Towards a Northeast Asian Security Community: Implications for Korea's Growth and Economic Development

The Political Economy of the Asia Pacific Series Editor Vinod K. Aggarwal For further volumes: http://www.springer.co...

Author: Bernhard Seliger | Werner Pascha

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The Political Economy of the Asia Pacific

Series Editor Vinod K. Aggarwal

For further volumes: http://www.springer.com/series/7840

Bernhard Seliger · Werner Pascha Editors

Towards a Northeast Asian Security Community Implications for Korea’s Growth and Economic Development

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Editors Bernhard Seliger Hanns Seidel Foundation Seoul Office 140-886 Seoul, Republic of Korea [email protected]

Werner Pascha Department of Business Studies The Institute of East Asian Studies of Duisburg-Essen University 47048 Duisburg, Germany [email protected]

ISSN 1866-6507 e-ISSN 1866-6515 ISBN 978-1-4419-9656-5 e-ISBN 978-1-4419-9657-2 DOI 10.1007/978-1-4419-9657-2 Springer New York Dordrecht Heidelberg London Library of Congress Control Number: 2011930810 © Springer Science+Business Media, LLC 2011 All rights reserved. This work may not be translated or copied in whole or in part without the written permission of the publisher (Springer Science+Business Media, LLC, 233 Spring Street, New York, NY 10013, USA), except for brief excerpts in connection with reviews or scholarly analysis. Use in connection with any form of information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed is forbidden. The use in this publication of trade names, trademarks, service marks, and similar terms, even if they are not identified as such, is not to be taken as an expression of opinion as to whether or not they are subject to proprietary rights. Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com)

Acknowledgements

This work was supported by the Academy of Korean Studies Grant, which is funded by the Korean Government (MOEHRD, Basic Research Promotion Fund). AKS-2007-CB-2002

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Contents

1 Introduction: Towards a Northeast Asian Security Community and the Role of North Korean Negotiation Tactics . . . Bernhard Seliger and Werner Pascha Part I

Prospects for a Northeast Asia Security Framework

2 From a Fault Line to a Catalyst: An Emerging Korean Confederation and the Contour of a Northeast Asian Security Community? . . . . . . . . . . . . . . . . . . . . . . . . . Key-young Son 3 Envisioning a Northeast Security Framework: The Korean Peninsula . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Scott Snyder 4 Korea as a Focal Point of the Security Concerns of Northeast Asia: A Geopolitical and Historical Perspective of the Present Scenario . . . . . . . . . . . . . . . . . . Brahm Swaroop Agrawal Part II

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Features of a “Peace Dividend”

5 The Unification Mythology and Reality of the North–South Divide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Andrei Lankov 6 Features of a Peace Dividend for the Two Koreas . . . . . . . . . . Paul Chamberlin 7 Peace Dividend and Regional Stability on the Korean Peninsula: Focusing on the South–North Korea Cooperation Fund Allocation . . . . . . . . . . . . . . . . . . . . . B. Jeong

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Contents

Part III

Implications for North Korea’s Economy

8 A Peace Dividend for North Korea? The Political Economy of Military Spending, Conflict Resolution, and Reform . . . . . . . Bernhard Seliger

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9 Implications for the North Korean Economy of Moving Toward New Modalities for Northeast Asian Security . . . . . . . . Bradley O. Babson

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Financial Cooperation with North Korea: Modalities and Risks . . Stephan Haggard and Marcus Noland

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Inter-Korean Cooperation in Special Economic Zones: Developments and Perspectives . . . . . . . . . . . . . . . . . . . . Ralph Michael Wrobel

Part IV 12

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Implications for South Korea’s Economy

Toward a Northeast Asian Security Community: Implications for South Korea’s Economic Growth . . . . . . . . . . Deok Ryong Yoon

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The Development of a Northeast Asian Security and Economic Community . . . . . . . . . . . . . . . . . . . . . . . Soon Paik

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Fractured Strategic Alliance, Restructured Economic Cooperation: Korea at the Helm of the Emerging Northeast Asian Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jitendra Uttam

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An Institutional Approach to Peace and Prosperity: Toward a Korean Fisheries Community . . . . . . . . . . . . . . . Martyn de Bruyn and Sangmin Bae

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Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Contributors

Brahm Swaroop Agrawal M.L.B. Government College, Jiwaji University, Gwalior, India, [email protected] Bradley O. Babson John’s Hopkins School of Advanced International Studies, US-Korea Institute, Washington, DC, USA, [email protected] Sangmin Bae Northeastern Illinois University, Chicago, IL, USA, [email protected] Martyn de Bruyn Northeastern Illinois University, Chicago, IL, USA, [email protected] Paul Chamberlin Independent Scholar, [email protected] Stephan Haggard Graduate School of International Relations and Pacific Studies, University of California, San Diego, CA, USA, [email protected] B. Jeong Graduate School of Public and International Affairs, University of Pittsburgh, Pittsburgh, PA, USA, [email protected] Andrei Lankov Kookmin University, Seoul, South Korea, [email protected] Marcus Noland Peterson Institute for International Economics, Senior Fellow at the East-West Center, Washington, DC, USA, [email protected] Soon Paik U.S. Department of Labor-Bureau of Labor Statistics, Washington, DC, USA; Washington Baptist University, Annandale, VA, USA, [email protected] Werner Pascha Department of Business Studies, The Institute of East Asian Studies of Duisburg-Essen University, 47048 Duisburg, Germany, [email protected] Bernhard Seliger Hanns Seidel Foundation, Seoul Office, 140-886 Seoul, Republic of South Korea, [email protected] Scott Snyder Center for U.S.-Korea Policy, The Asia Foundation, Washington, DC, USA, [email protected]

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Contributors

Key-young Son Tohoku University, Sendai, Japan, [email protected] Jitendra Uttam Korean studies at the Centre for East Asian Studies, School of International Studies, Jawaharlal Nehru University, New Delhi, India, [email protected] Ralph Michael Wrobel Faculty of Economics, West Saxon University of Applied Sciences, 08066 Zwickau, Germany, [email protected] Deok Ryong Yoon Korean Institute for International Economic Policy, Seoul, Korea, [email protected]

List of Figures

6.1 6.2 7.1 7.2 7.3 7.4 7.5 7.6 7.7 8.1 11.1 12.1 12.2 12.3

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North Korea at night . . . . . . . . . . . . . . . . . . . . . . . . . Rates of economic growth for North and South Korea . . . . . . . Regional comparison of military spending (Unit: million USD) . . Military expenditure of United States and countries in East Asia (Unit: million USD) . . . . . . . . . . . . . . . . . . . . . . Research framework: The transition process in triangle domain and the role of the peace dividend on the Korean Peninsula Stages of peace stabilization and research focus . . . . . . . . . . South–North Korea Cooperation Fund appropriated and allocated . Trend of the South–North Korea Cooperation Fund allocation . . . Trend of humanitarian assistance by the South Korean government, nongovernmental, and international organizations . . The triangle facing North Korea . . . . . . . . . . . . . . . . . . North Korean Special Economic Zones . . . . . . . . . . . . . . . ROK: Country credit rating by Moody’s . . . . . . . . . . . . . . Survey on North Korea’s influence in decision making to invest in Korea . . . . . . . . . . . . . . . . . . . . . . . . . . CDS Korea (five year) (2001/9 ∼ 2007/12). CDS (Credit Default Swap) Premium for governmental bond for foreign currency with five year maturity . . . . . . . . . . . . . . . . . . Premium for governmental bond in US dollar due 2013 (2003/5 ∼ 2007/12) . . . . . . . . . . . . . . . . . . . . . . . . . Railway connection between TKR, TSR, and TCR . . . . . . . . Eurasian railway network . . . . . . . . . . . . . . . . . . . . . .

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List of Tables

6.1 6.2 6.3 6.4 6.5 6.6 7.1 7.2 7.3 7.4 7.5 7.6 7.7

7.8 8.1 8.2 8.3 8.4 11.1 11.2 12.1 12.2 12.3 12.4 12.5 15.1

ROK & DPRK fertility rates. Note: Replacement is 2.1 . . ROK & DPRK lifespans . . . . . . . . . . . . . . . . . . Median ages – ROK, DPRK, USA . . . . . . . . . . . . . Total ROK population . . . . . . . . . . . . . . . . . . . Estimated military Spending as a percentage of GDP . . . Selected ROK and DPRK military resources (As of December 2006) . . . . . . . . . . . . . . . . . . . Comparison of military expenditures by country . . . . . . Trends of military expenditure by country (Unit: U.S. Million Dollars) . . . . . . . . . . . . . . . . . . . . . . . South–North Korea Cooperation Fund implemented for projects of nongovernmental or private organizations . Military expenditure by region (Unit: U.S. Million Dollars) South–North Korean Cooperation Fund added by year (Unit: 0.1 Billion S. Korean Won) . . . . . . . . . . . . . South–North Korea Cooperation Fund allocation trend (Unit: 0.1 Billion South Korean Won) . . . . . . . . . . . Trend of humanitarian assistance by South Korean government/nongovernmental/international organizations (Unit: 0.1 Billion S. Korean Won) . . . . . . . . . . . . . Expenditure of South–North Korea Cooperation Fund (Unit: 0.1 Billion S. Korean Won) . . . . . . . . . . . . . Reduction of military forces in Germany, 1989–2010 . . . Military spending, selected countries . . . . . . . . . . . . Active-duty military personnel, selected countries, 200 . . Military spending, selected countries and world . . . . . . Total Mount Kumgang tourists per year . . . . . . . . . . Kaesong Industrial Complex master plan (as of 2006) . . . Reconnected sections of inter-Korean roads and railways . Possible routes of gas pipelines . . . . . . . . . . . . . . Gaeseong Industrial Complex . . . . . . . . . . . . . . . State of main mineral resource possession . . . . . . . . . Estimates of unification costs . . . . . . . . . . . . . . . . Inter-Korean dialogue on maritime affairs and fisheries . .

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Chapter 1

Introduction: Towards a Northeast Asian Security Community and the Role of North Korean Negotiation Tactics Bernhard Seliger and Werner Pascha

The spectacular rise of the South Korean economy in the past half century has been duly highlighted as one of the most successful cases of economic development worldwide. The rise of the hard-hit Korean economy after the crisis of 1997/1998, and its resilience in the current economic crisis that started in 2008, have added to the well-deserved admiration for the “miracle on the Han river.” However, among the factors curbing South Korea’s economic growth perspectives has been, from the very beginning of its rise, the coexistence of the difficult brother, the Democratic People’s Republic of Korea (“North Korea”). While during the Cold War this coexistence had to be accepted as inevitable, after the end of the Cold War, there were hopes this obstacle to further growth could be overcome, either through the collapse and absorption of North Korea into South Korea, or through enhanced cooperation with North Korea, which would gradually decrease its threat potential and support peaceful relations. However, neither the first nor the second solution has become a reality yet. While North Korea survived the collapse of communist regimes elsewhere around the world, it suffered from a period of tremendous hardship for its people, resulting in widespread famine. At the same time, its external stance was alternating between unprecedented rapprochement – for instance, it participated in two summit meetings with South Korea and it allowed the establishment of the Kaesong Industrial Complex – and unprecedented levels of aggressiveness with the development of long-range ballistic missiles and nuclear devices, among others. Addressing the North Korea threat was no longer a national issue; it had become an international one. Multilateral talks to improve the situation, the four-party talks and later sixparty talks, came into existence as ad hoc measures to cope with the nuclear crisis. The idea of a Northeast Asian security community was born. There are five major reasons why the North Korea issue became a multilateral issue: First, drawing up a reliable, enforceable and verifiable security arrangement goes beyond the capabilities of North Korea and, more importantly, South Korea.

B. Seliger (B) Hanns Seidel Foundation, Seoul Office, 140-886 Seoul, Republic of South Korea e-mail: [email protected] B. Seliger, W. Pascha (eds.), Towards a Northeast Asian Security Community, The Political Economy of the Asia Pacific, DOI 10.1007/978-1-4419-9657-2_1, C Springer Science+Business Media, LLC 2011

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B. Seliger and W. Pascha

Second, almost all conceivable arrangements would involve guarantees or economic support measures that would also be beyond the means and power available to the two Koreas. Third, solving the North Korea issue in whatever way would have serious implications for the strategic interests of a number of major powers, including the United States and China. It would be naïve to assume that these powers would simply accept any bilateral solution; whatever it may be, so it is meaningful to include them in a transparent, effective way from the start. Fourth, the 1953 armistice has left North and South Korea in a formal state of war. North Korea in particular does not accept the South as a sovereign state. While this formal dispute may not be one of substantial significance, it would and indeed does make non-multilateral frameworks extremely difficult and volatile. Fifth and finally, apart from the costs that might have to be borne, any solution might also create an upside potential not only for North and South Korea, the so-called “Peace Dividend,” but also for other economies, particularly those in the Northeast Asian region. For instance, resource availability, transport infrastructure, and energy disposability would be very much affected if North Korea were put on the “economic map” of the region once again. A security framework for the Northeast Asian region thus creates considerable positive and negative externalities for other countries, making a multilateral framework desirable and unavoidable at the same time. Would and should this multilateral framework be a regional or a more encompassing, possibly global one? As most of the external economies are realized on the regional level – treating the United States as a “regional” power in this context – it is more or less that the security framework should be a regional one as well. While it cannot be denied that other countries do face some external economies, the marginal advantages of including them in the discussions would probably be offset by the diseconomies of having more actors at the negotiating table. Moreover, only the regional powers are able to play a meaningful role in the core security-related topics, because only they possess the military means to project that influence to the Northeast Asian region in a decisive way. However, it is one of the main arguments of this book that the global community or other regions of the world may not only have a legitimate interest in what is happening in Northeast Asia, but that they may have something to contribute. First, precisely because they have less military clout and vested self-interest, such external players may be more acceptable as go-betweens. Second, they may have some expertise or experience to contribute to solving the security disputes of the region. Europe’s experience with overcoming the deeply entrenched resentments caused by the two World Wars, its use of humanitarian action in international diplomacy and the widespread involvement of non-state players immediately comes to mind in this context. Against this background, on October 15, 2008, an outstanding group of scholars and policy-makers from Korea, the United States, and Europe came together at the Korea Economic Institute in Washington, DC, to discuss the ways “Towards a Northeast Asian Security Community? Implications for Korea’s Growth and Economic Development.” The revised papers debated during this conference form the core of this conference volume, enriched by some later outside contributions.

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Introduction: Towards a Northeast Asian Security Community and the Role . . .

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When discussing the possibilities of a security framework or, in an institutionalized form, security community, in Northeast Asia, it is important not to fall into the trap of wishful thinking, which so often has characterized approaches to North Korea as well as other isolated countries and resulted in disappointment. At least, this was the point of departure of all the open-minded discussions during the Washington workshop. It appeared that a key point for any progress toward a security framework for the Northeast Asian region has to rest on an understanding of how North Korea enters such negotiations and accompanying processes. Therefore, as a reminder of Northeast Asian realities, this introduction provides a short overview of North Korean negotiation tactics guided by century-old Korean adages.1

Ni jukgo nae jukja (You Die! I Die!) Nothing can describe the relations between North and South Korea better than this expression frequently heard in standoff situations. North Korea, for a long time, had an army perceived to be better equipped, trained, and motivated than the forces of its Southern counterpart, which, due to American involvement, had a great advantage because of its access to the most advanced warfare technologies. The decline of the North Korean economy after the collapse of the Soviet Union and the end of economic aid also brought a deterioration of the North Korean army, which was able to concentrate and specialize in certain fields (as the steady increase of special troops in comparison to the general army shows). In particular, the leadership found a powerful, though ambiguous weapon, namely the nuclear devices that it developed throughout the 1990s and 2000s, which were complemented by the development of ballistic missiles of medium and long range. To be able to use these new weapons as a credible deterrent against outside forces as well as a possible tool for the extortion of economic aid, a credible threat to actually use the weapons had to be communicated. This, to a considerable extent, explains the otherwise almost inexplicable outburst of violence at times, when North Korea at the same time pursues obvious tactics of negotiations and rapprochement, like in the early phase of President Barack Obama’s administration, when a nuclear test clearly alienated the new US administration. “You die! I die!” implies that North Korea is willing to use force, possibly even risking self-destruction, with so much credibility that no one dares to challenge its claim.

Baejjaera! (You Can Slash Open My Belly) When someone grabs and swallows a contested piece of (rice-) cake, the only possibility to take it back from him is to slash open his belly. Is the opponent willing to resort to this and thus raise the stakes to a level that will make the opponent back 1 All

of the following Korean proverbs were taken from Choe and Torchia (2002).

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down? Developing nuclear and ballistic weapons plus carrying out smaller provocations on the ground also enhances the first-mover advantage in provocations: When holding an employee of Hyundai Asan in Kaesong for alleged derogatory comments on the leader or shooting a tourist in Kumgang Mountain resort, or when heightening tensions in the West Sea (the Yellow Sea), North Korea can be confident that the surrounding powers, in particular South Korea, and also the United States and Japan, will be very careful and restricted by the nature of their democratic governments in order not let the conflicts escalate. The first mover, North Korea, can almost always gain something through provocations. The relatively lower value of human life, being it national citizens or people from a different nation, also supports a daring approach by North Korea, since such audacity cannot be matched by an equally daring democratic government.

Mule ppajinnom guhaejuni bottari naenora handa (When I Saved Him from Drowning, He Criticized Me for Not Saving His Baggage As Well) The North Korean negotiation history is full of examples of it accepting international aid, such as during the time of the Cold War from the Soviet Union and China, and since the mid-1990s from the international community, while, at the same time, distancing itself from the donations and criticizing them as too small. This tactics is partly a result of the wish to remain independent from any aid donor. It is moreover instrumental in the internal debate about autarky of the country, and it also raises the possibility of a race-for-aid among donors willing to increase their donations to outmatch the seemingly insufficient aid from other donors criticized by North Korea. The latest example for such a technique was the response to the South Korean offer of corn aid in the autumn of 2009, which was at the same time accepted by North Korea, but ridiculed as too little and niggardly.

Mot meokneun gam, jjilreona bonda (Poking Holes in Persimmons That He Cannot Eat) While North Korea is not as completely independent from the outside world as it makes its citizens believe and would like to make the international community believe, it is much less dependent on achieving tangible economic results for its citizens than the neighboring countries. For a long time after the Korean War, when the economic conditions in North Korea were improving due to reconstruction by forced savings and external aid rather rapidly, North Korea hoped to be permanently richer and more attractive than South Korea. Since the mid-1970s, this illusion has faded and in the 1990s, the catastrophic results of isolationism, failed central planning, and aid dependence became fully exposed during a major famine, called the “Arduous March” in North Korea. However, North Korea did not concede its loss in

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the ideological battle, but simply changed the battle ground: From around the year 2000, it argued that economic development in the South, which by now had become well-known through channels like visitors to and from China or smuggled DVDs from the South, was bought at the price of tainting the racially and politically pure Korean people with the evil influences of foreign countries. Thereby, it took up old prejudices against foreign involvement dating back centuries.

Gaemiga jeongjanamu geondeurinda (It’s Like Ants Trying to Topple an Oak Tree) Poverty and famine notwithstanding, North Korea sees itself as a pillar of stability in a world full of enemies. The lesson learned from the collapse of Eastern Europe and of the Soviet Union in the late 1980s is that all kinds of compromise – under the slogans of peaceful coexistence and gradual rapprochement – ultimately lead to the downfall, not the stability, of authoritarian regimes. Therefore, North Korea ridicules its enemies as ants trying to topple an oak tree. Still, its leadership also has the vigilance of someone fearing that one day the tree might succumb to the outside attacks. This results in a hardened stance, not so much for ideological reasons, which are almost completely absent from North Korea’s diplomacy, but rather for the fear of inviting cracks in the pillar on which North Korea stands. This short overview of North Korean negotiation tactics and considerations shows that North Korea has a certain interest in sustaining tensions with its neighboring states and can even gain from this. The history of the last two decades shows how well poverty and aggressiveness were used to secure aid from very unlikely sources, like food aid from the United States, which, for a long time, has been one of the most important donors. Along with food aid from the United States, North Korea has received generous unspecified monetary transfers from South Korean governments trying to avoid the collapse of North’s government. Nevertheless, the unbending stance regarding cooperation, the unending military and diplomatic provocations, plus the repetition of tactics to get rewards for issues already agreed upon and paid several times in the framework of the six-party talks leads to a certain fatigue of donors, negotiation partners, and even allies. In South Korea, in particular the step-by-step increase of tensions by North Korea during the presidency of Lee Myung-Bak eventually led to a strategic answer.

Yubimuhwan (Be Prepared and You Won’t Have a Crisis) It is not clear how much this proverb reflects the reality of the recent position of the South Korean government toward North Korea, let alone, whether this reflects a more sobering disposition in South Korea at large whose opposition parties certainly diverge from the government view in important respects. However, there is by now a widespread caution in all proposals put forward by North Korea or

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by international negotiators when promoting improved relations between the two Koreas. Such caution is certainly comprehensible, since it allows a realistic appraisal of cooperation possibilities. However, there is a danger that relations could rapidly deteriorate to another state of affairs more appropriately circumscribed by the last proverb cited here.

Michingaeneun mongdungyiga jegyeok (You Should Deal with a Mad Dog with a Bat) If relations reach a point in which there is simply an exchange of threats and “pinpricks,” discussing the possibilities of a security community becomes simply meaningless – at least for the time being. Tensions in the West Sea in 2009 and 2010 have the danger to push relations to such a point. Considering this imminent danger, the analytical issue turns considerably more humble: What incentives – provided by a multilateral framework – can prevent North Korea from acting in a way that results in South Korea freezing toward any further rapprochement? In this context, it is important to see that North Korea is often described as “irrational” in its international negotiations. It is certainly true that North Korea suffers from a tremendous shortage of qualified diplomats and does occasionally seem disoriented. (Here, we cannot discuss the issue any further whether North Korea can be seen as a single actor, epitomized in the person of the leader Kim Jong-Il, or whether different centers of policy-making, including the armed forces, would have to be considered.) Still, “irrationality” is not a meaningful category for describing the policy at large. Simply, North Korea uses a different yardstick for foreign policy success (or national interest). North Korea is less focused on peace and security in a traditional sense (increasing the GDP or national welfare), which are the typical benchmarks used by democratic states and often, implicitly, by scholars to measure a country’s success. Rather, North Korea measures success by its ability to signal firm leadership, and to survive as a coherent regime. Given this background, a discussion of the chances for a security community or security framework for Northeast Asia might be considerably restricted in its options, but much more realistic in its outcomes. The chapters of this volume address four topics. The first part explores the prospects for a Northeast Asian Security Community. The second part focuses on the economic implications. Parts III and IV discuss North Korea and South Korea, respectively. More specifically, the first part of this volume looks into the prospects for a Northeast Asian security framework. Key-Young Son in his contribution points out that a Northeast Asian security framework, different for example from the security environment shaped in Europe during the Cold War, is based on intraregional issues, such as territorial and historical issues and the ability of the region to cope with nationalist fervor, rather than on an alliance to counter external threats. Such a security framework could evolve from the current balance of power in Northeast Asia. It might include the closer cooperation of the two Koreas leading to a confederation, and Son is cautiously optimistic about this, citing the gradual

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reduction of tension and joint projects between the two Koreas. Scott Snyder starts his paper with the observation that Northeast Asia, in security terms, remains “under-institutionalized.” He then discusses the possible ways toward security cooperation in Northeast Asia. Ironically, North Korea, the country most contributing to regional conflicts, also could become the biggest promoter of multilateral security cooperation in the region, and this could emerge from the six-party talks. Brahm Swaroop Agrawal reviews the history of Korea’s security challenges and its answer, seclusion. In his opinion the strategic criticality of the Peninsula for its neighbors is a reason for the still unresolved conflict, more than the nuclear capability of North Korea itself, since dominant powers of the region do not want to loosen their grip on it. Will security cooperation and the possibility of peace in Northeast Asia benefit the economy of the region, and in particular, Korea’s? This question is raised in the second part of the volume, which discusses features of a “peace dividend” for Northeast Asia. Andrei Lankov takes a sobering view on the issue of a peace dividend, doubting a gradual convergence of North Korea with the South and pointing out that a potential collapse of North Korea will leave South Korea with no other option than to accept the burden of unification, under whatever circumstances at the time. He proposes a confederation-cum-immigration control, real estate sales control, and land reform in North Korea, a general amnesty as well as affirmative action for North Koreans as measures to cope with the economic and social effects of unification on South Korean terms. Paul Chamberlin views the issue of a peace dividend for the two coexisting Korean states and points out that it will be much easier for South Korea to realize the peace dividend than for North Korea. Absent major systemic reform, North Korea will not be able to absorb a peace dividend. For example, reductions of the military personnel only make sense if the inflow into the labor market can be used productively. Bok-Gyo Jeong looks into the interaction of government, nongovernmental organizations, and private companies to understand the possibility of change toward more peaceful relations between the two Koreas. In particular, he focuses on the role of the South–North Korea Cooperation Fund, established by the South Korean government to support cooperation projects. The third part of the volume deals with the implications of a possible Northeast Asian Security Community for the North Korean economy. Bernhard Seliger warns that the concept of a “peace dividend,” which became popular during the final years of the Cold War, and refers to the possible long-term benefits of lower military spending, is not entirely applicable to North Korea. The reason is that from a political economy point of view, “military first” policy and military spending should not be seen as entirely related to the external security threat for North Korea, but are equally dominated by domestic policy considerations, in particular regime survival. In this sense, the hope for a peace dividend might be premature, as long as the fundamental use of security crisis for regime survival in North Korea does not cease. Bradley O. Babson points out that, despite the formidable obstacles that still persist, the prospect that a Northeast Asia Security Community might provide a stable, long-term foundation for peace and prosperity in this critically important

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region is a goal worth pursuing. He argues that from the perspective of maintaining its national sovereignty and pursing economic development, it would be greatly in North Korea’s interest to reform its political and economic system to improve productivity and attract foreign capital as well as to build export-oriented economic relations with all its neighboring countries. A Northeast Asia Regional Security Cooperation architecture could be designed to provide a crucial underpinning for such a vision of North Korea’s future; this could support the necessary transition from an inward-oriented economic system to an outward-oriented one. However, he admits that it is hard to imagine how a regional security cooperation arrangement could, in fact, succeed unless North Korea is willing to undertake the critical transformations required to participate and benefit from genuine regionalism. Stephen Haggard and Marcus Noland look into financial cooperation with North Korea and discuss how such cooperation can be designed in a way to encourage long-run change in the North Korean system. All cooperation with North Korea should be based on the ultimate objectives of moderating North Korean behavior, encouraging reform, and increasing private financial flows to the country, both in the form of foreign direct investment and commercial bank lending. Aid should seek to complement and encourage such private flows, not provide a substitute for them. They point out that a multilateral approach to aid for North Korea, feasible in a multilateral Northeast Asian Security Community, can cope better with the moral hazard problems inherent in a purely bilateral approach to relations with North Korea. Ralph Michael Wrobel studies the inter-Korean cooperation in special economic zones and takes a critical stance toward the now-defunct Mount Kumgang Special Tourism zone, which provided no incentives for change in North Korea. He contrasts this with the Kaesong Industrial Complex, where economic cooperation takes place and important new skills can be acquired by North Koreans through the joint venture. The fourth and final part looks into implications of the concept of a Northeast Asian Security Community for South Korea’s economy. Deok Ryong Yoon argues that South Korea’s economy is burdened in multiple ways by the division of the Korean Peninsula, directly in terms of military spending and the costs of the division, and also through isolation from the Asian continent and by prospective costs of unification with an economically crippled North Korea. Yoon hopes that a peace regime on the peninsula may reduce these costs and open new opportunities for economic growth, using the limited economic potential for South Korea. Soon Paik analyzes the potential impact a Northeast Asian Security Community might have by developing scenarios related to how such a regime could evolve and by discussing its implications for Northeast Asian economic institutions. Jitendra Uttam also looks at Northeast Asian economic cooperation and the institutional framework and argues that the current state of strategic disequilibrium in the region has eroded long-held barriers that have hindered regional economic interaction. Several initiatives have, according to Uttam, a direct correlation with the

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shifting strategic priorities in the region, including the joint declaration on tripartite cooperation; the Greater Tumen Initiative (GTI), supported by the UNDP; the Northeast Asia Economic Council; Northeast Asian Energy Community; Chiang Mai Initiative (CMI); and the Asian Bond Market Initiative (AMBI). With “realists” in retreat, “idealists” have envisioned a freight corridor connecting Europe and East Asia via a vast trans-Siberian railway network, and “functionalists” see the connection of enormous resource-rich regions of the Russian Far East with the resource-poor global manufacturing core that comprises Japan, Korea, and China. This would put the Korean Peninsula into the center of Northeast Asian economic cooperation and present enormous benefits to the South Korean economy. The last chapter by Martyn de Bruyn and Sangmin Bae discusses the role of institutionalized cooperation for trust building among governments. While the six-party talks and the Kaesong Industrial Complex with its uneven contributions from North and South Korea (one party provides labor, the other management) are evaluated as a limited success, de Bruyn and Bae propose cooperation in the field of shipping and fisheries industries, in which both Koreas could build a balanced, equal partnership. Even modest integration of the nations’ shipping and fisheries sectors would substantially improve the level of trust between the two sides, while providing essential goods and development to the malnourished North. As the coal and steel community was only a start for the European Union – clearly implemented with the greater goals of peace and prosperity in mind – so can the integration of the fisheries industry provide a similar starting point in the search for equally lofty goals for the Korean peninsula, the authors hope. The conference “Towards a Northeast Asian Security Community? Implications for Korea’s Growth and Economic Development” at the Korea Economic Institute in Washington, DC, on October 15, 2008, and this volume would not have been possible without the aid of many persons and institutions, all of whom the editors thank for their contributions. First of all, generous funding and continuous support came from the Strategic Initiative for Korean Studies of the Academy of Korean Studies (AKS) and its Director, Dr. Do-Hyun Han. This publication appears as a contribution to the Modern Korean Economy book series funded by the AKS Initiative. The Korea Economic Institute in Washington, DC, not only hosted the conference but also helped to prepare the publication of this volume. Thanks go to the president of KEI, Jack Pritchard, to former Vice President James M. Lister, to Nicole Finnemann, and others at the institute for making the conference a wonderful event. The editors Mary Marik and David Kendall helped to bring the texts into a more readable form. For two years, Sarah Kohls of the Hanns-Seidel-Foundation Korea had been planning, organizing, and arranging for the conference and publication, together with aid from other staff in Seoul. Last, but not least, all authors and contributors to the volume made this an exciting and worthwhile endeavor: thank you all. At the time of finishing the manuscript of this volume, there are new clouds and doubts regarding inter-Korean cooperation; after the closure of the Kumgangsan tourism complex and tensions in the West Sea, culminating in the tragic sinking of

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the South Korean corvette Cheonan, a new ice age between the two Koreas seems possible. Nevertheless and possibly even more than ever, the search for a stable security framework for Northeast Asia as a precondition for peaceful economic cooperation and development will go on. We sincerely hope to make a small contribution to the ongoing debate in the chapters of this volume, as part of a much larger effort to secure peace and development in Northeast Asia.

Reference Choe, Sang-Hun, Torchia, Christopher (2002). How Koreans Talk. A Collection of Expressions. Seoul: Unhaengnamu.

Part I

Prospects for a Northeast Asia Security Framework

Chapter 2

From a Fault Line to a Catalyst: An Emerging Korean Confederation and the Contour of a Northeast Asian Security Community? Key-young Son

We have much ado about various scenarios of forming a regional community in East Asia. So far, many ideas and initiatives were centered on establishing a regional community bringing together the member states of the Association of Southeast Asian Nations (ASEAN) and its three Northeast Asian partners – China, Japan, and South Korea.1 The ASEAN Regional Forum (ARF) has also been in operation as a regional security dialogue with the participation of 27 countries interested in the promotion of security in East Asia. Does the ARF have any potential of evolving into a regional security alliance, such as the North Atlantic Treaty Organization (NATO)? Why does the idea of forming a security community appear controversial in East Asia, especially in Northeast Asia? Clearly, one of the stumbling blocks is the presence of the lingering Cold War-like security landscape in Northeast Asia, represented by the two divided states of China and Korea.2 In particular, the Korean divide, described as a major fault line partitioning Northeast Asia into two blocs, has been the locus of attention at the turn of the twenty-first century because of North Korea’s development of nuclear and missile programs and the protracted issue of regime survival. Though rare in Northeast Asia’s security landscape, two ad hoc multinational talks – four-party talks (1997–1998) and six-party talks (2003–?) – have been convened to address a multitude of problems emanating from the Korean divide, highlighting a linkage between the Korean issues and regional security. Already, economic integration is in full swing amongst Northeast Asian countries after the end of the Cold War. In contrast, the change of the security landscape has been painstakingly slow. South Korea’s diplomatic normalization with the Soviet Union in 1990 and with China in 1992 did not lead to North Korea’s rapprochement with the United States and Japan. As evidence of the lingering Cold War structure, 1 T.J.

Pempel (ed.) (2005) Remapping East Asia: The Constitution of a Region, Ithaca: Cornell University Press. 2 Samuel S. Kim (ed.) (2003) The International Relations of Northeast Asia, Lanham, MD: Rowman & Littlefield. K. Son (B) Tohoku University, Sendai, Japan e-mail: [email protected] B. Seliger, W. Pascha (eds.), Towards a Northeast Asian Security Community, The Political Economy of the Asia Pacific, DOI 10.1007/978-1-4419-9657-2_2, C Springer Science+Business Media, LLC 2011

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Japan has been closely aligned with the United States, while China has been a main political and economic backer of North Korea. South Korea’s future alliance politics appears precarious despite its current alliance with the United States, while North Korea and Mongolia have made only ad hoc presence in regional dialogue. As before, the region’s two strongest states, China and Japan, have been stuck in a bipolar rivalry, jockeying for a better position in a regional leadership game. Here, national identities loom large. China, once called the “Middle Kingdom,” does not identify itself simply as one of the Northeast Asian countries. Being the world’s third largest country in terms of territorial size after Russia and Canada, China ranks No. 2 in the world in terms of its gross domestic product only after the United States.3 Boosted by the population of 1.3 billion and robust growth potential, China has sought to ensure its “peaceful rise” with multiple engagements with different parts of the world. If China had played a main role in organizing the Shanghai Cooperation Organization (SCO) to address inter-state issues, such as conflicts on shared borders, with a group of countries located north and west of it, it is likely to seek to create a similar security mechanism in Northeast Asia. Like China, Japan does not want to nurture its identity purely as one of the Northeast Asian states. Being the world’s No. 3 economic power, Japan once aspired to change its identity from that of an East Asian country to one of the West despite its geographical fixation in Northeast Asia.4 As evidence that it has recovered from a decade-long recession at the end of the twentieth century, Japan returned to the world financial stage in 2008 by taking over parts of major US financial institutions, such as Morgan Stanley and Lehman Brothers. The US financial troubles, sparked by the subprime mortgage crisis, showed that Japan’s major financial institutions are equipped with expertise, as well as the purchasing power, far ahead of such fast-growing economies as China and India.5 All in all, the identity dynamic of China and Japan has given them a sense of exceptionality, making it hard for them to cooperate to build a regional community. This chapter sheds light on a scenario in which this bipolar rivalry could evolve into a dynamic three-way system of competition and cooperation in parallel with the emergence of a Korean confederation.6 This scenario is based on the belief that it would be virtually impossible to enter into any genuine dialogue to form a regional security community in Northeast Asia, as long as North Korea persists

3 See

the CIA World Factbook at https://www.cia.gov/library/publications/the-world-factbook/ geos/ch.html 4 Gerrit Gong (1984) “The Standard of ‘Civilisation’ in International Society,” in Hedley Bull and Adam Watson (eds.) The Expansion of International Society, Oxford: Oxford University Press. 5 New York Times, 24 September 2008. 6 For instance, Sejong Institute identifies 2020 as a year for the formation of a Korean confederation. See Chung Sung-jang (ed.) (2005) Hankukui kukajollyak 2020: Taebuk tongil (South Korea’s State Strategy 2020: Unification with North Korea), Seoul: Sejong Institute. Carl E. Haselden, Jr. forecasts that the political settlement on unification could be reached by 2015. See Carl E. Haselden, Jr. (2002) “The Effects of Korean Unification on the US Military Presence in Northeast Asia,” Parameters 32: 120–7.

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From a Fault Line to a Catalyst: An Emerging Korean Confederation . . .

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as a state posing threats to its neighbors.7 In the process of forming a community in Europe or North America, there has been no state that considers one or more states in the prospective bloc as an enemy. Beyond this security dimension, North Korea’s international isolation has created a grid lock hampering transportation and traffic between the continental and maritime countries in Northeast Asia. This grid lock has brought about far-reaching economic woes not only to ordinary North Koreans but also to those in the northeastern provinces of China, which had been denied opportunities of growth comparable to the other economically bustling parts of China.8 Therefore, the transformation of North Korea into an open society will be a blessing to the Northeast Asian countries, facilitating multilevel exchange and cooperation. Initially, the emergence of a Korean confederation will touch off a further nationalist or integrationist movement affecting Yanbian Korean Autonomous Prefecture in northeastern China and Mongolia beyond it, given that their ethnic, cultural and linguistic affinity could facilitate interactions on various levels.9 Surely, this development will irritate the Chinese government and provoke Chinese nationalism, raising political tension in the short term. Already, a series of history projects, sponsored by the Chinese government, provoked nationalist uproars in South Korea and Mongolia because they aimed to give a revisionist look at the history of China and its neighboring countries to incorporate the ancient history of the neighboring countries as part of China’s. Cyberspace in China and South Korea has been abuzz with the accusations of one another’s alleged nationalist or imperialist ambitions, occasionally spilling into bilateral diplomatic negotiations. However, the efforts to address these long-overdue issues between the concerned countries will become a golden chance to make reality checks on the boundaries of nationalism and to foster ways to establish a security regime to tackle various interstate issues as a prelude to the formation of a security community. So far, these bilateral negotiations and regional integrationist moves have been overshadowed by hard security issues emanating from Cold War-style political tension, such as the North Korean nuclear crisis. In this chapter, I am optimistic about the two possibilities: the formation of a Korean confederation and its positive role in the creation of a Northeast Asian security community. My arguments sound teleological, but teleology returned to the discipline of international politics with, for instance, Alexander Wendt arguing strongly in favor of the establishment of a world state as the final stage of various

7 Myung-lim Park (2004) “Tongbuka pyonghwagongdongcheui hyongsonggwa chonmang (The formation and prospects of a peace community in Northeast Asia),” available at http://220.72. 21.30/pub/docu/kr/AG/08/AG082004XBL/AG08-2004-XBL-001.PDF 8 Yanbian University Professor Kim Kang-il attributed economic backwardness in China’s three northeastern provinces to the Korean division. See Yonhap News, 2 October 2008. 9 The idea of the Korean-Mongolian confederation is already being circulated on various occasions with seminars on the topic being organized and a maverick South Korean presidential candidate arguing on a TV program that the Korean–Mongolian unification should come first before an interKorean unity.

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political projects of the human civilization.10 Teleology often marries history, which is a story of humans and their groupings, who are not just the agents of material power, but the incarnation of ideas and discourses. Though it is one of the weakest Northeast Asian states, South Korea has been recently saturated with the idea of the so-called “greater Korea,” with its film and drama industry increasingly featuring inter-Korean rapprochement and nostalgic renditions of once powerful Korean kingdoms, which had prospered in the territories of contemporary China and Russia more than 1,000 years ago, often described as “old lands,” or “lost lands” in a form of irredentism. The process of forming a Northeast Asian security community will gain momentum when China and a future Korean confederation institutionalize their contacts to find a political solution on many pending issues, including this, and Japan, regarded as a regional “intermediary” for American hegemony, is convinced it is time to deeply engage with these two historical rivals.11 Given the identities and pending issues affecting the Northeast Asian countries, an emerging security regime in Northeast Asia will be designed to address primarily intraregional challenges, such as territorial and history issues and accompanying nationalist fervor, rather than becoming a form of multilateral alliance to counter external threats.12 This is because the states in Northeast Asia need to alleviate the negative side of nationalism and control an arms race in parallel with the formation of a Korean confederation and the readjustment of US security commitments in Northeast Asia. It appears inevitable for the United States to review its “overstretched military commitments” in the wake of its unprecedented financial crisis affecting its global status, with mounting predictions on hegemonic transition.13 In the face of these external and internal challenges, as well as out of their desire to maintain economic prosperity and unhampered cultural exchange, I argue that the Northeast Asian countries would have no option but to create a regional security regime with an “Asian face,” similar to the SCO, rather than NATO or the Organization for Security and Co-operation in Europe (OSCE). The SCO is a multinational security organization under the twin leadership of China and Russia, but its refusal to grant the United States an observer status touched off the suspicion that it might be an anti-Western alliance. However, the Northeast Asian version of the SCO is likely to take more equal and open approaches to its members and the outside powers, such as the United States and Russia, because Japan and South Korea, regarded as pro-Western countries, would work to harmonize both Asian and Western values in the process of institutionalizing decision-making processes. The formation of a security regime in this region is likely to result from the successful confluence of the six-party talks and some regional integrationist initiatives, 10 Alexander

Wendt (2003) “Why a World State is Inevitable,” European Journal of International Relations 9(4): 491–542. 11 Peter J. Katzenstein (2005) A World of Regions: Asia and Europe in the American Imperium, Ithaca: Cornell University Press, p. 1. 12 For various types of a regional order, see Kim, The International Relations of Northeast Asia, p. 53. 13 The Observer, 28 September 2008.

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such as the three-way summit talks amongst China, Japan, and South Korea underway since 1999.14 Already, it is a norm that the leaders of the three countries hold a separate meeting of their own from the ASEAN process. Therefore, what are needed to create a security regime as a basis for a future community are the efforts to institutionalize these fledging contacts by establishing principles, rules, and decision-making processes.15 As a name for this future security entity, I propose the Pyongyang Cooperation Organization because the establishment of a security organization in Northeast Asia will mark the dramatic transition of Pyongyang from the capital of a “problem state” to the “Brussels” of Northeast Asia. In sum, this chapter will highlight a process in which the current intraregional balance-of-power system in Northeast Asia would evolve into a “cooperative security regime” via the formation of a Korean confederation.16 This chapter will first illustrate the current debate on forming a Northeast Asian security community. Second, it will explore the notion of a Korean confederation in the making. Third, it will elaborate on the role of a Korean confederation in creating a Northeast Asian security community.

Why a Northeast Asian Security Community? Northeast Asia is arguably one of the most rapidly transforming regions in the world because of China’s rise as an economic and political power, Japan’s transformation from a “peace state” to a “normal state,” and the possibility of Korean unity. Depending on the use of different yardsticks to measure the continuity and change of the region in flux, many commentators have diametrically different ideas on the characteristics of the region. Tsuneo Akaha, for instance, dismisses the idea of calling Northeast Asia a region as groundless, because it is not only devoid of regional institutions and transnational actors, but saturated with interstate rivalries, historical grudges, and divided states.17 Earlier, Aaron Friedberg argued that East Asia is “ripe for rivalry” with a potential of leading to great-power conflicts.18 Despite these warnings, however, the region has enjoyed peace and security, as well as economic prosperity, in an unstable post-Cold War world.19 Could this level of peace 14 Soung-chul

Kim (2008) “Multilateral Security and Economic Cooperation in Northeast Asia,” Sejong Policy Studies 4(2): 265–98. 15 For the definition of a regime, see Steven Krasner (1982) “Structural causes and Regime Consequences: Regimes as Intervening Variables,” International Organization 36(2): 185–205. 16 Eunsook Chung (2005) “Cooperative Security Regimes: A Comparison of OSCE and ARF,” Sejong Policy Studies 1(1): 183–239. 17 Tsuneo Akaha (ed.) (1999) Politics and Economics in Northeast Asia: Nationalism and Regionalism in Contention, New York: St. Martin’s. 18 Aaron L. Friedberg (1993/1994) “Ripe for Rivalry: Prospects for Peace in a Multipolar Asia,” International Security 18(3): 5–33. 19 Kim (2003) International Relations of Northeast Asia; David C. Kang (2003) “Getting Asia Wrong: The Need for New Analytical Frameworks,” International Security 27(4): 57–85.

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and security and the burgeoning economic ties amongst Northeast Asian countries be sufficient as a foundation for the creation of a regional security community? Perhaps, Northeast Asia might not need a NATO-like organization, created in 1949 to counter an external enemy, the Soviet bloc. In particular, Japan is against such an idea because of its current alliance with the United States and internal restrictions imposed by the so-called Peace Constitution.20 However, the sheer absence of a security framework has already become one of the most notable security challenges to the region, because it could not be ruled out that the mistrust of one another’s intentions could snowball into a political crisis and an armed conflict. What are the main problems putting the region’s security at stake? First, there are two divided states in the region, which do not renounce the use of military forces at times of contingencies. Partly because of the potentialities of unification wars, South Korea and Taiwan are heavily dependent on US security guarantees. Second, the US’s bilateral military alliances with Japan and South Korea divide the region into the two blocs of the haves and have-nots of US bases, posing another challenge to the discussion of a Northeast Asian security community. Depending on the transformation of North Korea and rapprochement between China and Taiwan, the United States will face internal and external pressures for a substantial withdrawal of forces and a change in the missions of its basing.21 In this juncture, the United States needs to play a constructive role to dispel some concerns that the sole superpower, which has to accept its weakening presence in this region, would become an “impediment” rather than a “facilitator” to regional security cooperation.22 Third, the Cold War grievances, as well as pre-Cold War ones, are still intact with diplomatic normalization talks between North Korea and the United States and between North Korea and Japan making no meaningful progress. Fourth, there are many cases of conflicting territorial claims amongst most of the countries in the region: the Northern Limit Line on the Yellow Sea between North and South Korea; Dokto/Takeshima between South Korea and Japan; Senkaku/Diaoyu between Japan and China; and Kuril Islands/Northern Territories between Russia and Japan. Fifth, there are many cases of nationalist disputes accompanying territorial claims and conflicting interpretations of both ancient and modern history. During the latter half of the twentieth century, the two Koreas and Japan sporadically clashed over how to interpret Japan’s colonial rule of the Korean Peninsula. At the turn of the twentyfirst century, China and South Korea entered into another round of disputes over the interpretation of ancient history mainly covering the identity of old Korean empires which had thrived in the northeastern provinces of modern-day China more than 1,000 years ago. 20 See

“The Future of Regional Stability and Regional Security Mechanisms in the Asia-Pacific Region,” Security Issues in the Asia-Pacific Region, National Institute for Defense Studies, Japan, and Center for Military and Strategic Studies, General Staff of the Armed Forces, Russia, NIDS Joint Research Series No. 2, March 2008, Chapter 3. 21 Haselden, “The Effects of Korean Unification on the US Military Presence in Northeast Asia.” 22 T.J. Pempel (2007) “Regionalism in Northeast Asia: An American Perspective,” Regional Integration in Northeast Asia: Issues and Strategies, A Policy Paper, University of Incheon.

