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PSPD    People's Solidarity for Participatory Democracy

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  • 2000.10.31
  • 869

The Inter-Korean Economic Exchanges and Co-operation

Senior Researcher, Samsung Economic Research Centre 
Research Fellow, The Resource Center for Asian NGO's at Sungkonghoe University 
Dr Kim Yun-chul 


I. The Significance of the South-North Summit Meeting

The Summit Meeting announced the historic beginning of co-operation and reconciliation in the Korean Peninsula. Past history has shown us that any agreement between both Koreas could signify nothing unless mutual trust was established; the fundamental principle for unification was agreed in the 7.4 Joint Communique in 1972, and reconciliation and non-aggression was declared in the South-North Agreement in 1991-2. Thus it is strongly expected that the first meeting of two summits since the division of the country will establish mutual trust and enable the two parties to put all the agreement into practice.

The South-North Joint Declaration of the 15th of June 2000 deals with comprehensive questions on the relation between two Koreas. That is to say, the basic spirit revealed in the declaration is that primarily, the discipline of reunification is declared and realisable issues are agreed, and then complicated issues are planned to be discussed in detail later. So it can be said that the common features shared by the two Koreas were announced in the declaration.

The historic dialogue has just started. But it should last until the establishment of peace and co-prosperity. First of all, the dialogue should continue and it should not be stopped for any reason. In particular, Kim Jong-il should visit Seoul in the near future and high-level talks should follow in order to discuss economic co-operation and how to achieve reunification in detail. Second, besides the improvement of the South-North relations a supportive international atmosphere for the South-North relation should be created. In fact, the U.S. worries that the issues of nuclear and missiles in North Korea might not attract international attention due to the summit meeting. It should be mentioned that the South-North Basic Agreement in 1992 has been losing effect since the U.S. raised suspicion about the North nuclear weapon in 1993. Therefore it should be taken into account that the two Koreas will try to gain diplomatic supports from neighbouring countries, because the stabilisation of international relations concerning the Korean Peninsula have to influence the South-North relation which was explicitly proved by the North Korea nuclear incident in 1993. In turn, improvement of South-North relations could bring improvement of the international atmosphere too.

The tasks concerning the South-North should be approached gradually but steadily; there are various kinds of tasks that should be resolved by the two Koreas. So, the realisable tasks in the short term should be resolved first, and then difficult tasks should be discussed and resolved in the long term. In South Korea, it is required that the laws hindering the improvement of South-North relations should be amended or abolished, and the people  attitudes towards North Korea shaped during the Cold War period, should be reshaped in line with the period of co-operation and reconciliation.

II. The Influence of Inter-Korean Economic Cooperation

Inter-Korean economic cooperation is a very significant measure to secure their mutually beneficial relation. It will take a longer time to solve the political and military problems. However, economic cooperation can produce a fruitful result in a shorter time. Furthermore, the success of economic cooperation will enable the South-North talks to last and sustain the general atmosphere very amicably.

1. The Influence on North Korean Economy

In order to set up a peaceful relationship between the two Koreas, it is primarily needed that North Korea should restore self-confidence in the dialogue. If North Korean economy shows growth to a certain degree due to investment by South Korean government and companies, North Korea is likely to participate in the South-North talks actively with confidence. The choice of North Korean economic policy depends on the leaders will as well as the extent of participation of neighbouring countries in North Korean market. If a peaceful relation is settled since the summit meeting, North Korea could propel its economic modernisation steadily, aided by neighbouring countries.

Domestically, it is expected that North Korea will enhance the efficiency of its economic planning and pragmatic decentralisation. In agriculture, a group management seems to be expanding, decentralised regional economy will be stressed, a self-supporting accounting system will be introduced and company unions will be abolished. Through these measures, a company will have the responsibility for distributing its products, which will enhance the decentralisation rapidly and steadily.

Of course, North Korea focuses on the primary sector of the people  economy and the restoration of the order of its planning economy rather than a change in its economic system. At any rate, it is forced to increase economic productivity. It can be called a changing strategy for the preservation of its system in contrast to a changing strategy oriented to the market economy. In other words, it is an economic policy focusing mainly on improving the efficiency of its planning. Such a strategy as this cannot respond to change, and it is difficult to sustain this strategy because of limitation of alternative investment programmes.

