and vice versa).

Despite these developments, there were some serious difficulties. For example, North Korea waited far too long before fulfilling its promise to send a high-level visitor to the United States. Presumably, Kim Jong Il did not adequately understand the politics in Washington. By the time he sent Cho, it was no longer possible for President Clinton to put together a visit to Pyongyang. Thus, even with the positive atmosphere that had been created – producing substantial changes in North Korean behavior and a major burst of optimism by all the players (including China) – the potentially crucial presidential trip to North Korea did not take place. With the advent of the George W. Bush administration in Washington, momentum has been lost and arguably the negatives now loom larger than the positives.

North Korea still clearly sees the US relationship as key, and is very reluctant to move forward significantly with South Korea until the North Korea–US relationship also is on track. The US–North Korea relationship, however, has stalled.

The five-month long post-election policy review by the new US administration brought everything to a halt. During the policy review, President Bush made harsh comments about not being able to trust the North Koreans and Kim Jong Il reacted negatively. This protracted review period cost Kim Dae Jung precious time, as the stated US position seemed to undercut his “sunshine policy”.

The policy review indicated US willingness to reengage, but it stipulated terms that Kim Jong Il may well find unpalatable. These include:

• early nuclear inspections;
• troop reductions;
• no payment for electricity that would have been produced had the light-water reactors (LWRs) come on line on time;
• potential pressure on the refugee issue.

Because the United States had already signed the Agreed Framework, it is not clear how much incentive these terms provide to move forward. To date, North Korea has shown no evidence that it will accept the US agenda outlined by the policy review.

The situation in the ROK also has become less favorable. Kim Dae Jung cannot run for election again and increasingly is becoming a lame duck. North Korea’s failure to follow through on the Kim Jong Il return visit has sapped Kim Dae Jung’s momentum on the North–South issue. Criticism of his “sunshine policy” promises is increasing as the election draws closer. A weak economy in South Korea also is making the idea of generosity towards the North less popular. And the ROK economy may well fare badly in 2002.

It seems unlikely that anything less than a major turnaround by North Korea could rekindle significant enthusiasm for the sunshine policy, and time is working against Kim Dae Jung here. North Korea, though, may well be making the same mistake it made last year with regard to the USA. It may be assuming it can wait until late in Kim Dae Jung’s administration and then try to deliver an electoral boost by offering the Kim Jong Il return visit. But by then it will likely be too late for this to produce real momentum in the ROK.

Note that a Kim Jong Il visit to Seoul holds major risks for Kim Jong Il, including the potential for large-scale demonstrations and loss of prestige. Kim Jong Il can, of course, use the visit to bargain for more aid and other benefits, but even here he is likely to gain more by holding off until closer to the ROK election.

The TCOG process also has lost considerable momentum. The ROK has expressed considerable chagrin over the way the US policy review was handled and now largely blames the United States both for crucial delays and for setting the bar too high for renewal of real engagement with the North. ROK relations with Japan have grown increasingly tense, especially over Japanese nationalist issues such as the distortion of history in textbooks and Prime Minister Junichiro Koizumi’s visit to the Yasakuni shrine. The TCOG has had one preparatory meeting, one full meeting, and another full meeting planned for in September 2001. But it has not regained the energy and momentum it had under the Clinton administration, and North Korea is undoubtedly well aware of this.

Finally, the steam seems to have gone out of Japan’s efforts to develop a better relationship with North Korea. This reflects, in part, the Japanese preoccupation with major domestic political developments, along with their recognition that the US–North Korea and ROK–North Korea relationships are now less dynamic. From a Japanese perspective, therefore, there now is very little pressure to improve ties with North Korea. Also, Japan recognizes that rapprochement with North Korea will hasten the day when Japan will have to lay out considerable sums in effective war reparations – hardly a positive incentive to support reunion.

Where does all of this leave us? While the future obviously is uncertain, we can anticipate the following:

• US talks with North Korea may resume but will not make rapid progress.
• Kim Dae Jung will not be able to make dramatic moves (such as the Berlin speech and his follow-up initiatives) until Kim Jong Il himself takes some significant steps to further North–South relations.
• But Kim Jong Il is likely to wait well into 2002 before making a dramatic gesture, and that could well be too late to produce the kind of reaction he seeks in the ROK.
• In this context, the new president of the ROK, who will assume office on 25 February 2003, will likely initially seek to pursue a policy toward North Korea that differs clearly from that of Kim Dae Jung for sixmonth s or more.
• Therefore, significant forward movement on reunification of the Korean Peninsula may well prove too difficult to achieve before late 2003, if then.