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With no solution in sight, many inter-state issues, such as North Korea’s nuclear and missile programs and Japan’s justification of its imperialist history through the revision of textbooks, remained controversial, often hampering political dialogue. With the public debate getting heated sporadically on history issues in China, Japan, and South Korea, the governments of the concerned states found themselves in a delicate position, sometimes becoming the instigators of the nationalist clashes and, at other times, falling victim to them. Nevertheless, these centrifugal forces did not deal a blow to the growth of economic and cultural ties amongst these Northeast Asian countries. The volume of trade amongst China, Japan, and South Korea reached about US$ 400 billion in 2007, one sixth of the total amount of trade of the three countries, effectively establishing one another as major trading partners.23 In particular, China emerged as the largest trading partner for both Japan and South Korea in 2007.24 Second, cultural exchange is in full swing, with the popular culture of Japan and South Korea sweeping across the region and China emerging as a new force and major consumer in the entertainment sector.25 As part of efforts to sustain the economic and cultural ties, the concerned countries shared a need to create a regional security framework, as demonstrated by the establishment of a working group within the framework of the six-party talks to address the issue of “Northeast Asia Peace and Security Mechanism.” The sixparty talks will become a long process to address various issues affecting Northeast Asian security, as well as nuclear issues. Back in 1996, the United States and South Korea put forward the idea of organizing four-party talks with China and North Korea with the aim of replacing the Korean Armistice Agreement with a peace treaty. Its first meeting was held in Geneva in December 1997 after several rounds of time-consuming preparatory sessions to build trust amongst the dialogue partners. Despite six rounds of talks, which lasted until June 1998, the four countries failed to make any meaningful progress because of the fundamental discrepancies in their approaches toward security on the Korean Peninsula. While the United States and South Korea sought a minimalist approach, such as tension reduction and confidence building, North Korea reiterated its traditional, maximalist demands that a peace treaty be signed between the United States and North Korea, excluding the South, and the US troops be withdrawn from the South. Though billed as the first strategic dialogue between the United States and China to discuss a regional security issue,26 the four-party talks were proven inappropriate to handle these issues because of the deeply entrenched security dilemmas on the Korean Peninsula, 23 See

the speech of South Korean Foreign Minister Song Min-soon at http://news.mofat.go.kr/ enewspaper/articleview.php?master=&aid=685&ssid=11&mvid=479 24 See the website of the Japan External Trade Organization at http://www.jetro.go.jp/en/news/ releases/20080229066-news 25 David Leheny (2006) “A Narrow Place to Cross Swords: Soft Power and the Politics of Japanese Popular Culture in East Asia,” in Peter J. Katzenstein and Takashi Shiraishi (eds.) Beyond Japan: The Dynamics of East Asian Regionalism, Ithaca: Cornell University Press, pp. 211–33; Katzenstein (2005) A World of Regions, pp. 162–7. 26 Mainichi Shimbun, 6 August 1997.

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the status of US troops, and the format of dialogue, which excluded Russia and Japan.27 At present, the ARF is playing a role as a regional security dialogue, but the overblown membership makes it difficult to develop into a working framework of security. In a fresh initiative, which is unrelated to the ASEAN process, China, Japan, and South Korea started to organize a trilateral foreign ministers’ meeting from 2007 with South Korea hosting its first meeting in Jeju Island in June. The three countries also agreed in 2007 to organize a trilateral summit on a rotational basis. So far, these meetings were held on the sidelines of other international forums, such as ASEAN Plus Three. It is encouraging to see the three Northeast Asian countries embarking on dialogue amongst themselves, but still this fresh initiative has a long way to go before producing any tangible framework of security. Prior to the first three-way summit, the sudden resignation of Japanese Prime Minister Yasuo Fukuda in September 2008 and political tension between Japan and South Korea over territorial and history issues clouded the feasibility of the initiative.28 Furthermore, this initiative is unlikely to produce a genuine security mechanism, as long as North Korea and Mongolia are sidelined and the participating states shun the institutionalization of this process. In addition to the membership issues of North Korea and Mongolia, it is difficult to predict how to accommodate the United States and Russia in this Northeast Asian security community.29 Given the US military presence and alliances with Japan, South Korea, and Taiwan and the location of Russia’s Far East as an integral part of this region, the two superpowers could claim a membership status. This membership issue would partially depend on how the current rounds of six-party talks on North Korea’s nuclear programs would proceed to address the issues of security mechanism in Northeast Asia and what kinds of constructive roles the United States and Russia can play to foster regional cooperation.

The Rise of a Korean Confederation This section will illustrate the notion of a Korean confederation, which would comprise the two Koreas aligned loosely or closely with other areas in Northeast Asia. The reason why I am optimistic about the formation of a Korean confederation stems from the post-Cold War history, which has already witnessed gradual tension reduction and the introduction of joint business and tourist projects between the two Koreas.30 At present, it is hard to discuss when Korean political elites would 27 Jin-kyoo

Yoo (2000) Sajahoedam gyonggwawa pukhanui hyopsangjollyak (The Progress of the Four-Party Talks and North Korea’s Negotiation Strategy), Seoul: Korea Research Institute for Strategy. 28 Yonhap News, 2 September 2008. 29 Kim, International Relations of Northeast Asia, pp. 11–12. 30 Key-young Son (2006) South Korean Engagement Policies and North Korea: Identities, Norms and the Sunshine Policy, London: Routledge.

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embrace this vision of “a greater Korea” and whether this highly risky idea is feasible in the face of China’s objection. When he returned home just after a summit with North Korean chairman Kim Jong-il in June 2000, South Korean President Kim Dae-jung vaguely hinted at this idea by introducing the vision of building the “Iron Silk Road” through which South Korea could reach Europe via North Korea, China, Mongolia, or Russia. President Kim’s vision was based on the emergence of a Korean confederation, facilitated by the linkage of railroads bringing together the communities of ethnic Koreans. The formation of a Korean confederation, regardless of whether it might be further aligned with the Korean autonomous region in China or Mongolia, would be one of the important variables in the debate of forming a Northeast Asian community. Already, the Final Report of East Asia Study Group, submitted to the ASEAN Plus Three meeting in Cambodia in 2002, did not mention either North Korea or South Korea.31 As proposed by President Kim Dae-jung of South Korea, this report envisioned Korea as a single entity as a member of an East Asian community. In this juncture, why do we need to think of a confederation rather than a unified state? Despite the presence of a nationalist zeal for unification, an increasing number of South Koreans favor gradual political and territorial integration by averting a sudden collapse of North Korea.32 As demonstrated in the transfer of power from the progressive forces to the conservative forces in the 2007 presidential election, the Lee Myung-bak government shifted its policies vis-à-vis North Korea, creating controversies between the two Koreas and amongst South Koreans with different opinions. However, South Korea’s general public is steadily in favor of a gradual unification through the promotion of exchange and cooperation. In an opinion survey in 2008, 54.8 percent said the speed of unification should depend on the social and economic situations of South Korea, while 28.4 percent supported the existence of two states based on the idea of peaceful coexistence.33 Only 14.4 percent favored a speedy unification accompanying substantial costs. At present, there are some scenarios on North Korea’s change in the future, if we exclude the possibility of a collapse that could take place under the circumstances beyond prediction, just like the fall of the Berlin Wall. First, North Korea could enter into a closer economic integration with South Korea, which could be the end product of a joint inter-Korean business initiative, already in progress at the Kaesong Industrial Complex. Second, North Korea might become a satellite state of China in the wake of a pro-Beijing military coup and introduce a Chinese-style economic change.34 Third, North Korea might be a US-friendly state as a result of the successful completion of the six-party talks and diplomatic normalization. Under any scenario, however, the end of North Korea’s international isolation could lead to a

31 See

the Final Report at http://www.aseansec.org/viewpdf.asp?file=/pdf/easg.pdf York Times, 20 October 2004. 33 Donga Ilbo, 15 August 2008. 34 See one of The Australian (16 October 2006) articles published after North Korea’s nuclear test, titled “China may back coup against Kim”. 32 New

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closer economic and social integration with the South, given its various advantages, such as ethnic, cultural and linguistic homogeneity, and geographical proximity. The actual political process is also in the direction of forming a confederation, as demonstrated in the agreement of the first summit between President Kim Daejung and Chairman Kim Jong-il in June 2000. The joint declaration, issued after the summit, reads, “Acknowledging that there are common elements in the South’s proposal for a confederation and the North’s proposal for a federation of lower stage as the formulae for achieving reunification, the South and the North agreed to promote reunification in that direction.” Even though there had been no follow-up negotiation on this issue between the two Koreas, the agreement itself has been regarded as a significant step forward in the sense that the two Koreas reached a kind of consensus on the future direction in managing the prolonged division. Another variable in the formation of a Korean confederation is whether the unity of the Korean Peninsula and its nationalist zeal could erupt out of the peninsula and into some parts of China and even Mongolia. Already, the Beijing government has paid a keen attention to the issue of irredentism, often uttered by Korean nationalists in their use of such expressions as the “restoration of old lands.”35 According to Andrei Lankov’s report, the Yanbian Korean Autonomous Prefecture in China’s Jilin Province, about a half of South Korea in size, saw the dwindling number of ethnic Koreans from 60 percent of the population in 1952 to 36 percent in 2000 as a result of the Chinese government’s assimilation policies and the ethnic Koreans’ migration to the other developed parts of China or even South Korea. Even though ethnic Koreans identify themselves as Chinese, they keep Korean culture and language, leaving open the possibility that they could forge a closer link with a confederal Korea in the future. To many of the ethnic Koreans who are originally from North Korea, the economic hardship of their fatherland was a disgrace, whereas the prosperity of South Korea has been interpreted as a new opportunity. Therefore, the formation of a Korean confederation will not only lead to the economic development of North Korea but also substantially increase economic opportunities in Yanbian and its neighboring areas. Beyond China, there have been a series of debates on the possible formation of a special political and economic link between South Korea and Mongolia, given their ethnic, cultural, and linguistic similarities. As one of the interesting developments, scholars and specialists from the two countries organized a seminar in Seoul on March 20, 2007, entitled “Significance of Confederation between Korea and Mongolia.”36 The Mongolian Embassy in Seoul was responsible for inviting the speakers from Mongolia. Since diplomatic normalization in 1990, the two countries have promoted multilevel exchange, including summit talks. Presidents Kim Dae-jung and Roh Moo-hyun visited Mongolia in 1999 and 2006, while Mongolian Presidents Punsalmaagiin Ochirbat and Natsagiin Bagabandi visited South Korea in

35 Andrei Lankov (2007) “The Gentle Decline of the ‘Third Korea’.” Asia Times, 16 August. Available at http://www.atimes.com/atimes/China/IH16Ad01.html 36 Shindonga, 1 June 2007.

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1991 and 2001. The economic complementarities of the two countries are one of the magnets for increasing exchange and cooperation. Mongolia, dubbed the second largest landlocked country in the world after Kazakhstan, has a small population of 2.9 million with rich natural resources. When he was a presidential candidate, President Lee Myung-bak was upbeat about the possibility of forming a confederation with Mongolia because South Korea could find it easy to provide a significant amount of economic assistance to Mongolia, given its small population and the possibility of a high synergy effect.37 In security and political areas, the rise of China, which could be translated into both challenges and opportunities to South Korea and Mongolia, encouraged the two countries to enhance cooperation, if not a balance-of-power coalition against China. The Chinese government’s history projects, which aimed to give a new look at the definition of ancient Chinese kingdoms, have embarrassed the historians and ordinary people of the two countries. As China’s demand for oil and natural resources to sustain its economic growth attracted the attention of global trade watchers, the two countries have been concerned about the developments in which the Chinese government and specialists in history have opted for the cultural appropriation of the histories of the neighboring countries. While it is making no visible progress from the standpoint of actual political processes, the idea of a “greater Korea” has been increasingly explored by South Korea’s film and television industries. With the freedom of expression introduced with the end of the authoritarian rule, the South Korean entertainment industry has extensively explored two themes in the past decade: inter-Korean rapprochement and heroism of ancient Koreans in Manchuria. Amongst Korean movies dealing with inter-Korean rapprochement are Joint Security Area (2000), Whistling Princess (2002), Taegukgi: Brotherhood of War (2003), and Welcome to Dongmakgol (2005). Themes related to Koguryo (37 BC–668) and Palhae (698–926), two Korean empires which once ruled Manchuria and the northern part of the Korean peninsula, and nostalgia of Koreans’ lives in Manchuria during Japan’s colonial rule were featured by such period dramas and films as Yongaesomun (SBS period drama, 2006), Taewangsasingi (MBC period drama, 2007), Taejoyong (KBS period drama, 2008), Jumong (MBC period drama, 2008), Paramuinana (KBS period drama, 2008), Dachimawa Lee (2008), and The Good, the Bad, the Weird (2008).

Dynamic of Three-Way Cooperation in Northeast Asia In the discipline of international politics, there have been debates over polarity, such as “Is bipolarity more stable than multipolarity?” Neorealist Kenneth Waltz viewed that bipolarity is simple, thus reducing the chances of miscalculation, while David Singer and Karl Deutsch argued that a multipolar system tends to be stable because 37 Donga

Ilbo, 18 May 2006.

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uncertainty encourages decision-makers to make calculations in consideration of the larger number of actors involved.38 Bipolarity between the United States and the Soviet Union, as witnessed during the Cold War, demonstrated a long-standing rivalry and competition by the time one party lost its status. In a similar way, China, a hegemonic contender, and Japan, the world’s third largest economy and key alliance partner of the United States, have been stuck in political rivalry in spite of rising economic interdependence. China is an emerging hegemon, working to build its own structure of international security, as demonstrated in its leadership in organizing and developing the SCO, a security mechanism of six countries – Russia, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan – and four observers – India, Iran, Mongolia, and Pakistan. The grouping, often billed as an anti-Western alliance, was originally built to address problems between China and its bordering states but expanded into a regional security framework to discuss such issues as separatism, terrorism, and extremism, timed with Uzbekistan’s entry in 2001 and attendance of the observer states.39 In the wake of a failure in its imperialist integrationist project, dubbed the Greater East Asia Co-prosperity Sphere, in the early twentieth century, Japan has been often compared to Britain in terms of its identity vis-à-vis the United States and its continental neighbors. Because of its military alliance with the United States and entrenched distrust toward continental powers, Japan finds it difficult to enmesh itself entirely in a regional security framework. Therefore, the emergence of a Korean confederation is likely to become a new variable with a potential of shifting this rivalry. How could a Korean confederation contribute to creating a Northeast Asian security community? The answer lies in a set of ideas or policies this Korean confederation is likely to pursue. First, a Korean confederation is likely to take an independent path in foreign and military affairs in a departure from South Korea’s substantial reliance on the United States and North Korea’s dependence on China.40 South Korea has already started a process to secure wartime operational rights from the United States, whilst seeking to dissolve the Combined Forces Command to promote autonomy in military decisions and actions. Therefore, the emergence of a Korean confederation will contribute to shifting the current political rivalry between pro-American forces (Japan and South Korea) and anti-American forces (China, North Korea). Second, a Korean confederation will seek the role of an honest power broker between the United States and China and between China and Japan. When he mentioned South Korea’s role as “a balancer,” President Roh Moo-hyun sought to illustrate South Korea’s shifting

38 Kenneth

Waltz (1979) Theory of International Politics, New York: McGraw-Hill; David Singer and Karl Deutsch (1964) “Multipolar Power Systems and International Stability,” World Politics 16(3): 390–406. 39 Alyson J. K. Bailes, Pál Dunay, Pan Guang and Mikhail Troitskiy (2007) The Shanghai Cooperation Organization, Stockholm International Peace Research Institute (SIPRI) Policy Paper No. 17. 40 See Hankyoreh’s (2 January 2002) interview with Professor Chen Pengjun of Beijing University, who highlighted the possibility of a unified Korea taking an equidistance, peace-oriented, neutral diplomacy.

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identity from an alliance partner of the United States to a new power broker in this region. However, Roh was forced to retract it because the international and domestic observers dismissed it as unfeasible, given South Korea’s political capability and dependence on its alliance with the United States as a bedrock of deterrence against any threat from North Korea. Third, a Korean confederation, depending on its diplomatic skills and economic viability, could be a catalyst in accelerating the debate of forming a Northeast Asian security community. As a minor power compared to China and Japan, a Korean confederation will resort to multilateralism as a way to ensure its security. So far, both North and South Korea concentrated their diplomatic activities on winning a competition of legitimacy to emerge a standard bearer of the Korean nation. Once confederated, the two Koreas are likely to devote themselves to creating a system of cooperative security in the way that, in Europe, Belgium, the Netherlands, and Luxemburg formed the Benelux trade agreement and become an active supporter of European integration with their bigger partners, such as Germany, France, and Italy.41 Already, South Korea emerged the most active player in promoting the idea of a regional community, with President Kim Daejung’s initiatives giving birth to the East Asian Vision Group and the East Asian Study Group. Though complicated, the three-way system of competition and cooperation has a potential of speeding up the process of multilateral diplomacy. The emerging Korean confederation and the shifting roles and partial withdrawal of US military bases in this region will galvanize international and regional efforts to address a new set of political, military, and ideational challenges, such as territorial and historical disputes and accompanying nationalist uproars, an arms race to fill the vacuum left by the partial withdrawal of US military bases, and the questions of identities and norms regarding how a state should see itself in relation to the other states in this region and what standard of behavior might be appropriate in response to shifting identities. To ensure the continued economic growth and cultural exchange, the Northeast Asian states are likely to intensify dialogue to avert any crisis and establish a modus operandi to reduce political tension. The institutionalization of cooperation on multiple levels amongst the Northeast Asian countries and interested external powers will be one of the priority tasks to handle old and new security challenges. In this way, the six-party talks and the three-way meeting of China, Japan, and South Korea could be regarded as two initial steps in this direction. These initiatives are expected to take shape in the form of the Northeast Asian version of the SCO as a subregional grouping of countries sharing a common history and borders, but still endowed with a more enhanced level of equality and openness than the SCO. Even though it can borrow some ideas on confidence building measures from the OSCE, the emerging Northeast Asian security community, which I proposed to call the Pyongyang Cooperation Organization, will be different from the OSCE, an inter-regional grouping of 56 states stretching

41 Gérard

Roland (2007) “European Integration: What Lessons for Northeast Asia?,” Regional Integration in Northeast Asia: Issues and Strategies, A Policy Paper, University of Incheon.

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from Vancouver to Vladivostok. It is argued that Pyongyang is the right city to accommodate this organization’s secretariat, since Beijing, Tokyo, or Seoul is unthinkable because of the identity-driven rivalries of the regional powers. On the other hand, Pyongyang could emerge as a new center of regional diplomacy, timed with North Korea’s diplomatic normalization with the United States and Japan and large-scale development projects to follow, sponsored by the United Nations and other international agencies. Given a set of norms established in the multilateral talks in East Asia, especially in the ASEAN process, the member states of this security community will likely resort to inter-governmentalism, valuing the process of consensus-building and avoidance of legalistic approaches, rather than supranationalism, witnessed in the European integration process.42

Conclusion This chapter argued that North Korea’s political transition into a normal state and the formation of a Korean confederation will be a notable milestone on the roadmap to the establishment of a Northeast Asian security community. In parallel with the progress of inter-Korean integration, this chapter viewed that the countries in this region will seek to form a security community to address many pending intraregional disputes, such as conflicting territorial claims and history issues. So far, these issues had not been identified and addressed as priority issues in bilateral and multilateral negotiations because of a set of imminent threats to regional security posed mainly by North Korea. In other words, the unsettled Cold War legacies, as well as historical grudges against each other, have actually prevented new post-Cold War integrationist initiatives from blossoming into a regional security community. Once North Korea manages to establish diplomatic ties with the United States and Japan and the two Koreas move to form a confederation, the window of opportunity will be open wide for the creation of a regional security regime. In fact, a momentum to form a security community is likely to arise in an era of uncertainty, ushered in by a series of seismic events, such as the formation of a Korean confederation, a shift in the roles of US military bases in the region and the rise of nationalist clashes accompanying territorial and history issues. These developments will enable the Northeast Asian countries and possibly the United States and Russia to intensify efforts to institutionalize the way they engage with one another to avert any future crisis and enhance mutual security.

42 Amitav

Acharya (2004) “How Ideas Spread: Whose Norms Matter? Norm Localization and Institutional Change in Asian Regionalism,” International Organization 58(2): 239–75.

Chapter 3

Envisioning a Northeast Security Framework: The Korean Peninsula Scott Snyder

Twenty years ago, there were many reasons to expect that a regional security framework in Northeast Asia would be just around the corner. The Cold War was ending and official proposals for new types of Asian security arrangements popped up regularly from many different sources. Mikhail Gorbachev proposed expanded regional cooperation on the model of the Council for Security Cooperation in Europe at a Vladivostok speech in 1986.1 South Korean President Roh Tae-woo proposed a SixParty Consultative Conference for Peace in Northeast Asia in a speech to the United Nations in 1988.2 Former US secretary of state James Baker advocated the establishment of a two plus four mechanism for dealing with Korean tensions in November of 1991.3 Susan Shirk established the Northeast Asia Cooperation Dialogue in 1993 with financial support from the US government as a Track Two process that would support the development of an official regional security community.4 However, none of these proposals gained traction at that time as a viable official, institutionalized mechanism for multilateral management of Northeast Asia’s security problems. Despite the fact that regional security frameworks have flourished in many other parts of the world, Northeast Asia, in security terms, remains “underinstitutionalized.” This point is particularly notable in comparison to the regionalized structures for security cooperation that have developed in other regions, including the Organization of African States, the Organization for Security Cooperation in Europe, and the Organization of American States. The ASEAN Regional Forum, established in 1994, is the organization that comes closest to providing a venue for multilateral cooperation on security issues, but thus far this conference has not

1 Andrew

Mack and Pauline Kerr (1995). Tae Woo (1990). 3 James A. Baker, III (1991) and Don Oberdorfer (1991, p. A36). 4 The Northeast Asia Cooperation Dialogue accessed at http://igcc.ucsd.edu/regions/asia_pacific/ neacddefault.php, on October 7, 2008. 2 Roh

S. Snyder (B) Center for U.S.-Korea Policy, The Asia Foundation, Washington, DC, USA e-mail: [email protected] B. Seliger, W. Pascha (eds.), Towards a Northeast Asian Security Community, The Political Economy of the Asia Pacific, DOI 10.1007/978-1-4419-9657-2_3, C Springer Science+Business Media, LLC 2011

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mobilized action to address regional conflicts and is particularly weak in its capacity to address Northeast Asian problems. There are many different reasons that experts offer to explain the failure of Northeast Asian countries to establish an official regional security framework. Some say that Northeast Asia’s character as the nexus for great power interactions makes a regionalized security arrangement particularly difficult to establish.5 Others attribute the failure of regional security mechanisms to take root to historical legacies; for instance, the perpetuation of a divided Korea is widely perceived as having prevented the cold war from ending on the Korean peninsula or in Northeast Asia. Among those who focus on the intractability of the conflict on the Korean peninsula as a reason why a multilateral security mechanism has not evolved, some blame North Korean intransigence, while others suggest that the US alliance is the primary obstacle that stands in the way of a multilateral security community in Northeast Asia. Still another explanation points to deeper historical legacies deriving from the scars of Japanese imperialism and the failure of Japan and the other countries to fully come to terms with the effects of that experience.6 The failure to develop official regional security cooperation stands in stark contrast to the economic regionalization that has developed along with China’s economic rise. Intra-Asian trade flows have risen from less than 30 percent in the 1980s to over 40 percent today. These trade flows initially followed regional investment in China as a low-cost center for production of goods destined for US markets, but increasingly components are manufactured for sale in home markets or as a means by which to gain a foothold in China’s growing consumer market.7 So far, there is little evidence that economic regionalism is having spillover effects into the security realm. Likewise, functional cooperation on issues related to the environment, transnational crime, or other nontraditional security issues has grown, but has not yet been sufficient to support the development of an official region-based mechanism for addressing common security interests. Pragmatic approaches to the construction of Northeast Asian regionalism have focused less on the obstacles that have prevented germination of a multilateral security arrangement and more on the complexities surrounding which country is best positioned to play a leadership role in promoting such a framework – or the reasons why various regional actors are disqualified from being able to play such a leadership role. Even if a satisfactory political leader were to emerge, there are active differences on what would constitute a suitable agenda for such a framework and the extent to which – in an Asian context – institutionalization of such a framework would be desirable. For all of these reasons, efforts to date establish a 5 For instance, realist international relations theory would argue that Northeast Asia should be a hotbed for great power rivalry and conflict. See Aaron Friedberg, “Ripe for Rivalry?”International Security. Vol. 18, No. 3. (Winter, 1993–1994), pp. 5–33. 6 See Cross Currents: Regionalism and Nationalism in Northeast Asia, Gi-wook Shin, Daniel C. Sneider, Walter H. Shorenstein. Stanford, CA: Asia Pacific Research Center, 2007), Samuel S. Kim, ed. (2003), and Gilbert Rozman (2004). 7 Gi-wook Shin, in “Cross Currents”, op. cit., pp., and Chen Xiangming. As Borders Bend: Transnational Spaces on the Pacific Rim, Lanham, MD: Rowman and Littlefield Publishers, 2005.

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Northeast Asia-focused structure or to envision an agenda practical or compelling enough to launch a fully formed regional institution dedicated to addressing security issues multilaterally have not been successful. From this perspective, prospects for establishing a regional security mechanism in Asia might seem dim.

North Korea’s Role in Promoting a Security Framework in Northeast Asia Despite pessimism regarding factors that have inhibited the development of a regional security architecture in Northeast Asia, it is possible to have hope for such a framework based on the halting, ad hoc efforts in that direction that have been operationalized during the past two decades, with each effort building on past experiences toward the establishment of a full-scale framework for multilateral management of regional security issues in Northeast Asia. Ironically, North Korea – as the actor that has catalyzed common concerns that have created a basis for cooperation among the other parties in the region – might be regarded as the biggest promoter of multilateral security cooperation in the region. When the North Koreans threatened to pull out of the Nuclear Nonproliferation Treaty in 1993, the United States initiated a bilateral dialogue with the DPRK, but the resulting Agreed Framework could not be implemented by the United States alone without support from its allies. The Agreed Framework called for the establishment of a multilateral consortium named the Korean Peninsula Energy Development Organization (KEDO), to implement the terms of the deal. The fact that the bilaterally negotiated Geneva Agreed Framework required a multilateral structure to pursue its own implementation provided clear evidence that a US-led bilateral approach to solving North Korea-related issues, while necessary, was by itself insufficient. KEDO was a practical step forward in forging multilateral cooperation to meet North Korea’s energy security needs as a solution to the North Korean nuclear crisis, but as an exercise in building regional cooperation, the core membership was incomplete. KEDO’s governing board included representatives from Japan, South Korea, the United States, and the European Union, but China and Russia declined to participate.8 Subsequently, the Four-Party Talks were established in the late 1990s by the United States, China, and North and South Korea in an attempt to promote confidence building measures and move from an armistice to a peace regime on the Korean peninsula. But the Four-Party Talks did more to promote Chinese cooperation with the United States and South Korea than to make progress on problems involving North Korea. A third form of multilateral cooperation during this period involved the establishment of the Trilateral Coordination and Oversight Group (TCOG) among the United States, South Korea, and Japan. This group did much to overcome differences among allies in support of the Perry process in the late 1990s, as all parties supported cooperative efforts to engage North Korea in more 8 Scott

Snyder (2000).

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active cooperation on the basis of Kim Dae Jung’s Sunshine Policy. Suspicions about covert North Korean nuclear efforts at Keumchangri (later proved unfounded) and North Korea’s Taepodong launch in 1998 catalyzed the establishment of TCOG to address differences in policy priorities among the three countries.9 In the context of the second North Korean nuclear crisis that developed as a result of concerns that North Korea was pursuing a covert uranium-enrichment path to the development of nuclear weapons in 2002, the ongoing Six-Party Talks were established as a means by which to include major regional stakeholders in a cooperative effort to address the security challenges posed by North Korea’s nuclear weapons pursuits. Early in the crisis, it became apparent that the United States had no option for unilateral action through military means, so President Bush cast the second crisis as a “regional issue,” and the Six-Party Talks were established, with China taking the lead role as host and mediator for the process.10 This time, all the regional stakeholders were represented in the forum, but the dialogue itself made little initial progress due to a combination of US reluctance to engage with North Korea and North Korea’s continued focus on the United States. During the second Bush administration, US chief negotiator Assistant Secretary Christopher Hill was able to obtain authority to negotiate bilaterally with the North Korean delegation in the context of the Six-Party Talks. Following intensive negotiations during July–September of 2005, all parties agreed to a September 19, 2005 Joint Statement of Principles for addressing the North Korean nuclear crisis. The document contained few concrete measures, only pledges that the various sides would move forward on the basis of “words for words” and “actions for actions.” The Joint Statement marked the first time that the regional stakeholders had identified and articulated the minimum common rhetorical objectives that through joint action and implementation might in the future bind the parties together as a “security community.” The common objectives identified were the (1) the denuclearization of the Korean peninsula, (2) normalization of relations among all the regional stakeholders, (3) economic development (focused on North Korea), and (4) peace on the Korean peninsula and in Northeast Asia. The rhetorical shared objectives that might constitute a Northeast Asian “Security Community” had been identified, but it was not yet clear that the parties were willing to take action in pursuit of those objectives. In retrospect, the Joint statement marked the inauguration of a rhetorical commitment to collective action in the service of these four objectives, but circumstances related to the Banco Delta Asia issue, through which North Korean funds were frozen in a Macao-based bank suspected of facilitating money laundering, prevented this rhetoric from being translated into action.11 North Korea’s October 2006 nuclear test and the drive for a UN Security Council resolution 1718 imposing economic sanctions on North Korea appeared to toss aside

9 Dennis

C. Blair and John T. Hanley (Winter 2001). Conference with President George W. Bush (2003). 11 The text of the Joint Statement of the Fourth Round of Six-Party Talks may be found at http:// www.state.gov/r/pa/prs/ps/2005/53490.htm, accessed on May 22, 2007. 10 Press

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any prospect for further negotiations related to the North Korean nuclear issue. But within weeks of the test, Chris Hill had returned to Beijing for several rounds of bilateral and multilateral talks, which eventually resulted in the February 13th “implementing agreement,” which carefully calibrated delivery of one million tons of heavy fuel oil or equivalent and a US pledge to begin the process of removing North Korea from the list of terrorist sponsoring nations and ending application of the Trading with the Enemy Act in return for North Korea’s shut down and disabling of its Yongbyon facilities and a “complete and correct” declaration of North Korea’s existing nuclear facilities as a first step toward denuclearization. Implementation of this agreement dragged to the end of the Bush administration, with the prospect that additional steps toward the objective of denuclearizing the Korean peninsula will have to be dealt with by a successor administration, presumably within the context of the Six-Party framework. Beyond the North Korean nuclear issue, it is likely that North Korea’s reconstruction and integration into the regional political, economic, and security order will remain a focal point for active regional cooperation in the economic and political spheres for some time. Multilateral cooperation in the areas of energy security and economic development are already being developed on the basis of a shared assessment of North Korea’s economic development needs, and many of those needs are being responded to in the context of the Six-Party Talks. There have also been nascent multilateral efforts such as the Tumen River Area Development Project to promote regional economic development in Northeast Asia as a way of both mitigating renewed tensions and positioning for possible economic development and integration of North Korea, Northeastern China, and the Russian Far East with the rest of Northeast Asia. Those efforts are poised to enjoy success only if it is possible to finally address the core sources of instability and insecurity on the Korean peninsula and in North Korea.

South Korean Views of Multilateral Security Cooperation Both liberal and conservative administrations in South Korea have shown support for establishment of a regional security architecture in Northeast Asia. As mentioned earlier, Roh Tae-woo proposed a Six-Party Consultative Conference for Peace in Northeast Asia in 1988. Kim Young-sam’s policy initiatives were linked to globalization, but he also promoted a two plus two arrangement and supported Four-Party Talks in the mid-1990s as steps toward multilateral cooperation to deal with North Korea. Under the progressive administrations of Kim Dae Jung and Roh Moo-hyun, the idea that South Korea could be a catalyst for promotion of regional cooperation was linked to and regarded as mutually supportive with inter-Korean reconciliation. Kim Dae-jung promoted the East Asia Vision Group and was an active promoter of multilateral cooperation to address regional security issues, in part to ensure that there a positive regional environment existed in support of the Sunshine Policy.

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Roh Moo-hyun established a Presidential Commission on Northeast Asian Cooperation and promoted its Northeast Asia Cooperation Initiative based on the idea that South Korea would be best positioned as a regional leader to promote such cooperation. From this perspective, promoting inter-Korean reconciliation was a response to globalization and the accompanying growth of institutional connections in Northeast Asia needed to support increased economic interdependence. It was also linked to the idea that South Korea could utilize such connections in order to promote peace and act a positive force in promoting regional stability through the strengthening and institutionalization of functional cooperation.12 Roh Moo-hyun catalyzed an active discussion of how South Korea might be positioned in Northeast Asia and what types of influence South Korea might mobilize as a regional actor with his 2005 proposal that South Korea play a “balancer” role in mediating SinoJapanese rivalry. Although Roh’s “balancer” proposal was quickly rebuffed and set aside, the idea of South Korea as playing a balancing role persists, and may be better informed by the concept of South Korea as a pivot in Northeast Asia. For South Korea, promotion of regional security cooperation may be justified both on the basis of a liberal rationale, the idea that institutionalization of economic and security cooperation will mitigate the likelihood of regional conflict, and from a realist perspective, since the promotion of regional security cooperation gives South Korea a seat at the table with larger powers and makes it more difficult for larger powers to independently forge agreements on security issues that would have a direct impact on Korean security. Although the Lee Myung-bak administration has not yet presented a clear perspective on the desirability of enhanced regional security cooperation, it has prioritized good relations with the surrounding four major powers as a focus for his initial foreign policy efforts. Some South Korean conservatives have argued that a return to the alliance simply ignore Northeast Asia’s increased economic interdependence. Another conservative argument that has been made by South Koreans is that South Korea can be valuable in the context of efforts to hedge against China’s rise. From both conservative and liberal perspectives, this discussion is one component of a broader discussion about how South Korea should position itself and what types of influence South Korea can muster as a “middle power” in Northeast Asia.13 Increasing South Korean interest in Northeast Asian regionalism has corresponded both with the rise of regional dialogue in East Asia and with South Korea’s own rising confidence and increased capacity to play a diplomatic role as a regional

12 Su-Hoon Lee, “Community-Building in Northeast Asia: A Korean Perspective,” in Cross Currents, op. cit., pp. 153–168. 13 For instance, Young Jong Choi made this argument at a presentation entitled “South Korea’s Middle Power Diplomacy and Regional Security Cooperation,” Sasakawa Peace Foundation, Washington, DC, October 2, 2008. Another effort to explore Northeast Asian security trends from the perspective of international relations theory is Jong Kun Choi, “ROK in the Changing Security Environment in Northeast Asia,” conference presentation at “Peace on the Korean Peninsula and the Security Environment in Northeast Asia: 10th Anniversary of the University of North Korean Studies, Kyungnam University, May 1, 2008, pp. 47–85.

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if not global actor – rather than being confined to parochial concerns and limited in its capacity to defend its own interests, as was the case when South Korea served as the doormat for great power rivalry at the end of the nineteenth century. However, the task of channeling South Korea’s capacity and forming a doctrine that might wisely guide the use of these capacities has thus far eluded Korean strategic thinkers, who must contend with the legacy of a mind-set that has traditionally conceived South Korean interests in reaction and in opposition to well-defined threats (anticommunism, anti-Japanese colonialism, antihegemony). South Korean efforts to define a constructive contribution to regionalism have constituted a first cut at defining South Korea’s role and contribution in positive terms, but the task of defining and operationalizing such a role remains an exceedingly difficult one for South Korean diplomats and policymakers, whose job has been complicated by an increasingly volatile, reactive, expressive, and nationalistic South Korean public opinion on foreign policy-related matters.

Six-Party Talks and the Northeast Asia Peace and Security Mechanism The Six-Party Talks, as the latest stage in the development of ad hoc multilateral approaches to the North Korean nuclear challenge, has arguably laid the foundations for the development of a permanent regional security mechanism in Northeast Asia. The September 19, 2005, Joint Statement of the Six-Party Talks provides a bare-bones lowest common denominator set of principles that might form the basis for common action in the sphere of regional politics and security, essentially identifying the objectives of the denuclearization of the Korean Peninsula, normalization of diplomatic relations among all six parties, economic development on the Korean peninsula, and the pursuit of a permanent peace regime as the basis for future cooperation. As the lowest common denominator set of agreed principles among major parties in Northeast Asia, the Joint Statement has laid a foundation for regional cooperation that is somewhat analogous to the role of the Helsinki Final Act, which provided the basis for institutionalization of security cooperation in Europe through the Committee on Security Cooperation in Europe (CSCE).14 However, the Joint Statement provides a much more narrow mandate for promotion of regional cooperation than did the Helsinki Final Act, suggesting that the basis for institutionalized regional security cooperation in Northeast Asia remains much more narrow than was the case in Europe in the 1970s. James Goodby argues that the operationalization of a Northeast Asian peace and security mechanism along the lines of the

14 James

Goodby and Markku Heiskanen have argued that a regional understanding analogous to that represented by the Helsinki Final Act in Europe will be a necessary component of a new regional security architecture in Asia. See James Goodby and Markku Heiskanen, “Emerging Regional Security Architecture in Northeast Asia,” Nautilus Institute Policy Forum Online 08-001A, January 3, 2008.

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Helsinki Final Act might draw on language regarding freedom of travel and contact and the establishment of military confidence building measures, some of which have already been agreed to but never fully implemented in the 1992 inter-Korean Agreement on Reconciliation, Non-aggression, Exchanges and Cooperation (known as the Basic Agreement).15 Following the announcement of the February 13, 2007, Six-Party Talks implementing agreement that outlined the first steps to be taken toward denuclearization and normalization of relations between North Korea and the United States and North Korea and Japan, the six parties have formed five working groups, including one to establish a Northeast Asia Peace and Security Mechanism as a multilateral vehicle for promoting security beyond the settlement of the North Korean nuclear crisis. The creation of the Northeast Asia Peace and Security working group as the single working group that has been envisioned to outlast the Six-Party process shows that all the participants in the Six-Party Talks have now officially accepted in principle the idea of a permanent, institutionalized regional security framework, although there are clearly differing ideas about how such a mechanism would work in practice. One might argue that despite the provisional nature of the Six-Party Talks, with its sole focus on the North Korean nuclear issue, the establishment of the Six-Party Talks is in fact an institutionalized multilateral mechanism in Northeast Asia. Some have argued that the establishment of the Six-Party Talks itself has had positive collateral influence in terms of promoting confidence building among the parties, developing habits of cooperation, providing venues for bilateral cooperation even in the context of strained political relations, and providing a vehicle for managing tensions related to the North Korean nuclear crisis. But differing perspectives among the countries on the utility of the Six-Party process suggest that these positive contributions do not necessarily guarantee that the Six-Party Talks will be institutionalized or lead to the establishment of a regional security mechanism.16 Jack Pritchard has suggested that the key ingredient currently missing from the establishment of a Northeast Asian security architecture is US leadership, and that there is an emerging set of common interests (transparency, avoidance of miscalculation, peaceful dispute resolution, disaster relief, energy security, pandemic response coordination, and avoidance of incidents at sea) in support of which all the regional parties should be willing to join together.17 However, if the Six-Party Talks represents the first step toward the institutionalization of security cooperation in Northeast Asia, its establishment also suggests that the role and prospects for such an institutional dialogue beyond dealing with the 15 James

Goodby, “The Emerging Architecture for Security and Cooperation in Northeast Asia,” Issues and Insights, Vol. 8, No. 3, Honolulu, HI: Pacific Forum CSIS, March 2008. 16 Sheila Smith, “Assessing the Six-Party Talks in NE Asia: Some Relationships Flourish, Others Suffer,” Korus House presentation, May 22, 2008, accessed at http://www.dynamickorea.com/korus_house/kh_view_news.php?main=KHF&sub=&uid=200800232641&keyword=, October 10, 2008. 17 Charles L. Pritchard, Failed Diplomacy: The Tragic Story of How North Korea Got the Bomb, Washington, DC: Brookings Institution Press, 2007, pp. 169–186.

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North Korean nuclear issue may also face significant obstacles. First, the focus of the Six-Party process solely on North Korea has the effect of limiting the capacity and utility of the talks to address traditional and nontraditional regional security issues beyond North Korea. By this logic, once the North Korean nuclear issue is no longer with us, it is hard to imagine a security agenda that would successfully mobilize full and constructive participation by all the parties at the negotiating table. Instead of envisioning the institutionalization of a multilateral security forum that will grow out of the Six-Party Talks, it may turn out that the Six-Party Talks is already a multilateral security forum but that the salience of that forum is directly tied to the existence of North Korea-related issues as problems to be resolved. Despite the “in principle” acceptance of the concept of a Northeast Asia Peace and Security Mechanism to be established beyond the North Korean nuclear crisis, it is hard to imagine on which issues the mechanism would generate a value added that would have unique application to Northeast Asia or go beyond the contributions of, for instance, the ASEAN Regional Forum in addressing issues unique to the stability and security of the region. Contrary to the conventional wisdom that it is necessary for the Six-Party Talks to show success in order to provide the basis for a Northeast Asian regional security mechanism, it is possible that such a mechanism is more likely to become semipermanent in the event that North Korea-related issues continue to be a preoccupation and a focal point for regional cooperation on a protracted basis – or that North Korean political stability and economic reconstruction be adapted as an agenda for regional cooperation that extends beyond the nuclear issue itself. Second, if North Korea were not the focal point of the talks, it is questionable under current circumstances whether any other issue would be “big” enough to mobilize effective regional dialogue and cooperation. Functional or nontraditional security issues may be addressed in other fora and do not inherently capture the same level of priority among participants in the Six-Party Talks. It is difficult to imagine that Northeast Asia’s great powers would allow bilateral territorial or political disputes to be regionalized, even if these issues have spillover security effects on the rest of the region. Third, the reluctance of the six parties to meet without North Korea illustrates the extent to which North Korea continues to control the agenda for the talks despite the common regional interests in stability and coprosperity that are threatened by North Korea. North Korea’s presence changes the nature of the dialogue and inhibits frank conversation regarding the collective interests and priorities of the other regional actors, yet it has also been impossible thus far for regional actors to discuss their common interests openly in the absence of North Korea. Despite efforts by the Bush administration to hold such a meeting and recommendations from several quarters that advocate the establishment of a Northeast Asia Regional Forum to address security, energy, health, and economic issues, the fact that it has thus far been impossible to establish a Northeast Asian five-party dialogue for fear of what the North Koreans will think – even if the proposed agenda is not North Korea-focused – illustrates both the extent to which North Korean issues hold regional dialogue hostage as well as

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the difficulty of having a regional dialogue that does not focus on North Korea.18 The dysfunctional nature of the Six-Party Talks in this respect is not establishing a proper foundation upon which to build a longer-term institutionalized framework or venue for discussion of common interests in security and prosperity.

Minilateral Building Blocks and Multilateral Security Cooperation Given the urgency and protracted nature of the issues surrounding North Korea’s nuclear program, it is unlikely that the task of building a Northeast Asia Peace and Security Mechanism will gain early attention from leaders of the six parties in the near term. However, the need to address regional security issues beyond North Korea is driving new forms of regional security dialogue at the official level, most notably through the proposal of new forms of trilateral dialogue and cooperation among states in Northeast Asia. For instance, a trilateral summit among the leaders of Japan, China, and South Korea may soon be held for the first time independent of the ASEAN Plus Three meetings, which had provided the venue for annual meetings since 2001. In 2007, the PRC proposed a trilateral meeting with the United States and Japan that might address confidence building and military transparency issues critical to security dilemmas among great powers in Northeast Asia. Although concerns about South Korea’s reaction to the dialogue have caused hesitation on the US side, a new administration may consider moving forward with such an initiative. A China–US–South Korea dialogue might play an important role in shaping the future of the Korean peninsula. The US–Japan–Australia trilateral security dialogue has been established since 2005, and renewed security coordination between the United States and its alliance partners in Japan and South Korea has been initiated in October 2008, replicating a trilateral dialogue initiated in the late 1990s that had been suspended in 2003 in the context of rising bilateral tensions between Japan and South Korea. These overlapping trilateral dialogues could play an important role in building a foundation and an agenda for institutionalization of regional security dialogue in Northeast Asia. Each of these forms of trilateral dialogue is being undertaken for different reasons and to meet differing objectives, but these forms illustrate a trend toward addressing a specific set of security concerns on a multilateral basis with partners perceived to be best suited to deal with specific issues. Some are motivated by a renewed sense of threat, while others are designed to promote confidence building among countries that face the necessity to manage tensions or promote cooperation so as to forestall 18 See

Ian Bremmer, Choi Sung-hong, and Yoriko Kawaguchi, “Northeast Asia: Defusing a Dangerous Region, International Herald Tribune, December 30, 2005 (http://www.iht.com/ articles/2005/12/29/opinion/edbremmer.php, accessed on October 10, 2008). Francis Fukuyama has also called for the United States to take the lead in devising a new security architecture in East Asia, possibly through the establishment of Five-Party Talks. See Francis Fukuyama, “Re-envisioning Asia,” Foreign Affairs, January–February 2005, pp. 75–87.