The modernisation of North Korean economy depends ultimately on the improvement of international relations. The main source of investment to North Korea seems to be international organisations and from inter-Korean economic cooperation. Humanitarian aid from the UN such as from UNDP, WPF, WFO and IFAD as well as official loans will be required for the development of agriculture. For the construction of roads, ports, airports, power plants, North Korea tries actively to gain loans from ADB, IBRD, IMF, and so on. However, financial aid such as loans from these international financial institutions are expected to be delayed until comprehensive approach to North Korea by South Korea, Japan and the U.S. is settled. Instead, they prefer to enquire about the economic conditions, give training in capitalist economics and accept humanitarian aid at this stage. North Korea has to expand an economic open area centred on Shinujoo and Hamhung which are easily accessed by neighbouring countries, and to designate Nampo and Wonsan as a bonded processing exports area.

Economic cooperation should be regarded, first of all, as an economic enterprise. Therefore, North Korea should make it clear to investing companies or institutions that its economy is changing to a durable growth economy in order to attract their capital. North Korea also needs to participate in international agreements in order that they can continue their economic activities in North Korea more securely. North Korea should achieve the economic modernisation efficiently, while South Korea provides a favourable condition for its realisation.

2. Influence on South Korean Economy

The South-North summit meeting has suddenly improved the atmosphere of inter-Korean economic cooperation. By establishing the basis of a mutual dialogue, it will diminish a sort of military risk, which can happen in the Korean Peninsula. As for economic cooperation, direct and indirect trade between the two countries in the past is changing to the direct investment by South Korean institutions to North Korea. The summit meeting has enabled to start discussion of investment to Social Overhead Capital (SOC) in North Korea, and of a systematic reshaping of regulations for economic exchanges and cooperation.

In the mid-term, inter-Korean economic cooperation will play a very constructive role in South Korean economy. The labour centred industry of South Korea has lost in the international competing market, but this industry could revive again owing to economic cooperation. Companies making shoes, textiles, and bags have headed to countries abroad looking for low labour costs. They can go to North Korea, instead, which will cost them less. Compared to the labour market in the third world countries, North Korean labourers are well educated. And it must be noted that the workers in North Korea speak the same language and share common cultures and traditions with South Koreans.

South Korean economy expects a construction boom when the construction of SOC in North Korea is put into practice. Roads and rail in Korea will be connected to China, Russia and Europe, which will drastically reduce transportation costs. In 2005, it is expected that the amount of transportation through North Korea to Europe will reach 60,000 130,000 TEU (one TEU is one container of 20 cubic feet). This will bring enormous economic benifits not only to North Korea but also to South Korea. In the long term by connecting road and rail between Korea and China, Russia and Europe could make the Korean Peninsula the centre of the North-East Asia economic cooperation, linking the continental economic area and the oceanic economic area.

III. Conditions to be Fulfilled After the Summit Meeting

1. Systematic Machinery for Investment in North Korea


The Joint Economic Committee is required to come into operation again after the summit meeting. Both Koreas reached a general agreement concerning economic exchanges and cooperation. In the first inter-Korean economic meeting on the 15th of November in 1984, both parties reached agreements on possible items to trade, areas of economic cooperation and operational procedures.

When the agreement of exchange and cooperation was announced in 1992, both Koreas set up a general guideline for procedures for economic cooperation and how to make systematic machinery for them. Among them, the investment security treaty and the prohibition of double taxation treaty were regarded as the systems, which could make South Korean companies invest their capital in North Korea in a more secure situation.

The declaration of these treaties is the expression of North Korea's strong will to attract South Korean capital to its economy. Even though the Joint Company Act was approved in North Korea in 1984, investment in companies by Korean-Japanese and by a South Korean company, Daewoo, did not bring the expected results. It is because North Korea was very reluctant to allow management of joint companies to investing companies. Therefore, North Korea has to reshape its legal systems concerning foreign investment in order to attract the capital to the extent that it can enable North Korean economy to revive.

2. Resource for Investment for the Construction of SOC in North Korea

SOC in North Korea should be fully constructed for acceleration of inter-Korean economic cooperation. The transportation cost by rail is only one third of that by sea, and it will reduce the transportation period, too. This is one of the good reasons why SOC in North Korea should be improved or newly built. When the shortage of electricity in North Korea is taken into account, energy cooperation is urgently required. The shortage of electricity is one of the most serious obstacles in the expansion of economic cooperation and the development of the North Korean economy in the future. We must wait 7, 8 years for the completion of a light-water reactor, which is expected to solve the electricity problem in North Korea. Thus, old facilities in power plants should be replaced, and new items for this should be provided first in order to improve the electricity capacity in North Korea. In the mid and long term, the supply of South Korean electricity to North Korea should be seriously considered, and a joint construction of new power plants should be planned, too. Furthermore, we have to seek to collaborate in the investment for energy resources in North East Asia and the construction of pipe-lines supplying natural gas from Siberia to both Koreas.