Note, finally, that living conditions in North Korea show no sign of improving. Drought early in 2001 and later flooding mean that the food crisis will likely grow worse. There is no reason to anticipate improvement in the urban economy in the absence of major international assistance. The energy supply situation will remain critical because North Korea lacks both generating facilities and a distribution infrastructure. Therefore, all the dangers inherent in a potential North Korean collapse will remain on the horizon. I do not anticipate such a collapse, but North Korea is indeed in disastrous condition.

Everyone agrees that the best alternative to a North Korean collapse is gradual reunification. That is what makes the more recent developments so disturbing. They seem to have effectively stalled progress toward gradual reunification for at least several more years.

Part I
Recent developments on the Korean Peninsula

2 The Korean Peninsula

Recent developments from an EU perspective¹

Borje Ljunggren

Why did the EU get involved and what did we achieve?

In May 2001, the Swedish Prime Minister, Göran Persson, visited North and South Koreas. He did so in his capacity as chairman of the European Council and was accompanied by Dr Xavier Solana, the High Representative of the Council, and Chris Patten, European Commissioner for External Relations. Sending such a high-level delegation to North Korea clearly exceeded the established practice of the common security and foreign policy (CSFP) of the EU. Bosnia, Kosovo, Macedonia and the Middle East were areas where the EU was expected to play a role, and failure to do so would in fact be seen as a serious sign of inner weakness. But the Korean Peninsula – and North Korea – were something quite different. It was not that the EU had not been involved on the peninsula. Actually, the EU had opened up a political dialogue with North Korea as early as 1998, but that was at the level of Asia Directors (my level of responsibility). A personal visit by the President of the European Council had not been considered an option. So, why were we getting involved?

I would like to point to three main reasons, each very different in nature:

1. The security situation on the Korean Peninsula, and in particular North Korea’s nuclear development program, missile launch, and export of missile technology. The fact that the EU in 1997 decided to contribute to Korean Peninsula Energy Development Organization (KEDO) was a clear sign of the EU’s concern.
2. The humanitarian situation in North Korea. Ever since the severe floods of 1995, the European Commission as well as individual EU member countries have been supplying food aid to North Korea in an effort to alleviate the serious deprivations facing the North Korean people. The fact that the situation is chronic and is as much due to structural conditions as to weather conditions has led to an increasingly deep involvement by the European Union in efforts to increase the productivity of North Korean agriculture.
3. The desire of the European Union to contribute to peace and reconciliation on the peninsula in the light of President Kim Dae Jung’s “sunshine policy”, the impressive US–North Korean process initiated by the work of William Perry and, of course, the historic June 2000 inter-Korean summit that caught the world by surprise.

In addition, several other factors help explain why the European Union decided to give priority to the question of the Korean Peninsula during the Swedish presidency of the EU. It is worth noting the rather special position that Sweden has on the Korean Peninsula. Sweden is, in fact, represented through three separate missions: an embassy in Seoul, an embassy in Pyongyang and a delegation in Panmunjom at the 38th parallel, the latter because since 1953 Sweden has been a member of the Neutral Nations Supervisory Commission, a body that was established when the ceasefire agreement came into being. Today no less than thirteen EU countries (all except France and Ireland), as well as the European Commission, have established diplomatic relations with North Korea. As late as the fall of 2000, only five EU countries had done so, and among them only Sweden had an embassy in Pyongyang.

One particular event also must be discussed. In December 2000, President Kim Dae Jung visited Stockholm after having received the Nobel Peace Prize in Oslo. During his meeting with Prime Minister Göran Persson, President Kim discussed his visit to Pyongyang and his talks with Chairman Kim Jong Il, stressing the importance of engagement and, in particular, of talking directly with Kim Jong Il, who clearly was in command in North Korea. During his visit to Pyongyang, President Kim had found that a meaningful exchange of views was possible. The Swedish Prime Minister was, according to the President, particularly well placed to pursue such a dialogue with the North Korean leader. A visit to Pyongyang while Sweden was in the presidency of the Union would be a significant event. No commitment was made at the meeting, but during the following months Prime Minister Persson explored the possibilities in consultations with colleagues within the EU, and in early March a preparatory mission was dispatched to Pyongyang and Seoul. The leader of that mission, State Secretary Hans Dahlgren of the Swedish Foreign Ministry, informed the North Koreans that a visit by the Swedish Prime Minister as President of the European Union might be possible provided that four assurances could be given:

1. Could North Korea confirm its commitment to the Joint Declaration signed by the two Korean leaders at the Pyongyang summit?
2. Could the North Korean leader reconfirm his intention to hold a second summit with his South Korean colleague President Kim?
3. Could the North Korean side assure that comprehensive and direct talks would be held between the EU delegation and Chairman Kim Jong Il personally?
4. Could the North Korean side assure that no subject would be excluded a priori from the agenda for the talk?