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the prospect of renewed tensions. These two contradictory rationales for promoting regionalism, first on a trilateral basis and perhaps subsequently among multiple parties, are likely to continue to coexist with each other for some time, with the intensity and agenda of each dialogue waxing or waning in response to changes in the regional security environment and in the respective threat perceptions and security dilemmas of the various parties in Northeast Asia. Each type of minilateral cooperation also supports a trend toward strengthening of multilateralism as a means to address security problems on the basis of shared interests – either on the basis of commonly perceived threats or on the basis of a need to mitigate and overcome suspicions and promote confidence among parties with potentially conflicting interests. In this sense, multiple, renewed forms of trilateral cooperation are serving as the building blocks for multilateral security approaches while simultaneously hedging against potential regional sources of insecurity. An outstanding question in Northeast Asia that has been a central component of debate over the future of multilateral security cooperation has been whether such a mechanism would be compatible with or contradictory to the role of American military alliances in the region. There are mixed and conflicting views on this subject among participants in the Six-Party Talks. It has become standard practice for Chinese to characterize the concept of alliance as a legacy of the Cold War and to underscore the need to abandon alliance thinking in favor of cooperative multilateralism as a more suitable model for preserving cooperation among states in the future, while conventional wisdom among American analysts is that there is no contradiction between America’s Asian alliances and the establishment of a multilateral security framework in Northeast Asia.19 On the other hand, some American analysts may consider the possibility that common social values may enable the expansion of tasks in the US–Japan and US–ROK alliances, and that these tasks might be synchronized through a bottom-up regional approach to cooperation that emphasizes common objectives of both alliances to maintain regional stability. As new circumstances develop, it is likely that responses to the leading security challenges that emerge in Northeast Asia will be characterized by deepening cooperation, but it also suggests that the development of multilateral cooperation in Northeast Asia will continue to be organic, ad hoc, and issue-driven for the time being, rather than developing according to a grand bureaucratic plan for institutionalization. The desirability and likelihood that a new institution will be established in the absence of a convergence of a common purpose, interests, and norms for operation remains low for now, but the ingredients for the eventual evolution of broader multilateral security cooperation exist and offer potential for development in the longer term. 19 For

instance, see Tang Shiping, “China and Korea in East Asia: Possibility for Collective Actions?” Paper presented at the Korea Association of International Studies Conference on “China and Korea in the 21st Century,” August 23–24, 2002, Seoul, Korea. See also Liu Jiangyong, “Creating a Peace Regime in Northeast Asia,” The 3rd Hankyoreh-Busan International Symposium, “After 2007 Inter-Korean Summit: The Role of Two Koreas for Peace in Northeast Asia,” November 13–14, 2007, pp. 265–271.

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References Baker, James A. III. 1991. America in Asia: Emerging Architecture for a Pacific Community. Foreign Affairs (Winter):1, 70(5) Blair, Dennis C. and John T. Hanley. 2001. From Wheels to Webs: Reconstructing Asia Pacific Security Arrangements. Washington Quarterly 24 no.1:7. Joint Statement of the Fourth Round of Six-Party Talks. http://www.state.gov/r/pa/prs/ps/2005/ 53490.htm, accessed on May 22, 2007. Kim, Samuel S., ed. 2003. The International Relations of Northeast Asia. Lanham, MD: Rowman & Littlefield. Mack, Andrew and Pauline Kerr. 1995. The Evolving Security Discourse in the Asia-Pacific. Washington Quarterly 18(1) Oberdorfer, Don. 1991. Baker, Roh Criticize N. Korean A-Arms Effort; Future of Divided Peninsula Discussed. Washington Post. November 15 edition. Press Conference with President George W. Bush. Federal News Service. March 6, 2003. Rozman, Gilbert. 2004. Northeast Asia’s Stunted Regionalism: Bilateral Distrust in the Shadow of Globalization. London: Cambridge University Press. Shin, Gi-wook, Daniel C. Sneider and Walter H. Shorenstein. 2007. Cross Currents: Regionalism and Nationalism in Northeast Asia. Stanford, CA: Asia Pacific Research Center. Snyder, Scott. 2000. The Korean Peninsula Energy Development Organization: Implications for Northeast Asian Regional Security Cooperation? University of British Columbia Working Paper Series, 2000. Vancouver, BC: University of British Columbia. The Northeast Asia Cooperation Dialogue. University of California Institute on Global Conflict and Cooperation. http://igcc.ucsd.edu/regions/asia_pacific/neacddefault.php Woo, Roh Tae. 1990. Korea: A Nation Transformed—Selected Speeches of President Roh Tae Woo. Seoul: Presidential Secretariat.

Chapter 4

Korea as a Focal Point of the Security Concerns of Northeast Asia: A Geopolitical and Historical Perspective of the Present Scenario Brahm Swaroop Agrawal

Northeast Asia, which constitutes virtually the major terrain of East Asia, is a unique world in itself. It has been a birthplace of exotic civilizations and legendary kingdoms and empires as well as an epicentre of “great European rivalries and Asiatic antagonisms.”1 It is a centripetal axis around which all the four regional powers – China, Japan, Russia, and the United States – have been revolving together since a long time and “interact quite closely” even today.2 Very recently, it has also emerged as one of the most dynamic and vibrant regions of the world and a “natural economic territory” of the East.3 As a matter of fact, Northeast Asia may be regarded as the heartland of East Asia when the spotlight is turned specifically on the Korean peninsula, Japan, and “greater China area.”4 During the age of warriors and conquerors, there lived some nomadic and ferocious tribes and clans in the Northeast Asian vicinity whose main occupation was to invade and plunder the neighboring or sometimes even far away lands, particularly the more civilized and prosperous ones, in order to derive sustenance. One of such luxuriant lands that fell prey to their frequent invasions was the Korean peninsula. Situated at the eastern edge of the Eurasian continent, this peninsula is endowed with enchanting natural beauty and mystical serenity. In consonance with its tranquil ambiance, a magnificent human civilization permeated with a kind of inner wisdom and a calm way of life arose in this land, “a country of educated gentlemen” as acclaimed by Tai-Tsung, the Emperor of T’ang dynasty, China.5 Strewn all over with Buddhist temples and monasteries and filled with the reverberating incantations of tripitikasutra in every nook and corner, the country also came to be known as the Hermit Kingdom. Attracted by the riches of this land, Kithan, Jurchen,

1 W.L. 2 R.A.

Langer (1935, p. 168). Scalapino (2002).

3 Ibid. 4 Wikipedia, 5 E.H.

free encyclopedia, accessed on March 10, 2009. Parker (1887).

B.S. Agrawal (B) M.L.B. Government College, Jiwaji University, Gwalior, India e-mail: [email protected] B. Seliger, W. Pascha (eds.), Towards a Northeast Asian Security Community, The Political Economy of the Asia Pacific, DOI 10.1007/978-1-4419-9657-2_4, C Springer Science+Business Media, LLC 2011

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Mongols, Manchus, and the Japanese invaded it from time to time. But the greatest disasters came from the Mongols and the Japanese. When Ogotai, the successor of Genghis Khan, attacked Korea in 1231, “the marauding bands of Mongols mowed a wide swath.”6 After ravaging and plundering the country to their hearts’ content, they decided to use the Korean peninsula as a stepping stone to invade Japan too, and forced the hapless Korean government to supply food, troops, and ships for this purpose.7 Even though both of the Mongol expeditions to Japan in 1274 and 1281 ended in failure, the enforced involvement of Korea in these expeditions added to the catastrophic sufferings of the Korean people.8 Similarly, a Japanese invasion of Korea took place in 1592 that ruined the country once again. With the ultimate aim of conquering China,9 the Japanese General Hideyoshi swept up the peninsula, pillaged its treasures, and razed its buildings and towns.10 Although the Japanese defeat in a decisive sea battle with a Korean naval armada compelled them to retreat and shattered their dream of conquering China, the six years of war left the country in complete desolation.11 But apart from the devastations and calamities wrought by these invasions, Mongol and Japanese incursions also set a precedent of the Korean peninsula being used by the neighboring powers as a stepping stone or corridor for the purpose of conquering one another. Due to its location as a gateway to Northeast Asia, “it has been prized not so much for itself as for what it leads to, the Pacific, China, Central Asia and Russian Siberia.”12 It is still a focal point of Northeast Asian power politics and a flashpoint of the security situation of the region. Even so, it does not mean that Korea has no other features of its history other than being a prey to foreign raids forever. Contrarily, it is an ancient civilization that evolved itself as a consolidated political entity much before the emergence of the system of national states in many parts of the world. “In the days when early Briton painted himself with woad, Korea was a powerful, orderly and civilized kingdom,” says F.A. McKenzie.13 Apart from its characteristics such as the homogeneity of culture, language, and ethnicity that contributed to the growth of its distinctive national identity, the kingdom reached its peak of power and prosperity as early as the middle of the eighth century. A centralized government system, civil administration, and accomplishments in the fields of arts and sciences made the country wealthy and

6 H.B.

Hulbert (1905, p. 199). Longford (1911, pp. 106–07). 8 The Mongols in Korea (1898). 9 Before invading the Korean peninsula, Japanese General Hideyoshi offered Korea to join in his expedition to conquer China. But the Korean government refused. Cf., Y.S. Kuno (1937, pp. 303–04). 10 G.H. Jones (1892, pp. 10–16, 46–50, 116–21, 147–52, 182–88, 217–22 and 308–11). 11 M.F. Nelson (1945, p. 77). 12 N. Peffer (1968, p. 123). 13 F.A. McKenzie (1920, p. 16). 7 J.H.

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Korea as a Focal Point of the Security Concerns of Northeast Asia . . .

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strong, and a “brilliant centre of literary and religious light.”14 Moreover, in spite of numerous invasions from the neighboring lands, Korea stood as an integrated state “with well defined and unchanged borders” continuously at least for 1,300 years prior to its division after the end of Second World War. Even when in the later half of the nineteenth century, the country was surrounded all of a sudden by several intrusive powers, it showed a remarkable strength in resisting their encroachments at least at the initial stages.15 For example, in 1866, when a French squadron of seven warships invaded the Korean island of Ganghwa, it was defeated by the Korean naval forces. In the same vein, the intrusions into its coastlines by US warships were repulsed in 1866 and 1871. A revealing instance of Korean determination to ward off foreign infringements at that time is a record of correspondence between a Korean official and an American envoy. In 1871, when the US government sent Minister Frederick F. Low to Korea with a view to negotiating a treaty of friendship and trade between the two countries, the High Magistrate of the Ganghwa county of Korea wrote to the American Minister: “If you are going to want us to give away land and people, then let me ask how can 3,000 of li16 of river, hill, city and country be lightly thrown away? . . . Our respective dispositions are mutually dissimilar; our guiding principles are not alike. It is precisely because we must not break through the ancient codes that we cannot discuss and cannot settle that which the honorable envoy desires.”17 Koreans were aware of the Opium War of 1842 between China and Britain and its consequences. They also knew how and for what purposes Britain and France forced China to open its ports for trade. Hence, they tried as much as possible to stand firm against overtures and pressures from the modern powers of the world for treaty relationships with them. An edict issued by the Korean court in 1866 proclaimed: “The barbarians from beyond the seas have violated our frontiers and invaded our land. If we do not fight, we must make treaties with them. Those who favour making a treaty, sell their country.” Thus, contrary to the general belief in the inborn weakness of Korea’s kingdom of Joseon, it was rather amazingly strong in putting up a bold resistance to foreign violations of its territorial integrity in spite of its small size and insufficient military resources. Korea is a nation that had struggled against the colossal China for several centuries for the sake of its survival.

14 W.E.

Griffis (1905, p. 48). Korea was the last target of Western gunboat diplomacy in East Asia. Prior to the midnineteenth century, there were only some occasional visits of European ships around the Korean coasts. In 1796, a British vessel was sighted near Tongnae on the eastern coast. In 1816, two ships belonging to the British East India Company conducted a survey along the western coast. In 1845, a British warship invaded the southern island of Cheju but retreated herself soon. In 1847, a French vessel attempted to reach the Kogunsan Islands of Cholla province but ran aground. According to the Korean historians, the sight of these foreign ships aroused excitement among the Korean people as well as at the Korean court. Cf., P.-k. Sohn et al. (1970, p. 184); Captain Basil Hall’s Account of His Voyage to the West Coast of Corea in 1816 (1920, pp. 1–37); H. Hamel (1918, pp. 91–148). 16 A Korean measurement of land approximately equal to 1/3rd of a square mile. 17 Papers Relating to the Foreign Relations of the United States, 1871 (1876), pp. 130–31. 15 Perhaps,

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Right from the Chinese Emperor Wu-ti’s incursion in 108 BC up to the end of the Goguryeo-Sui Wars of 598–614 AD, they fought to defend their country for almost 700 years.18 As mentioned by Frederick Foo Chien, “Koreans were not a people easily subdued.”19 Yet, it was not easy for a small kingdom like Korea to face all at once the onslaught of the combined forces of modern imperialism and militarism that had already humiliated such Asian giants as China and Japan. Anticipating the lurking dangers to his country as well, a revolutionary thinker of Korea, Choe Cheu, wrote in 1860: “The world was in disarray and people’s minds were confused, and no one knew where to turn. Strange news spread over the world. The Westerners established a doctrine through whose efficacy they could accomplish all things. In war no one could withstand them, and China was burned.”20

Korea as a Victim of Anglo-Russian Rivalry However, it was not as much the Western gunboat diplomacy as the rise of AngloRussian rivalry in the Far East which proved to be a decisive factor in sealing the fate of Joseon. The ever-increasing territorial expansion of Russia toward the central and eastern regions of the Asian continent since the mid-sixteenth century had been a matter of great concern for Great Britain.21 The emergence of Japan as a modern military power during the later half of the nineteenth century added to the worries of England. She was afraid that these developments in the Far East might affect her interests in China adversely and in the long run endanger the security of India, the most precious possession of her empire. Therefore, England decided to employ her time-tested strategy of “divide and rule” at a wider scale in the form of “divide and be safe” in East Asia. In a bid to divert Japan’s attention away from the southeastern part of the Asian continent and move it toward the northeastern part instead as well as to utilize its growing military capabilities against Russia, Great Britain not only impelled Japan to follow a forward policy toward the Korean peninsula and Manchuria but also encouraged it to eliminate Russia from the Far Eastern scene. In the meantime, Russia also acquired the territories east of the Ussuri River from China in 1860 and established its control over the left bank of the Amur River and Sakhalin Island in the following decade. Alarmed by this, the British Minister in Tokyo, Sir Harry Parkes, expressed his apprehension in 1874 that Korea might also pass into the hands of Russia in the near future.22 It was obviously a hint to Japan to act and establish its control over the Korean peninsula before it was too late. In 1905, while renewing the Anglo-Japanese Treaty of Alliance of 1902, Great Britain 18 H.-h.

Lee et al. (2005, pp. 102–257). Foo Chien (1967, p. 13). 20 S. Shin (1978, p. 23). 21 Cf., G.A. Lensen (1964, pp. 1–7). 22 S.L. Poole and F.V. Dickens (1894, p. 194). 19 F.

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recognized Japan’s paramount interests in Korea in lieu of the Japanese accord with Britain’s special interests in China and rule over India.23 The same year, British foreign minister Lord Lansdowne stated: “Owing to its close proximity to the Japanese Empire, its inability to stand alone, and danger arising from its weakness, Korea must fall under the control and tutelage of Japan.”24 During this period, the United States of America usually toed the British line in Northeast Asian affairs. After Japan failed in its attempts to entrap Korea into the web of a treaty relationship on a Western model in 1868, 1870, and 1872, it sent the Unyo to Korea in September 1875. When the Japanese warship entered the Han River, the Korean artillery fired upon it from a coastal fortress. This incident provided Japan with a pretext and “a clear reason to punish Korea for her arrogant attitude.”25 When the Japanese foreign minister, Terashima, conferred with the American and British envoys in Tokyo on this issue indicating that Japan was going to press Korea for a treaty of commerce and friendship and might employ coercion if peaceful efforts failed, the American minister, in concurrence with the British envoy, agreed to the necessity of making Korea “amenable to reason and justice by some means.”26 Moreover, by a secret pact known as the Taft–Katsura Agreement of July 29, 1905, America assured Japan that it would not oppose Japanese suzerainty over Korea in return for the Japanese pledge of nonintervention in the American control of the Philippines.27 Such assurances and encouragements to Japan whetted its long-cherished ambition of becoming a continental empire. Emboldened by these, Japan was able not only to extract a treaty of “friendship and trade” known as the Kanghwa Treaty of 1876 from Korea but also to enforce a protectorate treaty upon it within three decades after eliminating China and Russia from the Korean battlefield one after the other. As such, the Anglo-Russian rivalry in East Asia contributed to a great extent to the downfall of an ancient and well-established kingdom of Northeast Asia as well as to the beginning of the most tragic phase of Korean history. But together with the policy of pampering Japan, the Western powers employed a tactic of pulling its legs as well. After its debacle in the Sino-Japanese War of 1894–1895, when China ceded Taiwan, the Pescadores, and Liaotung Peninsula to Japan through the Treaty of Shimonoseki, the Triple Intervention by Russia, Prussia, and France compelled Japan to relinquish its control over Liaotung in the name of “integrity of China and peace in the Far East.” Yet within a few years, Russia itself occupied the southern tip of the Liaotung Peninsula including Port Arthur, Germany acquired Kiaochow, and France got hold of Kwangtung, Kwangsi, and Yunnan areas of China.28 (In the meantime, Britain also obtained the naval harbor

23 G.N.

Steiger (1936, p. 730). (1945, pp. 257–58). 25 W.W. McLaren (1914, p. 63). 26 Steiger (1936, pp. 200–12). 27 A.J. Grajdanzev (1944, p. 32); and Steiger (1936, p. 730). 28 W.L. Langer (1935, pp. 405–07). 24 Nelson

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of Wei-hai-wei and Kowloon from China as leased territories.) Such kind of double dealings by the European powers created a feeling of mistrust about them in the minds of Japanese. Never forgetting its loss in China, Japan retaliated by defeating the mighty Russia in the Russo-Japanese War of 1904–1905, and thereby recaptured Port Arthur and Liaotung Peninsula along with establishing its dominance in Korea and Manchuria.29 By this time, many a Western author and preacher had also started condemning Japanese imperialism purposely while justifying their own colonialism in Asia in the name of “education and justice.”30 They began to accuse Japan of “splitting the East Asian societies” and branded this as “a purely oriental method” of “divide and rule.”31 They even started ridiculing the Japanese customs and traditions besides denigrating the oriental culture and beliefs such as Confucianism and Buddhism.32 Likewise, in the aftermath of the First World War, when Japan emerged as one of the most formidable powers of the Far East33 , the Anglo-American powers became apprehensive of their own position in the Asia-Pacific region. Such ascendancy of an Asiatic and heathen nation was intolerable to them. In collaboration with almost all the West European nations, a conference on the pretext of disarmament and settling the Far Eastern issues was called at Washington in 1921 where combined AngloAmerican influence compelled Japan to accept limitations on its naval strength. They also coerced Japan to relinquish its hold over Jiaozhou, once again in the name of “respect for the independence and integrity of China.”34 It created a rift between Japan and the Atlantic community and changed the pattern of their relationships. The ensuing course of East Asian power politics was also altered drastically. Fed up with the maneuvers and double dealings of the Western powers, Japan raised the banner of “Asia for Asians” and avenged its humiliation in Washington in 1921 by attacking Pearl Harbour in 1941.35 Thus, it was mainly the Anglo-Russian rivalry in East Asia that pampered Japanese militarism and imperialism and helped Japan to subjugate Korea. In the same way, it was the duplicity of Anglo-American powers that made Japan even more chauvinistic and desperate. It drove Japan to a point of such fanaticism that it forgot all the limitations of civility and ultimately took self-destructive actions. A somewhat similar situation seems to be developing in Northeast Asia once again.

29 T.

Tatsuji (1935, p. 169). The Editorial Comment (1906). 31 Cf. the article “The Religion of the Heavenly Way” (1906, pp. 418–24). 32 Cf., J. Rob’t Moose, “Korea’s Greatest Need,” The Korea Review, Vol. V, 1905, p. 456, and the phrase “the disciple of Gautama” as a derogatory remark in The Korea Review, Vol. VI, p. 453. 33 During the First World War, Japan fought on the side of Allied powers of Great Britain, France, and America. As a reward for safeguarding the Anglo-American interests in the Asia-Pacific region, she acquired the German islands in the northern Pacific as well as the leased territory of Kiaochow in China. By that time, Japan had also developed her naval power almost equal to Britain and America. Takeuchi Tatsuji (1935, p. 169). 34 E.H. Carr (1977, pp. 19–21). 35 Ibid., p. 22. 30 Cf.,

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The Chinese Suzerainty over Korea and Its Implications Incessant incursions from adjacent lands, including China, finally compelled the Korean rulers to come to terms with the Chinese preeminence in East Asia. They found it more sagacious to ally their kingdom with this paramount empire rather than antagonizing it.36 For this purpose, they accepted its nominal suzerainty over their kingdom. It was beneficial to Korea in many ways. First of all, the Chinese patronage brought a sense of security to the kingdom. On the one hand, it was a diplomatic deterrent against various aggressive powers and, on the other hand, it eliminated the possibility of at least a Chinese assault on Korea. Second, it paved the way for smooth trade transactions not only with China but also with lands as far away as India37 and some of the West Asian countries through the legendary Silk Route.38 Third, the investitures received by the Korean monarchs in return for their tributes to the Chinese court enhanced their prestige and position among their own courtiers and subjects.39 It helped them to meet domestic crises and quell internal rebellions through Chinese assistance. It also worked as a discreet pretext for avoiding contact with the outside, particularly Western nations, at least for some time when they began to approach Korea for treaty relations.40 Moreover, the tributary pattern of relationship of Korea with China was quite in harmony with the common Confucian-cum-Buddhist culture and beliefs of both countries.41 It was also reasonably compatible with the diplomatic conventions prevalent among Asian states during the premodern ages. On some occasions, Chinese and Indian monarchs also sent tributes to each other just to convey their feelings of mutual esteem and cordiality without any notions of suzerainty or vassalage.42 It did not diminish the virtual independence of Korea as a self-governing kingdom. Most of the time, China itself acted as a benevolent patron rather than a domineering overlord, barring exceptional circumstances, and never claimed Korea as its territorial possession on the basis of it being a tributary state of the Chinese Empire.43 On the other hand, in spite of being symbolic and beneficial to the kingdom in some respects, the status of Korea as a vassal state of China did cause some

36 W.-k.

Han (1970, pp. 204–05). Relations Between Korea and India (2004, p. 2). 38 Facts About Korea (1984, p. 6). 39 G.H. Jones (1896). 40 For example, in 1866, when a Russian ship appeared near Wonsan on the eastern coast of Korea and the commander of the ship asked for trade and residence rights for the Russian merchants, the Koreans replied that they had no authority to grant such concessions to other nations as their country was tributary to China. 41 H.K. Thomas (1973). 42 D.B. Krishna (1973, pp. 84 and 142). 43 During the last quarter of the nineteenth century, when other powers sought a clarification from China regarding her relations with Korea, China repeatedly stated that although Korea was a dependent country of China, she is not a territorial possession and as such was self-governing in domestic and external affairs. Cf., M.C. Wright (1958). 37 The

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difficulties and complications in its domestic as well as external affairs. First of all, it created dissensions among the Korean nobility. Whereas most of the upper crest of the ruling elite favored the policy of reliance on China, some resented Chinese preponderance and intervention in internal and domestic matters. There were instances when China tried to misuse its dominant position in the kingdom, causing great resentment among the newly educated elites of Korea.44 It promoted the growth of unrelenting factional strife in the Korean court on foreign policy issues. At a later stage, sharp cleavages among Korean policy and decision makers became a serious impediment that thwarted establishment of a definite course in external relations.45 Second, the pro-Chinese faction of the Korean ruling stratum was possessed by an extremely conservative outlook. They resisted the introduction of new ideas and institutions and obstructed any kind of renovation and improvement of the country. Consequently, adaptation of the kingdom to the exigencies of the changing times was delayed up to its final moments. Third, long time and excessive reliance upon an overriding power caused the development of a deep-seated tendency among the Korean politicians to depend upon others. Such a tendency still persists in the psyche of Korea’s leadership and people at least to a certain extent.46 Ultimately, the tributary status of Korea became a bone of contention between China and Japan and an alibi for Japanese and Russian interventions in Korea. Finding a convenient raison d etre, Japan took it upon itself to free Korea from Chinese bondage and to “lead her into” the so-called “light of modern civilization.”47

The Policy of Seclusion and Its Effects Correlated with the acceptance of Chinese suzerainty was the Korean attitude of segregation from the rest of the world. It closed her frontiers to almost all other nations except for maintaining some necessary exchanges with China and unavoidable trade transactions with Japan. The main purpose of such a disposition was to “keep out her powerful neighbours”48 and “remain aloof from any foreign complications.”49 “Korea’s geographical location, its relative military weakness throughout most of its history, and the foreign invasions of the past justified the bare minimum of dealings with its immediate neighbors. Korea appeased China with a show of respect and pacified Japan with limited trade benefits.”50 Thus, remaining somewhat inaccessible even to the adjoining lands was a pragmatic effort of the Korean rulers to buy peace for their realm. It helped them to experience a long spell of comparative quiet.

44 C.-J.

Lee (1996, p. 2). Millard (1906, pp. 107–10); The History of Later Years of Korea (Seoul: National History Compilation Committee, National History Material Series, No. 2), pp. 266–69. 46 Cf. Poll shows Koreans back presence of U.S. (2004). 47 S.G. Hishida (1905, p. 164). 48 A.J. Grajdanzev (1944, p. 25). 49 F. Foo Chien (1967, pp. 9–16). 50 C.I. Eugene Kim and H.-k. Kim (1967, p. 13). 45 T.F.

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But this policy of seclusion did not help Korea to safeguard its national interests in the long run. During this period, the kingdom remained quite oblivious to the happenings not only in the distant lands of Europe and America but also even at its doorsteps. It kept her away from the new knowledge and advancements of the world for a long time and precluded the administrative, industrial, and technological reconstructions of the kingdom. Consequently, the inherent strength of the nation declined, and the country as a whole remained unprepared for future eventualities.51

Hermit Kingdom’s Rendezvous with the Modern World Even after signing the Kanghwa Treaty with Japan, the Koreans were still reluctant to enter into treaty relationships with other countries, particularly with the Western powers. At the same time, the US government also made no attempt to establish relations with the Korean kingdom for some years after the failure of its mission of 1871. By 1878, however, it once again became interested in Korea and appointed Commodore Robert W. Shufeldt to undertake a special mission of friendship with Afro-Asian nations for the purpose of extending American commercial interests in these countries, including specifically with Korea. In the beginning, Shufeldt tried to take help from the good offices of Japan but without much success. Then he turned to China for assistance but found Chinese authorities also not quite enthusiastic about his mission. In the meantime Russia had been pressing Korea for the same purposes. In January 1866, a Russian man-of-war appeared outside Wonsan on the eastern coast of the Korean peninsula and the commander of the ship presented a letter demanding the right of trade and residence for Russian merchants. The memorandum also threatened that if the demands were not met, Russian troops would cross the frontier to enforce them.52 Again in April 1880, a Russian delegation accompanied by a contingent of cavalrymen arrived at the Kyong-heung prefecture in Hamgyong province. The chief of the delegation asked the Korean local officials why their country would conclude a treaty with Japan but not with Russia.53 These developments convinced Chinese rulers that Korea’s opening up to Western nations was desirable in order to check Japanese and Russian ambitions on the peninsula. Accordingly, Li Hung-chang, the Governor General of the Chihli province of China, counseled Korea to conclude treaties with those Western powers that would be less likely to have territorial ambitions in Korea as a countermeasure to Japanese and Russian aggressiveness.54 He specifically pointed out that it would be advantageous to Korea to conclude a treaty of friendship with the United States stressing the importance of such treaties for the purpose of maintaining the territorial integrity

51 Cf.,

L. Isabella (1898, Vol. I); G. Kennan (1905, pp. 310–89). (1967, p. 56). 53 Ibid., p. 59. 54 T.-c. Lin (1936). 52 Chien

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of the kingdom.55 Believing in the Chinese assessment of the prevailing situation around them and somewhat reassured by Li Hung-chang’s counsel, Korean rulers ultimately agreed to sign treaties with the United States and other Western nations. Probably the US – Korea Treaty singed on May 22, 1882, was the most generous treaty ever concluded by a Western power with an Asian nation. Opium trade in Korea was banned, export of foodstuffs from Incheon port was prohibited, custom rates were to be self-determined, the exequatur of an American consul might be revoked in case of an improper conduct, and the right of extraterritoriality enjoyed by American citizens would have to be relinquished after the modification of the Korean legal system.56 The most assuring clause for the Koreans was that which provided for the mutual exertion of good offices in case of unjust or oppressive treatment by other powers.57 The treaty pleased the Korean king so much that he danced with joy when the first US envoy, Foote, arrived in Seoul. He placed his hopes in America and requested the US President to send advisers and instructors for the purpose of improving the administrative and judicial systems of the kingdom, revamping the economy of the country, and for training the Korean armed forces. Though the requests were repeated again and again, the US administration took no action. Eventually the Korean king’s faith in the US government was shaken.58 The US – Korea Treaty` not only ended the long spell of seclusion of the Hermit Nation but also opened the floodgates of accords with other Western powers such as Great Britain, Germany, Russia, Italy, and France. Following the US precedent, most of the Western nations treated Korea courteously and generously at this time and did not impose harsh stipulations upon it. It also goes to the credit of them that they generally refrained from carving out their areas of influence in the Korean kingdom as if it were a Chinese melon. Nevertheless, the so-called “Korea’s entry into the family of nations” made her all the more a victim of international rivalry and stratagem59 and a much sought after destination for “economic concessions” in the name of amity and trade.60 Depicting the Korean situation of that time, someone wrote in 1888: There’s a singular land far over the seas, Which is known to the world as Korea. . . Where hives are well filled by the Korean bees, But the foreigners get all the honey.

All the same, the most damaging effect of the opening up of Korea to the outside world was the intensification of the contest among its three neighbors China, Japan, and Russia to be the first to establish control over the kingdom. Each of 55 Chien

(1967, p. 78). Chung (1919, pp. 197–204). 57 D.G. Tewksbury (1950, p. 4). 58 Cf., G.M. McCune and J.A. Harrison (1950a). 59 Grajdanzev (1944, p. 26). 60 G.M. McCune and J.A. Harrison (1950b, p. 19). 56 H.

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them became eager to enhance its influence and began to take advantage of the situation in every possible way. Bewildered by the turn of events, Korean society also became divided into various groups of partisans guided by different opinions and notions. There were those who saw a better future for the country in adopting some of the meritorious ideas and institutions of the modern age, and hence, favored greater association of Korea with the external world. On the other hand, some believed that the introduction of Western things and ways would spoil the ancient culture of the land and bring misfortune to the kingdom. Each one of these movements also comprised two kinds of followers: those who were really guided by the considerations of long range national interests on the basis of their genuine convictions and beliefs and those who were merely driven by their personal motives and gains in a shortsighted manner. Thus, during the waning days of the kingdom, the Korean people found themselves at cross roads. Consequently, they were unable to take concerted action to meet the new challenges. The pulls and pressures of the external powers complicated matters further. First of all, China became worried about the decline of its prestige and influence in Korea that had been diminishing day by day since the signing of the Kanghwa Treaty. The success of Japan in extracting this treaty from the traditional kingdom gave an impetus to the quest for change and modernization among Korea’s younger and awakened generations. Many of them, including some ruling elites, began to look toward Japan as a worthy example. Seeing this, China decided to regain its lost ground in Korea. Taking advantage of the conditions created by the Soldiers’ Mutiny61 in Seoul in 1882, it had a pro-Chinese government installed in Korea under the leadership of Queen Min. As the Queen was obliged to China for reestablishing her authority in the Korean hierarchy as well as for removing her archenemy the Taewongun (her father-in-law and former regent) from the court, she readily agreed to various Chinese demands. Accordingly, a permanent Chinese emissary was placed in the Korean capital. In addition, China acquired preferential status in Korean trade and tariffs besides engineering appointment of a Chinese official 61 This

army revolt was the first explosion of resentment against increasing foreign influences on the affairs of the country in the aftermath of Kanghwa and US–Korea treaties as well as against corruption and graft prevalent among the high officials of the government The immediate cause of eruption was nonpayment of salaries to soldiers continuously for 13 months and mixing of sand in the rice being disbursed in compensation while, at the same time, giving special care and facilities to a “Special Skill Force” organized under the command of a Japanese military officer Lt. Horimoto in order to train a group of selected young Korean army officers. The embittered soldiers killed Lt. Horimoto, burned the Japanese legation, and entered the palace in search of Queen Min who was considered responsible for “bringing wrath of gods on the nation by admitting foreigners.” The short-lived mutiny resulted in far-reaching political and diplomatic consequences. Contrary to what was intended by the mutineers, it opened the way for greater armed interventions by China and Japan in Korea. The Korean government was compelled to pay indemnity to Japan and allow the stationing of Japanese troops in Seoul as legation guards. Later on in 1905, these guards were used by Japan to impose the Protectorate Treaty on Korea. Cf., McKenzie (1920, p. 25); Longford (1911, pp. 307–08); T.F. Tsiang (1933); and T. Hatada, Chosen-shi (History of Korea), (Tokyo: Iwanami Shoten, 1956), translated into English by Benjamin and Smith (University of Columbia Press, 1969), pp. 93–95.

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to the post of the inspector general of the Korean customs. Thus within a short time, China’s hold over the Korean administration increased to such an extent that it seemed as if “Korea was steadily becoming a protectorate rather than a tributary state of China.”62 For the purpose of forestalling China’s reascendancy, Japan supported an elite Korean group known as the Progressives, who were deadly against Chinese supremacy over the country. They began to advocate the “independence of Korea from Chinese suzerainty and closer association with Japan” so that their country could become a modernized nation on the model of the rising power of the East.63 The Japanese officials went to the extent of instigating the Progressives to bring down the pro-Chinese regime and establish their own rule in Korea. But the coup d état that occurred on December 4, 1884, for this purpose ended in a dismal failure.64 At this time, the Korean king and some of his ministers were also keen to free their kingdom from Chinese clutches and, according to a report by the American envoy in Seoul, showed great interest in the ongoing war between China and France over Indo-China, anticipating that this war might force China to withdraw her troops stationed in Korea.65 But their expectation was belied. Yet, Japan succeeded in installing a pro-Japanese government in Korea on the eve of the Sino-Japanese War of 1894 on the pretext of bringing some necessary changes and reforms “for the mutual welfare of the two countries.”66 Not to lag behind, Russia also became active in Korea. In 1885, it pressed the Korean government to lease the Port of Wonsan. With the intention of saving his kingdom by striking a balance between the two aggressive powers, the Korean king sent two officials to Vladivostok where they concluded a secret agreement with the Russian Governor to the effect that Russia would provide protection to Korea against attack by other powers in exchange for a Korean grant of Hamgyong province and the exclusive Russian right to train the Korean army. But the Korean foreign minister rejected that secret agreement on the ground that it was not authorized by the Korean Foreign Office.67 On February 11, 1896, the Korean king, who was virtually a Japanese prisoner in his own palace, escaped to the Russian legation and formed a new government there declaring some of the pro-Japanese ministers of the previous cabinet as traitors.68 The Japanese advisers and military instructors were replaced with Russians. Weapons were purchased from the same country and a School of Russian Language was opened in Seoul. The railroad from Seoul to Wonsan was extended further and connected with the Siberian rail line. Mining and

62 P.J.

Treat (1935, p. 296). Curzon (1894, p. 224). 64 F.H. Harrington (1944, pp. 26–29). 65 “Foote to Frelinghuysen, September 2, 1884,” in McCune and Harrison (1950a, pp. 95–96). 66 Cf., The Official Gazette issued on December 17, 1894 and published in the Korean Repository, Vol. II, No. 1, 1895, pp. 35–37. 67 “The History of the Russian–Korean Treaty,” North-China Herald, August 5, 1885. 68 The King at the Russian Legation (1896). 63 G.N.

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lumber concessions were granted to Russia.69 Thus, devoid of help from any other Western power, Korea now had no other way than to lean on Russia. Once again, the Korean king sought Russian protection for his kingdom and sent a message to this effect to Tsar Nicholas II. But the foreign minister of Russia, Lobanov, prevented this move.70 Yet, even without promising its protection, Russia continued to gain more advantages in Korea to the extent of occupying Yongampo near the mouth of the Yalu River besides making a secret plan for obtaining a lease on Masanpo situated at the southern coast of the Korean peninsula near Busan with a view to building a naval base there.71 But the Russian moves alerted the British and Japanese envoys in Seoul. They asked the Korean government to open Wiju and Yongampo to foreign trade in order to prevent a Russian monopoly.72 Thus caught in the maze of scramble for concessions by various powers, Korea became “a pawn in the larger game of international rivalries in north-eastern Asia.”73 It continues to be so even today. Instead of saving the kingdom from the aggressive designs of Russia and Japan, Korean rulers’ effort to play both powers against each other resulted in greater manipulations and moves by them. Anxious to check the growing Russian influence in Korea, Japan made a proposal to that country on June 27, 1903, for mutual recognition of the Japanese special interests in Korea and the Russian special interests in Manchuria.74 In reply, Russia suggested the division of Korea into two zones of influence with a neutral zone along the 39th parallel.75 Japan insisted that in exchange of her recognition of Russia’s special interest in Manchuria, it should keep Korea out of its sphere of interest. But Russia rejected the Japanese proposition. As each party refused to compromise, the negotiations broke down and led to a declaration of war by Japan on February 10, 1904. Russian defeat in the ensuing war removed the last obstacle in the way of Japan and gave it a free hand to annex the Korean kingdom. “Thus the curtain fell on the final scene of the passing of old Korea.” The kingdom had become a shuttlecock among nations who “treated her from entirely different and wholly irreconcilable standpoints according to their own interests or prejudices, and at whose hands, she was alternatively nay even simultaneously was patronized, cajoled, bullied and caressed,” and ultimately left to her fate.76 Korean rulers vainly kept hoping up to the last moment that some of distant power such as America or England with whom they had signed treaties of friendship might come

69 Cf., the editorial “Russian Ascendancy in Korea,” Korean Repository, Vol. IV, 1897, pp. 231–35. 70 R.

Rosen (1922, pp. 125–26). Brown (1921, pp. 143–44). 72 W.G. Beasley (1963, p. 171). 73 H.B. Hulbert (1906, pp. 185–88). 74 Treat (1935, p. 369). 75 R.H. Akagi (1937, pp. 235–36). 76 Curzon (1894, p. 85). 71 A.J.

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to the rescue of their kingdom.77 Perhaps they were not aware of the behind the scenes activities and maneuvers that had been taking place around them since the middle of the nineteenth century. Even if they were aware to some extent, they might have not understood well the deeper implications of these activities and maneuvers. And even if they understood, it was beyond their reach to turn the tide of events happening in their vicinity.

Korea at the Time of Its Liberation Likewise, at the time of Japanese surrender after its defeat in the Second World War, “the simple, innocent people of Korea were delirious with joy at the prospect of their independence and hailed both the Allies as their liberators. They welcomed them with tears of joy, little realizing that these same liberators would soon cause them to shed tears of sorrow.”78 Perhaps they were still oblivious to the fact that the only major change that had occurred during the intervening period was the replacement of Great Britain by the United States as the main adversary of Russia. But the overall situation around them had remained almost similar to that of the earlier times.79 The bargaining between both these emergent global powers over their respective spheres of influence in East Asia had already begun during the wartime conferences. As yet, they were not so much interested in Korean independence, which according to their view, was to be achieved only in “due course.” The actual question before them was who would replace the Japanese in Korea?80 The trusteeship proposals and temporary arrangements agreed between the erstwhile Soviet Union and America at Teheran and Yalta in 1943 and 1945 demonstrated clearly their real intentions regarding Korea.81 At the same time, Soviet Union was eager to extract some territorial privileges and rights in Japan and China too as a prize for its joining the war against Japan in the Far Eastern theatre. Driven by his insatiable territorial greed, Stalin expressed his desire to have an occupation zone in Japan as well. He also demanded to be associated with the postwar settlement of that country. But US President Truman refused to accept Stalin’s demand saying that the postwar administration of Japan should be entrusted exclusively to the United States.82 Conceivably, it might have been one of the reasons of American haste in annihilating the Japanese power so as to get hold of that country completely before the Russians could move in. Moreover,

77 Cf.,

McKenzie (1920, pp. 77–78). Gupta (1977, pp. 2–3). 79 Z.A. Corneille (2002, p. 297). 80 W.L. Langer (1935, p. 168). 81 At Teheran Conference, Roosevelt stated that the Koreans “need some period of apprenticeship before full independence might be attained, perhaps 40 years.” Stalin concurred with Roosevelt. Robert E. Sherwood (1948, p. 777). 82 Y. Nagai and A. Iriye (1977, p. 125). 78 A.

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it is quite probable that Stalin’s failure to have an occupation zone in Japan might have hardened his attitude toward Korea.83 It was this clash of interests of the two superpowers that eventually led to the division of an ancient nation. Furthermore, it was the main motivating force behind a proxy war between them that was fought on the territory of the same unfortunate nation. In this way, Americanization of the age-old Anglo-Russian rivalry in East Asia inflicted all the more calamities on the Northeast Asian countries. This kind of rivalry keeps on even today in the form of Sino-American competition in the Asia-Pacific region.

The Existing Security Scenario of Northeast Asia At the present moment however, there does not appear to be any serious or imminent threat to Northeast Asian peace and security in spite of a few unresolved issues and disturbing developments, particularly the North Korean atomic buildup. A strategic equilibrium has evolved during the last five or six decades, overall economic prosperity despite some periodic setbacks and gradual reduction of tensions between the major powers of the region has contributed to the relative stability of East Asia to a considerable extent. Even the recent monetary crisis of 2007 known as meltdown has stimulated a spirit of togetherness and mutual collaboration rather than reviving the age-old animosities among China, Japan, and Korea.84 Furthermore, the United States and China too have been endeavoring periodically to reach broad consensus on bilateral, regional, and international issues in spite of their different perceptions of and approaches to some of the basic matters in order to avoid sudden eruption of misunderstandings and apprehensions.85 There is overall a great deal of improvement in the relations between Asian and European nations. Both the Asiatic and European peoples have forgotten their past. Shedding off their earlier prejudices and misconceptions about each other, they have joined hands to work together in many fields for the benefit of humanity as a whole. Today the survival of mankind has become the most important question. The problems of environment, diseases, natural disasters, poverty, malnourishment, and the like have become more crucial rather than the trivial issues of territories and areas of influence. In this respect, it is clearly evident from their accomplishments in various fields, specifically the socioeconomic, that the East Asian peoples have learned well from their past experiences. Recognizing some of the merits of modern civilization, they have assimilated the valuable aspects of Western ideas and institutions, adapting them to the conditions of their own soils. Harmonious amalgamation of Occidental and Oriental ways of life and thinking has helped the evolvement of highly refined

83 Corneille

(2002, pp. 298–99). brings rivals together: Japan, China, S. Korea put aside decades of animosity to tackle crisis,” Sunday Times of India, New Delhi, December 14, 2008. 85 People’s Daily, December 16, 2008. 84 “Meltdown

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civil societies in most East Asian countries and has brought out their latent capabilities to change their destinies. It has resulted in great strides in almost all walks of life. It is one of the reasons for the socioeconomic miracles of South Korea and Taiwan and their joining the ranks of Asian Tigers.86 The credit of this phenomenal growth of Northeast Asia in recent times goes mainly to America for its massive economic aid. But the peoples of this region also deserve acclaim for utilizing that aid in a meticulous manner. There is no cause to differ from John D. Negroponte, US Deputy Secretary of State, who says, “Hardworking Asians deserve primary credit for their region’s accomplishment. But Asia prospered thanks also to a broader international economic and security order sustained by American leadership. For 60 years, the U.S. presence in Asia has had a calming effect on relations among the region’s major powers. Our military alliances with like-minded Asian partners have allowed many of the region’s powers to trade in their swords for ploughs and harvest the gains of global trade.”87 However, his assertions are quite worthy so far as the accomplishments of comparative stability and prosperity of Northeast Asia are concerned, but somewhat exaggerated in respect of the unresolved issues of the region. The United States cannot just absolve itself from its responsibility in creating some of the complicated and volatile situations in Northeast Asia – one which still confounds the political pundits being that which prevails on the Korean peninsula.