However, the point is how to collect enough money to invest. It is estimated that about 10 trillion won is needed for the construction of SOC in North Korea. Official loan from international financial institutions can hardly be expected at this moment because it depends solely on the improvement of North Korea-U.S. relations. If it is possible, North Korea should obtain membership of those institutions first. It will take quite a long time to inspect North Korea for official loans before they decide to grant. Therefore, the only capital available for the construction of SOC now is the South-North Cooperation Fund. At the moment, about 220 billion won is available from this fund. However, if the fund is to be invested for SOC, the usage of it should be redefined and the free loan needs to be changed to credit lending.

We had better approach how to accumulate enough capital gradually, even though there are some concerns about it. As for the railroad, the disconnected section (20 km in Kyungui Line, 31 km in Kyungwon Line) will be connected first; as for electricity, the old facilities in power plants will be replaced first; as for the improvement of port facilities, a certain amount of money from the South-North Cooperation Fund is available. In the long term, as an industrial complex is being built, all possibilities should be considered for the development of the North Korean economy: BOT investment by a company, a consortium, investment by public companies.

3. How to Improve Exporting Capacity in North Korea

Exporting capacity in North Korea will be improved with the improvement of the North-U.S. relation. According to the Berlin Agreement in 1999, the U.S. will lift the economic embargo against North Korea. However, it would take quite a long time for the U.S. to give North Korea GSP, the position of the most favoured nation. The U.S. refuses to give GSP to the countries that support an international terrorist group, do not protect workers right, do not have the most favoured nation status given by them, and do not join the International Monetary Fund (IMF). In short, the change of North Korean economic policies and establishing political relation with the U.S. are urgently needed for normal international trading.

Accordingly, North Korea has to try to expand its trade with European countries for the time being, and more actively to explore new market in former communist countries in Central Europe. Some countries in the European Union and Canada give North Korea quotas for clothes and textiles, however, North Korea cannot make full use of them.

4. Mitigation of Restricting Regulations

In South Korea, we have to consolidate regulations and legal procedures in order to cope with the acceleration of inter-Korean economic cooperation. First of all, the relation between economic cooperation and security should be redefined through exchanges of strategic materials between two Koreas. Carrying out so-called strategic materials to North Korea is banned and this is a real obstacle to the increase of investment in the manufacturing industry in North Korea. Thus, South Korea should be very careful about how to classify cases of strategic materials to be carried out. It should keep highly sensitive technology from being applied to weapons. However, it doesn  have to hesitate to invest in manufacturing industry in North Korea.

Governmental regulations and legal procedures concerning inter-Korean economic cooperation should be amended or newly created, and they must be approached from totally different perspective from that which was predominant in South Korean society, resulted from antagonism and aggression in the Cold War period. Ministries in South Korean government should establish a collaborative work spirit at least for economic exchanges and cooperation. All the acts concerning the economic exchanges and cooperation should be revised or newly created in Parliament in order to improve South-North relations. One of the most significant things to be recognised is that the economic cooperation between the two Koreas is the shortest way to reduce the military confrontation in the Korean Peninsula.

IV. Conclusion

The Korean people have entered into the period of cooperation and reconciliation. Inter-Korean economic cooperation, aimed at mutual reliance and joint prosperity, is a new approach escaping from the legacy of the Cold War period. Economic cooperation is not one-way support, but is two-way relations. Both Koreas have to look for a new model by which all the Korean people can enjoy prosperity. Economic cooperation is strongly expected to have a very constructive effect on South Korean economy in the mid and long term.

North Korea has to understand the economic cooperation from an economic viewpoint. It is important to note that capital investment will be continued as far as companies can produce profits by investment. Then North Korea should think of bitter examples of failure they experienced in the Joint Company Act in the 1980s and in the Special Economic Zone in Najin and Sunbong in the 1990s. The international community including South Korean government had better make efforts to establish a general atmosphere in which economic development in North Korea is secured and durable. North Korea  will for economic modernisation as well as external conditions provided by international society are required together. South Korean government has to make enough money for governmental investment in North Korea for SOC. This has to be planned and propelled on the basis of the people  consensus. As for companies, they have to develop a profit model in the inter-Korean economic cooperation, which only can guarantee the profits by sustaining mutual trust. It should be kept in mind that only a sustainable economic enterprise could bring benefits to both Koreas.

In consequence, the people  attitude towards inter-Korean economic cooperation should be drastically accommodated to the period of peace and reconciliation. Some cost is inevitable to create peace and to establish joint prosperity in the Korean Peninsula. The people should recognise that the economic cost of the division of the peninsula is much more expensive than that of unification.

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