Economic cooperation works both ways in Koreas

'The South will do everything in its power to help the North'

By Meredith Woo-Cumings
Special to CNN Interactive

Meredith Woo-Cumings is professor of political science at Northwestern University specializing in East Asian politics, international political economy and U.S.-East Asian relations. She has authored and edited four books, including "Race to the Swift: State and Finance in Korean Industrialization" (Columbia University Press, 1991). In 1996, President Clinton appointed her to the Presidential Commission on U.S.-Pacific Trade and Investment Policy.

South Korean automakers stand to benefit if talks succeed in opening the North Korean economy

(CNN) -- This June marks the 50th anniversary of the Korean War. It may also herald the beginning of a long-awaited reconciliation between the two Koreas.

The meeting of South Korean President Kim Dae-jung and Kim Jong Il of North Korea is the first summit between the two countries. It is an important step toward reducing tension in the peninsula and, by forging deeper economic ties, bringing closer the estranged halves of Korea.

"The South will do everything in its power to help the North," President Kim Dae-jung declared in Berlin in March 2000.

The help will not run one-way. In reality, South Korea will be helping itself as well.

This may come as surprise to those who are inured to complaints in the South Korean media, and from scholarly circles, about the cost to the South of sudden re-unification. But 55 years of separation and efforts at economic self-sufficiency notwithstanding, both Koreas today need each other, perhaps as never before.

State promotion of North-South trade and economic cooperation may become a new form of industrial policy. During the Vietnam War, the South Korean government not only dispatched troops but also capitalists to Vietnam, and jump-started many fledgling conglomerates which had been untested in the international market.

Shed debt, build infrastructure

In the 1970s, the South Korean government was actively involved in promoting exports in the U.S. market by subsidizing export firms. Now the government may be poised to boost its economy through a new form of Keynesianism that benefits both Koreas.

South Korea's biggest problem is its heavily indebted private sector, led by huge conglomerates which are structurally induced to over-invest. For the last two years, President Kim Dae-jung's government has forced these conglomerates to shed their debt and concentrate on their "core competence" to improve their export competitiveness.

The "core competences" of many of South Korea's conglomerates are in sectors that are highly competitive: automobiles, electronics, construction, machine- and ship-building, and iron and steel.

The opening of North Korea would clearly be a boon for South Korea's business, especially since the burden would be borne by the government. Kim Dae-jung believes that North Korea's food problem can only be alleviated by rebuilding basic infrastructure like roads, ports, railways, electricity and communications.

"Private businesses can do only so much in expanding the social infrastructure, promoting a favorable investment environment and reforming the overall agricultural set-up," he said in a speech in Berlin. "The time is ripe for government-to-government cooperation. The government of the republic is ready to respond positively to any North Korean request in this regard."

Catastrophic decline

In 1998, the founder of the South Korean conglomerate Hyundai sent 500 head of cattle to North Korea as a symbolic gesture to aid in the struggle against famine

For businesses in the South, the North beckons as a reservoir of disciplined and educated labor sharing the same language and cultural norms, heretofore cordoned off beyond the demilitarized zone. The average hourly wage in South Korea is more than 20 times that in China or Indonesia. And because the country lacks a meaningful social safety net, big businesses have had to act like giant welfare agencies, much like state-owned enterprises in China.

Lured by low-cost labor, there are already more than 600 South Korean firms with trading relationships in the North, and more than 150 companies with contracts to produce textiles, shoes, televisions, computer monitors, automobiles and other products there as well. Inter-Korean trade rose 50 percent to $333 million last year, and is rising sharply.

The real boost to trade will come when -- and if -- the United States lifts sanctions against North Korea which were imposed under the Trading with the Enemy Act. If the sanctions are lifted, the products made in North Korea could be exported to the United States, the biggest market in the world.