The Recent Trends of Reconciliation Between North and South Koreas After about a half century of mutual animosity and hostility, some hopeful signs of rapprochement and compromise between the divided parts of Korea have begun to emerge. It indicates that in spite of being separated by a forbidding neutral zone, the peoples as well as the regimes on both sides of this barricade have not forgotten their common ancestry and destiny. Since the early 1970s, they have been assiduously trying to see each other through the means of Red Cross talks, Roh Tae-woo’s Nordpolitik, Kim Dae-jung’s Sunshine Policy, summits, and the like, notwithstanding the occasional ups and downs.88 The tearing down of the Berlin Wall in Europe changed their mind-set and some developments in their own vicinity such as Sino-US rapprochement, the erstwhile Soviet Union’s and China’s flexibility toward South Korea, Japan’s readiness to enter into dialogue with North Korea,89 and the like helped them to come closer.90 Apart from the mutual opening up in sociocultural, economic, and political fields, they have even reached a stage of

86 A.

Sharma and S. Chakrabarti (2007, p. 1). Negroponte (2008). 88 Y.W. Kihl et al. (1993, pp. 21–47); K.-s. Kim (2002). 89 North Korea, Japan seeking diplomatic ties (2004). 90 Koreas catch up with reconciliatory mood (2004). 87 J.D.

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agreement to reduce military tensions between them.91 But the Koreans are still not able to get completely rid of their long-rooted tendencies of suspecting their own kin and depending on others. Till now, they are inclined to involve various outside powers in resolving their mutual problems forgetting the old saying that Too many cooks spoil the broth. Consequently, whenever there are favorable conditions or substantial progress in inter-Korean relations, something or the other crops up between them, vitiating the environment.92

The Nuclear Controversy One such deadlock is the contention over North Korea’s nuclear adventure. Undoubtedly, acquisition of atomic weapons by a secretive and impulsive regime like the one in Pyongyang is a matter of concern, but perceptibly the problem is being dealt with in a rather high-handed manner. Indeed from the very beginning, the fragile “Agreed Framework” of 1994 in conjunction with arrangements of IAEA Inspections and the Six-Party Talks were a predictable failure.93 It is because all these structures and institutions – the NPT, CTBT, IAEA, and others, – are highly discriminatory, and more often than not are used unjustifiably. People feel that the so-called campaigns against weapons of mass destruction are mere camouflage to conceal the real designs of aggrandizement and hegemony of some selected powers over the rest of the world. According to Sung-Han Kim, “The U.S. policy toward the Korean peninsula in general and North Korea in particular is part of a larger framework of global strategic interests. In other words, the U.S. deals with North Korea in terms of maintaining the leadership role of the U.S. in the postCold War era. In order to protect its leadership as the sole superpower, the U.S. must prevent the spread of WMDs among the nations which do not possess them already”.94 Moreover, it seems that the whole affair is somewhat being blown out of proportion. At the moment, even if North Korea is equipped with atomic weapons, it is not in a position to wage a war against South Korea and much less against any other regional power. The situation is quite different from that of the 1950s. No one, including its former allies, is going to support a misadventure by the regime in Pyongyang at this juncture. In view of its virtual isolation and socioeconomic handicaps, North Korea cannot afford to invite the risk of its own destruction unless it is pushed excessively to a point of desperation.95 It is very likely that Pyongyang opted to bolster its military strength by acquiring nuclear capability just to secure a

91 Koreas

take small steps to lessen tensions (2004). Koh (2002, pp. 1–15). 93 B.S. Agrawal (2004). 94 S.-H. Kim (1999). 95 Seoul Downplays US Rhetoric on NK Nukes (2004). 92 B.C.

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foothold in the international community and to compensate for its setbacks in diplomatic and economic fields.96 Hence, the more prudent approach to this problem may be just to ignore the Pyongyang regime’s nuclear escapade. It should be provided greater opportunities to develop its economy and must be encouraged to work in this direction in partnership with other countries, particularly South Korea.97 The resultant improvement of North Korea’s material conditions and its step-by-step collaboration with the international community would be more effective in dissuading its leadership from further accumulation of destructive arsenals. Otherwise, putting undue pressure on the DPRK would be counterproductive98 and driving it too much into a corner in the name of nuclear disarmament may make it desperate in the same manner as Japan was made in the name of naval disarmament after the First World War.99 When North Korea has already agreed to discontinue its atomic weapons programme and has provided detailed reports in this regard by handing over 18,000 documents to the United States in May 2008, there is no justification in insisting on the verification of these reports. It is going too far against the prestige of a sovereign state. Coercing Pyongyang in this way is already resulting in a backlash. In response to the suspension of energy aid to it by the United States and South Korea, Pyongyang has threatened to slow down disablement of its main nuclear facility.100 It has also jeopardized progress at the inter-Korean Kaesong Industrial Complex. This project symbolizes the growing desire of both Koreas to cooperate and the gradual liberalization of the North Korean politicoeconomic system.101 North Korea’s latest announcement regarding the restart of its nuclear facilities is a kind of a show of defiance against the international bodies which it feels are acting discriminately under the influence of monopolistic powers. This announcement came just hours after the United Nations imposed new sanctions on North Korea for its rocket launch of April 2009.102 Such unwarranted sanctions and pressure could only aggravate the situation further rather than resolve it. In an additional show of defiance, North Korea conducted yet another atomic test on May 25, 2009, and continued to launch more nuclear missiles.103 As a matter of fact, the real crux of all the uproar is neither atomic capability of North Korea nor the security of South Korea, but the strategic criticality of the peninsula. Because of its geopolitical importance, the dominant powers of the region do not want to loosen their grip on it.104 They keep some or the other issues

96 Cf.,

M. Khaled (2004). Kihl et al. (1993, pp. 21–47); H.M. Kim and W.s. Kim (1995, pp. 251–310). 98 Seoul Sticks to Silent Diplomacy for NK Rights (2004). 99 North Korea calls U.S. plan unrealistic (2004). 100 The Indian Express, December 14, 2008. 101 “Visiting the Kaesong Industrial Complex,” Special Report by Prof. Kim Suk, Hanns-SeidelFoundation Newsletter, Seoul, December 2008, received through e-mail. 102 Sunday Times of India, April 26, 2009. 103 The Times of India, June 9, 2009. 104 S.-H. Kim (1999, pp. 29–47); C.-s. Chung and C.-W. Chung (1979, pp. 91–120). 97 Y.W.

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alive as pretexts for their continued interventions. But no one should forget that any miscalculated or daring move in Korea would be terribly disastrous to the precarious stability of the whole of Northeast Asia because here at this melting pot, the scars are deeper, the stakes higher, and the contestants quite closer at one another’s heels. The best way is to let the Koreans on both sides of the 38th parallel solve their mutual problems by their own efforts. It would help them to come together in a normal way. Now they are prudent and experienced enough to overcome their twopronged misgivings and obstacles amicably rather than precipitating the situations. If the northern and southern Koreans could cooperate with each other shedding off their long-standing misconstructions and distrusts, they might make their peninsula yet another formidable nucleus of economic and industrial growth. In the long run, it may lead to the formation of a real Northeast Asian Security Community with both North and South Koreas as its constituent partners.

References Agrawal, B.S. 2004. Korean Nuclear Controversy. The Korea Times. June 3 edition. Akagi, R.H. 1937. Japan’s Foreign Relations. Tokyo: Hukuseido. Beasley, W.G. 1963. The Modern History of Japan. London: Weidenfeld and Nicolson. Brown, A.J. 1921. The Mastery of the Far East. New York: C. Scribner’s Sons. Captain Basil Hall’s Account of His Voyage to the West Coast of Corea in 1816. Transactions XI (1920):1–37. Korea Branch of the Royal Asiatic Society. Carr, E.H. 1977. International Relations Between the Two World Wars. London: MacMillan. Chung, C.-s. and Chung, C.-W. eds. 1979. Major Powers and Peace in Korea. Seoul: Research Center for Peace and Unification. Chung, H. 1919. Treaties and Conventions Between Korea and Other Powers. New York: H.S. Nichols Inc. Corneille, Z.A. 2002. The Problem of Korean Reunification: A Case Study of East Asian Geopolitics and Diplomacy. Unpublished Ph.D. dissertation, Jiwaji University, Gwalior. Curzon, G.N. 1894. Problems of the Far East. London: Longmans. Facts About Korea 1984. Seoul: Korean Overseas Information Service. Foo Chien, F. 1967. The Opening of Korea: A Study of Chinese Diplomacy, 1876–1885. Nottingham: The Shoe String Press, Inc. Grajdanzev, A.J. 1944. Modern Korea. New York: Institute of Pacific Relations. Griffis, W.E. 1905. Corea, the Hermit Nation. London: C. Scribner’s Sons. Gupta, A. 1977. India and UN Peace-Keeping Activities: A Case Study of Korea, 1947–53. New Delhi: Radiant Publishers. Hamel, H. 1918. An Account of the Shipwreck of a Dutch Vessel on the Coast of the Isle of Quelpart. Transactions IX: 91–148. Korea Branch of the Royal Asiatic Society. Han, W.-K. 1970. The History of Korea. Seoul: Eul-yoo. Harrington, F.H. 1944. God, Mammon and the Japanese. Madison: University of Wisconsin Press. Hatada, T. 1956. Chosen-shi. Tokyo: Iwanami Shoten. Translated into English by Benjamin and Smith. Chicago: University of Columbia Press. Hishida, S.G. 1905. The International Position of Japan as a Great Power. Chicago: University of Columbia. Hulbert, H.B. 1905. The History of Korea, Vol. I. Seoul: Methodist Publishing House. Hulbert, H.B. 1906. The Passing of Korea. New York: Doubleday. Isabella, L. 1898. Korea and Her Neighbours, Vol. I. London: J. Murray.

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Jones, G.H. 1892. The Japanese Invasion. Korean Repository I: 10–16, 46–50, 116–21, 147–52, 182–88, 217–22, and 308–11. Jones, G.H. 1896. Historical Notes on the Reigning Dynasty. Korean Repository III: 342–44. Kennan, G. 1905. Korea: A Degenerated State. Outlook. October 7 edition, New York. Khaled, M. 2004. Military Build Up vs. Diplomatic Overtures: A Comparative Study of North and South Korean Self-Defence Procedures in the Post-Cold War Period. A paper presented at the 18th IAHA Conference, Academia Sinica, Taipei, December 6–10, 2004. Kihl, Y.W., et al. eds. 1993. Rethinking the Korean Peninsula. Washington, DC: Georgetown University, Asian Studies Center. Kim, E. and H.-K. Kim. 1967. Korea and the Politics of Imperialism. Berkeley: University of California. Kim, H.M. and W.s. Kim, eds. 1995. Rationality and Politics in the Korean Peninsula. East Lansing: Michigan State University. Kim, K.-s. 2002. Inter-Korean Relations and the Future of the Sunshine Policy. The Journal of East Asian Affairs XVI no. 1: 98–119. Kim, S. 2008. Visiting the Kaesong Industrial Complex. Hanns Seidel Foundation Newsletter. December 2008 edition. Kim, S.-H. 1999. Resolving the Korean Question: A Comprehensive Approach or Muddling Through? International Journal of Korean Unification Studies 8: 29–47. Koh, B.C. ed. 2002. The Korean Peninsula in Transition: The Summit and Its Aftermath. Seoul: Kyungnam University. Koreas catch up with reconciliatory mood. The Korea Herald. June 5, 2004. Koreas take small steps to lessen tensions. Herald International Tribune. June 5–6, 2004. Krishna, D.B. 1973. Pracheen Bharat ka Videshon se Sambandh (Foreign Relations of Ancient India). Indore: Kamal Prakashan. Kuno, Y.S. 1937. Japanese Expansion on the Asiatic Continent. Berkeley: University of California. Langer, W.L. 1935. The Diplomacy of Imperialism, 1890–92, Vol. I. New York: Alfred A. Knopf. Lee, C.-J. 1996. China and Korea: Dynamic Relations. Stanford: Hoover Institution. Lee, H.-h. et al. 2005. New History of Korea. Seoul: The Academy of Korean Studies. Lensen, G.A., ed. 1964. Russia’s Eastward Expansion. Englewood Cliffs: Prentice Hall. Longford, J.H. 1911. The Story of Korea. London: Fisher Unwin. McCune, G.M. and J.A. Harrison, eds. 1950a. Korean–American Relations, Vol. I: The Initial Period, 1883–1886. Berkeley: University of California Press. McKenzie, F.A. 1920. Korea’s Fight for Freedom. New York: Revell. McLaren, W.W., ed. 1914. Japanese Government Documents XLII, Part I. Tokyo: The Transactions of the Asiatic Society of Japan. Meltdown brings rivals together: Japan, China, S. Korea Put Aside Decades of Animosity to Tackle Crisis. Sunday Times of India, New Delhi, 14 December 2008. Millard, T.F. 1906. The New Far East. New York: Scribner’s Sons. Moose, J.R. 1905. Korea’s Greatest Need. The Korea Review V–VI: 453–56. Nagai, Y. and A. Iriye. 1977. The Origins of the Cold War in Asia. New York: Columbia University Press. Negroponte, J.D. 2008. U.S. Policy in Asia: Meeting Opportunities and Challenges. Remarks at the Brookings Institution, Washington, D.C. on July 28, 2008. Nelson, M.F. 1945. Korea and the Old Orders in Eastern Asia. Baton Rouge: Louisiana State University Press. North Korea, Japan seeking diplomatic ties. Joong Ang Daily. July 8, 2004. North Korea calls U.S. plan unrealistic. JoongAng Daily. June 29, 2004. Papers Relating to the Foreign Relations of the United States, 1871. 1876. Washington: U.S. Department of State. Parker, E.H. 1887. A Chinese View of Corea. Chinese Recorder XVIII: 73. Peffer, N. 1968. The Far East. Ann Arbor: University of Michigan Press.

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People’s Daily. December 16, 2008. Poll shows Koreans back presence of U.S. JoongAng Daily. October 1, 2004. Poole, S.L. and F.V. Dickens. 1894. The Life of Sir Harry Parkes Vol. II. London: MacMillan. Rosen, R. 1922. Forty Years of Diplomacy. New York: George Allen and Unwin. Russian Ascendancy in Korea. Korean Repository IV (1897): 231–35. Scalapino, R.A. 2002. Northeast Asia Today—An Overview. Seminar proceedings of “Human Flows Across National Borders in Northeast Asia” held at the United Nations University in Tokyo, Japan. November 20–21, 2002. Retrieved from http://gsti.miis.edu/CEAS-PUB/200202 on 10 March 2009. Seoul Downplays US Rhetoric on NK Nukes. The Korea Times. August 10, 2004. Seoul Sticks to Silent Diplomacy for NK Rights. The Korea Times. October 2, 2004. Sharma, A. and S. Chakrabarti, eds. 2007. Taiwan Today. New Delhi: Anthem Press. Sherwood, R.E. 1948. Roosevelt and Hopkins: An Intimate History. New York: Harper & Brothers Shin, S. 1978. “The Tonghak Movement: From Enlightenment to Revolution.” Korean Studies Forum No. 5: 23. Sohn, P.-k. et al. 1970. The History of Korea. Seoul: UNESCO. Steiger, G.N. 1936. A History of the Far East. Boston: Ginn & Co. Sunday Times of India. April 26, 2009. Tatsuji, T. 1935. War and Diplomacy in the Japanese Empire. New York: Doubleday. Tewksbury, D.G. 1950. Source Materials on Korean Politics and Ideologies. New York: Institute of Pacific Relations. The Editorial Comment. The Korea Review VI (1906): 467. The History of Later Years of Korea (1969). National History Material Series, No. 2. Seoul: National History Compilation Committee. The Indian Express. December 14, 2008. The King at the Russian Legation. Special Supplement to the Korean Repository III (1896). The Mongols in Korea. Korean Repository V (1898): 133–37. The Official Gazette. Korean Repository II no. 1 (1895): 35–37. The Relations Between Korea and India. Korea.net News. October 4, 2004. The Religion of the Heavenly Way. The Korea Review VI (1906): 418–24. The Times of India. June 9, 2009. Thomas, H.K. 1973. The Role of Confucian Leadership and Ideology in the Political Development of Korea. Journal of Korean Affairs III: 21–27. Treat, P.J. 1935. The Far East, a Political and Diplomatic History. London: Harper & Brothers. Tsiang, T.F. 1933. Sino-Japanese Diplomatic Relations: 1870–94. Chinese Social and Political Science Review 19 no. 17: 57–61. Tung-chi, L. 1936. Li Hung-chang: His Korea Policy, 1870–1885. The Chinese Social and Political Science Review XIX: 203–23. Wright, M.C. 1958. The Adaptability of Ch’ing Diplomacy: The Case of Korea. Journal of Asian Studies XVII: 363–81.

Part II

Features of a “Peace Dividend”

Chapter 5

The Unification Mythology and Reality of the North–South Divide Andrei Lankov

For six decades, the idea of unification as Korea’s supreme political goal has been enshrined in the official mythology of both North and South Korea. The lip service to this “unification mythology” is still paid by virtually all political forces in both the Koreas, but the actual policy of both Pyongyang and Seoul nowadays is clearly based on a very different set of assumptions: Both sides try to avoid situations which might lead to unification. There are good reasons for this quiet change of policy. The gap between the Koreas is too great, and keeps growing. Depending on which calculations you believe, the per capita gross domestic product in the South is between 17 and 50 times higher than that of the North. Perhaps, nowhere in the world one can find two neighboring countries whose income levels would be so vastly different – and in this case the two countries happen to speak the same language and are officially considered two parts of the same nation. To put things in comparison, the difference in per capita income between the East and West in Germany in the late 1980s was between 1:2 or 1:3. The ratio of population is also less favorable than that in Germany. Taking into consideration the ongoing German troubles, well known in Seoul, all this sounds like a recipe for disaster. Both Korean governments expect troubles after unification. The North Korean rulers know perfectly well that in a unified country they would be unable to keep their privileges, and also are likely to be held responsible for decades of gross human-rights abuses and economic mismanagement. They might talk about North– South confederation as a preferable solution, but it is quite clear that if such a confederation leads to increase of interaction and exchanges between the two Koreas, the North Korean populace will soon become restive – and hostile to the current regime (and it is also doubtful whether the South Korean elite and public will be willing to cohabitate peacefully with people whose ugly deeds will start to surface). South Koreans are no more willing to unify with their impoverished brethren. The bitter German experience made the Seoul decision-makers and general public realize that the unification of the North and South would be more expensive and A. Lankov (B) Kookmin University, Seoul, South Korea e-mail: [email protected] B. Seliger, W. Pascha (eds.), Towards a Northeast Asian Security Community, The Political Economy of the Asia Pacific, DOI 10.1007/978-1-4419-9657-2_5, C Springer Science+Business Media, LLC 2011

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painful than anybody had imagined. Unification of Germany where the initial situation was much better, became an ordeal, so the unification of Korea would clearly become a disaster. Therefore, over the past ten years or so, the South Korean government has done much to support the current regime in Pyongyang, assuming that stability in the North is necessary for South Korean economic prosperity. Sufficient to say that in recent years some 40% of all grain consumed in North Korea was either directly received from the South or produced with the help of the mineral fertilizer shipped by Seoul free of charge. This policy is usually presented as a way to “create the environment for Chinesestyle reforms in North Korea.” This indeed might be one of its long-term goals, but for all practical reasons the major immediate outcome of massive South Korean aid is a continuous survival of the Pyongyang dictatorship (admittedly, it would also survive without aid). This, however, is not seen as a problem: The statement that a “German scenario is unacceptable” has become a mantra of Seoul politicians. So far, Kim Jong-il’s regime has not shown the slightest inclination to reform itself. Obviously, the Pyongyang elite believe that the Chinese model, so enthusiastically extolled by the good-wishers from Seoul, is not acceptable to them. Perhaps they are correct in their fears. The existence of a rich and free South, always presented as another part of the same nation, makes the situation in Korea quite different from that of China or Vietnam. Chinese-style reforms, if undertaken by Pyongyang, are bound to produce a certain openness of the country and certain relaxation of political control. As a result, the North Korean populace will soon learn about South Korean prosperity and will be less afraid of the regime’s repressive machine. It’s questionable to what extent the North Koreans would be willing to obey a government whose track record has been so bad after they see an attractive alternative in the South. Hence, North Korean leaders have made a rational decision: to keep stability and their own privileges. In recent years they have used foreign aid to roll back the changes which happened in the mid-1990s. Instead of reforms, they now do everything possible to limit or ban private economic activity and reassert their control over society. Despite the government’s resistance to reforms, the North Korean system is gradually crumbling from below, and this slow-motion disintegration might turn into an uncontrollable collapse any moment. A sudden death of even a serious illness of Kim Jong-il is almost certain to trigger a serious crisis. If this happens, all bets are off, but it seems that a collapse of the system, Romanian or East German style, is one of the most likely outcomes.

Unification as a Looming Disaster? This potential for violent collapse is what people in the South fear most. Indeed, unification might spell economic and social disaster for the rich South. There are different estimates of the “unification costs,” the amount of money that would be

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necessary to close the yawning gap between the two Korean economies. The most recent estimate was made public in October 2007. A report then prepared by a committee at the South Korean National Assembly states that if unification happened in 2015, it would cost between US$800 million and US$1300 million to raise North Korean per capita income to half of the South Korean level within a decade.1 There are other estimates of the “unification cost” as well: in 2005, a group of the researchers from the Seoul National University estimated the costs at US$2,600– 4,300 million.2 This is guesswork, of course, but everybody agrees that the amount of money necessary for reconstruction of the impoverished North could ultimately be counted in trillions of US dollars. The “unification cost” is a hot topic nowadays. Less attention, however, is given to manifold of a social nature which has nothing to do with money issues. For decades, North Korea has remained one of the world’s most isolated regimes whose rulers perfected Stalinism to the level undreamt of by Joseph Stalin himself. The population, with the exception of a tiny elite, has very vague and distorted ideas about the outside world and its ways, and mentally live in the world of the 1950s. North Korea used to be a well-educated society, but the technology and science they teach at the colleges is of 1950s vintage – and the 15 years of economic hardships seriously damaged the school system. At any rate, the average North Korean engineer has never used a computer. Society has been conditioned to perceive the total distribution of goods and services as the norm, and experts seem to agree that the average North Korean defector in the South has serious problems when it comes to making ordinary consumer or career decisions for oneself (no such decisions are necessary or even possible under the North Korean system). So, it is easy to see why South Koreans are so afraid of unification. However, history does not flow in accordance with human desires. If the North Korean state collapses, South Koreans will have few choices but to prepare themselves for unification at time and under circumstances which they would not be too happy about. As the East European revolutions of 1989–1990 (or, for that matter, of nearly all popular revolutions) have demonstrated, once changes begin, nobody can control the pace and direction of events. Now it is time to think what should be done if an emergency happens and the North Korean regime follows the fate of nearly all regimes which once were its models and aspirations – Albania, Romania, and the Soviet Union itself. When a crisis starts unrolling, it doesn’t leave much time for rational thinking. Alas, until quite recently any open media discussion of this subject has remained a taboo in the South. There are fears that such discussions might annoy the North, undermining inter-Korean detente. The Korean nationalist left believes that the Chinese solution is possible and “progressive,” and also perceives any talks about regime collapse in the North as a reminder of the official anticommunism of the

1 Syegye

Ilbo, 29 October 2007. Ilbo, 31 August 2005.

2 Kukmin

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past. The right is slightly more realistic, but it seems that its supporters are not too eager to discuss the difficulties such a turn of events could bring about. Alas, quite often the right-leaning scholars perceive talks of the post-unification difficulties as “leftist propaganda manipulation,” and avoid talking about problems, lest this will make people fear unification. The recent “Kim Jong-il’s health scare” probably had some impact on the situation. At least the discussions of post-Kim’s future became common in recent years. It might mean a dramatic (and long overdue) change of the situation, but it is a bit too early to predict. It will be a simplification to think that South Koreans are completely unprepared for such an eventuality. Seoul government has short-term contingency plans, to be put in motion in case of a power collapse in the North. However, these plans deal with immediate consequences of the crisis, and not with the long-term strategy of reconstruction, and this strategy is actually the hardest part of the task. The major task is to smoothen the transition, to make the unavoidable shock of unification less painful and more manageable.

Confederation: A Political Solution It seems that one of the possible solutions is a confederation. The idea of confederation has been suggested many times in the past, but in most cases it was assumed that the two existing Korean regimes would somehow agree to establish a confederative state. Needless to say, one has to be very naive to believe that the North Korean rulers could somehow coexist with South Korea, which even in its worst times was a relatively mild dictatorship committed to a market economy (and became a liberal democracy two decades ago). Such confederation is plainly impossible. However, one can imagine a different type of state union, a provisional confederation, whose sole and clearly stated task would be to lay the foundations for a truly unified state and to cushion the more disastrous effects of North Korea’s transformation. Such a provisional confederation will become possible only when and if the North Korean regime changes dramatically, and a new leadership in Pyongyang will have no reasons to fear the influence of the democratic and capitalist South. In other words, only a post-Kim government can be realistically expected to agree to such a provisional confederation. It does not really matter how this government will come to power, whether through a popular revolution, a coup, or something else. As long as this government would be genuinely willing to unite with the South, it might become a partner at these negotiations and a participant of the confederation regime. As a possible option one can even think about a North Korean government-in-exile, consisting of the prominent North Korean defectors, and first established outside the North but then taking control over the country. Even in case of a complete collapse of North Korean state, followed by the South Korean or international peace keeping operation, such a provisional confederation might be a good political decision as well.

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If the word “confederation” is considered unsuitable, a similar arrangement is achievable as a part of the “unification treaty” negotiated between Seoul and a new regime in Pyongyang. Like a confederation, such a provisional “unification treaty” regime would allow for coexistence of two Korean states for a certain period of time. During this period, each state should have its own laws and regulations, and the interactions between the two Koreas should be somewhat controlled and restricted. This is necessary to create legal and social environment which will be conducive to gradual and orderly transformation of North Korean state and society. It is very important to have an explicit statement about the maximum length of the provisional confederation (or “unification treaty”) regime, and 10–15 years seems to be ideal. A longer period might alienate common North Koreans who will probably see it as an attempt to keep them from fully enjoying the South Korean lifestyle while using them as “cheap labor.” On the other hand, a shorter period might not be sufficient for any serious transformations.

Immigration Controls One of the tasks of such a provisional system will be to control cross-border movement. South Koreans are now haunted by nightmarish pictures of millions of North Korean refugees flooding Seoul and other major cities, where they will push the South Korean poor from unskilled jobs or even resort to robbery and theft. Such threats might be real, and should be addressed. A confederation will make it easy to maintain a visa system of some kind, with a clearly stated (and reasonable) schedule of gradual relaxation. For example, it might be stipulated that for the first five years all trips between the two parts of the newly unified Korea will require a visa, and North Koreans will not be allowed to take jobs or long-time residency in the South. In the following five years, these restrictions could be relaxed (allowing, for example, free short-term travel, but not paid work) and then finally lifted.

Real Estate Sales Control South Korean fears of a North Korean crime wave might be well-founded, but the North Koreans also should be protected from the less scrupulous of their new-found brethren – not least, from South Korean real estate speculators. In the case of uncontrolled unification, South Korean dealers will rush to buy valuable property in the North, a task which will not be too difficult in a country where $10 a month is seen as a very good income. South Korean dealers vividly remember what happened in Kangnam, a former paddy fields area which in the 1970s was turned into a posh neighborhood in southern Seoul. In some parts of Kangnam land prices increased more than a thousandfold within a decade or so, making a lucky investor superrich. Unfortunately, there are good reasons to believe that the price of land in Pyongyang or Kaesong could skyrocket as well.

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However, such uncontrolled land sales are likely to have dire social consequences. It is easy to predict the resentment of those North Koreans who will lose their dwellings for what would initially appear to be a fortune, but soon will come to be seen as small change. If real estate speculations are left uncontrolled, in a few years entire North Korean cities could become the property of South Korean dealers – with predictable consequences for relations between northerners and southerners. Hence, the provisional confederation regime, while encouraging other kinds of investment, should strictly control or even ban the purchase of arable land and housing in the North by South Koreans. At the same time, the land development for the industrial purposes or, perhaps, even construction of new housing on the previously unoccupied land should be allowed and encouraged.

Land Reform Another painful issue is that of land property. One of the major challenges would be claims of land owners who lost their property during the North Korean radical land reform of 1946. A majority of the dispossessed landlords fled to the South in 1945– 1953 when some 1.5 million inhabitants of the North crossed the border between the two Koreas. Their descendants now live in the South and, as both anecdotal evidence and some research testify, carefully kept the old land titles. It is just a minor exaggeration to say that an arable plot in the North usually has an aspiring landlord residing in Seoul. These claims remain technically valid since the Republic of Korea has never recognized the North Korean land reform of 1946. For generations, the North Koreans have been told by their government that the collapse of the communist regime will bring back the nasty landowners who have been laying in wait in the South. If in this particular case the propaganda statements are correct, this would produce a very serious negative impression on North Koreans, further increasing their alienation and disappointment. Under protection of the confederation regime, a land property system could be redesigned, or rather created from scratch. The recognition of the 1946 land reform and its results is a necessary first step. To placate former owners, some partial compensation might be paid, even though the present author is not certain whether grandchildren of former landlords, usually rich and successful men and women, are really in dire need of such compensation.

Reintroduction of the Land Property Rights As a next step, the cooperative property should be distributed among its members, preferably among the people who are really present in their villages. This system will help to limit the scale of internal migration which is likely to become a serious source of social problems in post-Kim’s South. Perhaps, a free rent system might be the first step. According to the system, the land plots might be given to the farmers to be used for the period of 5–10 years. When this period expires, the land

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should be transformed into property of those farmers who were engaged in the actual economic activities using these plots. This condition is necessary to exclude the emergence of absentee owners and limit the land distribution only to those who are engaged in productive agricultural activity. By the end of the confederation period, land and real estate in North Korea should be safely privatized, with North Korean residents (and, perhaps, recent defectors) being sole participants in this process.

General Amnesty One of the more controversial – but still necessary – parts of the proposed package might be a general amnesty for all crimes committed under the Kim family regime. This is especially necessary because the fear of persecution seems to be one of the reasons that keep the North Korean elite, including its lower ranks, united around the inefficient and brutal regime. They believe that collapse of Kims’ rule will mean not only the bend of their privileges (which actually are quite small – only a handful of top officials enjoy a really opulent lifestyle in North Korea) but they are also afraid of judicial persecution and mob violence. It is not incidental that North Korean officials and guides in Pyongyang ask one foreign visitor after another about the fate of former East German bureaucrats. Indeed, despite considerable liberalization in recent years, the regime remains exceptionally brutal, and its officials have no illusions about this. Unfortunately, this fear of persecution has kept the murderous regime going for the past decade or so and has led to many more deaths. One might argue that such unconditional amnesties to all Korean officials are probably “unethical.” Perhaps, this is indeed the case, but let’s face it: The sheer scale of the crimes committed by the Kim Family Regime makes any serious and fair investigation almost impossible. About half million people have been in prison during those decades, and many more exiled, and nobody will be capable of investigating all these cases carefully and impartially. A great number of people have been directly or indirectly involved with the human rights abuses, and again, it is impossible to investigate a few hundred thousand former officials who by the nature of their job might have been responsible for some criminal actions. Hence, only partial, selective symbolical (and, therefore, largely politically motivated) justice can be served at best. A general amnesty would solve two problems: first, it will make former North Korean bureaucrats less willing to resist changes; second, it would diminish the scale of intrigue and manipulations, since people would not be fighting to avoid the fate of arbitrarily chosen scapegoats. It should become part of the law, and to be taken seriously the amnesty should be made as straightforward and unequivocal as possible. Of course, amnesty does not mean complete forgiveness. There might be restrictions for former party and secret police officials to occupy certain positions in a post-Kim Korea. This policy was pioneered by Eastern Europe where the socalled “lustrations” were introduced in the 1990s. It might be a good idea to

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create non-judiciary commissions to investigate former abuses, like it was done in postapartheid South Africa. This commission might lead to truly awful discoveries, but the promise of amnesty should be kept even if it will become clear that North Korean prison camps were not much different from Auschwitz.

Speedy Integration of the Military Structures The confederation treaty should also envision some legal measures which will make certain that North Koreans will not remain the source of “cheap labor,” to be used and abused by South Korean businesses. The military of the two Koreas should be integrated first, and there should be large quotas reserved for former North Korean servicemen in the united army. Politically, the North Korean military has a potential to become a hotspot of social discontent: The 1.2 million-strong North Korean armed forces probably lack the skills necessary for modern warfare, but this force consists of professionals who have not known anything except the barracks life and intense nationalist indoctrination. If former military officers are given commissions in the post-unification forces, their skills and zeal will find a good and useful outlet. Otherwise, the very same people are likely to join the ranks of organized crime.

Affirmative Actions for the North Koreans It is also important to provide large admission quotas for North Korean youngsters at major South Korean universities. Korean society is both hierarchical and meritocratic, and being a graduate of a major Seoul school is a necessary condition for entry in nearly all important jobs. It is not incidental that the entire life of a middleclass South Korean family is often designed to facilitate exam preparations for the children. Unfortunately, for decades to come even the most gifted North Koreans will be unable to compete on equal terms with much better prepared South Korean students, and this means that they can realistically hope to get into only lower-level universities, usually in the North. Both actual and perceived quality of education in those schools will remain relatively low for decades, and this will ensure that North Koreans, even with “new” college-level education, will be permanently relegated to subaltern positions. Hence, affirmative actions are necessary, even if such measures are certain to provoke a hysterical outcry from Seoul and Busan parents.

Problems of Middle Class and Professional The confederation regime will help to solve another important problem – that of the North Korean middle class. As East Europe demonstrated, a majority of active supporters of democracy and reform has come from local-educated urban groups, a close analogue of the Western “middle class.” The same is likely to happen in Korea.

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However, the same people will become very vulnerable after unification. Who will hire an engineer who has not seen a computer? What can be taught by a social science teacher who spent his or her college years memorizing Kim Il-sung’s genealogical tree and the “Dear Leader’s” asinine pronouncement on everything, from rice planting to nuclear physics? Who will visit a former North Korean doctor whose medicine is essentially on the 1950s level? During the confederation regime, special efforts could be made to reeducate those people, at least partially, preparing them for a new environment while still allowing them to continue their professional work in the North. This means that their North Korean professional qualifications and diplomas should be recognized as valid, albeit only within the former North Korean territory. Most of these people will be unable to adjust, unfortunately, but at least the 10 or 15 years leniency will give a chance to the lucky and determined few, and will also provide others with time to find other ways to make a living.

Some Potential Problems with Confederation The confederation model does have serious shortcomings. For example, there are good reasons to believe that the new North Korean political elite will consist largely of Kim-era officials (or their children) who will retain their old habits, including that of corruption and inefficiency. A Northern democratic government would be prone to populist decisions, based on pressure from below, and North Koreans are likely to have particularly naive views on how their society and economy can and should operate, so some mistakes introduced via popular vote might become ruinous and costly. But no ideal solution is possible. One should not harbor too many illusions. The recovery of North Korea will be prolonged and painful. Even if unification happens tomorrow, the difference between the two Koreas will remain palpable until 2050, if not longer. Tensions, misunderstanding, and even outright hostility between northerners and southerners are bound to continue for a long time. There are no easy and simple solutions. But the current state of affairs cannot continue indefinitely, and it is time to think how unavoidable problems can be mollified. The current policy of Seoul administrations merely helps to postpone the problems created by Korea’s division, and the disastrous choices made by the North half of the country. But sooner or later, Korea and the entire world will have to face these problems – and solve them.

References Kukmin Ilbo (2005). August 31, 2005. Syegye Ilbo (2007). October 29, 2007.

Chapter 6

Features of a Peace Dividend for the Two Koreas Paul Chamberlin

Can you imagine peace on the Korean Peninsula? As difficult as it may be, this goal to end hostilities between the southern Republic of Korea (ROK) and the northern Democratic People’s Republic of Korea (DPRK) has been a stated goal of the “Six Parties” – China, Japan, North Korea, South Korea, Russia, and the United States – since September 2005.1 The potential for peace on the Korean Peninsula implies the subsequent emergence of a “peace dividend” for the two Koreas, which is the subject of this chapter. Imagining a peace mechanism and peace dividend for a persistent, unresolved war that some believe ended over a half-century ago requires us to define certain terms and make certain assumptions. Let us define a peace dividend as “an amount of money taken from a defense budget and appropriated elsewhere in times of peace when less money is required for defense than in times of hostility or war.”2 This chapter rests on three major assumptions. One, North Korea will become a verifiable nonnuclear weapons state as a result of the Six-Party process. Two, the Six-Party process will produce a peace mechanism that will include arms control and confidence building measures to eliminate Korean security concerns about inter-Korean aggression. Inevitably, the peace mechanism should include verification procedures to assure compliance with the terms of the agreement. Historically, developing verification procedures with North Korea has been problematic. Three, the peace mechanism will resolve the so-called “Korea question” that emerged in the late 1940s regarding who among Koreans would govern Koreans. This question became more acute after South and North Koreans declared the existence of the ROK and DPRK in August and September 1948, respectively. To resolve the “Korea question” by force, the North Korean People’s Army (KPA) invaded South Korea in June 1950, launching the Korean War and a strong international response that assured the survival of South Korea. An Armistice

1 Joint

Statement of the Fourth Round of Talks of the Six-Party Talks, 2005. Elliot Goodman, 2008.

2 Downes,

P. Chamberlin (B) Independent Scholar e-mail: [email protected] B. Seliger, W. Pascha (eds.), Towards a Northeast Asian Security Community, The Political Economy of the Asia Pacific, DOI 10.1007/978-1-4419-9657-2_6, C Springer Science+Business Media, LLC 2011

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Agreement ended Korean War combat operations in July 1953. In the intervening half-century, however, no progress has been achieved in resolving the fundamental “Korea question.” Thus, Koreans have harbored anxiety about when a second Korean War might “break out” to achieve unification by force. Resolution of this “Korea question” is the last impediment to ending the Armistice Agreement.3 What remains to be determined is how much the assumed peace mechanism will assuage Korean concerns about foreign aggression by surrounding powers4 and thus inspire their willingness to divert significant funds for a peace dividend. A peace dividend ought to promote prosperity. This goal is as easy to envision for South Korea as it is difficult to anticipate for North Korea unless Pyongyang first revises its socialist system, governing principles, and national priorities. North Korea’s National Defense Committee Chairman Kim Jong-il promised to transform North Korea into a “strong and prosperous country” in the late 1990s. Today, North Korea’s military strength is arguably improved, but its poverty is not. Estimated per capita income in 2007 was a relatively meager $1,700 compared to South Korea’s $25,000.5,6 Can North Korea’s power elite afford to implement changes that will make North Korea prosperous? In examining the features of a peace dividend for the two Koreas, the section “National Needs” reviews selected national needs that might benefit from a peace dividend. The section “Potential Features of a Peace Dividend” addresses potential features of such a dividend and some additional thoughts to help manage expectations and implications for US Forces Korea (USFK).

National Needs Like other countries, each Korea shares a primary need to assure its national survival. This is nothing that Koreans take for granted. Throughout Korea’s 4,000 year history, the surrounding powers have sought to control the Korean homeland, as the Korean Peninsula is the strategic crossroads of East Asia. Koreans count 930 invasions or attacks, mostly from Japan and continental powers (primarily China). Mathematically, this averages to about one notable act of foreign aggression every five years. Some years obviously were much worse than others. Tokyo’s wars to control the Korean Peninsula in the late nineteenth and early twentieth centuries had the most traumatic consequences for modern Koreans. Japan’s aggression led to the end of unified Korea’s sovereignty in 1910 and the

3 Section 62 of the Armistice Agreement states, “The Articles and Paragraphs of this Armistice Agreement shall remain in effect [including the call for resolution of the “Korea question” in Section 60] until expressly superseded either by mutually acceptable amendments and additions or by provision in an appropriate agreement for a peaceful settlement at a political level between both sides.” Emphasis added. 4 The “surrounding powers” are China, Russia, Japan, and the United States. 5 The World Factbook, 2008 6 Per capita income reflects purchasing power parity (PPP).

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beginning of harsh colonization. Liberation in 1945 ended unified Korea for the first time since the seventh century, producing the two competing Koreas that exist today. The two Koreas pursued different strategies to assure their national security and achieve other national goals. Seoul looked out; Pyongyang looked in. Recognizing its relatively small national power compared to such traditional threats as China and Japan, for example, Seoul has nurtured its alliance with the United States to deter foreign aggression.7 It also embraced democracy, market economics, and trade. This strategy ultimately enabled Seoul to transform one of the world’s poorest nations in the 1950s to a modern, prosperous democracy. On the other hand, North Korea accepted authoritarian socialist principles while developing its problematic Juche philosophy and a “military first” policy to avoid having to rely on traditional threats for its national security. These different strategies produced vastly different national needs. Before reviewing them, let’s consider some basic demographic information.8

Needs of the Republic of Korea (South Korea) South Korea is a democratic, advanced industrial country and member of the Organization for Economic Cooperation and Development. Its GDP regularly numbers among the top dozen in the world. Having made the transition from the Agricultural Age to the Industrial Age in the late twentieth century, South Korea is now in transition to becoming a Knowledge Age society.9 South Koreans manage their social system in accordance with proven democratic and market economy concepts. In such an open, dynamic society, a lack of consensus on certain national spending priorities is quite natural. How much to spend on a “social safety net,” including elder care, for example, is not unique to South Koreans. Another likely topic for debate will be a reduction in military spending. 1. Social safety net: Seoul has a “minimal social safety net” for its people.10 While the government budget for the social safety net increased from 19.9 percent of the budget in 2002 to 27.9 percent in 2006, it still features an “underdeveloped social insurance system, an antiquated social welfare service sector, and extremely low levels of public social expenditure relative to that of other OECD countries.”11 In 2007, Seoul spent a relatively small 6 percent of GDP on public social spending; the OECD average was 21 percent.12 In part, the ROK budget allocation reflects Korea’s Confucian roots that expect family members to take care of one another, especially of the elderly. 7 Mutual Defense Treaty between the Republic of Korea and the United States of America, entered into force on November 17, 1954. 8 US census bureau data is used throughout these tables for consistency purposes. 9 Chamberlin, 2001, pp 21, 45–46, 105–106, 157–158 10 The Odd Couple, 2008 11 The Odd Couple, 2008 12 Policy Brief – Economic Survey of Korea, 2007, p. 2

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The problem is that modernization has profoundly transformed traditional large, extended families living in rural areas to nuclear families living in urban areas. South Koreans are not having enough babies to replace themselves and to care for the elders, who are living longer than in traditional times. Moreover, the median age is rapidly rising, producing a declining population (as shown in Tables 6.1, 6.2, 6.3 and 6.4) and potential workforce problems.13 2. Elder care: Elder care is becoming a major concern for South Koreans. By 2050, more than one in three Koreans (38 percent) will be “elderly,” making Korea’s population one of the oldest on earth. Korea’s low fertility rate means that each elder will have far fewer adult children to care for him or her than was historically the case. To fill the gap, Koreans are building private-sector elder care facilities, which are likely to be increasingly expensive to use. Koreans will probably struggle financially to care for their parents in these private facilities. Table 6.1 ROKa & DPRK fertility rates. Note: Replacement is 2.1

Source: US Census Bureau. a The OECD reports that South Korea’s fertility rate was 1.08 in 2005.14 Table 6.2 ROK & DPRK lifespans

Source: US Census Bureau. Table 6.3 Median ages – ROK, DPRK, USA

Source: US Census Bureau.

13 US

Census Bureau, International Data Base, 2008 Brief – Economic Survey of Korea, 2007, p. 7

14 Policy

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Table 6.4 Total ROK population

Source: US Census Bureau.

This struggle is expected to degrade individual savings and national financial resources.15 Consequently, we should expect the electorate to insist on more government spending to offset elder care costs while businesses seek to cope with an aging workforce.16 3. Military force structure: Seoul spends about 2.7 percent of GDP on its military,17 which comprised 681,000 personnel in 2005.18 Mindful of demographic trend projections and the usefulness of technology to achieve important combat force multipliers, the government developed the “Defense Reform 2020” plan in 2005. One of its key goals is to transform a 681,000 “manpower-intensive and conventional force structure into a technology-intensive and qualitatively advanced force structure,” comprising about 500,000 personnel.19 A peace mechanism will prompt a reassessment of forces to protect Korea in a new security environment. Conclusion A peace mechanism will likely prompt a national debate among South Koreans on how much to reduce defense spending and apply to the social safety net.

Needs of the Democratic People’s Republic of Korea (North Korea) North Koreans, on the other hand, face chronic problems that stem from a siege mentality, dysfunctional socialist principles, a unique Juche ideology, and “military first” policy, which combine to impede healthy national development and prosperity. North Korea is one of the world’s most centrally directed and least open economies. Its core principles are an anachronism in the modern, highly interdependent world. The North Korean system does not work for the common good. Thus, North Korea has many more needs than South Korea. Perpetuating Juche is likely to be one of these needs. Juche constitutes one of North Korea’s epic myths regarding its place in the universe. It also provides the fundamental legitimacy of the Kim Il-sung dynasty. While Juche is literally defined as “self-reliance,” in practice it is a governing philosophy and core of a 15 The

Odd Couple, 2008 Howe, Nakashima, 2007, p. 2 17 Military, 2008 18 Defense Reform 2020 – The Way Ahead, 2005 19 Ibid. and Defense White Paper 2006, 2006, p. 87 16 Jackson,

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type of state-religion. As a governing philosophy, it comprises three parts: leader, party, and people. The leader controls the people through the party. Juche highlights the primacy of the Korean Workers Party over any other institution below the leader. Principal organizations within the KWP are the Central Committee and its “Organization Guidance Bureau.” The military is subordinate to this structure. As a religion, Juche comprises a trinity with the late Kim Il-sung as the infallible Father and now “eternal president” under the 1998 constitution, Kim Jong-il as the infallible Son, and the Juche ideology as the “Holy Spirit.”20 A modern “Hermit Kingdom,” North Korea does not routinely provide verifiable information about political, social, and economic topics that most other countries provide to the United Nations and other international organizations. Thus, foreigners rely on a range of other sources with varying degrees of accuracy. One trustworthy source is the [South] Korea Institute for International Economic Policy (KIEP), which has comprehensively reported on North Korean politicaleconomic topics. KIEP published its most recent North Korea Development Report in July 2004. While much has probably changed on the fringes since then, interim reporting by The Economist magazine and other credible observers indicates that the core findings of KIEP’s 2004 report are reasonably reliable for the purposes of this chapter. On balance, significant shortcomings in North Korea’s social system, infrastructure, and major economic sectors imply that the fundamental system does not work. The “military first” policy has produced lopsided emphasis on military spending and heavy industry, which prevents healthy economic development (see Fig. 6.2). Rampant malnutrition and poor economic performance drive the point further home.