In addition, it was noted that if such an EU delegation were to visit North Korea, it would be accompanied by a large number of journalists.

A few weeks later a special emissary arrived in Stockholm to deliver a message from Chairman Kim to Prime Minister Persson. The message was that the Swedish Prime Minister was welcome to travel to Pyongyang under the conditions requested by the Swedish side. Shortly afterwards, a European Union summit took place in Stockholm. The idea of a high level visit to Pyongyang and Seoul was endorsed by the European leaders.

Meanwhile, the USA had elected a new administration which announced that it would undertake a policy review before any further decisions were made regarding US–North Korean relations. This move meant that an EU initiative would take place under a more complexset of circumstances. Additionally, the inter-Korean dialogue was suspended in March. After President Kim’s premature visit toWashington earlier that month, the North Korean side declared that in the light of the new US position and South Korea’s dependence on the USA, further inter-Korean meetings would not be meaningful for the time being. In the space of just a few months, the momentum of the inter-Korean summit of June 2000 had faded away. Under such circumstances, it became even more important than before for the EU to proceed in close consultation with Seoul and Washington, which is what happened. It was made perfectly clear that the EU did not have any ambition whatsoever to replace the USA in its strategic dialogue with North Korea. Still, the EU saw a role for itself that was no less important given the change in climate that occurred in the first few months of 2001.

The outcome of the EU visit

A high-level visit to North Korea is no routine affair, and this trip by the EU troika proved to be no exception. When the delegation arrived in Pyongyang on 2 May, no acceptable program had been presented to the preparatory team, probably primarily due to North Korea’s obsession with the security of its leader. As it turned out, the EU delegation had five hours of direct talks with Chairman Kim Jong Il, during which the EU side raised all the questions that it had planned to present. Furthermore, each issue was discussed in a way that makes it reasonable to talk about a dialogue in the same way as President Kim had done when he visited Stockholm five months earlier. The talks were meaningful and a number of concrete results were produced.

Chairman Kim reconfirmed North Korea’s commitment to the Joint Declaration of June 2000. Furthermore, Chairman Kim explicitly stated that he intended to hold a second summit with President Kim. In fact, he asked the Swedish Prime Minister to “tell his friend Kim Dae Jung” when meeting him in Seoul the following day that Kim Jong Il was looking forward to seeing the President. He said this in a way that suggested that he was looking forward not just to seeing a South Korean president but to engaging with Kim Dae Jung, with whom he had held fruitful talks the previous year. At the same time, it was clear that the talks would not take place any time soon. The Chairman stressed that they had to take place at the right time and had to be well prepared. It still remains to be seen whether the two Kims will meet for a second summit. My guess is that not even Kim Jong Il knows. However, I do believe that the possibility still exists, provided that the US–North Korea dialogue can recommence. The link between the resumption of the US–North Korean dialogue and a second summit was the central theme in Chairman Kim’s analysis. So too, it should be added, was the Chairman’s message that North Korea did not want to be an enemy of the USA.

A broad range of security issues was discussed during the meeting. Chairman Kim reconfirmed North Korea’s commitment to the Agreed Framework Agreement entered into in 1994 between North Korea and the USA. He stressed that North Korea had been “prepared to go all the way” if a visit by President Clinton had materialized. It was impossible to determine the validity of that statement, but it was clear that North Korea felt very uncertain about where the USA was heading with its policy review. The fact that the review would continue for months and that it would not necessarily lead to a resumption of talks was clearly a cause of great frustration. Assertions that a policy review was not necessarily the same as a policy reversal did not sound convincing to the North Korean side.

The most significant outcome of the discussion on security was Chairman Kim’s unprompted statement that North Korea would maintain its moratorium on missile testing until 2003, though the moratorium could be reviewed in the light of future developments. The latter was clearly made with reference to the ongoing policy review. The Chairman’s reply to questions regarding his country’s export of missile technology was considerably less comforting. According to the Chairman, North Korea had no choice but to continue exporting missile technology since it was in dire need of foreign currency. It would, however, be prepared to cease exporting if compensated for the loss of foreign exchange income. A wide range of other issues related to the international security regime was covered, such as the importance of North Korea’s signing of the Comprehen...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Figures
• Tables
• Contributors
• Preface
• Acknowledgements
• Introduction
• 1 Progress on the Korean Peninsula
• Part I: Recent developments on the Korean Peninsula
• Part II: The North Korean economy
• Part III: Prospects for economic development in North Korea
• Part IV: Korean unification and economic integration
• Part V: Economic cooperation with the DPRK
• Part VI: Where do we go from here?