By Sarah K. Yun

At the recent talks between North Korea and the United States in Beijing, U.S. Special Representative for North Korea Policy, Glyn Davies, once again stressed the importance of restored inter-Korea relations in order to resume the Six-Party Talks to Kim Gye Gwan, North Korea’s First Vice Minister of Foreign Affairs.  Although the two Koreas are the parties most directly impacted by the security issues surrounding the Korean Peninsula, inter-Korea relations have been tense over the years, although some landmark accomplishments remain as symbols of inter-Korean cooperation.  On the other hand, the Cross-Strait relations have improved dramatically since 2008.  What caused such different outcomes?  What lessons from the Cross-Strait relations can be applied to inter-Korea relations?

Inter-Korea relations and Cross-Strait relations are inherently different in nature, history, and scope.  However, the two cases have interesting parallels from their Cold War split, largely driven by the ideological divide between capitalist democracy and communism.  They are also similar in that domestic politics plays an important role within the relations.  Additionally, the U.S. has played a key and complementary role in both relations through its support for Taipei’s engagement with Beijing and President Lee’s efforts to deter provocations by North Korea.

Despite these similarities, the two Koreas and the two China’s have taken divergent approaches to resolving their long standing separations. Experts have characterized Cross-Strait relations as “No Talks, Many Actions.”  There have been few official talks between the two sides but, a recent influx of trade, visits, investments, and exchanges.  However, these have been recent changes. Historically, communication between China and Taiwan ceased during the Cold War.  In 1979, after gaining confidence within the international community, China proposed the “Three Links” (trade, postal service, and transportation) and “Four Exchanges” (academic, culture, sports, and science and technology) to Taiwan.  Taiwan was not prepared to accept China’s offer at the time, therefore responded with the “Three Nos” policy of no contact, no negotiation, and no compromise.  In 1987 that changed. Taiwan began to allow visits to China and established two trade zones for Taiwanese companies in Fujian province in 1989.  During this period, Taiwan also renounced intentions to militarily recapture China.  In 1991, Taiwan officially declared end to hostilities and recognized the legitimacy of the Chinese Community Party.  Just when relations were on the road to improvement, then President Lee Teng-hui and his successor Chen Shui-bian argued for a Taiwan national identity separate from mainland China. 

All of this was reversed dramatically by the election of president Ma Ying-jeou who argued for the improvement of Cross-Strait relations in six stages: 1) charter and direct flights, 2) economic and financial cooperation, 3) investment and trade, 4) Taiwan’s participation in international organizations and non-governmental organizations, 5) promotion of a Cross-Strait common market and Taiwan’s participation in the East Asian economic integration, and 6) a peace accord and confidence-building measure.  He also implemented his own “Three Nos” policy to include no unification, no independence, and no use of force.  The current challenge, however, is that the Cross-Strait relations are successful at cooperation and exchange, but unsuccessful at creating a linkage between economic relations and political transformation.  In other words, this framework is effective in maintaining status quo, but ineffective in creating political spillovers.  The ultimate goal is not reunification, but a comparative advantage that China and Taiwan are able to gain economically and diplomatically from improved Cross-Strait relations.  The Economic Cooperation Framework Agreement (ECFA) was the epitome of improved Cross-Strait relations based on the economy-first paradigm. 

On the other hand, inter-Korea relations have been described as “No Actions, Talks Only.”  Although many official-level talks took place and declarations were announced between the two Koreas, it has had limited political spillover due to the fact that the Kim regime habitually exploited the cooperation projects.  Inter-Korea relations have for the most part been sustained by large-scale projects such as the Kaesong Industrial Complex, Mount Kumgang tourism, reunion of  separated families, and a few others.  A complete replication of the Cross-Strait framework would be difficult for the Korean Peninsula since North and South Korea have too much asymmetry of economic and political power as a result of North Korea’s military-first policy.  In essence, the current inter-Korea relations are focused on a framework of politics-first. 

What if the inter-Korean model also focused on economic integration first by stabilizing economic and trade relations?  This could create a platform for North Korea’s economy to be integrated into the region and provide an opportunity for North Korea to rethink its position in the world economic order.  In return, South Korea could play the role of Taiwan in supplying needed capital to a reforming command economy and would be able to benefit from  lower labor costs, access to raw materials, and decrease future reunification cost by reducing the economic gap between the two Koreas.  This would require a framework change in a way that the two Koreas view the inter-Korea relations from a perspective of ideology to one of practical economic interest.  Focusing on the economic aspects would bring political spillover effects, as in the case of Kaesong Industrial Complex where more than 50,000 North Koreans are employed by the South Korea-run companies.  These North Korean laborers are empowered financially and economically compared to others across the country.  Overall, a comprehensive strategy like the Ma Ying-jeou’s six-step plan may be needed in Korea, but it would require two willing partners. 