Fig. 6.1 North Korea at night1

20 Initially,

Kim Il-sung’s wife and mother of Kim Jong-il, Kim Jong-sook, was described as the Holy Spirit, but Juche now seems to be the accepted view. Further adjustments to describe the North Korean ‘trinity’ is likely since late 2010 when Kim Jong-il designated his son, Kim Jong-un, to be his successor.

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Fig. 6.2 Rates of economic growth for North and South Korea Source: Bank of Korea

Some of many needs that could benefit from a peace dividend are social security and welfare, national infrastructure, agriculture, civilian21 and defense industry, and military forces that could be subject to a reduction in force. 1. Social Security and Welfare services: The North Korean system is not meeting its constitutional responsibilities to assure “. . . the rights and duties of citizens. . . [per] the collectivist principle, ‘One for all and all for one.’”22 For example, the socialist government does not provide all citizens with adequate food, medical care, employment, and “other social security systems.”23 The implied equality of the collectivist principle is skewed by the existence of a highly stratified social system. The government has put each citizen into one of about 50 different groups based on one’s socio-economic class background, that is, songbun. Some students at North Korea’s Kim Il-sung University humorously divide these many groups into three larger categories that they call tomatoes, apples, and grapes. Tomatoes, which are red (communist) to the core, comprise about 30 percent of the population. Apples are red only on the outside but are considered to be relatively loyal, despite the need for “ideological improvement.” Apples comprise about 40 percent of the population. At the bottom of the barrel are the “grapes,” which are considered to be “hopeless.” Education, employment, and social services are provided in consideration of one’s songbun.24 Upward mobility is not the norm.

21 “Civilian”

is used reservedly to distinguish this sector from the overtly designated defense industrial sector. 22 Article 63, Socialist Constitution of the Democratic Peoples’ Republic of [North] Korea, as revised September 5, 1998, unofficial translation, http://www1.korea-np.co.jp/pk/061st_issue/ 98091708.htm 23 Articles, as revised September 5, 1998 24 Hunter, 1999, pp. 4–5

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a. Food shortages are a chronic problem. “Resolving the food shortage” has been a top priority throughout North Korea’s history.25 The scope of the problem came to a head in the mid-1990s when up to about 1 million North Koreans reportedly died of famine and malnutrition.26 The United Nations and others provided extensive assistance, but problems persist. In 2008, North Korea’s “agricultural sector contracted 9.6 percent.”27 North Korea continues “to suffer chronic food insecurity, high malnutrition rates and economic problems, and remains reliant on external food assistance to meet the needs of its 23 million people,” according to the UN World Food Program in September 2008.28 Earlier in 2008, Yoonok Chang, Stephan Haggard, and Marcus Noland conducted a survey of 1,300 North Koreans and concluded that about “23% of men and 37% of women say family members died of hunger.”29 Those with particular dietary requirements – for example, the elderly, pregnant/nursing women, and young children – are especially vulnerable to food shortages and malnutrition.30 A UN assessment circa 2004 found “stunting rates at 37 percent, underweight at 23 percent and wasting at 7 percent among children under 6. Maternal [anemia] was around 35 percent.”31 Declining economic performance since 2005 suggests that these problems probably persist. In October 2008, well-known North Korea political-economy watchers Drs. Stephen Haggard and Marcus Noland concluded, “North Korea has experienced an intensification of long-standing problems of malnutrition and hunger-related deaths. Moreover, the lack of fertilizer and the consequent possibility of a weak fall harvest in 2008, continuing constraints on commercial imports, and the vacillating policy response of the government will carry the emergency into 2009 if not beyond.”32 b. Medical care is wholly inadequate. In early 2007 the World Health Organization reported: “The economic downturn has led to the erosion of DPR Korea’s extensive health-care infrastructure. There are serious shortages of essential drugs and vaccines as well as essential medical diagnostic 25 North

Korea Development Report 2003/2004, July 2004, p. 105 reports assert that about 2 million North Koreans may have died from famine and malnutrition. The true number may never be known. 27 North Korea’s economic slide picks up speed, 2008 28 Paragraph 1, Emergency Operation Democratic People’s Republic of Korea, 2008 29 Survival of the fittest, 2008 30 Executive Summary, Emergency Operation Democratic People’s Republic of Korea; Title: 10757.0- Emergency Assistance to Population Groups Affected by Floods and Rising Food and Fuel Prices, World Food Program, http://www.wfp.org/operations/current_operations/project_ docs/107570.pdf, accessed 10.3.2008 31 Paragraph 12, Emergency Operation Democratic People’s Republic of Korea, 2008 32 Stephan Haggard and Marcus Noland, Famine in North Korea Redux?, Peterson Institute for International Economics, Working Paper (WP) 08-09, October 2008, http://www.petersoninstitute. org/publications/wp/wp08-9.pdf, accessed November 7, 2008 26 Some

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equipment and surgical supplies.”33 However, blaming all of these problems exclusively on the “economic downturn” may be too simplistic an explanation for what appear to be systemic shortcomings. Since December 2007, the Canadian government warns travelers to North Korea, “Medical facilities are primitive. Hospitals often lack heat and medicine and suffer from frequent power outages.”34 These views complement KIEP’s bleak assessment in 2004: North Korea’s “medical security system. . . has been all but demolished, because of the collapse of the supply system for medical equipment and drugs as well as the doctor-district assignment system. . .”35 Associated problems include inadequate medical resources, inadequate funding, and a highly bureaucratic, nationalized medical system that cannot meet local needs nationwide.36 c. The public assistance system, including food distribution, falls short of meeting public needs. Two problems are that the system provides assistance on a preferential basis and it depends on government funding, which is problematic.37 Extensive malnutrition among nonelite North Koreans eloquently demonstrates systemic shortfalls in the public assistance system. d. Employment and wages are problematic. As noted, per capita income is estimated at only $1,700, which is less than 7 percent of that of South Koreans. 2. Infrastructure.38 Problems persist in the national infrastructure, as well as in such sectors as agriculture, manufacturing, and defense industries. a. Electricity production and distribution are inadequate. Frequent, extended blackouts are common.39 North Korea uses a roughly equal mix of thermal and hydroelectric plants to generate electricity, but this diversification has failed to meet national needs. Some reasons for this poor performance are lack of fuel for thermal plants and “antiquated” hydroelectric plants that had an operational rate of only 20 percent in 2004. Many of the hydroelectric plants were built before 1945, and some have been nonoperational since 1996.40 Moreover, the transmission grid is “antiquated” and inefficient.41 Associated problems include the lack of energy product markets and “suppressed/latent demand for energy services.”42 33 Emergency and Humanitarian Country Report – DPR Korea, p. 33 – Note: The publication date

is not stated, but the report reports developments through February 2007 REPORT, 2007 (and still valid as of October 3, 2008) 35 North Korea Development Report 2003/2004, July 2004, p. 258 36 North Korea Development Report 2003/2004, July 2004, p. 258–260 37 North Korea Development Report 2003/2004, p. 258–260, July 2004, pp 260–261 38 Infrastructure is also known as “Social Overhead Capital.” 39 North Korea Energy Overview, February 2006 40 North Korea Development Report 2003/2004, July 2004, p. 145 41 North Korea Energy Overview, February 2006 42 Hippel and Hayes, published Draft report dated June 30, 2007 34 TRAVEL

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b. Railroads require significant attention, as they are North Korea’s primary transportation system and also connect to the Chinese and Russian railroad systems, which is important for trade. North Korea’s railways span the country with about 5,235 km (3,253 miles) of track.43 Over 80 percent of North Korea’s trains are electrified, which is problematic given North Korea’s electricity issues. The rail system moves 90 percent of North Korea’s freight and 60 percent of the population. However, trains operate at low speeds, because of aged locomotives and low-quality track.44 c. Roads and highways also require attention. Most of North Korea’s roads were built during the period of Japanese colonization (1910–1945). The Japanese destroyed or seriously damaged many of the roads when they left in 1945. Others were damaged during the Korean War. While the late Kim Il-sung45 talked about the importance of building a good road infrastructure,46 less than 3 percent of North Korea’s 25,554 km of roads were paved in 1996. This reluctance to improve roads reflects KPA concerns about an aggressor using an improved road infrastructure to wage war against North Korea.47 Virtually no roads cross the DMZ. d. Ports cannot efficiently handle modern ships. North Korea has eight trade ports, 40 fishery ports, and five pelagic marine base harbors. Most port facilities are old with a usage rate of only 3 percent in 2004. By comparison, the usage rate of railroads was 90 percent and that of roads was 7 percent. The ports need to be modernized (and deepened) to accommodate large transport vessels and their cargo, which is often in containers.48 3. Agriculture. The agriculture sector is rife with difficulties, as demonstrated by its chronic inability to feed the population. Between 1991 and 2004, the average annual yield was approximately 3.5 million tons, which is well below the estimated annual requirement of about 6.25 million tons.49,50 In 2008, North Korea remained unable to overcome its historic inability to feed its people. The “. . . [UN Food and Agricultural Organization] projected that the country will suffer a cereals deficit of 1.66 million mt in 2008 – the largest deficit since 2001.”51 43 North

Korea transportation, The World Factbook, US Central Intelligence Agency, https://www. cia.gov/library/publications/the-world-factbook/geos/kn.html#Trans, accessed 10.4.2008 44 North Korea Development Report 2003/2004, July 2004, pp. 126–128, 134–135, 145–146 45 Kim Il-sung died in July 1994 and was succeeded by his son, Kim Jong-il. 46 North Korea Development Report 2003/2004, July 2004, pp. 135–137 47 North Korea transportation, The World Factbook, US Central Intelligence Agency, https://www. cia.gov/library/publications/the-world-factbook/geos/kn.html#Trans, accessed 10.4.2008 48 North Korea Development Report 2003/2004, July 2004, pp. 140–141 and 146 49 Estimated annual production ranged from a low of 2.4 million tons in 1996/1997 to 4.1mt in 2004. Estimated annual food requirements ranged from a low of 4.6 mt in 1997/1998 to 6.6 mt in 1999/2000. 50 North Korea Development Report 2003/2004, July 2004, pp. 110–111 51 Paragraph 7, Emergency Operation Democratic People’s Republic of Korea, 2008

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The core of the problem does not seem to be the weather, as North Koreans routinely claim. North Korea’s chronic failure seems to be rooted in the inadequacy of socialist and Juche concepts to meet national needs, especially in light of the amount and quality of arable land, the climate, the need for fertilizer, energy shortages (that affect the use of farm and food distribution equipment), and low incentives for farmers to be more efficient. Collectivization and centralized planning ignore the efficacy of modern agricultural methods. 4. Industrial Sector. The industrial sector reveals more systemic shortcomings with its emphasis on heavy and defense industries to achieve self-reliance per the Juche ideology. Kim Jong-il officially came to power in 1998 and launched a new policy to build a great and prosperous country (Kangsungdaeguk). The policy called for investments in “agriculture, coal mining, electricity, rail transport and metals.”52 Just as problems persist in the agriculture, electricity, and transportation sectors, they are also evident in heavy and chemical industries. Certain aspects of the “civilian” and military defense industrial sectors are summarized below. a. Civilian sector. North Korea’s fundamental problem in this sector is its very structure, which reflects socialist and Juche ideological shortcomings. Heavy and chemical industries constitute the heart of the sector but they are not competitive. Compounding the problem is an undeveloped light industry sector. KIEP diagnosed North Korea’s industrial problem in 2004: It is not just a certain industry or sector that has fallen behind, but the entire industrial cycle is riddled with problems. The problems include the dual structure of military and civilian industries, the relationship between heavy and light industries, and the relationship between upstream and downstream industries. For example, because of a shortage of raw and subsidiary materials, the textile industry is failing to achieve regular production. In addition, the chemical fiber factories that require vast amounts of electricity to inefficiently produce vinyl have lowered their utilization rates because of the stagnant coal sector and the resulting energy shortage. Meanwhile, the mining sector, which is suffering from worsened mining conditions and a lack of equipment and materials, is unlikely to see a recovery in the short term. In addition, the food and necessities shortage is making it difficult to recruit labor in the mining sector and has caused production to fall even lower. Because the economy’s problems are interconnected in this way, it is difficult to improve the situation simply by focusing human resources on a certain sector. Even if the energy situation is improved, the raw materials shortage would continue in the textile industry if the synthetic fiber factories fail to reform their inefficient production system.53

In September 2008, The Economist magazine confirmed the accuracy of KIEP’s 2004 assessment. It reported, “The factories of the command economy have ground to a halt: fuel and other inputs are too expensive to run them, and workers often go unpaid. Frequently, it is not just a factory’s output that

52 North 53 North

Korea Development Report 2003/2004, July 2004, pp. 89–90 Korea Development Report 2003/2004, July 2004, p. 100

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its managers have sold on the black market but all its plant and equipment too, leaving a shell.”54 These assessments inspire no confidence that North Korea’s socialist and Juche concepts can guide the development of a productive industrial sector. b. Defense Industry. Juche’s emphasis on self-reliance is particularly evident in the defense industrial sector. “. . . [N]o other country of equivalent size [had] such an extensive and complete defense production capability,” according to the US Defense Intelligence Agency in 1991.55 Since then, North Korea has developed a variety of long-range ballistic missiles, a nuclear device, which it first tested in October 2006, and presumably some nuclear warheads. Pyongyang conducted a second nuclear test in May 2009. The defense budget has routinely been estimated to comprise 20–30 percent of the total government budget. In 2004, North Korea’s defense industry appeared to comprise more than 50 percent of the total economy and about 30 percent of North Korea’s total annual production.56 Military expenditures were estimated at over 30 percent of Gross National Income.57 This single-minded military focus has come at a high price. North Korea remains a poor country with per capita income of only about $1,700, which is well short of South Korea’s $25,000.58,59 North Korea’s poor economic performance and relative poverty belie the government’s notion that heavy industrial development improves other industries and the quality of life for ordinary people.60 North Korea is in a vicious circle with its persistent commitment to the defense sector while ignoring or not comprehending the consequences for the overall economy and its implications for national security. The extent to which bureaucratic politics affects the government lopsided priorities is presumably quite high, given the “military first” policy. 5. Military Reduction in Force. The North “Korean People’s Army” – which includes the Air Force and Navy – is the world’s fourth largest force with approximately 1.2 million active duty personnel.61 It also has some 7.7 million

54 Survival

of the fittest, The Economist, September 25, 2005 Korea – The Foundations for Military Strength, 1991, p. 34 56 North Korea Development Report 2003/2004, July 2004, p. 170 57 2006 Defense White Paper, December 2006, p. 19 58 Per capita income is calculated on a purchasing power parity basis. 59 The World Factbook, US Central Intelligence Agency, https://www.cia.gov/library/publications/ the-world-factbook/geos/kn.html#Govt and https://www.cia.gov/library/publications/the-worldfactbook/geos/ks.html#Econ, accessed 9.24.2008 60 North Korea Development Report 2003/2004, July 2004, p. 172 61 Background Note: North Korea, US Department of State, http://www.state.gov/r/pa/ei/bgn/2792. htm, accessed 11.25.2008 55 North

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reserves.62 To deploy and sustain this force, Pyongyang may spend about 25 percent of its GDP.63 Theoretically, a peace dividend would see a dramatic reduction in this force. After World War II, for example, the United States slashed defense spending from $90 billion in 1945 to $10 billion in 1947.64 By 1947, it had reduced its 12 million-strong force to about 1 million men and women.65 The demobilized soldiers, sailors, airmen, and marines encountered essentially no difficulties in finding jobs in different industries that were surging to meet postwar needs. North Korea’s situation is dramatically different due to a weak economy that could not absorb so many job seekers. Thus, improving the general economy should be the top priority before reducing the force. 6. Structural – Systemic Reforms. Kim Jong-il launched some economic reforms in July 2002. The goal was to adjust certain aspects of North Korea’s socialist system, not to abandon it. Key measures pertained to the rationing system and approval for citizens to establish markets and other trading centers.66 Five years later, however, Kim Jong-il expressed concern about some of the measures. On August 26, 2007, he announced, “. . . markets have become antisocialist, Western-style markets.” By the end of 2007, authorities were cracking down on many aspects of how North Koreans were implementing the 2002 reforms. The apparent objective was to “control the development of a market economy.”67

Conclusion North Korea’s system, governing principles, and practices require major reform before the government can seriously consider implementing the measures that one normally associates with a peace dividend – including a major reduction in military forces, for example.

Potential Features of a Peace Dividend A peace dividend could help each Korea address a number of national needs including the above. However, they could not do so equally, because of profound differences in their political, social, and economic systems. Another key factor affecting a potential peace dividend is the extent to which a peace mechanism will assuage Korean concerns about future attacks from traditional 62 2006

Defense White Paper, December 2006, p. 261 Conventional Military Balance on the Korean Peninsula, 2008 64 Pollard, 1985, pp. 20–23. 65 Goulden, 1982, p. 24 66 Dick Nantos, 2008, October 9, 2008 67 Dick Nantos, 2008, October 9, 2008 63 The

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aggressors – especially China and Japan. Because of Pyongyang’s propaganda, some North Koreans might also worry about US aggression, which makes it important for the United States to ameliorate North Korean anxieties as circumstances warrant. Korea has been the victim of foreign aggression throughout history as noted, except for a respite when it was under Chinese suzerainty from the mid-seventeenth to late nineteenth centuries. Dependence on Chinese protection weakened Korea’s ability to maintain appropriate defense forces and thus left it vulnerable to Japanese aggression in the late nineteenth and early twentieth centuries. The consequences for such a lack of preparedness included the end of Korea’s 1,200 year history as a unified sovereign state in 1910, brutal colonization from 1910 to 1945, and lingering bitter national division since then. Koreans have yet to realize their historic status as a unified sovereign state from Mount Halla in South Korea’s Cheju province to Mount Baekdu on the North Korea–China border. Therefore, one should not expect Koreans to place their future security at risk if the assumed Korean Peninsula peace mechanism is implemented. South Koreans will probably continue the ROK– US alliance and host US Forces Korea to deter foreign aggression. North Korea will probably concur with an adjustment of USFK’s mission to include a regional balance of power role, based on a conversation between North Korea’s Chairman Kim Jong-il and ROK President Kim Dae-jung during the first inter-Korea summit in June 2000.68 These likely developments imply a new role and mission for USFK to help maintain a balance of power in the post-peace mechanism period. Adjusting USFK’s ability to deter other aggression in East Asia would help maintain regional security over the long term. US military units should remain garrisoned south of the Han River to avoid worrying Chinese national security planners. The withdrawal of USFK, on the other hand, would likely alarm US allies and others who worry that China might try to expand its influence in the region with military pressure or overt force. Another way to assure North Koreans that they need not fear US aggression would be for Washington to steadily improve relations with Pyongyang on a patient, transparent, verifiable, and mutually beneficial basis. Then, when conditions warrant, Washington and Seoul should consider expanding the ROK–US mutual defense treaty to include North Korea. Essential conditions for this major step would include North Korea becoming a confirmed nonnuclear weapons state and resolution of

68 James

Morrison, “EMBASSY ROW: DEFENDING THE TROOPS,” The Washington Times, June 28, 2000, http://www.nautilus.org/archives/napsnet/dr/0006/JUN29.html#item5, accessed 11.10.2008. Former ROK Ambassador to the United States Hong Choo-hyun told the Japanese Kyodo News Service that ROK President Kim Dae-jung defended the presence of US troops in his country at the inter-Korean summit with the DPRK, saying their deployment prevents regional domination by the PRC or Japan. He said that the DPRK’s Kim Jong-il “showed understanding” toward Kim Dae-jung’s explanation.

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the “Korea question,” perhaps through each Korea’s diplomatic recognition of each other as sovereign, preunified Korean states.69 Potential features of a peace dividend for South Korea and North Korea are discussed in the sections “Republic of Korea (South Korea)” and “Democratic People’s Republic of Korea (North Korea)”, respectively. The section “Managing Expectations” provides some additional thoughts to help manage expectations, and the section “Implications for US Forces Korea” outlines implications for USFK.

Republic of Korea (South Korea) We should expect South Koreans to seek a modest peace dividend and apply it to improve the social safety welfare net, including elder care if the envisioned peace mechanism and ROK–US alliance assure South Koreans that the ROK’s national security is not at imminent risk. The funding for this peace dividend quite possibly could come primarily from economic gains attributable to increased foreign investor confidence and such related factors addressed by Dr. Deok-Ryong Yoon elsewhere in this volume. Other economic benefits are expected as South Koreans expand their economic presence in North Korea to build closer relationships, take advantage of the low-cost labor market, and help North Koreans learn how a market economy works. Such goals would probably be somewhat independent of Pyongyang’s ability to establish a favorable business environment. How much Seoul would reduce military spending, however, is difficult to predict, given concerns about traditional aggressors among their neighboring countries. Koreans terribly miscalculated their security environment in the late nineteenth century and consequentially lost their country, which remains tragically divided. They are not likely to repeat this mistake. South Korea’s biennal Defense White Papers routinely detail the military capabilities and trends of China, Japan, Russia, the United States, and of course North Korea. ROK security planners consider the military capabilities of neighboring countries when crafting force structure and acquisition plans. Defense Reform 2020 calls for cutting the ROK military manpower approximately 25 percent from 681,000 personnel in 2005 to about 500,000 in 2020. The envisioned force will be more mobile and dependent on technology than the current force. But because that technology is expensive, Seoul has envisioned increasing the defense portion of the annual government budget by 6.2 percent from 2005 to 2020. Defense spending was forecast to peak at 3 percent of GDP in 2015

69 Such

recognition should involve the exchange of diplomatic missions, for example, and would be a qualitative improvement over the acknowledgements inherent in each country’s UN membership and the 1992 inter-Korea “Agreement on Reconciliation, Nonaggression, and Exchanges and Cooperation. . .” – aka the “Basic Agreement.”

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and level off at 2.3 percent in 2020, assuming the reforms are accomplished as planned.70 Seoul’s per capita income is the second highest among the five Northeast Asian countries but its military spending as a percentage of GDP is second lowest among this group. In descending order, Northeast Asian country military spending as a percentage of GDP is North Korea – estimated 25 percent (ongoing); China – 4.3 percent in 2006; Russia – 3.9 percent in 2005; ROK – 2.7 percent in 2007;71 and Japan – 0.8 percent in 2006. Washington spent an estimated 4.06 percent in 2005. By comparison, the average amount that OECD countries spent was about 1.8 percent (Table 6.5).72 North Korea has quantitative advantages over the ROK in several areas, aside from whatever nuclear weapons North Korea might have in its arsenal. So how much will Seoul cut its defense budget? Much depends on how it assesses its security environment and the arms control measures of the envisioned peace mechanism. Given North Korea’s quantitative advantages, the peace mechanism’s arms control measures would probably call for the two Koreas to achieve rough parity in measurable resources (Table 6.6). Such a call would not yield a significant peace dividend to South Korea, but it could for North Korea as it cuts forces to achieve rough parity with the ROK. There is a temptation to assume that a credible peace mechanism will prompt Seoul to cut its defense spending to approximate the OECD average. While some South Koreans might welcome such a significant budget cut, we should expect decision makers to weigh the implications of such a cut for Korea’s national security in their historically dangerous neighborhood. For example, if a credible peace mechanism were implemented in 2009, planning for a peace dividend would probably focus on the 2011 budget year, at earliest. Let’s assume that South Korea’s GDP had grown to about $1.5 trillion (PPP) in Table 6.5 Estimated military Spending as a percentage of GDP

70 Defense

Reform 2020: The Way Ahead, 2005, pp. 40–41 sources note that ROK defense spending was actually 2.8 percent. 72 The World Factbook, US Central Intelligence Agency, https://www.cia.gov/library/publications/ the-world-factbook/, accessed November 21, 2008 – the year of the estimated spending for each country is ROK, 2006; DPRK, ongoing; China, 2006; Japan, 2006; Russia, 2005; USA, 2005. Estimates for 25 of the 30 OECD countries are as of 2005. Three – Australia, Korea, and Mexico – are as of 2006. Two – the Czech Republic and Denmark – are as of 2007. 71 Some

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Table 6.6 Selected ROK and DPRK military resources73 (As of December 2006)

Overall military manpower Army Main battle tanks Armored vehicles Field artillery (e.g., cannons) Multiple launch rocket systems Navy Naval warships Air Force Fighter aircraft

ROK

DPRK

> 674,000 2,300 2,500 5,100 200 120 500

> 1,170,000 3,700 2,100 8,500 4,800 420 820

Source: ROK 2006 Defense White Paper.

2011, its defense spending was 2.9 percent of GDP per the Defense Reform 2020 program, and the OECD average hovered around 1.9 percent. Under this scenario, Seoul would cut its military spending by 1 percent of GDP and gain a $14.7 billion peace dividend. But what would be the security implications? Such a cut would prevent the timely achievement of the modern military envisioned by Defense Reform 2020. Given the aging of the Korean population and corresponding reduction in the pool of young adults to serve in the military, one questions the feasibility of suspending the defense reform program. More likely, South Korea will reassess its security environment, perhaps along the lines of the US “Bottom Up Review” in the immediate post–Cold War years. Two key factors affecting the ROK reassessment will be the state of the ROK–US mutual defense treaty and ROK confidence in US ability to help it defend against external aggression. Another will be the military capabilities and trends of surrounding countries. Political factors, of course, will affect the reassessment, given previously mentioned concerns regarding the social safety net and elder care. One other possible factor affecting South Korea’s future military and a peace dividend is the tantalizing prospect that the two Koreas might form some sort of a confederation after resolving the Korea question and ending inter-Korea hostilities. Planning to establish a confederated military would require significant decisions on command and control, force structure, training, and zones of operations, to name just a few variables. Such planning would take a long time, and therefore seems infeasible in the coming five years, for example. To conclude, Seoul’s defense spending is relatively justifiable over the years required to achieve the goals of Defense Reform 2020. Sufficient consensus seems to exist in the MND, Blue House, and National Assembly to transform the manpowerintensive military into a more modern force to meet current and future defense requirements. Therefore, Seoul seems unlikely to seek significant cuts in military spending prior to achieving the Defense Reform 2020 goals. The primary source of funds for a South Korean peace dividend will probably be the indirect economic benefits of a peace mechanism. 73 2006

Defense White Paper, December 2006, p. 261

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Democratic People’s Republic of Korea (North Korea) A number of potential features of a peace dividend for North Korea come to mind if Pyongyang can divert a significant portion of its extensive defense spending to fund peacetime activities. In addition to Pyongyang substantially cutting the size of its active duty military forces to achieve rough parity with South Korea, for example, we might also imagine it dramatically cutting the funds for its defense industry, military operations, research, development, etc., and applying the savings to the production of consumer goods and services for domestic and export purposes. Coupling such actions with such other initiatives as inter-Korea economic projects and other special economic/free trade zones for foreign enterprises and newly privatized or quasi-public North Korean firms could provide employment opportunities for newly discharged military personnel. One can even envision International Financial Institutions (IFIs) and other foreign entities providing substantial grants and loans and growing foreign direct investment. All this and more is imaginable if the North Korean government were to implement a range of structural reforms and practices to attract foreign business, investments, and loans. And that is the rub. Not only has Pyongyang been unable to reform its socialist, Juche system for its own good, but its system also does not inspire confidence among foreigners that they can profitably do business there, even if all foreign economic sanctions were lifted. From a foreign perspective, the North Korean system is like a cracked pot. A Korean proverb reminds us: Putting water in a cracked pot is hopeless.

Therefore, foreigners are not likely to provide significant economic assistance or invest in North Korea unless Pyongyang implements a range of major reforms that will inspire confidence among foreigners that they can profitably invest in North Korea and expect reasonable economic development from loans and grant aid. The burden is on Pyongyang to create such favorable foreign perceptions and help launch a virtuous circle. But North Koreans cannot do it alone. Foreign assistance is needed. Therefore, the primary features of a peace dividend for North Korea should include internal and foreign initiatives. Both are needed to help North Korea break out of the vicious circle created by its siege mentality, dysfunctional ideologies, unfamiliarity with proven politico-economic concepts, and fear of change. Some measures are suggested below but not sequentially. The most important internal component for North Korea is its willingness to implement major structural and ideological reforms. While this would be a difficult decision for Pyongyang, certain prerequisites will include its confidence in the new security environment and its ability to govern in a reformed DPRK. The primary features of a peace dividend for North Korea, therefore, should include mutually complementary internal and foreign measures:

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1. Suggested Foreign Measures to help start a Virtuous Circle Foreign entities confident that North Korea’s reform efforts are sincere and likely to bear fruit should look for opportunities to improve relations with and assist North Korea along the following lines: a. End economic sanctions. (1) Presumably the United Nations will lift the sanctions it imposed after North Korea’s several ballistic missile tests in July 2006 and nuclear tests in October 2006 and May 2009. (2) Other countries should also lift their sanctions against North Korea commensurate with their assessment of North Korea’s confidence building measures. (3) The United States should be especially alert to opportunities to reciprocate to sincere North Korean initiatives. One bellwether indicator will be Pyongyang’s approach to implementing ideological and structural reforms. b. Normalize relations (1) The United States should seek to develop a friendly relationship with Pyongyang as it has with Seoul, mindful that the Korean Peninsula is strategically important. Of course, this will take time, but every moment patiently spent over time in changing North Korean perceptions to regard the United States as a friend will be time well spent. (a) Americans should keep three principles in mind as they deal with North Koreans: transactions should be transparent, verifiable, and mutually beneficial. (b) In addition, Washington should carefully coordinate with Seoul to develop various US and allied approaches to North Korea to strengthen the alliance and ensure that Pyongyang does not play Washington off against Seoul. (c) Normalizing US–DPRK diplomatic relations is an appropriate goal. But it should be done on mutually respectful terms, as Koreans have bad memories of “unequal” relationships. As the North Korean view of what constitutes “normal” relations is not clear, significant effort should be dedicated to ensuring that Americans and North Koreans have common understandings. (d) Developing a range of personal and institutional relationships is a necessary prerequisite for normalizing relations. At the same time, Americans should be cautious that North Koreans don’t try to manipulate them. (e) The United States should provide practical assistance to help North Korea apply for membership in the International Monetary

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Fund and other IFIs provided North Korea no longer qualifies for inclusion on Washington’s list of states supporting terrorism.74 (f) Washington should also be willing to help North Koreans learn proven economic and governance principles and practices to help it implement the major reforms that will be essential to take advantage of a peace dividend and create a system that works. (g) To help build confidence and achieve important national interests, some measures could be initiated before a Six-Party peace mechanism is concluded if conditions warrant. For example: i. The United States and North Korea should normalize relations with each other in consideration of long-standing statements of such intent, resolution of the “Korea question” and nuclear issue, and the confidence that will come from a patient series of transparent, verifiable, and mutually beneficial transactions. US human rights concerns are addressed under “Internal Features” below in part 2.a.(2). Waiting for a Six-Party peace mechanism is not necessary but close coordination with Seoul is. ii. The United States and Seoul should consider expanding the ROK–US security alliance to include North Korea should circumstances warrant. Key prerequisites would include North Korea’s status as a verified nonnuclear weapons state, resolution of the “Korea question” and steady improvement in US–DPRK relations (in full coordination with Seoul). iii. The United States should expand its national interests to include the peaceful unification of Korea on terms mutually agreeable to Koreans, recognizing this will likely be a lengthy process. Washington should then develop a national strategy and policies for the long term while also coordinating with Seoul for a peaceful bilateral alliance approach. A peacefully unified Korea – particularly one aligned with the United States – would best serve the interests of maintaining peace and promoting prosperity, given the likelihood of increased trade throughout Eurasia. USFK units should remain south of the Han River. (2) Other countries should also seek to improve and ultimately normalize relations with Pyongyang along the lines just outlined. c. Other foreign entities (1) The IMF and other IFIs should welcome North Korea’s application for membership per the existing standards for all members. 74 President

George W. Bush removed North Korea from the US terrorist list on October 11, 2008.

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(2) The IFIs should provide education and training to North Koreans to help them modernize their system in addition to advancing financial assistance as circumstances warrant. (3) Foreign businessmen should consider investing in North Korea as they gain confidence that North Korea is sincere about transforming its system to something that is more functional and less threatening than the current system. (4) Russia, Japan, and China should consider helping North Korea rehabilitate infrastructure facilities that they helped build – for example, power plants in the case of Russia and Japan. A likely prerequisite for Japanese support will be resolution of the North Korean abductee issue. (5) On a final note, foreigners should exercise caution to avoid enabling dysfunctional practices and North Korean manipulation to gain some perceived advantage over others. North Korea has a long history of “playing off” one foreign actor against another. 2. Suggested Internal Measures to help start a Virtuous Circle Initiatives that Pyongyang should implement to gain a peace dividend include the following: a. Replace or revise anachronistic core principles including Juche to reflect proven concepts, as the North Korean system demonstrably does not work. (1) Pyongyang should consider studying other socialist countries that have implemented major reforms to improve their economy and build new governing legitimacy. IFIs and other foreign entities are additional resources to help North Koreans think about ways to reform their system. While foreigners might want North Korea to become a democracy and market economy, this is not likely to happen in the near term. (2) Juche requires major reform. North Korea’s strict concept of selfreliance in an interdependent world is a prescription for its continuing isolation and poverty. Juche’s call for socializing the Korean Peninsula would conflict with the likely intent of a Six-Party peace mechanism, and its anti-American components would hinder US–DPRK rapprochement. Another byproduct of Juche and hindrance to US– DPRK rapprochement is Pyongyang’s failure to respect human rights, which cruelly imprisons domestic critics,75 creates disincentives for creating a productive workforce, and greatly degrades foreign respect for the government. North Korea should reach out to foreign entities for assistance in crafting ways to reform this dysfunctional ideology and its practices. 75 For more on North Korea’s prison system, see Kang and Rigoulot, 2001, Basic Books, a member

of the Perseus Books Group, New York, NY

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Changing Juche will be as difficult for North Koreans while the Kim Il-sung family rules as changing Maoism was for the Chinese while Madam Mao and the Gang of Four ruled. But where there’s a will, there’s a way. (3) North Korea’s “military first” policy also requires reform so that North Koreans can begin to develop an economy that will meet national needs. (4) Other major reforms are needed to create a functional economy with particular attention to the agricultural and industrial sectors and the overall business climate. (5) North Korea should implement a range of reforms regarding industrial and economic affairs to establish a proper balance between “civilian” and defense industries and heavy and light industries. It should also consider establishing special economic and free trade zones that will induce foreign investment. It may be particularly difficult for North Koreans to overcome their fear of foreigners, but doing so is a prerequisite for progress. b. Develop a new, growth-oriented, transparent business climate that rewards foreign expectations for a reasonable return on investment. Foreigners – especially in the private sector – are not likely to provide financial assistance or invest in North Korea unless they believe they can do so safely and profitably. Expecting a foreign firm to invest with no hope for a reasonable return on investment is unreasonable. In developing a new business climate, North Koreans should give attention to such important topics as rule of law, protecting intellectual property rights, facilitating the repatriation of funds, and permitting foreign employers to pay North Korean workers directly. South Koreans may be a particularly good resource to help North Koreans with these difficult reforms. Additional resources are IFIs and friendly countries, which at this point (after a credible peace mechanism, for example) should include the United States. c. Peace dividends With such reforms in place, a restructured economy poised to move in a positive direction, and a virtuous circle coming into sight, North Korea can start to implement a range of measures to achieve normal attributes of a peace dividend, including: If a credible peace mechanism were implemented in 2009 (as outlined in the South Korea discussion) and Pyongyang were to implement needed reforms and cut its military spending in 2011 to match that of South Korea as a percentage of GDP,76 it could achieve a significant peace dividend of more than $8 billion. Of course, demobilizing troops into an economy that cannot profitably put them to work can be problematic. Therefore, 76 South Korea had planned to spend 2.9 percent of GDP on military spending in 2011 as mentioned

in Section “Republic of Korea (South Korea)”.

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this estimate wholly depends on economic liberalization featuring enough reforms to provide gainful employment for the huge number of discharged military personnel under the envisioned reduction in force.77 An $8 billion peace dividend could be exceptionally useful to rebuild North Korea’s national infrastructure and improve the social welfare system. Indirect benefits stemming from more workers in a reformed economy could contribute further to expanding the GDP.

Managing Expectations So many variables attend this discussion of a peace dividend for North Korea that we should keep some possible scenarios in mind. One scenario is the complete implementation of a peace mechanism that inspires North Korea to launch a virtuous circle per the preceding suggestions to dramatically cut military spending, embrace foreign investment; enthusiastically apply for membership to the IMF and other IFIs; subsequently demonstrate the requisite transparency to inspire IFIs and others to advance loans and promote development projects, for example. A second scenario envisions a peace mechanism that inspires only partial confidence by Pyongyang and thus, a reduced peace dividend. For example, one stimulant for this scenario could be a Six-Party peace mechanism that would not assure Pyongyang of its long-term security and would thus discourage it from implementing major reforms to build a functioning system. A final scenario for consideration would emerge if the six parties fail to establish a plausible peace mechanism but the United States and DPRK were to normalize relations, for example. While we should not expect a peace dividend if there is no peace mechanism, there is some value to contemplating how a new North Korean leader (individual or group) who is less paranoid than current incumbents could be positively influenced under such a scenario.

Implications for US Forces Korea US military planning would naturally be affected by a credible inter-Korea peace mechanism, which would include the assumed resolution of the long-standing “Korea question” and North Korean nuclear weapons program. Seoul and Washington would be wise to continue US Forces Korea to help contribute to regional peace and stability. USFK units should be stationed south of the current Demilitarized Zone in South Korean territory to avoid alarming Korea’s neighbors.

77 For

additional information, see Marcus Noland’s Avoiding the Apocalypse: The Future of the Two Koreas, [Petersen] Institute for International Economics, Washington, D.C., June 2000, pp. 266–277

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USFK roles and missions should be adjusted to help guarantee the security of both the Koreas and assure other Asian nations that the United States is well positioned to honor its treaty obligations and contribute to maintaining regional peace. Opponents of USFK who call for its dissolution should consider the implications of such a decision for US ability to achieve its national interests in the East Asia Pacific region. Dissolution of USFK would certainly affect US alliances with South Korea and Japan, US Forces Japan, and the perceptions of other regional states of US dependability should hostilities break out again in the region.

Conclusions Thinking about a peace dividend on the Korean Peninsula merits serious consideration regardless of how difficult it may be to imagine an intra-Korea peace mechanism brokered by the six parties. It merits consideration if only to help us ponder the future state of the strategically important Korean Peninsula and interim measures to achieve it patiently over time. We should not expect an inter-Korea peace mechanism to assuage Korean fears of foreign aggression, unless the mechanism specifically addresses them. Why? Because the Korean Peninsula is the strategic crossroads of East Asia and Koreans believe they have been the victims of almost 1,000 acts of aggression throughout their 4,000 year history. When the East Asia security architecture – including Korea as a protectorate of declining China – collapsed in the late nineteenth century, Korea was wholly unprepared to cope with rising Japan. As a result, it was no match for Imperial Japan’s modern, aggressive military. It became a Japanese colony from 1910 to 1945 and a victim of great power politics upon its liberation. Koreans – north and south of the DMZ – are likely to keep this history in mind as they resolve to no longer threaten one another with a military attack. Neither Seoul nor Pyongyang is likely to demobilize the bulk of their military forces. Their challenge will be to develop a military force and alliances that can defeat foreign aggression if deterrence fails. Turning to a peace dividend for the two countries: South Korea has a robust electorate that is fully capable of debating how to apply a peace dividend. Because South Korea has a relatively modest social safety net and growing elder-care needs, South Koreans are likely to debate ways to reallocate some defense spending to these and other areas. Commitments to achieving military modernization per the Defense Reform 2020 plan imply that major cuts in military spending are unlikely until the modernization is completed. Funds for a peace dividend will probably come from expected economic benefits following the end of inter-Korea tension, resolution of the North Korean nuclear issue, and the “Korea question.” North Korea’s decisions, however, are more difficult to anticipate. The leadership’s siege mentality may be understandable but it seriously inhibits the country’s healthy development.

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Economic growth depends on the wise application of proven principles and development of mutually beneficial trading relationships with other countries. To grow, Pyongyang needs to develop policies and practices that will enable it to interact successfully with foreigners, both to facilitate exports and to attract foreign investment. Whether it will have the courage to undertake the broad range of needed reforms remains to be determined, but if it were to do so, a peace dividend of at least $8 billion seems feasible in the first year it is implemented. History teaches us that only the DPRK leadership can chart its course, and foreign efforts to pressure the leadership to act contrary to its perceived self-interest will fail. If the North Korean leadership wants to put North Korea on a course to prosperity, then Pyongyang would be wise to move away from its demonstrably unsuccessful socialist model to one that can work. Building confidence among North Koreans that they don’t have to fear foreign aggression and can therefore reallocate some funds from defense spending to other peacetime priorities is as essential as it is difficult, given Korea’s troubled history at the strategic crossroads of East Asia. Foreign entities including the United States, therefore, have an important role to inspire and enable North Koreans to reform their highly authoritarian socialist system. Foreign entities should begin now to improve relations with North Korea – on a transparent, verifiable, and mutually beneficial basis – and not wait for a peace mechanism to be implemented. Starting now is important because building confidence takes a long time.

References Articles 25, 63, 70–72. (1998). Socialist Constitution of the Democratic Peoples’ Republic of [North] Korea. 1998 unofficial translation. http://www1.korea-np.co.jp/pk/061st_issue/ 98091708.htm Chamberlin, Paul. (2001). Korea 2010: The Challenges of the New Millennium. Washington, DC: The CSIS Press. Defense Reform 2020 – The Way Ahead (2005). Seoul: Ministry of National Defense. Defense White Paper (2006). Seoul: ROK Ministry of National Defense. Downes, John and Jordan Elliot Goodman (2008). Dictionary of Finance and Investment Terms, 7th edition. Barron’s Educational Series, Inc. http://www.answers.com/library/Finance%20and% 20Investment%20Dictionary-cid-233495, accessed 9.23.2008 Emergency and Humanitarian Country Report – DPR Korea (2007). World Health Organization. http://www.searo.who.int/LinkFiles/EHA_CP_DPR_Korea.pdf (accessed October 3, 2008). Emergency Operation Democratic People’s Republic of Korea; Title: 10757.0- Emergency Assistance to Population Groups Affected by Floods and Rising Food and Fuel Prices. (2008). World Food Program. http://www.wfp.org/operations/current_operations/project_docs/ 107570.pdf (accessed October 3, 2008). Goulden, Joseph C. (1982). Korea – The Untold Story of the Korean War. New York, NY: McGrawHill Book Company. Hunter, Helen Louise (1999). Kim Il-song’s North Korea. Westport, CT and London: Praeger. Jackson, Richard, Neil Howe and Keisuke Nakashima. (2007). The Aging of Korea – Demographics and Retirement Policy in the Land of the Morning Calm. Center for Strategic and International Studies.

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Joint Statement of the Fourth Round of Talks of the Six-Party Talks (2005), Section IV from talks held in Beijing on September 19, 2005. http://www.state.gov/r/pa/prs/ps/2005/53490.htm, accessed 9.10.1.2008 Kang, Chol-hwan and Pierre Rigoulot (2001). Aquariums of Pyongyang: Ten Years in the North Korean Gulat. New York, NY: Basic Books. Military (2008). The World Factbook, U.S. Central Intelligence Agency. https://www.cia.gov/ library/publications/the-world-factbook/geos/ks.html#Military (accessed October 7, 2008). Nantos, Dick (2008). The North Korean Economy: Leverage and Policy Analysis. The Congressional Research Service. http://www.nautilus.org/mailman/listinfo/napsnet (accessed October 10, 2008). North Korea – The Foundations for Military Strength (1991). US Defense Intelligence Agency. North Korea Development Report (2003/2004). Seoul: Korean Institute for International Economic Policy North Korea’s Economic Slide Picks Up Speed (2008). Joongang Ilbo, June 19, 2008 edition. http:// joongangdaily.joins.com/article/view.asp?aid=2891287, accessed 10.5.2008. North Korea Energy Overview (2006). United States: Energy Information Agency. http://www.eia. doe.gov/emeu/cabs/North_Korea/EnergyOverview.html (accessed on October 4, 2008). Policy Brief – Economic Survey of Korea (2007). OECD Observer, Organization for Economic Cooperation and Development. Pollard, Robert A. (1985). Economic Security and the Origins of the Cold War 1945–1950. New York, NY: Columbia University Press. http://www.mtholyoke.edu/acad/intrel/pollard.htm (accessed October 6, 2008). Survival of the Fittest (2008). The Economist (Print edition). September 25, 2008. The Conventional Military Balance on the Korean Peninsula (2008). International Institute for Strategic Studies. http://www.iiss.org/publications/strategic-dossiers/north-korean-dossier/ north-koreasweapons-programmes-a-net-asses/the-conventional-military-balance-on-thekore/ (accessed October 6, 2008). The Odd Couple (2008). The Economist (Print edition). September 25, 2008 edition. http://www. economist.com/specialreports/displayStory.cfm?STORY_ID=12237163, accessed 10.6.2008. The World Factbook (2008). U.S. Central Intelligence Agency. https://www.cia.gov/ library/publications/the-world-factbook/geos/kn.html#Econ; https://www.cia.gov/library/ publications/the-world-factbook/geos/ks.html#Econ, accessed 9.24.2008 TRAVEL REPORT [regarding] Korea, North (DPRK) (2007). Canada: Foreign Affairs and International Trade. http://www.voyage.gc.ca/dest/report-en.asp?country=152000#7 (accessed October 3, 2008). U.S. Census Bureau, International Data Base (2008). http://www.census.gov/cgi-bin/ipc/idbagg; http://www.census.gov/cgi-bin/ipc/idbsprd; http://www.census.gov/cgi-bin/ipc/idbagg, accessed 10.6.2008 Von Hippel, David and Peter Hayes (2007). Fueling DPRK Energy Futures and Energy Security: 2005 Energy Balance, Engagement Options, and Future Paths. The Nautilus Institute for Security and Sustainability in collaboration with the Korea Energy Economics Institute. http://www.nautilus.org/fora/security/07042DPRKEnergyBalance.pdf (accessed on October 4, 2008).