North Korea's agriculture has been devastated by massive flooding and mismanagement

(U.S. President Clinton announced on September 17, 1999 the lifting of sanctions, a gesture of reconciliation that was quickly reciprocated by North Korea's halting of missile testing. But the administration has yet to make good on the president's commitment.) North Korea's needs in improving the relationship with the South are more transparent.

Since the death of Kim Il Sung in 1994, North Korea has lost two-thirds of its economic output, a catastrophic decline for what was -- contrary to popular images -- an industrialized nation. It has also suffered a severe famine caused by massive flooding in 1995 and 1996, and its long history of agricultural mismanagement has led to depletion of soil, land erosion and deforestation.

Starvation and disease

With only one-seventh of its land arable, North Korea was never self-sufficient in food and by the late 1980s, more than three-fourths of its working population was non-agricultural.

The collapse of the Soviet Union and the end to North Korea's preferential terms of trade turned North Korea's disadvantage in food production into a catastrophe. Bereft of Soviet petroleum and, therefore, electricity, North Korea's ability to produce fertilizer and use tractors and irrigation pumps was crippled.

An estimated 1 million people have died of starvation in a country with a population of 21.4 million, and tens of thousands of North Korean children suffer today from disease and stunted growth.

On May 6, 2000, South Korea announced a shipment of 200,000 tons of chemical fertilizer to North Korea, and there were unconfirmed reports that Seoul might be considering up to $2 billion in assistance to Pyongyang.

For its part, the North Korean government is clearly interested in economic cooperation, including investment, trade and direct assistance. In addition to direct economic benefit, North-South cooperation may also halt, or perhaps reduce, the North's spiraling military spending, which is one-fourth or more of its gross domestic product (GDP). (South Korea's military spending, on the other hand, claims 3 percent of its GDP.)

Security and sunshine

The primary victims of North Korea's food shortage have been its children. Two out of three have suffered from malnutrition and stunted growth

Apart from economic interests that may benefit both Koreas, there are other factors that augur well for improved relations.

One is that North Korea's Kim Jong Il (his official title is National Defense Committee Chairman) has been six years in power and is said to be firmly in control. He has completed the 1994 agreement to freeze North Korea's nuclear weapons development program and halted missile testing. His political control is said to have stabilized, and he has the support of the military.

His response to the famine was stupendously ineffective, if not downright callous, but the food crisis seems to have eased somewhat thanks to increased crop production and an estimated $1.2 billion in food aid from the rest of the world. But a leadership which is secure and which has slowed down the economic tailspin somewhat might be in a better position to act effectively.

The reform leadership in South Korea is similarly bolstered by popular support for President Kim Dae-jung's "sunshine policy."

The recovery from the Asian crisis of 1997-1998 was remarkably fast. Unemployment is under control, and last year alone the economy grew by 10 percent. Even the opposition party, which used to complain bitterly that Kim's North Korea policy lacked reciprocity, seems to be supportive this time around.

Hope and pragmatism

In the end, though, one ends up placing hope in a trait both North and South Korea share: pragmatism. Contrary to popular perception -- and unlike other communist countries -- North Korea's economic policy was governed by very practical considerations.

Its capacity for sophisticated calculation and adept management is suggested by its ability to avoid economic crisis and famine following agricultural collectivization. Other Asian communist countries were not so fortunate during what was called "socialist transition."

China's Great Leap Forward, for example, introduced a period of famine and virtual economic collapse. Yet during that same period, North Korea's economy grew much more rapidly during its "Chollima," or "rapid development," movement than South Korea's. For the first quarter-century of independent government, there were consistent indications that North Korea's per capita output surpassed that of South Korea's.

South Korea's track record in economic management shows the same pragmatic and non-ideological bent. Just as the Koreans in the North mixed communism and exhortation with material incentives, Koreans in the South mixed capitalism with massive state intervention and industrial policy.

Both Koreas did this in order to win the race against each other. One would only hope that the Koreans can put their prodigal energy and pragmatism at work once again, and begin the long process of reconciliation.

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