Whereas inter-Korea relations have undergone many challenges in the recent years, Cross-Strait relations have faced a dramatic détente.  The key point is that China reached out to Taiwan only after it gained status and confidence in the international community.  In other words, it did not feel threatened by Taiwan nor the international system, which was a product of China having a better economic foothold in the world.  From this, one can gather that unless North Korea’s economy is developing and industries being diversified, reconciliation and reunification may face more challenges.  Although  inter-Korean and Cross-Strait relations are not the same, a lesson learned from China and Taiwan’s experience is that economic cooperation is a key to closing the gap and improving inter-Korean relations. 

Sarah K. Yun is the Director of Public Affairs and Regional Issues for the Korea Economic Institute. The views expressed here are her own.

Photo from  Beautiful Taiwan’s photo stream on flickr Creative Commons.

By Yu, Byoung-gyu 

The sudden death of North Korean leader Kim Jong-il has increased uncertainty regarding the future of inter-Korean economic cooperation. The prospects for economic cooperation between the two Koreas can be considered from both short term and a medium to longer term perspectives.

In the short term, deadlock on economic cooperation will likely continue. North Korea needs to work to stabilize the new political regime under Kim Jong-un and to promote the policies of necrocracy, while in the current environment, South Korea lacks much impetus to try and increase its economic relations with the DPRK.

But from a mid-to long-term perspective, it is plausible that economic cooperation between the two Koreas could be revitalized in a stronger way than ever seen before. The North Korean government needs this cooperation to sustain itself, and in realizing the goal of creating a “strong and prosperous nation”.  It is absolutely essential for North Korea to present a long term vision to resolve its basic economic difficulties. In the months preceding his death, this may have been why Kim Jong-il focused so much time in visiting sites related to economic activity.

In 2011, Kim Jong-il made a total of 143 public visit around the country in which he made 59 economic visits (41.3%), 39 military visits (27.3%), 16 visits related to foreign affairs, (11.2%), and 29 visits in the category of “other” (20.3%). It is anticipated that North Korea will proceed in expanding the limited reforms and in opening up the economy to secure foreign capital and improve people’s living standards. In particular, as the “guardians” of Kim Jong-un, people like Jang Sung-taek (constructed 100,000 housing units in Pyongyang, led development in Hwanggeumpyeong and Nason, visited Seoul as economic inspector), Kim Kyong-hui (Director of the light industry Department of the Worker’s Party of Korea), and Kim Yang-gun (Director of the United Front Department of Chosun), are all expected to have significant interest in areas such as securing foreign capital and improving people’s living standards.

Economic improvement in North Korea is also very important to the South, potentially helping to alleviate tension and bring peace to the Korean Peninsula. Additionally, cooperation would provide the economy of the South with a new dimension for economic growth. Above all, cross-border cooperation will help expand domestic demand. The volume of domestic demand is determined by the size of population as well as income levels. A nation is required to secure a certain level of population in order to independently manage its own economy while promoting industrial development. However, South Korea`s population is declining due to its record-low birthrate. If inter-Korean economic cooperation is stimulated, a market with a population of nearly 100 million consumers can be secured. It will offer new hope for light industries and small to medium-sized companies, which have deepened an economic bipolarization due to their falling competitiveness. In fact, some textile and footwear manufacturers which invested in China or Vietnam after securing competitiveness and profitability at the Gaeseong Industrial Complex in North Korea, are now showing signs of relocating their operations back to the Korean peninsula. At the Gaeseong complex, a project that marries South Korean capital and technology with cheap labor from the North, South Korean companies produce clothes, utensils and watches, as well as electronic and machinery parts, employing more than 47,000 North Korean workers.

The creation of new demand will also ease excess supply concerns of the South Korea’s key industrial players, including manufacturers of steel, cars and ships. Geopolitical risks on the Korean peninsula can also be reduced if the two Koreas increase economic dependence on each other, as evidenced by the relations between China and Taiwan. These two countries have steadily expanded bilateral economic cooperation in spite of their prolonged military confrontations. They eventually signed the Economic Cooperation Framework Agreement, accomplishing the so-called “Chi-wan” (China+Taiwan) economic integration. The deepening of economic interconnections will ultimately help eliminate ideological confrontations by increasing the opportunity cost caused by military conflicts.

It will be important to have enthusiasm and willingness to maintain and expand inter-Korean economic cooperation under a strategy to promote the sustained prosperity of the Korean nation in the future. Regardless of political party, faction and ideology, mid- to long-term visions and strategies for inter-Korean economic cooperation should be established and faithfully carried out. Like China-Taiwan relations, the two Koreas should take advantage of practical strategies and measures to fully guarantee business cooperation regardless of mounting military tensions. In fact, the activity of private enterprises should be used to ease military tensions and safeguard communication channels. In order to ripen the environment for inter-Korean economic cooperation, it is essential to foster working-level experts on North Korea rather than political theorists.

Multilateral measures should be also pursued to enhance international cooperation to ensure the success of inter-Korean economic cooperation. If China, Russia, the United States, Europe and international organizations become involved in various inter-Korean economic cooperation and development projects, they can proceed smoothly regardless of conflicts between the two Koreas. Eventually, the economic cooperation between South and North Korea will and should be increased.