Chapter 7

Peace Dividend and Regional Stability on the Korean Peninsula: Focusing on the South–North Korea Cooperation Fund Allocation B. Jeong

Introduction The Korean Peninsula is the last remaining place that holds the legacy of the Cold War. For that reason, the discussion of the peace dividend, considered outdated historical coinage, is still continued in Northeast Asia. This chapter begins with addressing the relevance of this discussion for the Korean Peninsula not because a stable peace has been attained and the benefits are starting to materialize but because Northeast Asia still suffers from a disturbing peace deficit. Denuclearization of this region seems to be out of reach and the arms race is an accepted truth. The concept of the peace dividend emerged when Thatcherism replaced governmental interventionism with neoliberalism, and the Western democracies pushed the Eastern Communist bloc off the world stage. Discussion of the peace dividend has thrived since the end of the Cold War (Gupta, Clements, Bhattacharya, & Chakravarti, 2002). The disruption of the rival bipolar system of the Cold War and the emerging skepticism regarding the role of government in the era of supplyside economics brought the necessity of thoroughly reviewing the utility of military expenditures within the now-defunct Cold War framework (Gupta et al., 2002). Because of changes at the global and regional levels since the introduction of the concept of the peace dividend, this chapter starts with an analysis of the military environment on both of these levels and seeks to measure the extent to which peace has been established in the region. Based on a diagnosis of the current arms race on the Korean Peninsula, this chapter focuses on the process of a dynamic change from a military security-dominated perspective toward one of social and economic development. This study offers a framework of change that adopts the three-domain model of Cohen and Arato (1992) utilizing empirical data from the South–North Korea Unification Fund as a proxy that demonstrates the emerging nonmilitary and multiactor approach on the Korean Peninsula. Cohen and Arato’s triangular model B. Jeong (B) Graduate School of Public and International Affairs, University of Pittsburgh, Pittsburgh, PA, USA e-mail: [email protected]

B. Seliger, W. Pascha (eds.), Towards a Northeast Asian Security Community, The Political Economy of the Asia Pacific, DOI 10.1007/978-1-4419-9657-2_7, C Springer Science+Business Media, LLC 2011

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provides some significant implications in that it pays attention to the role of civil society as a facilitator of social change. It also focuses on the balance among three social domains – the state, civil society, and the market. The chapter employs the proxy data to demonstrate a comprehensive overview of the longitudinal change and cross-sectional interaction of two sides of the peace dividend approach: mobilization of civil society (social spending) and the market (investment for economic cooperation). To sum up, by linking the concept of the peace dividend with the three-domain model and using the empirical data from the South–North Korea Cooperation Fund, this chapter works to encompass the dynamic process of social change toward the development of society and the establishment of regional security.

The Peace Dividend and Northeast Asia Definition of the Peace Dividend In this chapter, the peace dividend is defined as a share of the benefits from keeping peace through a reduction in military spending with the involvement of multiple actors. This definition has two main components: First, the bottom line of this concept lies in calculating the benefits from the conversion of military spending into nonmilitary purposes. Second, the concept of a peace dividend highlights the process in which various actors are involved in security and development in regional and global systems. Although the first component of the peace dividend has been addressed and examined in previous literature (Feffer, 2008; Gupta et al., 2002; Knight, Loayza, & Villanueva, 1996; Seliger, 2008; UNDP, 1994), the components of the dynamic process among the comprehensive domains – the state, civil society, and the market – have not yet been fully discussed. By articulating the components of process and utility as a tool, this chapter contributes to the discussion in two regards. First, the concept of the peace dividend can be significantly addressed even when a “peace deficit” – as mentioned Feffer (2008) and seen in East Asia – is the main atmosphere. Second, it extends the usage of this concept as a vehicle for facilitating change in a regional or global system toward peace and cooperation as related to the attributing actors. For example, Northeast Asia is expected to go through a change in terms of its security system and market development.1 In this case, the peace dividend is employed as a central means to stimulate involvement by various domestic, regional, or global actors and expand the concept of security by linking it with the idea of development.2

1 This

model will be explained later in the research framework of a triangle-stage model. example, UNDP (1994, p. 58) pointed out that “A genuine improvement in human security requires that the ‘peace dividend’ be fully harnessed” through its annual Human Development

2 For

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Peace Dividend and Regional Stability on the Korean Peninsula: Focusing . . .

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The Arms Race and the Peace Dividend on the Korean Peninsula The concept of the peace dividend has evaded a comprehensive analytical examination because it has been discussed in a highly sensitive but rapidly changing political environment. For example, the concept of the peace dividend has emerged since Thatcherism and Reaganomics replaced interventionism with neoliberalism. Given the background of the introduction and emergence of the concept of the peace dividend on the global level, a careful examination of its relevance in regard to the Korean Peninsula is required. The benefits of the peace dividend for the Korean Peninsula are estimated to be higher than those for other regions or countries since both the Koreas have excessive military expenditures. This abnormally high level of military expenditure has caused a “growth-retarding” effect on the Korean Peninsula because it obstructs “capital formation” and distorts “resource allocation” (Knight et al., 1996, p. 1). As the “Korea Discount” noted, the security problems caused by military confrontation between the two Koreas have undermined the tax base of the governments because they shrink business activities and reduce foreign direct investment (Salmon, 2007).3 The following sections provide a more detailed examination of the security situation in Northeast Asia and the Korean Peninsula by considering the relevance of the peace dividend on the global, regional, and national levels. Global Level: The End of the Cold War and Efforts for Threat Reduction There are various programs and projects that have implemented the idea of a peace dividend on the global level. The Strategic Arms Reduction Treaty (START) led to a decrease in military spending globally during the late 1980s through the late 1990s. These cuts in military spending over a ten-year period can be interpreted as the result of the end of the Cold War. START I and II are the results of negotiations between the United States and the Union of Soviet Socialist Republicans. The Nunn-Lugar Cooperative Threat Reduction program demonstrates well the efforts of the United States to address nonproliferation operations. It also shows the transition of threat reduction programs since the Soviet Nuclear Threat Reduction Act of 1991 and the Cooperative Threat Reduction Act of 1993.

Report. In this case, the extension of the concept of security, in tandem with development, is supported by the new approach to the peace dividend. 3 The opposite perspective argues that defense spending is beneficial to economic growth because it provides both internal and external security, the foundation of economic activity. The establishment of security, despite the fact that it is supported by military force, boosts private savings and investment and attracts foreign investment. Most of the literature, however, adopts the perspective that a decrease in military spending encourages economic growth.

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Regional Level: The Arms Race and the Absence of a Security Community in Northeast Asia The arms race in Northeast Asia is salient, and the peace deficit rather than the peace dividend concept is more appropriate to depict the current situation in Northeast Asia surrounding the Korean Peninsula (Feffer, 2008). Unlike other regions, there is no security community in Northeast Asia, which means that bilateral competition and the arms race between the Koreas are the main traits of this region. The contrast in the pattern of military spending among the regions clearly indicates this vestige of the end of the Cold War shown in Fig. 7.1. For example, Asia and Oceania show a continuous increase in military spending during the 1990s as the Americas exhibited a decreasing pattern. A continuous increase in military expenditures in East Asia suggests that this region lies outside of the global trend of the end of the Cold War. This data may imply that East Asia might need a different approach in terms of leveraging the concept of the peace dividend. In East Asia, the peace dividend may be mobilized as a vehicle to trigger a change in regional stability unlike World War I and World War II, which brought about discussion of the conversion of budget usage from the realized military spending cuts. Country Level: Korean Peninsula and Participants of the Six-Party Talks Ideological and military confrontation is preventing a cutoff in military spending on the Korean Peninsula and the arms race is salient, as shown in Fig. 7.2. The United States, China, and Russia have shown a steep rise in military spending since the late 1990s. South Korea is no exception in terms of the increase in military expenditure; it has continuously increased its military spending in the two decades since 1988.4 According to Global Security data shown in Table 7.2 in appendix, both the Koreas take a high position in the ranking of the size of defense spending. South Korea spent US$21.1 billion, taking ninth position, and North Korea spent US$5.0 billion and held the twenty-fourth place. Given its national economy facing intermittent nationwide famine, North Korea in particular has spent far beyond a level that the current government can rightly afford to sustain. As shown in Fig. 7.2 and Table 7.2, the United States and Russia decreased their military expenditure during the 1990s. The United States decreased its expenditure on the military from $483.9 billion in 1988 to $328.6 billion in 1998. Russia’s expenditure decreased from $42.5 billion in 1992 to $13.6 billion in 1998. Japan’s rearmament, accompanying the competition for regional hegemony with China, has been another regional threat in the Northeast Asian region. North Korea’s movement to possess nuclear weapons has been used as justifying rearmament in Japan and actually triggered militarism there.5 As Feffer (2008) noted, Northeast Asia

4 Although military expenditures decreased in 1999, it seems to be the result of the financial crisis. Given the exceptionality of the financial crisis, the phrase “continuously increased” may be seen as appropriate. 5 For example, Japan upgraded the country’s defense agency to a full ministry. (BBC News, December 15, 2006, Available at http://news.bbc.co.uk/2/hi/asia-pacific/6182087.stm)

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1400 1200 1000 Africa 800

Americas Asia and Oceania

600

Europe 400

East Asia

200

World total

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

0

Fig. 7.1 Regional comparison of military spending (Unit: million USD) Source: Stockholm international peace research institute (2009)6 . Note: Military expenditure7 by region in 1995 constant U.S. dollars. Data retrieved July 26, 2009. Available at http://milexdata.sipri.org (see Table 7.2, Military expenditure by region in appendix for the raw data).

Table 7.1 Comparison of military expenditures by country Country

Military expenditure (U.S. Billion dollars)

Budget period

Rank

United States China Russia Japan South Korea Taiwan North Korea

623 65.0 50.0 41.75 21.1 7.9 5.0

FY08 budget 2004 2006 2007 2003 est. 2005 est. FY02

1 2 3 6 9 19 24

Source: Global Security (2009). Note: Global Security data utilizes various sources, including CIA The World Factbook, 2002, 2006; World Military Expenditures and Arms Transfers; and Stockholm International Peace Research Institute (SIPRI). 6 Stockholm International Peace Research Institute (SIPRI) is an independent international research institute that focuses mainly on global peace and conflict. It provides sources for the analysis of arms control, disarmament, and conflict management as well as global and regional security. (Accessed July 28, 2009. Available at http://www.sipri.org/about.) 7 SIPRI uses three sources for its military expenditure data, ordered by priority. First, it mainly uses official data from national governments. Second, when it is not feasible to get data from the official governmental source, it uses data quoted by international organizations such as NATO (North Atlantic Treaty Organization) and the IMF’s Government Financial Statistics Yearbook. For example, in many cases developing countries do not provide reliable sources for military expenditure data. Third, as a last resort, it utilizes specialist journals or newspapers. (Accessed July 28, 2009. Available at http://www.sipri.org/about.)

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500,000

400,000 South Korea Japan

300,000

China Taiwan Russia

200,000

USA 100,000

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

0

Fig. 7.2 Military expenditure of United States and countries in East Asia (Unit: million USD) Source: Stockholm International Peace Research Institute (2009). Note: Military expenditure by country in constant 1995 U.S. dollars. Data retrieved July 26, 2009. Available at http://milexdata.sipri.org (see Table 7.2 in appendix for the raw data).

finds itself in a peace deficit rather than benefiting from a peace dividend. Countries in this region are now pouring a staggering amount of money to increase offensive military capabilities. Approximately 65 percent of global military expenditure is attributed to the countries participating in the Six-Party Talks: the United States, Russia, China, Japan, and the two Koreas (Feffer, 2008). North Korea’s desire to possess nuclear weapons has been considered another significant threat to regional security.8 From the perspective of the peace dividend, the use of nuclear weapons as a means of establishing the stability of the regime is a choice centered on a military-focused approach. This chapter intends to seek an avenue for converting this current military-centered peace deficit into a nonmilitary-centered peace dividend by detailing changes within the security development triangle.

8 A U.S. diplomat also expressed worries about a possible regional arms race because of North Korea (Lee, 23 July 2009).

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The Korean Peninsula and the Transition Process Model The Particularity of the Korean Peninsula and the Transition Process Model The particularity of the Korean Peninsula can be explained as follows: First, there has been a continuing confrontation rooted in the Cold War. As discussed previously, military expenditures have never decreased in Northeast Asia, including the Korean Peninsula, during the past 20 years. Furthermore, even before the benefits from the demise of the Cold War flowed into the Korean Peninsula, the post-9/11 backlash brought back an abrupt increase in military spending (Seliger, 2008) on the global level. This backlash and rearmament on the global level combined with the existing legacy of the Cold War has aggravated the security problems in this region. Second, the stability of the North Korean regime is one of the most significant variables affecting regional security in Northeast Asia. The case of the Korean Peninsula is estimated to be more complicated than the cases of Eastern Europe or China because the regime’s stability issue dominates the concerns of North Korea’s military and political leaders (Seliger, 2008). North Korea’s request for bilateral talks with the United States – or even the seemingly irrational negotiation behavior – can be understood in the context of the desire of North Korean leaders and the elite to maintain their current positions. Based on these particularities, this chapter suggests a transition process model from the current military confrontation to regional stability and economic cooperation. This prospect is based on transition among different focuses, including political/military security, social/humanitarian affairs, and economic cooperation and development. It can provide some implications from the peace dividend discussion in regard to the main rationales for catalyzing and accelerating change on the Korean Peninsula toward economic and social development. This study suggests two separate processes for peace building and peace stabilizing on the Korean Peninsula. These two processes can be decomposed and reconstructed by concentrating on the three different focuses – military/security, social/humanitarian, and economic development.

Research Framework and Theoretical Background The main focus of this chapter is the introduction of Cohen and Arato’s threedomain model (1992). This model is intended to delineate a dynamics of change in security and development stages on the Korean Peninsula, leveraging the peace dividend in a broad sense. As mentioned previously, the most significant implication of this work is creating the benefit of the peace dividend under a peace deficit situation, and mobilizing various actors: governmental and nongovernmental, domestic and global, and profit and nonprofit.9 9 This study focuses on the dynamic relations among various sectors (political, economic, and civil) and actors (government, corporations, and nongovernmental organizations). It is an attempt

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Cohen and Arato’s Three-Domain Model This chapter’s model is predicated on Cohen and Arato’s (1992) idea of three domains in society. The three domains are composed of the state, the market, and civil society (Cohen & Arato, 1992). Cohen and Arato differentiate civil society from both the state and the economy. They identify their model as a “society-centered model,” as compared to the “state-centered model” of Hegel and the “economy-centered model” of Marx (p. 411). Following Gramsci and Parsons, Cohen and Arato introduce a three-part model to move “beyond economism and statism” (xiv). They articulate two main questions in terms of constructing a theory of civil society: whether the “economy is included or excluded from the concept of civil society,” as we observe in the debate between Hegel and Gramsci; and whether “civil society” is separated from “political society,” as we see in the debate between Tocqueville and Hegel (p. 75). This chapter attempts to apply this classification of three domains to a dynamic process model in which the relative significance and proportion of each domain change. Cohen and Arato’s civil society and political theory were not developed as a dynamic model that focuses on the change and transition among domains; rather, it attempts to set boundaries among the sectors, clarifying the identities of different parts and domains. However, the chapter addresses the changes over time of the roles among sectors and domains, denying the fixed portion of role distribution. Figure 7.3 demonstrates the research framework that utilizes two pillars of the peace dividend. It also illustrates the steps and interactions among those focuses. The establishment of a stable peace is targeted through the engagement of nongovernmental actors in humanitarian affairs and the support of economic cooperation. The enhanced role of nongovernmental actors and the increased use of the market then reinforce each other.

Data Source This chapter uses data from South Korea’s White Paper on the South–North Korea Cooperation Fund. The White Paper provides information on the allocation of the South–North Korea Cooperation Fund since its launch. The data can serve as a proxy

to integrate liberalism and idealism into the existing realism-centered security model, first by incorporating non-state organizations as main actors; and second, by conferring to nonmilitary issues the same status accorded to military issues in the security community. This approach has surfaced in the international development community by extending the concept of development with a comprehension of human security (Martinussen, 1997); by recognizing the value of integrative resolution instead of violent coercion in global issues (UNDP, 1994); and by encompassing nongovernmental actors as independent global actors (Edwards & Gaventa, 2001; Lindenberg & Bryant, 2001). Therefore, the focus of this study is somewhat different from existing liberalism literature in international relations theory that focuses on a world political order centered on post-Cold War democratic peace theory (Doyle, 1986; Ikenberry, 2005) or neoliberal literature which highlights the role of global trade and economic cooperation under established institutions (Keohane, 1984).

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Government Political/Military Security

B

Markets Economic Cooperation and Development

A

C

NGOs/IGOs Humanitarian Affairs Social Development

Fig. 7.3 Research framework: The transition process in triangle domain and the role of the peace dividend on the Korean Peninsula Note: Arrows indicate the function of the peace dividend among the triangle and the mutual relationships. (a) Peace Dividend I (conversion from military spending → social support and social spending). (b) Peace Dividend II (conversion from military spending → investment in economic cooperation). (c) Mutual Escalation (the growth of economic cooperation and the integration of social development boost each other).

of the peace dividend because this expenditure of government funding represents to what extent the South Korean government allocates resources for nonmilitary purposes.10 Scope of Focus: The Transition Process Leveraging the Peace Dividend Figure 7.4 presents the change among stages on the Korean Peninsula. During the peace building stage, governmental agencies can leverage the transition process based on the concept of the peace dividend. First, the South Korean government can provide funds and support for nongovernmental actors during the transition period from peace deficit to stable peace status. For example, increased involvement in humanitarian affairs such as famine, human rights, or support for settlement of

10 Despite

the relevance and usefulness as an indicator of the peace dividend, the data have some limitations. First, they do not encompass the total expenditures spent independently from the government by private and nongovernmental actors. They do not even cover all of the government’s nonmilitary expenditures for North Korea-related activities and programs because some information is not available to the public, depending on the government’s policy ideology. The data should be cross-checked through the aggregation of data of the expenditures and budget from individual nongovernmental or private actors.

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B. Jeong [Stage I] Peace Deficit Stage Political/Military Security

[Stage II] Peace Building Stage

Political/Military Security

[Peace Dividend Approach] Humanitarian Affairs/Social Development

[Stage III] Peace Stability Sage

Fig. 7.4 Stages of peace stabilization and research focus

North Korean immigrants will counter the escalating military competition between the two Koreas. Second, active economic cooperation can boost the process for stabilizing peace on the Korean Peninsula. The positive function of global trade and economic cooperation can create countervailing effects of markets against the tensions formulated by modern state-based political regimes and sovereignties. For example, the establishment of, and the increasing investment in the Kaesong Industrial Complex have lessened military tension.

Measurement of the Peace Dividend and Change on the Korean Peninsula As illustrated earlier, construction of a triangular model adopting the theory of the three domains is the main focus of this chapter. The model is summarized as adding two main focus areas – social/humanitarian affairs and economic cooperation – to the existing political and military domain. In this part, measurement of the peace dividend is attempted by centering on those three domains. The scope of analysis will be narrowed to the actors covered in the White Paper of the Ministry of Unification and the White Paper on the South–North Korea Cooperation Fund. Therefore, the actors included in the analysis of this chapter are the Ministry of Unification;11 the nongovernmental and international organizations 11 This chapter assumes that these actors – including military and nonmilitary actors – are comple-

mentary to some extent because without military security other types of efforts can be vulnerable and cannot be maintained. For example, the South Korean Ministry of National Defense states that it attempts to “facilitate a durable peace on the Korean Peninsula” by “building confidence and

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involved in humanitarian affairs that deal with the Ministry of Unification in connection with the South–North Korea Cooperation Fund; private corporations investing in the Kaesong Industrial Complex; and other parties involved in trade between the two Koreas.

The History and Implications of the South–North Korea Cooperation Fund South Korean President Roh Tae-Woo’s Special Declaration for National SelfRespect, Unification and Prosperity in 1988 was the foundation of the South–North Korea Cooperation Fund (Ministry of Unification, 2008). Although the Korean Peninsula is sometimes described as an exception to the end of Cold War tension, both Koreas have been making efforts analogous to U.S.–Soviet and global reconciliation agreements. This declaration paved the way for enacting the cooperation fund and allowing economic cooperation between the two Koreas. Based on this declaration, the Law for South–North Korea Cooperation was enacted in 1990, and the actual project was launched in 1991. The Kim Dae-jung administration’s Sunshine Policy and the Inter-Korean Summit in 2000 contributed to expanding cooperation between the two Koreas. The South–North Korea Cooperation Fund reflects the changes in the relationship among governmental and nongovernmental actors, including civil society and market-centered actors. The changes are evident from 1999 directives on humanitarian assistance for North Korea and the South Korean government’s decision to support private and nongovernmental organization projects in 2000. Construction of the Kaesong Industrial Complex and the establishment of the Mount Keumgang Tourist Resort were direct results of the new fund and law and demonstrate the dynamism between governmental agencies and companies. Furthermore, the implementation of this fund reflects the indirect relationship and link between military tension and solutions based on a nonmilitary approach. For example, the light water reactor construction and the implementation of the February 13 Agreement in 2007 demonstrate the efforts toward nonnuclearization of the Korean Peninsula. In 2008 the creation of the nonnuclearization account was also possible under this law of the South–North Korea Cooperation Fund. To sum up, this fund symbolizes the process for stabilizing peace based on a nonmilitary approach or leverage of the peace dividend. This fund and law also demonstrate the multiactor approach suggested by Cohen and Arato’s three-domain model.

relieving military tension.” It also proclaims that it attempts to “maintain military stability on the Korean Peninsula and continue its efforts to create a new peace structure”(Ministry of National Defense, 2008, p. 146). This means different actors are making efforts with their own approaches, either separately or collaboratively, to keep the peace in the Korean Peninsula.

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The Actor’s Landscape in Leveraging the Peace Dividend on the Korean Peninsula The Ministry of Unification: Implementing Policy Based on the Peace Dividend The Ministry of Unification’s function exemplifies the work that the implementation of the peace dividend could achieve. The current Ministry of Unification has the following responsibilities: Establishment of North Korean policy; Coordination of inter-Korean dialogue; Pursuit of inter-Korean cooperation; Pursuit of inter-Korean humanitarian cooperation; and the Provision of education program on unification.12 The South Korean government leverages nongovernmental actors to ease military tension or conflicts. For example, throughout the stand-offs caused by North Korea’s development of nuclear weapons or the conflicts linked to West Sea skirmishes, the South Korean government has maintained inter-Korean exchanges through projects or works carried out by nongovernmental organizations or corporations. In the extension of the line, the South Korean government uses the resumption of the funding as leverage to end stand-offs, while the government is suspending support from the South–North Korea Cooperation Fund for projects implemented by nongovernmental organizations.13 For example, the South Korean government resumed South–North Korean Cooperation Fund support for nongovernmental and private organizations as an initial step to break the stalemate after a period of tight political stand-off caused by North Korea’s missile tests and development of nuclear weapons. Nongovernmental Actors On the Korean Peninsula, nongovernmental organizations vary depending on their focus, history, and background. Efforts exist to synthesize all South Korea-based private and nongovernmental actors that promote East or Northeast Asian development and security (Citizen’s Newspaper, 2003; Seonam Forum, 2006).14 Most of the nongovernmental organizations discussed in this research concentrate on 12 This

function of the Ministry of Unification was retrieved from http://www.unikorea.go.kr/ accessed January 2008. The functions and the priorities of the Ministry of Unification under the current government show a change compared to the previous government. The functions of the Ministry of Unification under President Rho were as follows: unification policies, analysis on North Korea, inter-Korean exchanges and cooperation, humanitarian assistance, political education on unification, inter-Korean dialogue, South–North transit, and light water reactors (retrieved from http://www.unikorea.go.kr/ accessed January 2008). 13 Although the South Korean government consistently states that it will maintain humanitarian assistance to North Korea, inevitably tax-based funding is intimately linked to the political situation. It is also true that the decision of which groups or projects are funded is closely related to the government’s political ideology and policy priority. 14 The report categorizes the organizations into the following two types: East Asian antiwar and peace movement organizations and pro-unification solidarity movement organizations. This chapter focuses on the latter type of organizations in this categorization.

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improving inter-Korean relations or other social/economic/political issues through humanitarian aid. There are two types of NGOs in regard to their relationship with the government. One type of these organizations demonstrates a relatively intimate or cooperative relationship; the most representative case is the Association of NGOs for Humanitarian Aid toward North Korea. NGOs with a membership in this association have been working in tandem with the South Korean government. NGOs that are assisting in the settlement of North Korean refugees or immigrants in South Korean territory also demonstrate close collaboration with government programs. The other type works separately from the government, such as NGOs involved in the protection of North Korean refugees or immigrants in the Chinese border area or in the prosecution of North Korean human rights violations.15 International Organizations As mentioned earlier, this chapter focuses on the support provided by the South Korean government via international organizations as a way to approximate the peace dividend intended by it. The Association for South–North Korea Exchange and Cooperation within the South Korean government is mediating projects with international organizations. International organizations working on North Korean issues are involved in food, agricultural, and healthcare support. The World Food Programme (WFP) is the main actor taking care of food support for North Korea. The United Nations Development Programme (UNDP) and the Food and Agriculture Organization (FAO) are two representative organizations that focus on support for agricultural development. The World Health Organization (WHO) and United Nations International Children’s Emergency Fund (UNICEF) have been taking charge of health care activities. In addition, there are special projects related to the UN or other international organizations such as the International Vaccine Institute (IVI), the World Meteorological Organization (IMO), and the United Nations Fund for Population Activities (UNFPA). Corporations and Private Actors Economic cooperation between the Koreas consists primarily of four main projects: construction of railroads and roads; investment in the Kaesong Industrial Complex; tourism, including Mount Keumgang; and investment in light industry. With institutional support from both Koreas as a foundation, private companies have

15 This

chapter focuses on the former type of organization – in a cooperative relationship with government – because the goal is analyzing increased benefits provided by private and nongovernmental actors through financial and institutional support from the South Korean government that otherwise could have been mobilized for military purposes.

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been increasing their investments.16 In the 1990s privately initiated economic projects had been leading the economic cooperation domain. However, in the 2000s government-initiated and privately initiated economic cooperation projects developed in a complementary relationship (Ministry of Unification, 2008).

Measurement of the Peace Dividend in Terms of Role Distribution Among Actors Total Allocations and Expenditures of the South–North Korea Cooperation Fund Figure 7.5 illustrates the funding formulated and allocated by year. By and large, the fund has increased in both received and spent amounts, which demonstrates the utilization of the peace dividend approach discussed in this chapter. In most cases, the amount of funds spent is less than the amount collected during the same year. However, there are some exceptions, such as in 2000, 2004, and 2007. In 2004 a special investigation surrounding remission to North Korea during the Kim Daejung administration brought a sharp reduction in the collection of funds. In 2007 the total amount of funding decreased by a large margin, and the allocation of funding maintained the same level as the previous year. The discontinuance of inter-Korean governmental talks caused governmental food assistance to stop, slowing the growth of allocated funds in 2001 and 2006. In 0.1 Billion S.K.Won 18,000 16,000 14,000 12,000 10,000

Fund allocated

8,000

Fund appropriated

6,000 4,000 2,000 0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

Fig. 7.5 South–North Korea Cooperation Fund appropriated and allocated Source: Ministry of Unification (2008). Note: For the raw data, see Tables 7.5 & 7.8 in the appendix for funds appropriated and allocated, respectively.

16 Some

risks exist, as shown in recent evidence that North Korea’s nuclear and missile tests obstructed the continuation of economic cooperation. However, it is expected that economic cooperation will resume and increase in the long run.

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2006 in particular, the tension caused by the nuclear test brought an abrupt decline in the collection of funding until the following year. The comparison between different administrations in South Korea is interesting. During the Kim Dae-jung administration, the appropriations and expenditures of funds increased regardless of the relationship between the two Koreas. However, we have been witnessing fluctuations in the South–North Cooperation Fund appropriations and expenditures in other administrations, even that of Rho Mu-hyun that called for continuation of the Kim administration’s Sunshine Policy. The year 2004 showed an enormous decrease in both appropriations and spending related to the fund as a result of North Korea heightening the state of nuclear tension on the peninsula. This measure froze construction of the North’s light water reactor, which had taken up the majority of outlays from the fund. After 2004 and 2005, the main focus of cooperation between the two Koreas changed from supporting the light water reactor project to assisting economic cooperation, such as the Kaesong Industrial Complex. Since 2000, economic cooperation has increased in a relatively consistent manner. Private companies have become more active in contracts for road construction and the restoration of railroads, indicating a shift in the center axis. Lacking a direct link, it is difficult to gauge the extent to which a reduction in military spending resulted in an increase in the South–North Korea Cooperation Fund. It is even more complicated to surmise, given the consistent increase in military spending of the South and North Korean governments. However, the amount of funding allocated to the light water reactor between 2000 and 2006 may reflect the attempt to mitigate the tension surrounding the nuclear crisis. Military spending might have otherwise increased because of the tension caused by the stand-off surrounding the nuclear weapons crisis. Figure 7.6 shows the trend in the allocation of the South–North Korea Cooperation Fund among sectors – social/humanitarian affairs and economic cooperation. These two sectors mirror the peace dividend approach, along with the governmental sector. Those three sectors comprise the three-domain model of this chapter. This figure offers the following four findings or implications: First, the starting point of the involvement in civil society came earlier than that in the market domain. Social affairs such as humanitarian assistance started even when the intergovernmental relationship was not fully developed because of the necessity of the assistance and the relative distance from the regime’s ideology. For example, social/humanitarian assistance resulted in large amounts of food aid in 1995. However, government-backed aid was not based on full-grown trust between the governments and was vulnerable to changes in the political environment. Therefore, the actual beginning seems to have been in 2000, after nongovernmental actors were allowed to engage in humanitarian affairs with a substantial degree of freedom. Also, 2000 saw the beginning of economic cooperation and the emergence of a market-centered approach in leveraging the peace dividend concept. Second, economic cooperation and involvement in social/humanitarian aid are mutually compatible. The increase recorded in 2001 resulted from the initiation of a railroad restoration project and the Mount Keumgang tourism business. Economic

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Fig. 7.6 Trend of the South–North Korea Cooperation Fund allocation Source: Ministry of Unification (2008). Note: Economic cooperation includes railroad/road construction and maintenance, the Kaesong Industrial Complex, tourism, and light industry cooperation, and social/humanitarian affairs includes food/fertilizer assistance through governmental agencies, nongovernmental/ private/international organizations’ work, assistance for separated families, social/cultural assistance, and assistance for family reunion exchanges.

cooperation shows a consistent increase, barring the 2006 decline caused by the crisis following North Korea’s nuclear weapon test. Although the economic cooperation and the involvement in social/humanitarian aid have been in harmony so far, there could be crowding out effects or trade-off elements. For example, the increase in the economic cooperation might bring a gradual reduction in the involvement of social/humanitarian aid because the need for the involvement of market and civil society varies respectively depending on the stages and priorities of cooperation between the two Koreas. Third, the military and political environment is a crucial and dominant factor that restricts governmental policy makers’ choices and the options of nongovernmental organizations and even private companies. The decline in both the economic cooperation and social/humanitarian aid in 2006 demonstrates the significance of the military and political situation in the Korean Peninsula. Both civil society and the market saw abrupt decreases in their activities. Fourth, the relative proportion of social/humanitarian-related affairs and the market domain has been changing by a large margin. Although so far, involvement in social affairs has taken a greater proportion of funding, this may change given the increasing trend of economic cooperation. Therefore, the future prospects of the

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relative proportion of social/humanitarian-related affairs and market domain will be one of the main issues in the field and academia.

Allocation of Funds for Projects Initiated by Nongovernmental or Private Organizations Table 7.3 shows the allocation of funds for projects initiated by nongovernmental or private organizations. It shows that the number of events increased continuously, except in 2007. The total amount implemented increased by 267 percent from 2000 through 2007. This indicates that the governments are paying attention to a greater number of projects implemented by nongovernmental actors, and more nongovernmental organizations are recognizing the relationship with the government as collaborative. As shown in Fig. 7.7, the humanitarian assistance by nongovernmental organizations consistently increased over time. An interesting observation is that international organizations took over the role of the South Korean government while the government was not involved with humanitarian assistance from 1997 until 1998, which implies that the role of international organizations may be complementary to the role of an individual government. Another intriguing finding is revealed by the contrast of the assistance pattern of the South Korean government and that of nongovernmental or private organizations. The assistance by the South Korean government demonstrates a fluctuating trend,

01 Billion S Korean

3,500 3,000 2,500 2,000 1,500 1,000 500 0

95

96

97

98

99

00

01

02

03

04

05

06

07

S. Korean Government International Organizations Non-governmental or private organizations

Fig. 7.7 Trend of humanitarian assistance by the South Korean government, nongovernmental, and international organizations Source: Ministry of Unification (2008). Note: See Table 7.7 for the raw data used.

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indicating the sensitivity and vulnerability of the government’s activities to the political environment. In contrast, assistance through nongovernmental organizations shows a stable pattern. This empirical evidence implies that in a highly sensitive political environment, combining the financial resources of the government and the resources of NGOs can produce an autonomous and largely successful governance model (Jeong, 2003).

Conclusions and Policy Implications This chapter investigated the possibility of the peace dividend concept as a vehicle for facilitating change and movement toward a more peaceful, developed Northeast Asia. Unlike major global changes and transformation, denuclearization of this region seems out of reach and the arms race in Northeast Asia is an unwanted reality. Beginning with an examination of the background of the peace dividend concept and the specific situation in Northeast Asia, this chapter argued that this concept can be leveraged as a tool for facilitating change vis-à-vis dynamic interaction among government, nongovernmental organizations, and private companies in the threedomain model. The study provided a framework of change adopting the three-domain model of Cohen and Arato (1992). It utilized empirical data of the South and North Korea Unification Fund as a proxy that demonstrates the two approaches based on the peace dividend – mobilization of civil society and the market. The investigation of the South–North Korea Cooperation Fund offered the following findings concerning the dynamics among the three domains. First, both appropriated and spent funds have increased, which implies the utilization of the peace dividend approach. Second, the starting point of the involvement in civil society came earlier than that of the market domain. Third, economic cooperation and social/humanitarian aid can be complementary activities. Fourth, the military and political environment is a crucial and dominant factor that restricts all the choices of governmental policy makers and the options available to nongovernmental organizations and even private companies. Fifth, the relative importance of social/humanitarian affairs and market activity has changed substantially and may continue to change, given the increasing trend of economic cooperation. As for the dynamics among different actors, this study yields the following three implications. First, the role of international organizations may be complementary to the role of an individual government. Second, the fluctuation in assistance from the South Korean government implies the high sensitivity and vulnerability of the government’s activities to the political environment. Third, the stable pattern of assistance by nongovernmental organizations implies that NGOs’ autonomy and detachment from the political environment can be significant policy resources. In conclusion, by linking the concept of the peace dividend with the three-domain model, and utilizing the empirical data of the South–North Korea Cooperation Fund, this chapter contributes to encompassing the dynamic process of social change toward the development of society and the establishment of regional security.

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Policy Implications This chapter provides certain policy implications. First, the South Korean government should open space for more nongovernmental and private actors to participate in the process of change. The paradox of this approach is that the replacement of public funds with private investment in the initial stage can only be possible through the involvement of the government; however, as time passes, the government should allow nongovernmental or private actors to take the initiative in the stabilizing and expanding process. Second, this chapter shows how a combination of government resources (financial support) and NGO strengths (autonomy from the political environment) can contribute to the making of a working governance model, overcoming the restrictions caused by a highly sensitive political environment (Jeong, 2003). Third, funding sources need to be diversified to diminish the government’s vulnerability to the political environment, which is caused by its dependence on one source of funding. International organizations and private companies are also potential funding sources, given the conditions and incentives both Korean governments provide. Fourth, it is essential for nongovernmental organizations to have institutional structures and policy support as well as financial backing. For example, the environment for investing in North Korean projects or businesses should be made more appealing through backing from insurance or financial institutions. Finally, the peace dividend approach’s main contribution comes from providing the North Korean government with an alternative to developing nuclear weapons. The South Korean government and nongovernmental actors have to demonstrate that substantial and long-term economic and social development is compatible with the security concerns of North Korea’s authoritarian regime.

16,652 43,803 23,767 7,807 19,138 342,167

1999

15,689 43,484 21,626 8,412 14,042 329,416

2000

7,858 218,402 483,987

1989

12,325 38,397 12,276 8,618 202,512 479,053

11,961 37,136

1988

17,133 44,276 28,515 7,965 21,242 344,927

2001

12,519 39,515 13,147 9,091 171,322 457,641

1990

17,605 44,725 33,436 7,256 23,601 387,297

2002

12,915 40,411 13,691 9,342 − 401,943

1991

18,204 44,818 36,405 7,357 25,107 440,806

2003

13,666 41,391 16,534 9,448 42,521 424,699

1992

19,004 44,476 40,631 7,923 26,120 480,444

2004

14,294 41,850 15,331 10,712 37,563 402,369

1993

20,554 44,165 44,911 7,725 28,488 503,353

2005

14,713 42,052 14,607 10,592 36,608 377,861

1994

21,224 43,666 52,199 7,323 31,176 511,171

2006

15,477 42,472 14,987 9,574 21,680 357,376

1995

Table 7.2 Trends of military expenditure by country (Unit: U.S. Million Dollars)

22,119 43,460 57,861 7,791 33,821 524,591

2007

16,311 43,329 16,606 9,656 19,145 337,941

1996

23,773 42,751 63,643 9,498 38,238 548,531

2008

16,706 43,522 16,799 10,024 21,242 336,179

1997

Source: (Stockholm International Peace Research Institute, 2009). Note: Military expenditure by country in constant 1995 US dollars. Data retrieved July 26, 2009. Available at http://milexdata.sipri.org

South Korea Japan China Taiwan Russia USA

South Korea Japan China Taiwan Russia USA

Appendix

16,127 43,406 19,263 9,770 13,555 328,605

1998

118 B. Jeong

7,574 16 3,843

8 3,379

2001

5,414

Source: Ministry of Unification (2008).

Amount approved (million South Korean won) Number of events Total amount implemented (million South Korean won)

2000

16 5,448

7,657

2002

16 7,547

4,740

2003

25 8,828

9,867

2004

30 7,778

11,368

2005

47 8,076

10,861

2006

44 12,399

11,538

2007

40 4,155

10,064

Sep 2008

Table 7.3 South–North Korea Cooperation Fund implemented for projects of nongovernmental or private organizations

242 61,453

79,083

Total

7 Peace Dividend and Regional Stability on the Korean Peninsula: Focusing . . . 119

13.6 383 139 287 104 877

2000

1999

14.6 368 136 281 101 847

1176

12.3 520 107 498 80.2

1195

12.1 525 103 514 76.8

1989

14.2 388 147 289 110 895

2001

1137

12.6 493 110 468 83.8

1990

15.1 430 154 298 116 952

15.1 482 160 302 122 1015

2003

961

− 2002

10.4 456 119 326 91.8

1992

11.2 433 113 − 86.4

1991

16.8 523 169 303 127 1071

2004

929

10.6 437 122 315 93

1993

17.3 549 177 303 133 1113

2005

900

11.5 414 122 308 93.6

1994

17.8 559 186 309 140 1142

2006

856

10.9 396 124 283 95.2

1995

18.6 576 196 314 149 1182

2007

836

10.1 375 128 282 99.1

1996

20.4 603 206 320 157 1226

2008

843

10.1 373 131 284 100

1997

833

11.1 366 132 276 100

1998

Source: Stockholm International Peace Research Institute (2009). Expenditure by region in constant US dollars http://www.sipri.org/research/armaments/ milex/resultoutput/sources_methods/ definitions (accessed July 26, 2009).

Africa Americas Asia and Oceania Europe East Asia World total

World total

Africa Americas Asia and Oceania Europe East Asia

1988

Table 7.4 Military expenditure by region (Unit: U.S. Million Dollars)

120 B. Jeong

7


Table 7.5 South–North Korean Cooperation Fund added by year (Unit: 0.1 Billion S. Korean Won)

Year

Amount by year

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 September 2008

252 451 448 494 2, 547 1,185 782 403 1,728 3,858 8,405 10,371 11,695 5, 198 9,912 16,266 11,235 7,471

Total funds accumulated

92,702

121

Source: Ministry of Unification (2008). White Paper on South.

North Korea Cooperation Fund Seoul: Ut-ko Publisher

.

1,359 2,081 3,440

Economic cooperation Social /humanitarian affairs Sum (Economic cooperation + Social affairs)


2001

13 10 23

1991

Year

Economic cooperation Social /humanitarian affairs Sum (Economic cooperation + Social affairs)

Year

1,031 3,120 4,151

1,285 4,230 5,515

2003

− − −

− 6 6

2002

1993

1992

1,498 3,424 4,922

2004

− − −

1994

2,491 5,883 8,374

2005

− 1,824 1,824

1995

2,141 3,286 5,427

2006

49 55 104

1996

3,011 4,622 7,633

2007

− 191 191

1997

771 622 1,393

Sep 2008

− 199 199

1998

Table 7.6 South–North Korea Cooperation Fund allocation trend (Unit: 0.1 Billion South Korean Won)

13,796 31,936 45,732

Total

− 343 343

1999

146 2,043 2,189

2000

122 B. Jeong

3,018

Sum


2,734 203 81 2,218

2,090 26 102

2004

2003

S. Korean government International organizations Nongovernmental or private organizations

55

1,824

Sum

30 25

1,824

1996

S. Korean government International organizations Nongovernmental or private organizations

1995

3,627

3,249 258 120

2005

191

191

1997

1,954

1,696 125 133

2006

199

199

1998

2,989

2,424 349 216

2007

339

339

1999

228

43 93 92

Sep 2008

1,845

34

1,811

2000

21,798

18,958 1,934 906

Sum

1,121

829 229 63

2001

2,193

1,891 237 65

2002

Table 7.7 Trend of humanitarian assistance by South Korean government/nongovernmental/international organizations (Unit: 0.1 Billion S. Korean Won)


Kaesong industrial complex Tourism cooperation Light industry cooperation Others Social/cultural exchanges Assistance for visiting exchanges

Food assistance Fertilizer International organizations Private organizations Assistance for separated family exchange visit Railroad/road

Total

Light water reactor project Public fund principal redemption Fund management cost

Social/cultural exchange

South–North Korea economic cooperation

Humanitarian assistance

25

3

13 10

1991

8

3

6

1992

3

3

1993

3

3

1994

1,826

2

1,824

1995

106

2

49

25

30

1996

193

2

191

1997

201

2

0

0

199

1998

Table 7.8 Expenditure of South–North Korea Cooperation Fund (Unit: 0.1 Billion S. Korean Won)

346

2

4

339

1999

5,661

3,259 190 169

3

21

146

34 28

867 944

2000

124 B. Jeong


8,621

5,940

Total

237

28

11 1 3

1 669

45 898

334

65 20

63 13

450

1,058 833 237

190 639 229

3,009 2,124 6

Gaesung industrial complex Tourism cooperation Light industry cooperation Others Social/cultural exchange Assistance for visiting exchange

Food assistance Fertilizer International organization Private organization Assistance for separated family exchange visit Others Railroad/road

2002

Light water reactor project Public fund principal redemption Fund management cost

Social/cultural exchange

South–North Korea economic cooperation

Humanitarian assistance

2001

10,940

3,287 3,250 8

104 6 11

60

44 1,121

81 30

1,898 836 203

2003

Table 7.8 (continued)

8,594

870 3,895 12

74 32 11

70

250

27 1,104

102 32

1,124 966 26

2004

10,296

227 3,658 16

75 38

48

465

32 1,978

120 133

1,985 1,264 258

2005

13,351

89 8,713 18

26 74 53

77

1,143

211 895

133 99

496 1,200 125

2006

13,400

6,337 19

503 69 17

22 694

1,202

688 590

216 269

1,462 962 349

2007

2,509

1,191 15

246 25 27

17 130

287

104 91

92 147

93

43

Sep 2008

82,023

13,744 29,749 291

1,054 312 399

1,078 824

3,347

1,153 7,493

906 781

10,976 7,982 1, 934

Sum


126

B. Jeong

References A comprehensive overview of private and nongovernmental organizations in South Korea (2003). Citizen’s Newspaper. Seoul: Citizen’s Newspaper. Cohen, J. L., & Arato, A. (1992). Civil Society and Political Theory. Cambridge, MA: MIT Press. Doyle, M. W. (1986). Liberalism and World Politics. The American Political Science Review, 80, 4: 1151–1169. Edwards, M., & Gaventa, J. (2001). Global Citizen Action. Boulder, CO: Lynne Rienner Publishers. Feffer, J. (2008). Asia’s Hidden Arms Race. Asia-Pacific Freeze. http://pacificfreeze.ips-dc.org/ 2008/08/the-growing-military-industrial-complex-in-asia/. Global Security (2009). World Wide Military Expenditures. http://www.globalsecurity.org/military/ world/spending.htm (accessed August 6, 2009). Gupta, S., Clements, B., Bhattacharya, R., & Chakravarti, S. (2002). The Elusive Peace Dividend. Finance and Development, 39, 4. Ikenberry, G. J. (2005). Power and liberal order: America’s postwar world order in transition. International Relations of the Asia-Pacific, 5: 133–152. Jeong, B. (2003). A study on the role distribution of government and NGOs: Focused on humanitarian policy toward North Korea. Master’s thesis, Seoul National University, Seoul. Keohane, R. (1984). After Hegemony: Cooperation and Discord in the World Political Economy. Princeton, NJ: Princeton University Press. Knight, M., Loayza, N., & Villanueva, D. (1996). The Peace Dividend: Military Spending Cuts and Economic Growth. World Bank & International Monetary Fund. Lee, C. -D. (2009). U.S. worried about regional arms race due to N. Korea. Yonhap News, July 23 edition. Lindenberg, M., & Bryant, C. (2001). Going Global Transforming Relief and Development NGOs. Bloomfield, CT: Kumarian Press. Martinussen, J. (1997). Society, State and Market: A Guide to Competing Theories of Development. London & New York, NY: Zed Books Ltd. Ministry of National Defense (2008). White Paper on National Defense. Seoul: Ministry of National Defense. Ministry of Unification (2008). White Paper on South-North Cooperation Fund. . Seoul: Utgo Publisher . Salmon, A. (2007). Cutting the Korean Discount. Forbes.Com. http://www.forbes.com/global/ 2007/0521/034.html Seliger, B. (2008). A Peace Dividend for North Korea?: The Political Economy of Military Spending, Conflict Resolution, and Reform. Paper presented at conference Toward a Northeast Asian Security Community: Implications for Korea’s Growth and Economic Development, Washington D.C. http://www.keia.org/Publications/Other/HS-Seliger.pdf. Seonam Forum (2006). White Paper on Solidarity Movement Organizations in East Asia. Seoul Arche . Stockholm International Peace Research Institute (2009). Expenditure by region in constant US dollars http://www.sipri.org/research/armaments/milex/resultoutput/sources_methods/ definitions (accessed July 26, 2009). UNDP (1994). Human Development Report 1994: New Dimensions of Human Security. United Nations Development Programme.

