High Cost and Low Odds

With the South Korean delegation home from the October 2-4 inter-Korean summit in Pyongyang, Seoul is debating what it would take to overhaul the North’s rusty infrastructure.

Under the joint declaration — which is not exactly an agreement — signed by South Korean President Roh Moo Hyun and North Korean supremo Kim Jong Il, Seoul has promised to upgrade key components of the infrastructure including railways, highways and ports in addition to building a new industrial complex, and even a shipyard. These projects are meant to revitalize the North Korea’s moribund economy, now staggering under the impact of recent summer floods, themselves made worse by the lack of proper water diversion infrastructure.

But the main issue is where to find the money. An estimate by the Hyundai Economic Research Institute, a private think tank belonging to Hyundai Automotive Group, says it will require at least US$11 billion to undertake the main projects from the declaration. Hyundai argues that the amount, while large, is workable because it represents a tiny fraction of South Korea’s nearly 900 billion GDP and it will also result in an eventual profit for companies that invest in North Korea.

But the bigger challenge lies in finding enough resources to eventually bring the North’s economic level to that of the South’s. An earlier estimate given by a government research organization said it would require a massive sum of US$600 billion, to be spread over a period of a dozen years or longer, to stop the North from collapsing altogether.

The situation is already pretty dangerous. The North no longer has a national economy functioning on the principle of supply and demand. With about 70 percent of its factories said to be idle (things have now apparently improved with China, Russia and South Korea shipping heavy fuel oil under the Beijing denuclearization accord), only its military economy (dependent on the munitions industry and exports of missiles and other weapons) is functioning. Its gross domestic product is a puny US$20 billion. The country depends on China, South Korea and other countries to feed its people.

Kim Jong Il however is yet to push for full-scale agricultural reform, limiting concessions to recognizing small independent plots for individual farming and allowing a small number of “farmers’ markets” in major cities including Pyongyang. The party has yet to tackle the fundamental problem of the so-called Juche farming doctrine, by which Kim’s father ordered farmers to chop down trees to make room for terrace farming (causing floods and landslides) and high-density rice planting for maximum harvests.

Against that reluctance to undertake real, substantial reform, it is doubtful if the North can really lift itself from its economic mess. So far, the South’s economic aid has had no impact other than providing foreign exchange to the Kim regime, which some analysts believe it has used to finance its nuclear weapons program.

But the Roh administration, insisting that aid based on largess will moderate the regime, is confident that its policy will better ensure peace on the peninsula. It also believes the South’s private sector is big enough to absorb the cost of infrastructure modernization. The South’s minister of finance and economy, Kwon O Kyu, has assured that the amount necessary for these projects is within the reach of private sector resources. He said the government would help with funds it created for improving the South’s own logistical facilities.

But Seoul’s business community is reserved. It prefers to find its momentum for growth in the global markets, not in the revitalization of the North Korean economy. The captains of industry who accompanied Roh to Pyongyang remain distinctly cool in responding to the North’s needs. A group of 17 top executives from the family-based chaebol conglomerates, including Samsung Electronics, Hyundai Motor, LG and SK energy group were noncommittal on investment prospects. Chung Mong Koo, chairman of Hyundai Motor, refused to make any public commitments at all. Another tycoon, requesting anonymity, sniffed, “you make investments for profits,” implying he saw no such chance in the North.

Privately, they raise the crucial need for Kim Jong Il to undertake a North Korean version of glasnost (transparency) and perestroika (restructuring). In order to invest and do business, one said, they need “unrestricted communications, unfettered transportation and an unencumbered customs clearance procedure [across the border].” These are not available in the North where movement of people and freedom of communications are all highly restricted. The regime treats its economic statistics as state secrets.

Accepting what in other countries is normal would in North Korea require the party, the military and economic bureaucracy to relinquish much control. That, in short, implies easing the party’s control mechanism such as the secret police, indeed, and reducing the arbitrary power of Kim and his cult of personality.

The regime appears in no hurry to guarantee free travel and free communications to South Korean investors, let alone free passage of goods through the customs clearance at the border. All goods — like spare parts and textile material — heading for the Seoul-invested factories inside the Kaesong Industrial Complex north of the border are rigorously examined and checked, for fear they may contain newspapers or other banned materials. No North Korean worker can come to work or go home singly or be seen chatting individually with South Korean managers. They must stay in groups at all times and keep a distance from South Korean supervisors.

During Roh’s trip to Pyongyang, one South Korean official gained a firsthand experience of the North’s rigid control when he was prevented from moving from his hotel to talk to reporters billeted at another hotel.

Even Roh had a taste of what it would be like asking for reform when he “mentioned” the need for the North “reforming” and “opening up” its economy to attract investment. He said he felt like he was “running into a thick wall” when conversation turned to the subject of reforming the North Korean economy.

The power of the personality cult was so strong that North Korean officials instantly tensed and froze at the mere mention of Kim’s name. One broadcaster from Seoul was sternly told to address him as “Chairman Kim Jong Il,” not simply as chairman, as it ran the risk of listeners “confusing” the Dear Leader with Kim Yong Nam, the party’s No. 2 leader and chairman of the Supreme People’s Assembly, the rubber-stamp parliament.

Since Kim Jong Il personifies the party, the state, the armed forces and everything else in the country, the idea of divesting power or delegating authority is inconceivable. Kim himself underscored his omnipotence when he arrived at the negotiating table with just one aide to his right, facing an array of five senior officials from South Korea headed by Roh. At one point during the meeting, when Roh demurred and said he needed to talk to his staff on whether he should accept Kim’s off-the-cuff invitation for an extra day in Pyongyang, Kim turned almost derisive, asking, “You are the President, and you can’t make your own decision on that?”

Such was the gulf between the two sides. “I am here just to see what it’s like for myself,” allowed one business executive in the party, nervously avoiding any meaningful comment. Most businessmen sat politely and listened as North Korean officials took umbrage and complained they were getting nothing but “low-tech investment based on low wages” in the Kaesong complex, according to Seoul press reports. This impassive indifference continued even as North Koreans asked that high-tech companies like Samsung Electronics should make “ambitious investment” in the North.