Yu, Byoung-gyu is the Executive Director of Hyundai Research Institute & also a visiting scholar at SAIS 

By Troy Stangarone

Years ago, The Economist developed the Big Mac Index to track how much a MacDonald’s Big Mac cost in countries around the world. The idea was to provide an understandable measure for purchasing power parity across countries since the Big Mac is a basic commodity that has spread across the world. Of course, there are no MacDonald’s in North Korea and statistics on economic activity are often hard to come by or have to be inferred by data reported from foreign countries that trade with North Korea. However, some recent reporting might point the way to a commodity that could at least signal the direction of economic developments in North Korea – the Choco pie.

About a month ago, the Chosun Ilbo reported that North Korea had asked South Korean companies working in the Kaesong Industrial Complex to stop giving its workers Choco pies and that daily consumption in the Complex had dropped from 200,000 to below 150,000. The pies are not only a big hit among North Korean workers, but also on the North Korean black market. Reporting indicates that the pies go for about 100 grams of rice in open air markets and that a year ago they were worth about $9.50 on the black market where 2.5 million pies may be traded a month. The trade has become so successful, that some traders only deal in the pies.

Now comes word that Choco pies may also be becoming a way for companies in the Kaesong Industrial Complex to provide their workers with a benefit beyond their salaries. It has long been known that the companies provided their North Korean workers with extra food that they could take home to their families, hence how the Choco pie craze began. But now it seems that the amount of pies given to workers by companies varies and that they try to outdo each other in the amount of pies they give to workers. This means that companies have found a way to basically vary compensation to workers in terms of salary and benefits, even if the North Korea state still assigns workers and sets wages through agreements with the South Korean government. The immediate impact of this of course is to maintain morale at individual plants, but at the same time it’s beginning to set a precedent for the future competition between companies for workers in the Complex based on wages, benefits, and skills.

North Korea seems concerned enough about the popularity of the pies and these developments that it has asked companies to either provide other types of food or cash instead. The companies so far have declined to do so. Given the spread of the pies across North Korea, perhaps it’s time to consider developing a Choco Pie Index for North Korea to track what is becoming one of the most popular mediums of exchange in the country?

Troy Stangarone is the Senior Director for Congressional Affairs and Trade for the Korea Economic Institute. The views expressed here are his own.

By Troy Stangarone

Despite the financial crisis of 2008, the global downturn that followed in 2009, and a year of tension between North and South Korea, the Kaesong Industrial Complex has been remarkably resilient. New numbers from the Ministry of Unification show that production at the complex was up 38 percent in September from a year earlier to $36.8 million, setting a new monthly high. The number North Koreans working in Kaesong’s 123 factories also set a new high of 48,242, up 8.4 percent from a year ago.

The growth at Kaesong is interesting in light of the challenges of recent years. After the Cheonan was sunk, South Korea implemented a series of sanctions against North Korea. New investments in the Kaesong complex were prohibited and ongoing expansions were halted. While some of the restriction on investment have recently been lifted, they would be unlikely to account for the increase in production over the last year. At the same time, visits to Kaesong by South Koreans were limited to essential personnel.   

The continued growth of Kaesong is also bucking recent global economic trends. While South Korean trade as a whole was down 20 percent in 2009 from the global economic recession, trade with North Korea through Kaesong has continued to grow. Inter-Korean trade from Kaesong was up 7.9 percent in 2009 and 48.9 percent in 2010 despite North Korea’s provocations. Through the first half of this year it is up 19.5 percent from last year and a significant 135.8 percent since 2009.

As we approach 2012, a symbolically important year for North Korea, production growth at Kaesong is likely to continue. South Korea is working to improve road access from Kaesong to the industrial complex and providing additional buses to transport workers from their homes. Additionally, after removing the restriction on construction in the complex, South Korea is moving ahead with the construction of a fire station, medical facility, and resuming construction on facilities for seven companies that had already received permits, including three metal and machinery plants, three textile factories, and one electronics factory.

However, while trade has been up, and the increase in workers and wages means North Korea will earn more from the complex, below the surface the picture is less robust.  An increasing number of firms are facing bankruptcy, and at the end of August 40 firms wrote to the government to request a grace period for their debts.

Despite being enticed to Kaesong with some combination of low interest loans, preferential tax rates, political risk insurance, and state subsidies, the political risk has clearly taken its toll on some firms in the complex. Even prior to the sinking of the Cheonan, it was unclear how profitable firms were in Kaesong, and the sanctions from May 24 likely only increased losses for firms that saw a halt to the importation of needed equipment, continued construction, or a decrease in orders. While some firms have suffered from the sanctions, the complex as a whole has sought to increase the supply of North Korean labor to boost production. These two factors likely explain why production has significantly increased as more firms face financial difficulties.

Troy Stangarone is the Senior Director of Congressional Affairs and Trade at the Korea Economic Institute. The views expressed here are his own.