Part III

Implications for North Korea’s Economy

Chapter 8

A Peace Dividend for North Korea? The Political Economy of Military Spending, Conflict Resolution, and Reform Bernhard Seliger

The West as a whole in the early 1990s became obsessed with a ‘peace dividend’ that would be spent over and over again on any number of soft-hearted and sometimes soft-headed causes. Politicians forget that the only real peace dividend is peace. Margaret Thatcher (2002, p. 40)

Among the most striking and menacing features of the Democratic People’s Republic of Korea (North Korea) is the extreme worship for the military and militarization. Not only is North Korea a totalitarian state, but it is a state where the military, uniquely in the world, officially has the upper hand in all functions and issues. This is the principle enshrined in its songun policy. There have been a number of explanations and speculations of and around this military-first policy, among them the guerrilla tradition of Kim Il-sung,1 which after the generational change has been more formalized as “military first”; the fact that Kim Jong-il did not have the military credentials of his father, the alleged liberator of Korea from Japanese colonization; and the expectation that military-first could lead to a modernization process of the economy while political control had to be guarded by a strong military. By the numbers, North Korea has one of the largest armies in the world and, given the tiny GDP, also probably the largest share of military expenditure compared with GDP, although no exact figures are known. It is no wonder then that the idea that peace might bring enormous benefits to North Korea through conversion of military spending to civilian purposes is one of the issues thought to be an attractive feature of denuclearization and the creation of a security order for Northeast Asia. In addition, the insistence of North Korea on nonaggression guarantees in some

1 Adrian

Buzo (1999).

B. Seliger (B) Hanns Seidel Foundation, Seoul Office, 140-886 Seoul, Republic of South Korea e-mail: [email protected]


129

130

B. Seliger

phases of the story of confrontation with the United States and South Korea seems to corroborate this idea: peace seems to bring a large dividend to North Korea.2 The concept of a peace dividend, referring to the possible long-term benefits of lower military spending, became popular during the last years of the Cold War. While there are indications that there has been a peace dividend, certainly for the Eastern European states freed from the burden of maintaining large armies plus hosting sometimes considerable numbers of Soviet troops, the peace dividend in the West did not materialize immediately; plus, military spending saw a large reversal in the post-9/11 world. For North Korea, for the reasons mentioned above, the concept of a peace dividend seems particularly relevant. At the same time, a larger concept of a peace dividend could include the end of spending on certain prestige goods and a better allocation of resources when military dominance in North Korea ends. Therefore, the creation of a stable security environment and lasting peace in Northeast Asia is accompanied by expectations of higher growth that would at the same time lower the internal and external burden of adjustment in North Korea. From a political economy point of view, however, the military-first policy and military spending should not be seen as entirely related to the external security threat for North Korea; instead, they are equally importantly dominated by domestic policy considerations, in particular, regime survival. In this sense, the hope for a peace dividend might be premature as long as the fundamental use of security crises for regime survival in North Korea does not stop. Certainly, the size of the peace dividend is also related to the concrete form a security order for Northeast Asia will take. Today it is most likely that it is an extension of the six-party talks,3 in its most ambitious form as a counterpart to the Organization for Security and Co-Operation in Europe (OSCE).4 For the purpose of this chapter, a stable security and peace order in Northeast Asia is understood as an arrangement, most likely in the form of a successful conclusion of the six-party talks, whereby North Korea is denuclearized and in one or the other form receives credible security guarantees against outside aggression.5 This chapter looks into the peace dividend for North Korea from an economic point of view and from a political economy point of view as well. Integrating both 2 See Homer T. Hodge (2003: 68–71), for a discussion of the relation of the goals of “national reunification” (the official foremost goal of North Korea), regime survival, and defense against aggression led by genuine fear of a US attack. Ken E. Gause (2006), on pages 5–10, discusses the change of the role of the military after the introduction of the songun policy and its relation to the Korean Workers’ Party and points out that it cannot simply be understood as military dominance in civilian affairs. 3 Charles L. Pritchard (2007, 176–84). 4 Exchange of ideas on the possibility of an OSCE style organization for Northeast Asia has been lively for some time, in, for example, the two OSCE-Korea conferences in 2001 and 2005. 5 Other benefits North Korea could get, among them aid by the other parties in the six-party talks, outside aid (for example, in the form of official development assistance from the European Union or assistance from international institutions), or, possibly, reparations by Japan, would be part of the peace dividend discussed here.

8

A Peace Dividend for North Korea? The Political Economy of Military . . .

131

views not only makes policy analyses more realistic but also allows for more realistic negotiations with North Korea. The remainder of this chapter is organized as follows: The second part discusses the North Korean expectations during the current state of the six-party talks. The third part deals with the European experience with a peace dividend and the implications of the Northeast Asian military buildup and its potential demise after achieving a state of peace in Northeast Asia. The fourth part discusses the same problem from a political economy point of view; this is followed by some conclusions in the fifth and final section.

Current Stage of Six-Party Talks and Prospects of Benefits for North Korea In early October 2008, after North Korea agreed on a verification system for its nuclear program and the George W. Bush administration finally announced that North Korea had been taken off the list of terror-sponsoring states, one of the most contentious issues had been resolved, from the North Korean point of view. North Korea’s leadership not only psychologically feels itself threatened and surrounded but also literally blames the encroachment of the United States and its allies for the bad performance of the North Korean economy. In this belief, unfortunately, it is not alone. A number of foreign observers also seem to share the belief that the sanctions of the United States and the hostility of the international community are among the reasons for the bad state of the North Korean economy. This is, however, wrong since the reasons can be found exclusively in the mismanagement and dysfunctionality of the North Korean economic system.6 Also, the reforms of July 2002 only marginally altered this fact because no basic decision for economic transformation has been taken.7 Moreover, the often-heard conclusion is wrong that a lifting of sanctions or a peaceful resolution of the nuclear issue will automatically bring prosperity to North Korea. While it might bring, in the most fortunate circumstances, a massive inflow of aid (in particular, there are prospects of Japanese reparation payments although they are by no means legally binding and politically secured), it does not alter the state of the North Korean economy and the lack of human capital development. The lifting of sanctions can, therefore, only be the beginning of serious efforts to change North Korea, which will require much more than the possibility of free exchanges and trade: these efforts will require North Korean products to be competitive, North Korea to provide a legally and financially safe environment for trade, and North Korea to tackle its problem of old debt, on which it defaulted long time ago. All these issues are often forgotten in the debate about the impact of peace on North Korea’s economy. 6 Bernhard 7 Bernhard

Seliger (2004). Seliger (2005).

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It is important to point out these misconceptions, however, because they are determining to some extent the pattern of negotiations between North Korea and the other members of the six-party talks. If no economic benefits materialize from the new status of North Korea no longer being considered as sponsoring terror, the North Koreans could well misunderstand this as another conspiracy against their state. Such a misunderstanding would mean that North Korea again, like before, would probably claim that, if not legally then at least by its actions and intentions, the United States violated the “spirit of reconciliation” and therefore North Korea would not take any new steps without new incentives. This can be seen in the way the North Koreans perceived the financial sanctions and, in particular, the freezing of $25 million in Banco Delta Asia. The freeze, not being a defined sanction but the result of a warning by the US Department of the Treasury, was solved after protracted negotiations in which North Korea insisted on the involvement of North American institutions. This, the North Koreans believed, would whitewash their country in the eyes of the financial community. This did not happen. Still, North Korea’s external financial transactions are extremely limited.8 The lack of understanding of market mechanisms compared with the intervention of the state is behind this case. Equally, the lifting of sanctions will lead to the expectation that trade flows will begin by political decision rather than economic decision.9 This would be in line with the immediate benefits – like heavy oil and food shipments – that North Korea was granted after it entered the first and second stages of the six-party talks. North Korea is currently, according to the consensus view of aid organizations working in the country, once again facing enormous difficulties in feeding its population, and some even think that the country is at the brink of another famine.10 The possible benefits from the six-party talks, therefore, can play an important role as incentives for North Korea to cooperate in the talks. First, the dependence of North Korea on external aid seems to be auspicious because it gives everybody who is promising aid a certain leverage. At second glance, it is less easy. Aid is an important goal for North Korea, but only to a certain extent. When in 2008 a tourist was shot at Mt. Kumgang and South Korea unilaterally stopped the Mt. Kumgang tourism business and required a joint investigation, North Korea not only rejected the investigation but also stepped up confrontation by requiring a South Korean apology for its alleged violation of North Korean territory. Thus,

8 In the words of one with personal knowledge of the situation, “it took North Korea extremely long to thoroughly destroy its financial reputation and will take as long to regain it.” 9 Similarly, in capacity-building projects of the Hanns Seidel Foundation concerning international trade, the North Korean side always stresses to Europe the importance of good political relations, not the quality of its goods, as the precondition for trade. 10 Until now, the World Food Program, which conducted the most far-reaching survey of living conditions in North Korea in recent months, did not find a full-fledged famine but did find alarming signs of malnutrition (for example, skipping of meals, collection of wild herbs, and, in particular, increased cases of diarrhea in hospitals).

8


133

pride and self-assurance (also with a view to the domestic population, which can no longer be fully shielded from international news) are more important than aid, although certainly the business generated at Mt. Kumgang was an important foreigncurrency earner for North Korea. Even more important than pride is defense against any threat to the regime; this is highest in the hierarchy of goals of North Korea. As an answer to leaflets with anti-Kim Jong-il propaganda that have been carried within its borders by balloons, North Korea threatened the complete closure of the Kaesong industrial complex, although it would itself be hurt most by this action. By late 2008, the Kaesong tour business had been stopped although it had been another cash cow for North Korea. But the anti-Kim propaganda entering the country seemed to be so dangerous that the threat had to be taken seriously, and the result was the closing of the quite successful inter-Korean industrial complex. From these initial considerations, we can draw two conclusions about the possibility of the peace dividend: First, the peace dividend has to be tangible and should materialize not as a potential long-term benefit, but soon. Second, the peace dividend has to fit in the hierarchy of goals of North Korea: aid and stabilization as well as pride (either as an intrinsic value or as an instrument to uphold the regime) and, ultimately, regime survival. The next section looks at the peace dividend, and the fourth part discusses how it fits into the North Korean hierarchy of goals.

Military–Industrial Complex and the Possibility of a Peace Dividend The European Experience – Elusive Peace Dividend and the Real Dividend of Lasting Peace in Europe The idea of the peace dividend that was widely discussed in the final days of the Cold War can be shown by the following figures. During the peak of military expenditure in the Cold War – 1987 – more than $1 trillion (in constant 1994 US dollars) was spent worldwide; but after this peak it continuously sank, and in 1995 it was only $700 billion, a reduction of 30 percent.11 This has been not the result of a planned and uniform reduction, but it began slowly in the last years of the Cold War and accelerated when it was rather forced upon the former Warsaw Pact states during the first phase of their economic and political transformation. In some states, like the German Democratic Republic (East Germany) during the last year of the GDR’s existence, the reduction was an explicit policy (the first and last defense minister of East Germany, Rainer Eppelmann, a former dissident and pastor, was symbolically called minister for defense and disarmament); in other countries, like the late Soviet Union, reductions in military expenditures were the result of economic forces. In

11 Bonn

International Center for Conversion (1997).

134

B. Seliger

NATO states also military expenditures sank. As a share of world GDP, military expenditures sank from 3.7 percent in 1990 to 2.4 percent in 1995. At that time, military spending in absolute terms bottomed out, stayed for some years at a similar level, and after 2001 strongly increased. In relative terms, in 2007 military expenditures stood at 2.5 percent of GDP owing to the strong increase of world GDP in the first years of this decade. The peace dividend includes not only capital but also the reduction of military personnel, which at least theoretically was available as a factor of peaceful production. The example of Germany (Table 8.1) shows that this effect is quite considerable for some countries. This dividend was unequally distributed, however, and depended on the available jobs for dismissed military personnel. There are considerable long-term effects of lower military spending; they include higher per capita output as a result of improved capital formation and resource allocation.12 Although it is undeniable that the peace dividend led to a reduction in spending of capital and the use of labor, the expectations for the peace dividend as a solution for budgetary problems – especially as Western European welfare states coped with the 1993 recession, the effects of ballooning welfare spending, and the aging of their societies – were vastly excessive and consequently led to disappointment. The recession with its record-high unemployment, the civil war in the former Yugoslavia requiring the modernization of Western European armies, and finally the post-9/11 developments made the peace dividend elusive. Where has the peace dividend gone? As Margaret Thatcher in the quote preceding this article pointed out, the real peace dividend is peace itself, and the beneficial effects of peace on European economic development are so overwhelming that they cannot be stressed enough. The end of the Cold War led to the reintegration of Europe, with the first enlargement of the European Union in 1995 (Sweden, Finland, and Austria), then a second round in 2004 (Estonia, Latvia, Lithuania, Poland, the Table 8.1 Reduction of military forces in Germany, 1989–2010 Personnel

1989

1991

1994–95

1999

2006

2010

Professional soldiers 270,000 Conscripts 218,000

1st reduction 2nd reduction 3rd reduction 4th reduction – 211,000 200,000 200, 000 195, 000 – 155,000 135,000 85, 000 55, 000

Total

487,000

495,000

370,000

335,000

285, 000

250, 000

Source: Annual Report 2005/2006 (Bonn: Bonn International Center for Conversion, 2006), 30, www.bicc.de/publications/jahresbericht/2006/bicc_annual_report_2005_2006.pdf.

12 See

Malcolm Knight et al. (1996). Knight et al. also point out that Germany and Japan in the post–World War II period were also examples of peace dividend because military spending in these states was curbed while their external security was guaranteed by the Allied forces.

8


135

Czech and Slovak Republics, and Hungary as well as Slovenia), and a third in 2007 (Bulgaria and Romania). The economic effects of an enlarged Europe rightly should be counted as a peace dividend because economic integration became possible only after the end of military and ideological confrontation. This again leads to questions for Northeast Asia: What will a peace order look like? What are the potential benefits of economic integration? Can such an order be achieved with the end of military aggression alone, or does it also require some form of systemic convergence, as was strongly and uniformly the case in Europe?

From Military First Toward a Peaceful State – What Can North Korea Expect? “Military first” is not a mere slogan, but indeed the military in North Korea probably accounts for a larger share of the GDP than in any other country of the world. Adding up military expenditure has always been difficult and in many countries military expenditure has been hidden under various budgetary titles, but the following comparison in Table 8.2 shows, even allowing for large inaccuracies, that the military’s share of GDP is larger in North Korea than anywhere else in the world.13 Ceteris paribus, this would also mean a larger peace dividend able to be reaped than anywhere else in the world. The same is true in the comparison of armed personnel, where North Korea has the world’s fourth largest army in absolute terms, and relative to its total population its army easily beats the competitors, with almost 5 percent of its population enlisted

Table 8.2 Military spending, selected countries

Country

Military expenditure (percentage of GDP)

Budget period

North Korea China United States Russia South Korea Germany Japan

31.3 4.3 4.3 3.9 2.7 1.5 0.8

Estimate 2006 2005 est. 2005 2006 2005 est. 2006

Source: North Korea, CIA World Factbook (Washington, D.C.: Central Intelligence Agency, 2008), https://www.cia.gov/ library/publications/the-world-factbook/rankorder/2034rank. html

13 See, for example, Dick K. Nanto and Emma Chanlett-Avery, Report no. RL32493 (2008), which

cites an estimate from the online Chinese People’s Daily of April 12, 2005 that puts North Korea’s military expenditure at only $2.3 billion or 15.9 percent of GDP.

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B. Seliger Table 8.3 Active-duty military personnel, selected countries, 200

Rank (no. of troops) 1 2 3 4

Nation

No. of active-duty troops

Population of country (billions)

Troops/ population

People’s Republic of China United States India North Korea

2,255,000 1,474,000 1,325,000 1,106,000

1.330 0.303 1.147 0.023

0.0016 0.0048 0.0011 0.0480

Source: International Institute for Strategic Studies (2005); population data from CIA World Factbook, 1 October 2008.

in the military, as shown in Table 8.3.14 In addition, there are reportedly reserve troops making up another 4.7 million, and consequently, “as a result of the steady increase in military manpower and weaponry, North Korea has essentially become one huge armed camp.”15 If active and reserve troops are counted together, almost one in four North Koreans qualify as military personnel. To put this figure in perspective, in terms of absolute spending it has to be understood that North Korea spends only a fraction of what South Korea or the United States spends on military, as shown in Table 8.4. In terms of its own GDP, however, this fraction is much higher than in any other country. This might also explain the continued sense of threat the North Korean leaders experience despite living in an overly militarized country. The military burden and its flip side, the possible peace dividend, make up much more than military expenditure alone. One of the most closely linked sectors is the military–industrial complex. In all socialist states heavy industry had been a focus Table 8.4 Military spending, selected countries and world Jurisdiction

Military expenditure (billions of US dollars)

Budget period

World United States People’s Republic of China Russia Japan Germany South Korea North Korea

1,100.00 623.00 65.00 50.00 41.75 35.10 21.10 5.00

2004 est. 2004 est. 2008 budget Est. 2007 2003 2003 est. FY 2002

Source: Worldwide Military Expenditures, GlobalSecurity.org, 1 October 2008, www. globalsecurity.org/military/world/spending.htm 14 Again,

the figures have to be taken cautiously. Data for North Korea’s population and data for its military might be overestimations; however, the overwhelming evidence for the militarization of North Korea is undisputed. 15 Kim Jing-wun (2008).

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area of economic development, originally for a political reason but later closely linked to the quest for military dominance.16 North Korea, together with the Czech Republic and East Germany, had been until the early 1990s one of the most industrialized countries in the Eastern Bloc. The share of manufacturing in total GDP in North Korea declined from approximately 45 percent to almost half of that from 1990 to 1997–1998, although it has been estimated to be recovering for some time now.17 The decline is entirely due to the stopping of production in companies lacking energy and other inputs. Although the nominal share of industrial employment has stayed high, men who were still enlisted in companies as workers (their entitlement to housing and food through the public distribution system is linked to such employment) began to look for other jobs and possibilities for securing food, especially in mountainous areas where farming is carried out on hillside land.18 In the recent increase of production, the output of the Kaesong industrial complex plays an especially important role. Among the industries directly related to the military are the arms factories, many of which are located in the eastern cities of the country. According to one source, in 1990 North Korea had approximately 134 arms factories, many of them completely or partially concealed underground. These facilities could produce ground service arms, ammunition, armored vehicles, naval craft, aircraft (spares and subassemblies), missiles, electronics, and possibly chemical-related materials. In addition, some 115 nonmilitary factories had a dedicated wartime matériel production mission.19 Of these, however, not all are entirely devoted to equipping the North Korean army; an important goal of their production is sales abroad. Among these sales, missile sales have received the highest attention, while sales of conventional arms have also, according to estimates, contributed to foreign currency earnings. It is not clear how much a security protocol for Northeast Asia (if it does not explicitly cover these issues) would curb North Korean arms exports.20 Important resources now going to the arms industry would no doubt be freed for peaceful use if North Korea would seriously consider a reduction of its overblown military. In fact, a large part of the old industries has already been dismantled. Throughout the 1990s and during this decade, the capacity utilization of factories in North Korea

16 The

political reason was the early Soviet Union’s lack of a proletariat necessary for the transformation toward socialism. Accelerated industrial growth spurred by the “price scissors” of agricultural and industrial products was supposed to create the industrial economy lacking in post-feudal Russia in the 1920s. 17 See Nanto and Chanlett-Avery, The North Korean Economy, 14; with data from the Bank of Korea. 18 In the mountainous areas, private, unofficial farming is allowed. This, together with overexploitation caused by energy shortages, has led to complete deforestation in many areas of North Korea. 19 Andrea Matles Savada (1994). 20 Recently, during a parliamentary inspection, a South Korean lawmaker, without providing evidence, estimated North Korea’s annual arms sales to be a modest $13 million.

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has been estimated to be not more than 10–30 percent. Although the military– industrial complex was certainly on a priority list for energy and raw materials, in particular, by being an export-earning enterprise, it could not escape from the downturn of the entire economy. Outdated machines and other equipment were taken en masse to China as scrap metal when early in this decade prices for raw materials in China soared. In the border region and beyond, mining businesses, like the largest iron ore mine in Musan, were monopolized by Chinese companies and consequently were no longer able to supply the military and heavy industry. North Korean soldiers have always had second jobs – farmers in uniform. But now, farming and securing their means of survival through business or by force (stealing from farmers, for example) seems to be a preoccupation of parts of the military.

External Aspects of the Peace Dividend Among the most intriguing aspects of the peace dividend for North Korea are the potential effects of peace on the external relations of North Korea, namely sanctions, trade, aid, and reparations, as well as the potential effects of membership in international organizations. Sanctions against North Korea have existed ever since the Korean War but have been reinforced during the nuclear crisis, in particular in 2006 through Resolution 1716 passed by the UN Security Council.21 Sanctions have been related to the sponsoring of terror, the Trading with the Enemy Act, the fact that North Korea as a nonmarket state does not enjoy the same status as market economies, and North Korea’s status as a proliferator of weapons, in particular, missiles. During 2008, two of the sanctions were lifted: On June 26, 2008, President George W. Bush signed proclamation 8271, terminating most of the restrictions under the Trading with the Enemy Act. And in October 2008, North Korea was removed from the list of terror-sponsoring states.22 Some of the sanctions already had only a symbolic meaning: for example, the Trading with the Enemy Act did provide for a limited range of sanctions (like the approval of imports on a caseby-case basis, a freezing of selected assets, and the prohibition of direct financial transactions with the United States), but more important for exports, from the point of view of North Korean companies, are the tariffs imposed for being a nonmarket economy.23 The removal of North Korea from the list of terror-sponsoring states is especially relevant because the list is an effective blockade to any attempts by North Korea to become a member state of any international institution. However, it is only a necessary but not a sufficient condition. Other conditions, in particular those regarding

21 For an overview of sanctions and their relation to aid, see Bernhard Seliger et al. (2007). For a timeline of sanctions, see Peterson Institute (without year). 22 Japan, however, extended its existing sanctions. 23 For an in-depth analysis of the impact of the lifting of economic sanctions, see Lim Soo-ho (2008).

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transparency, changes in economic management toward a market economy, and the advance payment of a quarter of the allotted funds for the International Monetary Fund (IMF membership is a prerequisite to join the Asian Development Bank, which has been one of the stated goals of North Korea) seem unlikely to be fulfilled in the near future. For inter-Korean cooperation, successful denuclearization could open complete new ways of cooperation. Under the Kim Dae-jung and Roh Moo-hyun administrations, the link between the nuclear issue and inter-Korean cooperation existed, but it was weak. In fact, North Korea exploited the situation by sometimes playing closer to South Korea, and sometimes closer to the United States for a maximum of aid. Regarding humanitarian aid, South Korea explicitly or implicitly (when the pressure from its allies was too great) rejected a link to denuclearization. However, all this has changed under the Lee Myung-bak government, which made reciprocity and the restoration of a close alliance with the United States its mantra and explicitly linked aid for impoverished North Korea to a successful continuation of the denuclearization process. Smart acronyms and slogans for a long time have accompanied policymaking in South Korea – from the “miracle of the Han River” (the Korean economic rise in the 1960s through 1980s) to DJnomics, the economic policy of the Kim Dae-jung administration after the Asian crisis, and the Sunshine Policy for its Nordpolitik. The government of Lee Myung-bak equally reduced its goal for North Korea to a simple formula: “MB doctrine” (named after the initials of President Lee); also “Denuclearization–Opening–3000” is Lee’s vision for North Korea. The MB doctrine relates economic North–South cooperation with the six-party talks so that denuclearization and further cooperation enhance each other. If appropriate steps are taken to denuclearize North Korea, the per capita income of North Korea should, with the help of large economic cooperation projects, reach $3,000, far from the current near-starvation levels. Throughout 2008, however, North Korea continuously snubbed all offers for cooperation, and even when South Korea almost begged to be allowed to send food aid to the North, which once again is on the brink of famine, the North declined, citing its discontent with President Lee Myung-bak’s government. For the North, the United States has become a handy substitute for the aid given by the previous two South Korean administrations, leading to fears that South Korea may become isolated. The Denuclearization–Opening–3000 policy has been much criticized and even ridiculed by experts, predictably by those with close ties to the previous administration. First, they argue, it is unrealistic, given the state of the North Korean economy. Second, without cooperation from the North it could not be achieved anyway. The critics maintain the mantra of the two previous administrations, that rapprochement means not raising any issues that might irk the North; quite simply, denuclearization and rapprochement cannot be pursued simultaneously. Surprisingly, North Korea itself made the offer public in the North, but immediately added derogatory comments on the true nature of the Lee Myung-bak administration. Nevertheless, the publication of the offer was quite unexpected. The current average official income of North Koreans is just $1 or $2 per month, according to market rates. This is due to

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the astronomical depreciation of the domestic currency, which now trades at 3,000 won or more per dollar. Even the most optimistic valuation of real income in North Korea, taking into account purchasing power parities rather than market rates, would mean that the current level is maybe one-fourth of the $3,000 level that Lee Myung-bak is offering to the North. Therefore, $3,000 seems an almost impossibly attractive offer – either typical propaganda that people in North Korea are so used to, or an offer by an incredibly rich country, by the standards of North Koreans. By now, most North Koreans know that South Korea is not the impoverished country the North Korean propaganda machine often touted, but rather the rich brother. At least the rapprochement during the past few years conveyed a clearer picture of reality to ordinary citizens in North Korea. People quickly began to talk about the “$3,000 per capita” offer, so much, in fact, that the party had to finally intervene. But party intervention cannot stop gossip and amazement. Even some foreign diplomats in North Korea thought that the publication of the offer was some ingenious North Korean move to prepare the ground for renewed cooperation with South Korea. This seems far-fetched, but one thing is clear: North Koreans now see South Korea in a totally different light than their propaganda wants them to see it, namely, more than ever as a cure for an ailing economy on the brink of famine. Thus, denuclearization and rapprochement, or opening, might suddenly no longer be two competing concepts, but rather a virtuous circle: By making the North such an irresistible offer, the South Koreans have forced the North Korean leaders to either kill off their people’s hope or else accept. Nobody is in a better position to make such an offer than the Lee Myung-Bak government because it is firmly grounded in its alliance with the United States and therefore not likely to be accused of blindness vis-à-vis the nature of North Korea’s political system. Renewed inter-Korean cooperation could thus be the real winner of denuclearization. It has to be pointed out, though, that the concept of opening is a prerequisite for achieving its ambitious goal – and that is where the interests of North Korea’s leaders might differ most from South Korea’s. Overall, for inter-Korean cooperation the prospect of denuclearization holds great attraction. Plans for the extension have already been made – the second phase of the Kaesong industrial complex (which already has assumed an importance reaching beyond its narrow borders), the plans of the last summit meeting of October 2007, and, from the new government, the plans for a Russian–Korean energy connection. As for trade, a successful and stable security order for Northeast Asia also has potential benefits. First, the lifting of sanctions will lead to the judicial precondition for free (or freer) trade, although an additional problem for trade with the United States is the status of the North as a nonmarket country. Second, the lifting of sanctions, if all political sanctions are included, means easier access to certain technology goods. Given the current economic state of North Korea, this would be especially important in the Kaesong industrial complex, where technology imports could enhance productivity. In terms of exports, those originating in Kaesong would no longer be a political problem for trade with the United States. The question remains, however: What goods would pay for the imports from abroad? In this

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sense, again, the lifting of sanctions is necessary, but it is not sufficient. Competitive goods will be produced only in a market environment, that is, opening has to follow denuclearization. The Kaesong industrial complex principally provides such an environment, but more opening is necessary to benefit the whole country. The most far-reaching expectations of North Korea with regard to a successful completion of the six-party talks are related to aid inflows. These comprise, besides aid from China and South Korea, inflows from the European Union and other international actors especially, in addition to the possibility of funding through international agencies. The EU, for example, has long considered official development aid (ODA) as a way to alleviate poverty in North Korea. When the EU established relations with North Korea, it set out its strategies on relations in a country strategy paper (CSP).24 Technical assistance was an important part of this strategy, and a total of C35 million has been set aside through 2006 for EU technical assistance projects, making the EU a substantial donor of technical assistance to the DPRK. The ECDPRK CSP and the EU’s National Indicative Program (NIP) for the DPRK set out the framework and objectives for technical assistance projects in North Korea. The CSP and NIP, if ever implemented, will provide for training in market economic principles and projects designed to support and promote sustainable management and the efficient use of natural resources and energy in the DPRK, the development of a reliable and sustainable transport sector, and rural development as well as institutional support and capacity building. The admission of a nuclear weapons program by North Korea stopped ODA, however; and the EU froze the money earmarked for technical assistance. Instead, humanitarian projects alone have been allowed, executed by a multitude of bilateral and multilateral donors and implementing organizations, and coordinated on the European side by European Community Humanitarian Office ECHO, the EU’s office for humanitarian aid. When the 1995 floods, a result of environmental degradation brought upon the North by its dysfunctional economic system as well as famine, brought North Korea to the brink of collapse, the North opened its doors to international aid. The EU, via its food aid and food security programs, has provided significant aid since 1997. Food aid to the needy was originally the focus of the program, but soon it shifted to structural food assistance, in particular, the provision of inputs and technical assistance. ECHO assistance had already started in 1995, targeting the improvement of access to safe water and sanitation and providing drugs and medicines to health institutions.25 The focus of the two food programs shows that the EU’s aid was not designed simply to bring food to North Korea, with the negative side effect of possibly making people dependent on the food. This happened only in the initial years of the crisis, 24 “The

EC – Democratic People’s Republic of Korea (DPRK) Country Strategy Paper 2001– 2004,” European Commission, External Relations, 2002, http://ec.europa.eu/external_relations/ korea_north/docs/01_04_en.pdf. 25 “Democratic People’s Republic of Korea (North Korea),” European Commission, External Relations, January 12, 2009, http://ec.europa.eu/comm/external_relations/north_korea/intro/index. htm.

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when there was an immediate need for feeding millions of undernourished people left stranded by their regime. Instead, the EU saw the necessity for structural assistance, such as capacity building and training to broaden the domestic North Korean food supply. Although it has been frequently pointed out that North Korea is not an agricultural country and that North Korea should rather focus on the rehabilitation of industrial production, earning by exports the money necessary to import food, the rehabilitation of agriculture nevertheless offers abundant potential for improvement and possibly could lead to self-sufficiency in food production after a household responsibility system (in other words, privatization) of agriculture begins. In the current circumstances of collective farming, such improvements are not likely. Nevertheless, the eviction of most foreign aid workers in December 2005, which in particular affected the European nongovernmental organizations, shows that it was not the shift to development assistance that bothered North Korea, but rather it was the fact that aid workers were in the country at all. Also, substitution effects had set in: The unconditional aid of South Korea was much more attractive from the point of view of North Korea because no stringent monitoring requirements were attached and the flow of information as they dealt with South Koreans, who were at that time accepting every control placed upon them by the North, could be much more effectively controlled. The possibility of renewed South Korean aid under successful denuclearization has already been discussed. As for other foreign aid, it depends on the concrete final documents of a denuclearization process and the possible promises made to make North Korea accept denuclearization. One very attractive prize is the possibility of reparations that Japan might pay North Korea for actions during the colonial period, although in the meantime other important issues, most of all the question of abducted Japanese, have to be resolved. China might act anti-cyclically, however, because its aid is merely designed to help North Korea survive and has no specific development goal other than stabilizing North Korea enough to prevent regime instability and the prospect of a united Korea with US troops at China’s border. Thus, larger shipments by other partners in the six-party talks might lead China to the thought that its own contributions are less necessary.

The Political Economy of the Peace Dividend for North Korea The demise of the military buildup, the lifting of sanctions, the opening of trade and aid, and inter-Korean cooperation have been discussed earlier as potential effects of denuclearization. What is the feasibility of denuclearization? Ceteris paribus, the factors mentioned above allow for a shift to civilian production and, consequently, more growth. Also, a reduction of mandatory military service would be a precondition for better education of young people, who currently enter the army at ages 17–20 and stay until they are 26 years old. The external dimension, as already shown, is particularly important for reaping a peace dividend. North Korea’s leadership benefits, however, from conflict: If it is accepted that within the North regime survival is highest in the hierarchy of goals, then conflict

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with the outside is one means to foster regime stability. Conflict, in the limited way it has been simmering throughout the past two decades, benefits the leader vis-à-vis his subordinates, benefits the military vis-à-vis other state entities, and benefits the leadership vis-à-vis the population. The leader, Kim Jong-il, gains through conflict because he is able to apply emergency rules that his subordinates must obey, and he can rely on the discipline related to a conflict situation more than he could in an environment of peace. Kim Jong-il’s ability to gather information through, for example, the Internet, which is restricted for most of his subordinates, allows him to issue commands in an authoritative manner, and these commands are certain to elicit admiration among his subordinates. Kim Jong-il’s entourage and the country’s military gain through conflict, not only in the form of additional prestige, but also in particular in the form of additional resources allocated in the name of priorities in times of conflict. The militarization of the language and everyday life is to some extent independent of a real military threat. But it is not easy to uphold this illusion when information about external affairs can no longer be completely controlled by the state and when the external security situation improves. If the military threat were to disappear, people would probably demand a larger share of goods for consumption or even more openness. In addition, in general, benefits accrue to the leadership, not the population, since conflict and militarization (justified by conflict) are a means to control the population. This can be directly observed in Pyongyang almost every day. Thousands, sometimes tens of thousands, of people, most of them students but also the elderly, are training in the central Kim Il-sung square and other places (for example, near the Cultural Palace) for political demonstrations. Often, these take place on the birthday of an important person such as one of the leaders or on some other national holiday; sometimes they are related to events like the first nuclear test. From an economic point of view, this can only be described as wasteful. Pupils who attend these practices skip millions of school hours as they drill, sometimes until the early morning hours. And, although it is true that companies are idle, the central planning (at least on the national level) of the socialist state always needs new labor (labor hoarding) even if that labor is used at infrequent intervals. This seems to be the exact problem: thousands and tens of thousands of people can roam the city and possibly bond together. Through military action and exercise, however, these elements are firmly under control. This is perhaps the best explanation of why months of exercises preceded the founding day of the state on September 9, 2008, which was a rather sober party, lasting less than two hours and without the leader in attendance. There is a second related reason why conflict stabilizes the regime. As in other socialist regimes, the emerging Kim regime in the 1940s was based first on its superiority as an economic system. Kim Il-sung essentially promised three things: a tiled roof (versus the widespread use of straw roofs), a silk traditional garment to wear, and meat soup to eat every day. For the poor farmers and workers of North Korea, this promise indeed was a promise of unknown luxury. For some time after the Korean War, North Korea seemed to make great progress in fulfilling these

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promises, but beginning in the late 1970s the economic situation turned worse again. Soon Kim Il-sung’s legitimacy was enhanced by a military claim, namely, the single-handed victory Kim allegedly achieved in the fight against the Japanese army and the US army.26 The economic promises failed spectacularly in the 1990s, and the specious military victories are now a distant memory. In this situation, conflict allows Kim Jong-il, who suffers from a lack of legitimacy because he inherited his position, to prove himself as an equally important military commander. His depiction of himself as one of the three “great generals of Paektusan” is related to the countless victories he has claimed in countering sinister US and international designs on North Korea. Without conflict, this would not have been possible. What would denuclearization and an environment of peace in Northeast Asia mean for regime stability in North Korea? First, there would be no more reason to keep the whole nation on alert. Hungry people would ask about the benefits of peace. Although to some extent additional aid could be distributed, the real benefits of peace would materialize only through opening. China’s and Vietnam’s openings began with thousands of students who were abroad. In the case of Korea, this seems impossible: the attraction of South Korea would be too great to allow young, unmarried, and unattached people to leave the country en masse. Also, what kind of border regime should North Korea choose in a peaceful Northeast Asia? Any relaxation of the tight control toward the South would lead to an unwanted exodus. Finally, what would happen to the resources freed from military use in the absence of any change of the economic system? The resources would be put to an equally wasteful use outside the military: maybe even more monuments to the leader (and maybe his successor, whoever this might be) would be built; maybe the defunct public distribution system would be revived? As long as there is no better allocation of resources in North Korea, the peace dividend might evaporate in the wasteland of socialist planning. This result in North Korea is not the consequence of an adherence to any form of socialist creed or ideology. The North Korean leadership, if it ever was ideological, changed its mind a long time ago. Today it would prefer to follow the Chinese model and adopt a modern market economy if the problem of regime stability did not enter into the question. The attraction of South Korea is the real reason that North Korea cannot reform and prefers conflict to peaceful cooperation. Thus, one conclusion is straightforward: a peace regime for Northeast Asia is, all in all, a necessary but not a sufficient precondition for a peace dividend. And, again, such a peace dividend is, on the one hand, wanted by North Korea’s leadership but is, on the other hand, feared because it might interfere with regime stability. Regime change, as occurred in Eastern Europe, is the real trigger for creating and actively using an emerging peace order.27

26 Both

claims were complete inventions and were used to foster the Kim regime. change does not necessarily mean different personnel although this would be probable, but it does mean different policies and hierarchies followed by the regime.

27 Regime

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Impossibility of North Korean Reform and Implications for Negotiating Peace in Northeast Asia One way to understand the potentially dangerous implications for the North Korean leadership of a Northeast Asia peace and security order is to think about the forces determining North Korea’s economic policy between opening and reestablishment of state control in the last decade. North Korea has been torn between the forces of opening to the outside world – forces that include not only the hungry population but also the technocratic young elite now in leading positions in party and government – and forces of conservatism, among them the military. Economic reform is welcome to some extent, and on the issue of economic reform North Korea moved during the past decade; but at the same time the moves were timid and inconclusive. Political opening (in the form of a Northeast Asian peace order), although promising a peace dividend, cannot be carried out simultaneously with maintaining the traditional order of the regime. The reason is that they form an impossible relation with the third, and most important, goal of the North’s leadership: survival. Two out of three goals might be reached, but it seems impossible to achieve them all simultaneously. The Chinese solution was achieved without political opening (it was, at most, a tightly controlled opening). The Eastern European experience was a simultaneous and chaotic process of economic and political transformation, resulting in a change of political leadership early in the phase. For North Korea, the attraction of the South poses the additional challenge of regime stability, denying it policy options that China and Vietnam used to achieve opening without political reform (Fig. 8.1). Understanding the North Korean leadership’s perception of threat allows us to draw up an appropriate incentive structure for negotiations with North Korea. Negotiations with North Korea will be successful insofar as they accept the goal

Fig. 8.1 The triangle facing North Korea Source: author’s concept

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of regime survival as the ultimate goal of the North Korean leadership. This, however, severely limits the negotiating options because it would mean accepting the fact that under the current circumstances North Korea is not interested in lasting peace in Northeast Asia. This has nothing to do with militarization for ideological reasons. In fact, there is some genuine interest in overcoming the history of confrontation with the United States, which is perceived as the largest external threat to regime stability. At the same time, however, the internal threat to regime stability is thought to be just as pressing and requiring of as much attention; for this reason, the external threat might even be welcome to the North’s leadership. Can the North Korean incentive structure be altered? Probably not completely, but there are two possibilities for those negotiating with North Korea: First, on a short-term basis, North Korea is flexible as long as it expects immediate benefits from flexibility and as long as it expects no major threats from concessions it makes. Negotiators can (and have) offer a variety of incentives for desired behavior on the part of North Korea, but this will not have lasting effects. It can nevertheless be an appropriate strategy if one expects major political changes in the near or at least not-too-far future.28 Second, and more fundamentally, there could be an attempt to interest at least certain parts of the leadership in opening and reform. One reason is that the Chinese military was remarkably calm throughout two and a half decades of transition, and it benefited enormously from economic change, first in the form of military enterprises and later through the ability of the strong new China to finance vastly increased military expenditures. North Korea’s military, however, currently perceives peace and opening as threatening. Engaging the military might be difficult, but it is not impossible.29 Although remunerating the military for its role in protecting a rogue state might be repellent, this could prove to be a better strategy than isolation. Such support, in terms of a certain division of labor in the six-party talks, could largely be a role in which the Chinese side could be active, with tacit support from the other members of six-party talks. The analysis above depicts the possibility of a peace dividend for North Korea in somber and sober but, it is hoped, not unfair words. There is still a chance that North Korea under the current leadership or new leadership will recognize the enormous benefits of peace, not in the form of a readily spendable peace dividend but in the form of a chance for a complete reversal of the decades-old patterns of confrontation and economic disintegration in Northeast Asia.

28 The

question of the health of the leader and the unresolved succession immediately comes to mind. 29 In talks with European politicians, the desire for closer contacts with European militaries and police forces has occasionally been expressed.

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References Bonn International Center for Conversion. 1997. Annual Report 1996/1997. Bonn: BICC. Bonn International Center for Conversion. 2006. Annual Report 2005/2006. Bonn: BICC. Buzo, Adrian. 1999. The Guerilla Dynasty: Politics and Leadership in North Korea. Boulder, CO: Westview Press. Case Studies in Sanctions and Terrorism, Case 50-1, US and UN v. North Korea (1950–: Korean War) and Case 93-1, US and UN v. North Korea, (1993–: Nuclear Proliferation). Peterson Institute. http://www.petersoninstitute.org/research/topics/sanctions/nk.cfm (accessed October 1, 2008). Central Intelligence Agency. The World Factbook. https://www.cia.gov/library/publications/theword-factbook/ (accessed October 1, 2008). European Commission. 2002. The EC – Democratic People’s Republic of Korea (DPRK) Country Strategy Paper 2001–2004 (2002). European Commission. http://ec.europa.eu/comm/external_ relations/north_korea/csp/01_04_en.pdf (accessed May 23, 2006). European Commission. 2005. The EU’s Relations with the Democratic People’s Republic of Korea – DPRK. European Commission. http://ec.europa.eu/comm/external_relations/north_ korea/intro/index.htm (accessed October 22, 2006). Gause, Ken. 2006. North Korean Civil–Military Trends: Military-First Politics to a Point. Strategic Studies Institute of the Army. http://libweb.uoregon.edu/ec/e-asia/read/PUB728.pdf (accessed October 1, 2008). Hodge, Homer T. 2003. North Korea’s Military Strategy. Parameters 33(spring): 68–81. International Institute for Strategic Studies. 2005. The Military Balance 2005/2006, London: International Institute for Strategic Studies. Kim, Jingwun. 2008. Korea, Democratic People’s Republic of, Armed Forces. In The Encyclopedia of the Cold War, Vol. II, ed. Spencer C. Tucker, 733–34. Santa Barbara: ABC-Clio. Knight, Malcolm, Norman Loayza and Delano Villanueva. 1996. The Peace Dividend, Military Spending Cuts and Economic Growth. World Bank Policy Research Working Paper no. 1577. Washington, D.C.: World Bank. Lim, Soo-Ho. 2008. The Alleviation of US Economic Sanctions Against North Korea and Its Implication for Inter-Korean Economic Cooperation. SERI Issue Report no. 6. Seoul: Samsung Economic Research Institute. Nanto, Dick K. and Emma Chanlett-Avery. 2008. The North Korean Economy: Leverage and Policy Analysis. CRS Report for Congress. Washington, D.C.: Congressional Research Service. OSCE. 2005. New Security Threats and a New Security Paradigm. Consolidated Summary and Papers of the 2005 OSCE-Korea Conference, Seoul: MOFAT, Vienna: OSCE. Ministry of Foreign Affairs and Trade/Organization for Security and Co-operation in Europe. Pritchard, Charles L. 2007. Failed Diplomacy. Washington, D.C.: Brookings Institution Press. Savada, Andrea Matles, ed. 1994. North Korea: A Country Study. Washington, D.C.: Federal Research Division, Library of Congress. http://lcweb2.loc.gov/frd/cs/kptoc.html#kp0034 (accessed October 1, 2008). Seliger, Bernhard. 2004. The North Korean Economy: Nuclear Crisis and Decline, or Peace and Reform in the Last Asian Dynastic Regime? Korea’s Economy 2004 20: 77–86. Korea Economic Institute. Seliger, Bernhard. 2005. The July 2002 Reforms in North Korea – Liberman Style Reforms or Road to Transformation? North Korea Review 1(fall): 22–37. Seliger, Bernhard, Thomas T. Park and Hyung Suk Kim. 2007. Economic Sanctions, North Korean Famine, and Humanitarian Assistance. In Economic Sanctions Against a Nuclear North Korea: An Analysis of United States and United Nations Actions Since 1950, eds. Suk Kim and Seemon Chaung, 127–48. Jefferson, NC: McFarland & Company. Thatcher, Margaret. 2002. Statecraft. New York: HarperCollins.

Chapter 9

Implications for the North Korean Economy of Moving Toward New Modalities for Northeast Asian Security Bradley O. Babson

The prospect that a Northeast Asian Security Community might provide a stable long-term foundation for peace and prosperity in this critically important region is a goal worth pursuing, despite the formidable obstacles that persist. The epicenter of uncertainty is the DPRK’s problematic political and economic system that in its current form is geared to isolation and confrontation and not regionalism. For the DPRK to become an integral part of any regional security community, transformative change inside the DPRK will be necessary. Since transformative change is already underway – in an unplanned and unregulated process – the stakes are high as to whether this change will evolve in ways that are compatible or antithetical to enhanced regional cooperation. Engagement with the DPRK with an objective of helping to guide the transformations down a path compatible with regional cooperation and mutual benefit with neighboring countries is a policy worth pursuing, regardless of the priority given to the nuclear proliferation issues that have global not just regional significance. This broad agenda of engagement with the DPRK underlies the September 19, 2005 Joint Agreement negotiated in the auspices of the Six-Party Talks process, which remains valid as a framework to pursue long-term regional security cooperation goals as well as nuclear nonproliferation goals. This chapter explores the implications for the North Korean economy of efforts to build a Northeast Asian Security Community. The underlying presumption is that within the context of a regional security architecture, the North Korean economic system could pursue structural reforms that would enable both a large peace dividend to the domestic economy and closer integration with the regional economy and international financial community more broadly. But to maximize the benefits for the DPRK economy that would be possible to achieve would also require difficult changes in the political system and political economy. Resistance to such changes is highly likely and could greatly reduce the potential benefits to the economy of a peace dividend. These political factors as well as the contours

B.O. Babson (B) John’s Hopkins School of Advanced International Studies, US-Korea Institute, Washington, DC, USA e-mail: [email protected] B. Seliger, W. Pascha (eds.), Towards a Northeast Asian Security Community, The Political Economy of the Asia Pacific, DOI 10.1007/978-1-4419-9657-2_9, C Springer Science+Business Media, LLC 2011

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of economic opportunity shape the choices that will need to be made by both the authorities within the DPRK and their foreign partners in whatever security and regional economic cooperation arrangements may be considered.

Potential Peace Dividend for the North Korean Economy There are five broad areas where the North Korean economy could reap the benefits of a peace dividend. First is a reduction in the military budget. Since data are sparse and estimates vary, it is reasonable to believe that the DPRK spends nearly 25 percent of GNP on defense to maintain its conventional forces and deterrence capabilities,1 although the published North Korean annual budget figures put the military share in the 14–15 percent range.2 This compares with estimates of about 2.7 percent of GDP in South Korea.3 Reducing defense expenditures would allow more resources to be directed to productive economic activities. Second is the efficiency gain that could be achieved through reallocation of resources in the economy and rationalization of pricing with an expanding role for market-based mechanisms. Redeployment of military-owned assets and manpower, integration of the military economy with the peoples’ economy, and price reforms that would more closely reflect market forces could generate significant efficiencies for the North Korean economy. These efficiencies would lift productivity and underpin growth potential. Third is stimulation of foreign investment and trade. A Northeast Asian Security Community would lower perceptions of risk to investors and trade partners, unleashing potential new capital and trade opportunities and lowering risk premiums for investment. If accompanied by legal and financial system reforms aimed at integrating the DPRK economy with regional and international norms, the DPRK could expect significant new inflows of foreign investment and market openings, principally from South Korea, Japan, and China, but also from the United States, Europe, and Australia. Fourth is expanded and better coordinated foreign aid. Regional security cooperation can also improve the prospects for mobilizing and coordinating development assistance that can support economic reforms and investments that will lead to economic growth and economic integration in the regional economy and international financial system. Fifth is benefiting from regional externalities, where cross-border cooperation can produce benefits for the DPRK economy, for example, in environment, tourism, transport, and energy.

1 Hamm

(2006). (2003). 3 CIA World Factbook. 2 Yoon

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Issues and perspectives related to the challenges to be faced if these potential benefits for the North Korean economy were to be realized, and their implications for discussions of the prospects for a Northeast Asian Security Framework, are discussed in the following sections.

Reducing Military Expenditures and Redeploying Military Assets and Manpower Reducing military expenditures and converting to more productive use military assets and manpower are potentially highly significant for the North Korean economy. The estimate of 25 percent of GNP devoted to military use suggests that the scope for structural reform is huge in relative terms even if the DPRK continues to rely on asymmetric strategies to protect its national defense interests. Redeploying such resources would also naturally be a high priority for reducing threat perceptions by other countries in the region and it can be expected that programs to assist such redeployment would be supported by foreign governments, including through retraining and technical assistance for restructuring asset management. Nevertheless, there are important limitations on what can be expected. First, while the DPRK maintains military forces estimated to be over one million, soldiers are deployed in agriculture production and in infrastructure construction and maintenance, thus contributing to the general economy already. Second, much of DPRK’s military–industrial complex has been experiencing degradation of capital stock for decades and its conventional military equipment is in poor condition and has little residual value. Third, some military industries, such as missile production, are already foreign exchange earners for the North Korean economy and could be expected to expand with opportunity for additional investment. Fourth, some military-owned enterprises, notably in mining, are forming joint ventures with Chinese enterprises or are actively engaged in cross-border trade, but the benefits are accruing to the military, not to the people’s economy. Fifth, corruption in the military, especially along the DPRK–China border, is extracting rents from the people’s economy and likely also from the court economy that serves the inner elite circle.

The Dilemma of Military-First Politics and the Military Economy The fragmentation of the North Korean economic and financial system into multiple systems that are not integrated nor managed under a coherent national policy or regulatory regime mitigates against redeployment of resources and integrating pricing signals that would lead to large efficiency gains where the role of markets is growing. This fundamental feature of the present economic organization of the DPRK is rooted in the separation of power between the military, the Workers Party,

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and the Cabinet. This separation of power reflects the internal political balance that has been struck to maintain support for the regime and has been carefully crafted to maintain Chairman Kim Jong-Il’s overall control over the country. Militaryfirst politics was adopted as a uniquely North Korean solution to maintaining this balance, by anchoring national cohesion under the constant threats posed by enemies. If the DPRK were to become part of a Northeast Asian Security Community, the rationale for this balance of power would become unhinged, as the justification for a military-first politics grounded in the need to maintain national mobilization against highly threatening enemies would be substantially weakened. Thus, a critical choice that would have very significant consequences for the future North Korean economy would be whether a rebalancing of roles among the military, the Workers Party, and the Cabinet would be adopted by the leadership. If the Workers Party is given the leading role, as is the case in China and Vietnam, and the military role reduced to subservience to the Party, it is possible to imagine a restructuring of the economic and financial system to reduce fragmentation and bring the national economy under the coherent guidance of the Party. (The Party is already exercising its dominance over the Cabinet.) If such were the case, large economic efficiency gains could be achieved if well-designed economic policies were put in place to support the system integration process. It would also have consequences for the forms of economic cooperation that the DPRK would pursue with its neighbors, with a closer alignment with policies and institutional arrangements favored by China and weaker alignment with South Korean policies and institutions. This outcome would be highly politically favorable to China, who would actively pursue the goal of fostering a “third jewel in the crown” of successful socialism, rooted in rapid economic growth and stable political control of the Communist Party. For this reason, in such a scenario, China would likely make all efforts to support an economic restructuring leading to sustained high growth and poverty reduction in the DPRK, buttressed and legitimized by the Northeast Asian Security Community cooperation arrangements. If, on the other hand, entrenched interests in the North Korean military are unwilling to relinquish the privileges and direct control over enterprises, manpower, and finances they now possess, the prospect of rational integration of the fragmented DPRK economy would be much reduced. Competition for access to new potential sources of income from economic opportunities that might be forthcoming under a Northeast Asian Security Community could be a potential source of added instability within the DPRK political system and political economy. In this scenario, the military would likely concentrate on rationalizing its use of assets and manpower within its own sphere of control, and a mixture of bargaining with the Workers Party and Cabinet from a position of strength and seeking rents through both accepted and corrupt practices could be expected. Such a situation would pose complications for economic relations with neighboring countries who might be put in a position of making choices among competing North Korean economic partners and contending with unfettered corruption. It is also possible that the military would aggressively expand military industries for overseas sales that are legal

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under international law and would use the umbrella of the Northeast Asian Security Community to refocus prestige and resources on such military equipment sales as the rationale for maintaining independent power and a place in the regional security system.

Implications for Expanded Investment and Trade Apart from the issues surrounding the internal structures of the DPRK economic system that would surface in considering the impact of a Northeast Asian Security Community on the North Korean economy, any peace regime and regional security framework would greatly enhance the prospects for mobilization of investment in the DPRK and expanded trade. Investment quality as well as quantity could be enhanced, as technologies now closed to the DPRK under sanctions and dual use policies would likely become available. This would open new areas for potential economic development and productivity gains. Trade with neighboring countries could also be expected to expand significantly if the DPRK adopts an outwardoriented economic development strategy that would become politically feasible under the umbrella of a regional security cooperation framework.

Economic Relations with South Korea Inter-Korean economic relations have expanded significantly since the 2000 Summit, despite ups and downs in the nuclear negotiations and bilateral political relations. Establishment of a Northeast Asian Security Community could be expected to create an environment that would encourage further expansion of South Korean investment in the DPRK and trade at a much larger scale. Plans already on the books for phased expansion of the Gaesong Industrial Zone and development of other such zones would likely figure prominently in this situation, with South Korean investment creating a large number of industrial jobs for North Koreans that would serve as one mechanism to absorb labor from the reduction of the North Korean military forces. The mutual political as well as economic benefits from such a coordinated strategy to support the redeployment of North Korean military manpower with high-value investment and jobs could be expected to become a major feature of the bilateral relationship. This would likely be accompanied by sustained economic and humanitarian aid flows from South Korea to the DPRK to support food security and advance South Korean interests. In addition, the inter-Korean economic relationship could expand to embrace joint projects to develop and environmentally protect the demilitarized zone (DMZ) and other cross-border shared resources as symbols of commitment to cooperation for activities of mutual benefit and Korean aspirations for eventual unification. The DMZ can be expected to remain, however, as a firewall between the two societies, as long as South Korea pursues a policy of gradually leveling the economic gap between the two countries before seeking to achieve political and institutional unification objectives (which

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could in the end be unattainable for the foreseeable future if the political system evolution aligns more tightly with communist China rather than democratic South Korea).

Economic Relations with China Chinese trade with the DPRK has been growing steadily and the composition of trade differs significantly from inter-Korean trade. Chinese demand for raw materials to feed the construction boom in the northeast provinces is exerting a commercially based incentive for this expansion in economic relations, and government policy aims to reinforce the growth of market mechanisms in the DPRK through cross-border trade and enterprise-based economic relationships. Aid plays a minor role compared with the inter-Korean economic relationship. Chinese investment in the DPRK has also been growing, but warily. Informal barter trade, smuggling, corruption, and refugee crossings also permeate the China–DPRK relationship that have both negative and positive consequences for the North Korean economy.4 The Chinese–DPRK economic relationship can be expected to continue to grow with or without the development of a Northeast Asian Security Community. What would be different is the potential for improving the quantity and quality of Chinese investment in the DPRK that could reinforce economic system restructuring and investments that would produce more domestic value additions in North Korean exports to China. Economic growth that is broadly based in the DPRK would reduce pressures on cross-border refugee flows, and China could be expected to pursue a coordinated policy of improving human security within the DPRK while benefiting from trade. A regional security framework would also foster cross-border transport cooperation, notably access to the Rajin port in the DPRK, giving landlocked provinces of eastern China a long-sought access to the sea. Such expanded port operations would directly benefit the DPRK economy.

Economic Relations with Japan Japanese participation in a Northeast Asian Security Community that includes the DPRK would require improvement in bilateral relations. If this occurs, the potential impact on the DPRK economy of Japanese trade, aid, and investment could be substantial. Normalization of relations would be accompanied by a package of financial benefits for the DPRK, which if implemented in the context of the regional security cooperation would allow the DPRK to accelerate its economic transformation and make investments in industries exporting to the Japanese market, as well as open the door to tourism and remittances from Japan that could be significant long-term sources of foreign exchange. 4 For a full discussion of both Chinese and South Korean economic relations with the DPRK, see Haggard and Noland (2007).

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Economic Relations with Russia Bilateral trade and investment in the DPRK–Russian relationship is minimal at present and would not likely expand much under a regional security cooperation arrangement. What would significantly impact the DPRK economy would be Russia’s participation in regional energy and transport projects that could move forward once such a framework for cooperation is established. Russia is keenly interested in upgrading the rail link between South Korea and the Russian network to promote land-based trade with Europe and the DPRK economy could benefit from this. Recent reports suggest that Russia is already investing in upgrading the rail link of 54 km from Khasan to the North Korean port of Rajin.5 Similarly, potential benefits of cross-border gas and oil pipeline projects and power trade have been discussed for many years and are now actively being pursued by Russia and South Korea. These could reduce DPRK’s dependence on refined petroleum imports from China and improve its energy security through participation in such regional initiatives based on Russian oil and gas reserves. However, these projects face many challenges above and beyond the necessary but not sufficient condition of functioning regional security cooperation.6

Economic Relations with Counties Outside the Northeast Asian Region Beyond opening prospects for new dynamics in the DPRK’s economic relations with neighboring countries, movement toward establishing a Northeast Asian Security Community would improve the environment for investment and trade with countries outside the region, including the United States, Europe, Australia, and ASEAN. Such expanded economic relations would benefit the DPRK economy through diversification of export markets and sources of technology transfer and investment. Removal of sanctions would contribute to this process as well as efforts on the part of the DPRK to move toward adopting internationally accepted standards of transparency and rules-based financial and legal systems in its international economic relations.

Security Cooperation and Foreign Aid Foreign aid falls into three broad categories: humanitarian, development, and political. Humanitarian and development assistance have well-defined internationally accepted principles and modalities. Political aid is tied to specific objectives of 5 Dong-A

Ilbo, October 7, 2008. discussion of the issues relating to regional energy cooperation, see Haggard and Noland (2008). 6 For

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the provider. In the case of the DPRK, the boundaries between political aid and humanitarian and development assistance have been blurred, both in bilateral and multilateral forms. Because the DPRK economy is vulnerable in food security, energy security, and financial security, international efforts to entice through aid or force through sanctions the DPRK to move in politically desirable directions have tended to focus on food, energy, and foreign exchange. For these reasons, any future Northeast Asian Security Community that responds to the needs of the DPRK will have to address all three areas of economic security as well as political and military security perspectives. To have the most benefit for the DPRK economy, aid should be based on internationally accepted best practices and be coherent, transparent, and results oriented. The potential benefit of a regional security cooperation framework is that coordination of aid policies and modalities for delivery would be more likely than at present. The Six-Party Talks working group on energy and development assistance provides a starting point for regional cooperation and coherence in aid policies linked to political and security issues. But the experience of the working group mechanism also raises caveats. Technical expertise must be integrated in the political aid planning if it is to produce economically rational results and incorporate international best practice principles of humanitarian and development assistance. Also, aid linked to political processes is subject to fits and starts that are not related to an economic logic or practicalities of implementation. Thus, an economic aid dimension of a future regional security cooperation arrangement should be designed to produce benefits for the DPRK economy that are aligned with shared security objectives and provided in ways that are operationally efficient and reinforce cooperation in achievement of the desired results. Foreign aid linked to an economic system reform process and efforts to increase trade and private investment with neighboring countries could result in high economic growth and rapid integration of the DPRK economy in the international system. To achieve this outcome would require a high level of trust and commitment to manage transformative engagement on the part of both the DPRK leadership and the international community. Even if such trust and commitment were to be forthcoming, coordination of aid policies and delivery would be a huge challenge and mechanisms would need to be put in place to do this, both within the DPRK government and within the international community. A Northeast Asian Security Cooperation arrangement would be an important underpinning of such an economic development path for the DPRK, but insufficient. Complimentary institutional mechanisms for managing the economic transformation process would be needed.

Potential Regional Externalities Regional economic cooperation among South Korea, China, Japan, and Russia could have spillover effects on the DPRK economy. Under the auspices of the Tumen River Commission and the Economic Research Institute for Northeast Asia,

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numerous studies and workshops have been conducted since the mid-1990s exploring the potential benefits of coordinated investments in regional transport, energy, tourism, and environmental management. A Northeast Asian Security Community would stimulate renewed efforts to design regional economic cooperation projects that would require long-term commitments and legal and financial frameworks that bind the interests of participating countries, much the same way that has been achieved in Europe. Energy security would be a high priority for all the counties, given the high dependence on foreign energy of South Korea and Japan and China’s rapidly expanding demand. Apart from the potential for infrastructure investment in the DPRK that would accompany regionally motivated projects in transport and energy, the DPRK economy could benefit from technology transfers and employment for operation and maintenance, as well as transit fees for freight, oil, and gas that may pass over North Korean territory. While there are risks associated with such regional economic cooperation ventures, they can contribute to the security architecture by providing incentives for continued cooperation through mutual benefits that come from shared commitments. Deepening economic interdependence can have an important impact on maintenance of regional security. Lack of trust in the DPRK has been one major factor inhibiting progress on investments in regional infrastructure, particularly in rail and energy links between South Korea, Russia, and China. Overcoming this distrust would be a critical challenge for the DPRK leadership in participating in a Northeast Asian Security Community. DPRK’s desire for guarantees of its own security will need to be accompanied by DPRK guarantees on the risks faced by investors and neighboring countries if the benefits of regional economic cooperation are going to be realized.

Peaceful Evolution of the North Korean Economy Ideological as well as pragmatic political economy considerations make the idea of a rapid transformation of the DPRK political and economic system unlikely under a scenario of peaceful negotiated development of a Northeast Asian Security Community. The Juche philosophy of “self-reliance” that has underpinned the North Korean preference for isolation instead of regional collaboration remains an obstacle. However, both the pragmatic economic-self interest and the security enhancement that would be served by participation in a regional security arrangement would be strong incentives to find ideological rationales that would be consistent with a shift to a more outward orientation. Both China and Vietnam have managed to pursue creative ideological reinterpretations of communist dogma to support their successful processes of expanding economic relations with the international community and pursuing development of market economies despite over-hangs of past ideological preferences. Endorsement of expanded trade and investment relations with outside countries has been given by senior North Korean officials in recent years and suggests that such creative ideological reinterpretation is possible in the DPRK as well.

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From the perspective of a peaceful managed transformation process, the idea of a “peace dividend” for the DPRK economy can best be understood not as a one-time fixed-value economic boost but rather as a series of sequenced economic “dividends” that are potentially possible. As the DPRK leadership takes decisions relating to political and economic system change that can take advantage of new external political and security realities, domestic stakeholder interests, and expanded aid, trade, and investment possibilities with neighboring countries and the international community more widely, it will also be necessary to build new financial and economic institutional capacities to implement these decisions and take advantage of opportunities. Even under the most optimistic scenario, this will be difficult and will take time. If the DPRK moves down this path of incremental sequenced economic dividends from a peaceful evolution process, the involvement of the International Financial Institutions (IFIs) and UN development agencies could potentially be of significant help to the DPRK. Joining the IFIs in particular would help accelerate integration into the global internal financial system as well as the Northeast Asia regional economy.7 Objective policy advice and technical assistance for capacity building can facilitate and accelerate the reform agenda and process. In addition to mobilizing financial resources through their own mechanisms, the IFIs and UN development agencies can mobilize finance for catalytic investments from their resources and leverage the resources that can be made available by other donors through aid coordination mechanisms and application of best practice economic development principles that are now well-established in the international community. Establishment of transparent and well-designed IFI and UN programs of assistance for the DPRK would also support confidence building and lower risk perceptions by private investors and trading partners and contribute to the realization of the economic dividends for the DPRK.

Conclusions From the perspective of maintaining its national sovereignty and pursing economic development, it would be greatly in the DPRK’s interests to reform its political and economic system to improve productivity and attract foreign capital and to build export-oriented economic relations with all of its neighboring countries. Each provides different opportunities and potential, and by expanding and diversifying its external economic relationships, the DPRK could pursue a policy of regional integration while protecting its national identity and interests without becoming overly dependent on any of its principal neighbors. A Northeast Asia Regional Security Cooperation architecture could be designed to provide a crucial underpinning for such a vision of the DPRK’s future and support for the necessary transition from

7 For a discussion of issues related to developing relations with the International Financial Institutions, see Babson (2008).

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an inward-oriented economic system to an outward-oriented one. It is hard to imagine how a regional security cooperation arrangement could in fact succeed unless the DPRK is willing to undertake the critical transformations required to participate and benefit from genuine regionalism. The commitments and actions that would be required are daunting however, and in the current environment, hardly plausible. Thus, the process of moving international dialogue and engagement toward the creation of a Northeast Asian Security Community, should consider how to shape incentives and mechanisms that would encourage the DPRK to develop the courage, trust, and commitment to take bold steps and make the necessary policy and system adjustments in its own long-term national interest. A Northeast Asian Security Community would necessarily embrace a much broader scope of objectives than dealing with the DPRK’s issues, critical as they are, and to some extent the DPRK tail should not wag the Northeast Asia dog given the larger security concerns at stake. A regional security solution that does not resolve the fundamental misalignment of the DPRK political and economic system with the rest of the region and address its long-term viability as a sovereign nation is, however, not likely to be satisfying to the countries of the region, not the least of which is the DPRK itself.

References Babson, Bradley. 2008. Realistic Expectations of the Future Role of the IFIs on the Korean Peninsula. Korea’s Economy 24. Washington, DC: Korea Economic Institute of America. Haggard, Stephan and Noland, Marcus. 2008. A Security and Peace Mechanism for Northeast Asia: The Economic Dimension. Peterson Institute for International Economics Policy Brief no. PB 08-4. Peterson Institute for International Economics. Haggard, Stephan and Noland, Marcus. 2007. North Korea’s External Economic Relations. Peterson Institute for International Economics Working Paper Series. WP 07-7. Peterson Institute for International Economics. Hamm, Taik-young. 2006. North Korea: Economic Foundations of Military Capability and the Inter-Korean Balance. In North Korea: 2005 and Beyond, eds. Philip Yun and Gi-Wook Shin, 175. Washington, DC: Walter H. Shorenstein Asia-Pacific Research Center Monographs. North Korea-Russia Railway Reconnection. 2008. Dong-A Ilbo. October 7, 2008. The World Factbook. https://www.cia.gov/library/publications/the-world-factbook/. Yoon, Deok Ryong. 2003/2003. Public Finance and Fiscal Policy. In North Korea Development Report 2002/03, ed. Choong Yong Ahn, 353. Seoul: Korea Institute for International Economic Policy.

Chapter 10

Financial Cooperation with North Korea: Modalities and Risks Stephan Haggard and Marcus Noland

It is well-known that the North Korean economy has experienced a catastrophic decline over the past 20 years and will need massive foreign investment and aid if it is to shift onto a higher growth path. Economic assistance and expanded trade and investment have been promised in the multilateral setting of the Six-Party Talks, including North Korea’s ultimate entry into international financial institutions. China has also continued to extend substantial assistance to North Korea, and both trade and investment between China and the North have grown dramatically (Haggard and Noland 2008). Of particular significance will be the stance of the South Korean government. The economic package of the Lee Myung-bak administration (Vision 3000 and the policy of “mutual benefits and common prosperity”) is quite explicit and forwardlooking in this regard, motivated in part by genuine interest in reunification, in part as a hedge against collapse. The new administration has promised wide-ranging economic cooperation with the North, but only in the context of a solution to the nuclear question. Yet financial cooperation with North Korea carries a substantial number of risks. Inter-Korean engagement was originally conceived as an instrument: The point was to encourage sufficient systemic evolution within North Korea to establish a meaningful basis for reconciliation and, ultimately, national unification. However, critics of this strategy noted that engagement gradually became an end in itself, with financial inducements offered simply to keep talks moving forward. At times, the Six-Party Talks ran similar risks. The dangers of this strategy are apparent. Proffering aid – which may help address real needs in North Korea and make the regime feel more secure – may also discourage the long-run evolution in the North Korean system. To the extent that North Koreans have any interactions with foreigners, it is often with government agencies or NGOs. Given the North Korean milieu, it is quite natural for

S. Haggard (B) Graduate School of International Relations and Pacific Studies, University of California, San Diego, CA, USA e-mail: [email protected] B. Seliger, W. Pascha (eds.), Towards a Northeast Asian Security Community, The Political Economy of the Asia Pacific, DOI 10.1007/978-1-4419-9657-2_10, C Springer Science+Business Media, LLC 2011

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North Koreans to think of such engagement as a form of political bargaining. But an important long-run task of engagement is a sort of political-economic socialization: to educate North Koreans about the functioning of market economics, and to reorient their conception of engagement away from one-way resource transfers or political tribute and toward mutually beneficial exchange. In this regard, nominally commercial trade and investment have also carried risks. Both for tactical reasons and because of the state-socialist nature of its economy, the North Korean government has historically blurred distinctions between private and public capital flows, particularly in its interactions with South Korea. Nominally private flows have been embedded in larger political bargains between the two countries and carried public subsidies and guarantees. As a result, such flows have not been fully subject to market tests of viability and profitability. Private actors are encouraged to undertake projects that are not sustainable, and the North Korean government is not held accountable for enabling a positive rate of return on foreign investment. As an important first principle, the policy of donors toward North Korea should keep in mind the ultimate objectives of moderating North Korean behavior, encouraging reform, and increasing private financial flows to the country, both in the form of foreign direct investment and commercial bank lending. Aid should seek to complement and encourage such private flows, not provide a substitute for them. This principle is not ideological; it does not stem from a belief that North Korea will – or even should – adopt a “big bang” reform along the lines of the so-called “Washington consensus.” Rather, it stems from several quite pragmatic considerations. Private sector involvement is important to promote this learning and bring the discipline of the market to the engagement process. Foreign direct investment constitutes the institutional mechanism for both technology transfer and the links to marketing and distribution networks that North Korea currently lacks. Private capital flows are an absolute necessity if the North Korean economy is to be revitalized. Aid flows alone are unlikely to provide the scale of financing needed to turn the North Korean economy around. This is even true with respect to infrastructure, where a number of developing countries have benefited from private investment in projects ranging from telecommunications to highways and even the provision of power and water. Indeed, the Egyptian conglomerate Orascom is already developing North Korea’s cellular phone network. Even if private providers do not build and operate infrastructure, commercial lending will presumably play an important role. The North Korean government will eventually seek to resolve the overhang from its past international defaults (probably with South Korean government assistance) and reenter international capital markets as a borrower. Such borrowing has been important in financing infrastructural development in Vietnam once reform makes such investments viable. This observation suggests that the international donor community is unlikely to be supportive of large aid flows in the context of a hostile policy toward foreign investors. It will be extremely difficult for South Korea to mobilize large-scale multilateral support for its North Korea policy without some sign of a change of course from Pyongyang. With the onset of the global financial crisis, the demand for foreign

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assistance will rise and donors will be more selective in where funds go. Moreover, aid flows are unlikely to have their desired affect in the context of government policy that remains hostile to private financial flows; aid will simply be wasted. However, North Korea has repeatedly undercut private investors, reneging on financial commitments, interfering with the management of foreign-invested facilities, and elevating political over economic concerns to the detriment of foreign investors. The country remains in default on several billion dollars of commercial bank debt and has continually changed the rules governing foreign investment in ways that make it difficult if not impossible to realize a competitive risk-adjusted rate of return. The recent North Korean decision to close the border suggests that these risks pertain even – and perhaps particularly – to such high-visibility projects such as the Kaesong Industrial Complex. In a recent survey of 63 companies operating within the industrial park by the Korea Federation of Small and Medium Business, 60.3 percent said that the deterioration in North–South political relations is having an “extremely grave effect” on their business. The purpose of this chapter is to review the problems involved in extending large-scale assistance to North Korea. In the first section of this brief, we provide an introduction to the scale of the North Korea problem: the aggregate costs and likely effects of a unification or “deep” integration scenario on the two economies. The most important conclusions to be drawn are that integration in these ways will be extraordinarily costly not only in terms of the required financing but also with respect to the adjustments required in the South Korean economy; it is important to get policy right. In the second section, we turn to some alternative ways in which financial cooperation might be brought to bear on a more gradual transition path. We consider three distinct purposes for foreign financing – humanitarian, physical, and social infrastructure – and emphasize the importance of designing these programs both to limit total costs and to maximize systemic transformation and reform. We outline a hierarchy of modalities of engagement, with the most preferable being those that encourage private investment throughout North Korea. We argue that the most efficient way of promoting such investment is to use tax policy rather than discretionary state support for particular projects. In the final section, we discuss some possible means of mobilizing international financial resources through multilateral means, and the implications of these strategies for a new institutional architecture in Northeast Asia. We emphasize the benefits of a multilateral approach that exploits existing institutions and expertise and avoids some of the moral hazard problems inherent in a purely bilateral approach.

Scaling the Problem It is quite obvious that South Korea will of necessity bear substantial costs associated with an economic transition in North Korea. This is partly a result of the deep national desire for reunification, but also because South Korea has the proximity and knowledge – including simply the language skills – required for this task. It is

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important to begin with a reminder of the scope of the problem at hand, and the costs of unification or “deep” integration. The capital outlay associated with rehabilitating the North Korean economy is obviously a function of how ambitious the target is. There is a large literature on the “cost of unification” which has generated a wide range of estimates of the capital investment needed to achieve various income targets in the North.1 One common approach is to ask what capital investment would be necessary to raise North Korean per capita income to 60 percent of South Korean per capita income. This difference is roughly the same as that between the richest and poorest South Korean provinces, US states, and member states of the European Union (before its recent expansion into Central and Eastern Europe). Such a differential would probably be adequate to stave off mass migration and would thus be consistent with a modicum of social stability. Results obtained from general equilibrium modeling exercises indicate that the key parameters in determining the costs (and benefits) of unification are: • the efficiency gains from policy reform in the North; • the rapidity of the associated North Korean technological upgrading and total factor productivity increase; • the magnitude of cross-border labor migration; • the shares of capital investment originating in South Korea and elsewhere, and the extent to which it is made on concessional terms. In these models, migration acts as a substitute for capital transfer. The more labor is allowed to migrate, the lower the amount of capital investment necessary to reconstruct the North Korean economy and achieve the 60 percent income target. However, the larger the cross-border migration is, the greater the adjustment problems in the South. Choosing a plausible and prudent set of parameters, the models suggest that under a scenario of moderate, controlled, cross-border migration, and rapid convergence in North Korea toward South Korean levels of productivity, achieving the 60 percent goal would require a decade and approximately $600 billion of investment, and this may understate the problem given the continuing deterioration of the North Korean economy. Contingent on the amount of investment that could be financed from abroad, this scenario would imply South Korean transfers similar in relative magnitude to the German case (Noland et al. 1998, Noland et al. 2000b; Funke and Strulik 2005). In addition to the financial costs, however, such integration would imply substantial adjustment processes in both countries. Among the anticipated effects are the following: • The North Korean growth rate would accelerate dramatically and a unified Korea would see an increase in peninsular output relative to the no integration baseline. 1 See

Noland (2000) chapter 8 for a review of this literature.

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South Korean growth would slow mildly, however (Noland et al. 2000b; Funke and Strulik 2005). • Within South Korea a shifting of income from labor to capital, and within labor, from relatively low-skilled to relatively high-skilled labor. In the absence of compensatory policies, the distribution of income and wealth would become more unequal (Noland et al. 1998, Noland et al. 2000b). • Across the South Korean economy, sectors such as construction would expand, while internationally traded-goods sectors would be disadvantaged, particularly if there was a large inflow of capital from beyond the Korean Peninsula (Noland et al. 1998, Noland et al. 2000b). In sum, unification or deep integration with the North carries a steep price tag. It is therefore important to make sure that the large investments required to achieve this objective or a more gradual transition path are not wasted.

Modalities of Engagement A less ambitious transition path assumes North Korea’s continued existence as a sovereign state, the maintenance of the border as a means of population influx control and less rapid convergence in income levels. If there were sufficient reduction in the external tensions associated with North Korea’s nuclear ambitions and a serious North Korean commitment to policy reform, the country could face a fairly supportive international environment. Cooperation could be expected to yield economic benefits to North Korea in the form of enhanced trade and investment, assistance from multilateral development banks, and settlement of postcolonial claims against Japan. To obtain these benefits, North Korea would not only have to resolve the nuclear issue but also forego its current revenues from weapons exports, proliferation activities, drug trafficking, and counterfeiting. North Korea, probably with the support of South Korea and others, might also need to settle private claims arising from past international loan defaults to reenter international capital markets. Such a deal could well emerge from the current Six-Party Talks and the Northeast Asia Peace and Security Mechanism. Therefore the goal of South Korea should be to encourage the evolution of the North Korean state in desirable directions – encouraging less threatening and provocative behavior externally, and less repressive practices internally, while encouraging reform and the rehabilitation of the North Korean economy as a hedge against possible collapse. Again, it is worthwhile to return to first principles; what should such aid seek to accomplish and how should it be provided? One can think of a number of criteria for the evaluation of specific integration policies or projects. Perhaps the simplest is the division between humanitarian and development assistance. While developmental assistance and private capital flows are essential to North Korea’s long-run economic revival, in the short-run North

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Korea will continue to require humanitarian aid. The latter is warranted by North Korea’s chronic food emergency which shows no signs of permanent resolution, and indeed could be tipping back into crisis (Haggard and Noland 2009). However, to the extent possible, such assistance should also be guided by the longer-run objective of weaning the country from the need for humanitarian aid. The need for humanitarian assistance will only be reduced by reforms of two sorts: those that change incentives in the production and distribution of food; and those that provide adequate incentives for exports that will allow North Korea to import food on commercial terms. In the face of North Korea’s chronic food emergency, it would seem reasonable to divorce humanitarian assistance from politics, and both the United States and South Korea have offered aid (which in the South Korean case, Pyongyang has to date rejected). Long-term development assistance is a different matter, however, and placing a greater emphasis on policy conditionality and reciprocity as the Lee government has done is warranted. Experience the world over is that support is most effective when coupled with domestic reform. In the absence of reform, aid may have little impact, or may even perversely encourage temporizing behavior by reluctant authorities. We can see two main purposes for such assistance: investment in physical infrastructure; and investment in social infrastructure. In current discussions of physical infrastructure investment, substantial attention has been focused on “big ticket” items such as roads and rails, gas pipelines, the power grid, and new industrial parks. But large projects also carry large risks and, as the Korean Peninsula Energy Development Organization (KEDO) exercise demonstrated, tremendous costs. In thinking about infrastructural investment it is worthwhile to pilot efforts that demonstrate their value in particular locales and are smaller-scale ways to deliver infrastructure that may be more efficient and not vulnerable to the hold-up problem. An example is small-scale energy projects that meet local needs without relying on the reconstruction of the national grid. Nonetheless, it is clear that the costs of rehabilitating basic infrastructure are going to be large. As a result, it is again important to underline that the social return on such investment will only be realized if it is complementary to policies that not only stimulate the revival of the state sector but also the emergence of new economic activities, including foreign ones. Investment in export-processing zones is certainly warranted on these grounds, but only to the extent that North Korea signals a willingness to provide a welcoming policy environment. Second, there will undoubtedly be needs associated with the revival of social infrastructure, including education but particularly health. Education needs go far beyond the primary, secondary, and tertiary education systems and encompass the importance of training programs for both managers and workers; such efforts are likely to pay off just as handsomely if not more so than high-cost investments in physical infrastructure. An important long-run task of engagement is a sort of political–economic socialization: to educate North Koreans about the functioning of market economics. The catastrophic decline in the North Korean economy has also been associated with adverse health outcomes, including chronic malnutrition and disease. It is

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impossible to have a productive North Korean economy in the absence of a healthy population. One can imagine a hierarchy of modalities of engagement with differential effects on the long-run objective of reform. From the standpoint of encouraging systemic transformation in North Korea, transportation links or energy pipelines would have the least impact. Next would be projects such as the Mt. Kumgang and Kaesong Industrial Complex (KIC), which can literally and figuratively be fenced off from the rest of the North Korean economy and society and as a result have limited effects on structural transformation. Given the historical enmity and distrust between the North and the South, the Mt. Kumgang (currently suspended following the killing of a South Korean tourist) and KIC projects may have been a necessary first step to build confidence and trust. Future projects should be evaluated with a more critical eye. Marginally preferable to the Mt. Kumgang or KIC projects would be mining concessions or special economic zones in remote areas such as Rason (nee RajinSonbong). However, it is important to note that these are classic enclave economies with little prospect for spillover into the broader society as well, and should be seen only as tactical steps on the road to a broader opening. Industrial parks, bonded warehouses, and other preferential investment zones in urban areas would be preferable, and investment by South Korean and thirdcountry firms throughout North Korea would be the best of all. The latter would not only permit location decisions to be driven by profit opportunities but also maximize the contact between North and South Koreans and third-country nationals (and thus provide demonstration or educational effects with respect to the operation of a market economy). Such an approach would also create competition between local authorities to attract investment. It is apparent that Pyongyang understands the implications of these different modalities of engagement and prefers precisely the ones that generate hard currency earnings without requiring significant alteration of existing practices. However, this strategy should not be encouraged. South Korea should commit to the principle that investment in such projects should be done on efficient, transparent terms. As long as the South Korean government maintains direct and indirect influence over specific capital allocation decisions by financial intermediaries, it will be tempted to use this influence to promote its policy toward the North.2 Cooperation projects should minimize discretionary state involvement either directly or indirectly through public sector financial institutions or other state-owned enterprises. However, there is an economic case for intervention. Economic integration between the North and South may convey positive externalities to South Korea and the social rate of return on South Korean investment in the North may exceed the private rate of return on such investment. As a consequence, there is a public policy justification for encouraging investment in the North. Subsidization of engagement

2 The Hyundai Asan corruption trials in which five South Korean government officials were convicted of illegally channeling funds through the Korean Development Bank to Hyundai Asan for use in the North is Exhibit A in this regard (Noland 2004).

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with the North can be justified from a social standpoint (it may promote evolutionary economic and political change in the North) but it should be clear, limited, and transparent, and implemented as neutrally as possible with respect to specific projects and firms. The fundamental issue is that as long as the state maintains direct and indirect influence over specific capital allocation decisions by financial intermediaries, it will be tempted to use this influence to promote its policy toward the North. Cooperation projects should minimize discretionary state involvement either directly or indirectly through public sector financial institutions or other state-owned enterprises. The simplest way of accomplishing this would be to put provisions into the tax code that would create an incentive for South Korean firms to invest in the North instead of moving operations offshore to other destinations such as China and Southeast Asia. The notion behind a tax-based policy would be to divorce the overarching societal goal of investment in the North from state influence on particular investment decisions. The advantage of such an approach is that it would preserve the microeconomic efficiency of private firms selecting among potential investment projects on the basis of expected rates of return, while taking the broader social imperative to encourage such investment into account. Market-compatible engagement would have the added benefit of encouraging learning on the part of the North Koreans, for whom much of their interaction with the outside world has been on nonmarket terms. In contrast to implicit hidden subsidies and political quid pro quos delivered through the public-sector financial institutions, this approach would be a way to capture the possible social benefits of engagement with the North on the basis of microeconomic efficient behavior of private firms. Market-compatible engagement would have the added benefit of encouraging learning on the part of the North Koreans, for whom much of their interaction with the outside world has been on nonmarket terms, either through aid agencies, politically subsidized activities by South Korean firms, or fronts for intelligence-gathering activities. The notion that the road to riches is through the efficient transparent provision of services is a lesson that North Korean officials should be encouraged to learn.

Mobilizing International Finance A successful engagement strategy should incorporate a multilateral dimension. Multilateral cooperation not only reduces the chances that North Korea will play the interests of outside parties against one another but will also provide additional resources for the tremendous private investment ultimately required for North Korea to successfully integrate into the global economy. International financial institutions such as the World Bank and Asian Development Bank have a role to play in this process as providers of nonpoliticized technical assistance and policy advice, as well as capital. The ongoing Six-Party Talks, if ultimately successful, could spawn regional economic initiatives, including the development of Northeast Asian transport and

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energy links, as well as facilitating cooperation on other transnational issues such as the environment and drug trafficking. Such initiatives would embed the process of inter-Korean reconciliation in a broader regional fabric. But past experience suggests that good intentions are not sufficient: The Tumen River project provides a case study of how well-intentioned multilateral schemes can go nowhere in the absence of complementary domestic policies and serious private sector interest (Tsuji 2004). Similarly, the efforts by the KEDO to provide North Korea with light water reactors (LWRs) – whatever their political merits – proved a complete white elephant from an economic perspective. Multilateral cooperation on infrastructure, such as pipelines and the energy grid, might provide an opening wedge as we will argue in more detail below. But multilateral cooperation must also be cautious. First, undertaking such initiatives in the absence of a shift in North Korean policy is unlikely to garner either public or private support and could send misleading signals to North Korea given the vast resources such projects would demand. The problem is not simply that aid sustains the regime; since aid is fungible, even purely humanitarian aid will have that effect. The problem is that too much aid can delay or even undermine the reform process and divert North Korean attention from the crucial role that ultimately needs to be played by private investment (Noland 2004). There are a variety of ways in which multilateral and bilateral public sector initiatives could support private investment. Examples include multilateral assistance for the development of export processing zones and engaging South Korean institutions such as the Korea Trade-Investment Promotion Agency (KOTRA) and the Korea Exim Bank in North Korea. But many discussions of multilateral support for North Korea have overemphasized public investment and failed to consider the crucial complementarities between public sector investment, economic reform, and the engagement of the private sector. At least some of the massive costs of modernizing the North Korean economy can be born by the private sector through foreign direct investment. This is even true with respect to infrastructure, where a number of developing countries have benefited from private investment in projects such as the provision of highways, power and water plants, and telecommunications. As mentioned earlier, the Egyptian conglomerate Orascom is already offering cellular phone service in limited urban areas. Over the medium run, there is also a role for commercial lending. The North Korean government will eventually try to reenter international capital markets by resolving its past international defaults. With South Korean government assistance, it could once again secure loans. Vietnam was able to obtain important private financing for its infrastructural development after reforms made such investments viable. A second reservation about multilateral finance is that it risks duplicating at the regional level what might be more effectively managed through existing multilateral institutions. North Korea is in need of depoliticized technical assistance on a panoply of issues running from the mundane but critical, such as developing meaningful national statistical capabilities, through basic agricultural and health technologies, to the social infrastructure of a modern economy. This infrastructure

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includes policy mechanisms to: manage macroeconomic policy, including through a reform of the central bank; specify property rights and resolve commercial disputes; regulate markets, including financial markets as they emerge; establish and implement international trade and investment policies; and so on.3 The possibility of a Northeast Asian Development Bank has been floated as a vehicle for undertaking these tasks. However, it would be a mistake to construct a new institution that would duplicate the activities of existing global and regional institutions in which the five other countries are already well represented. Rather, both advice and multilateral lending will be facilitated by North Korea’s entry into the World Bank, IMF, the Asian Development Bank (ADB),4 and the World Trade Organization (WTO) and an expansion of the activities of those agencies that are currently engaged there, such as the UNDP, WHO, and UNICEF. In our view, the sooner this happens, the better.5 One multilateral-engagement model for North Korea would be to allow the World Bank to play a coordinating role as the administrative arm of a consultative group. The bank would engage in more detailed analysis of the North Korean economy and become the repository for a dedicated North Korea fund that would initially support technical assistance and the building of local institutional capacity. These early actions would eventually support direct lending and investment guarantee activity. Japanese postcolonial claims payments could be one source of financing for such a facility as the two countries normalize relations. Calibration on the basis of Vietnam’s experience in joining the World Bank suggests that the North Koreans might expect an eventual lending program on the order of $150–$250 million annually; given South Korea’s interest in revitalizing North Korea and the prospects of Japanese postcolonial payments, the actual lending from such a facility might be substantially larger.6 3 The

perils of duplication can be seen with respect to humanitarian assistance as well; from the standpoint of efficiency, the overall aid mission would be better served by channeling more Chinese and South Korean assistance through multilateral institutions such as the World Food Program. 4 It is sometimes suggested that North Korea join the ADB before joining the World Bank, since bank membership is contingent on joining the International Monetary Fund, and ADB membership is not. However, even North Korea’s potential membership at the ADB would depend on reaching a political accommodation with the United States and Japan, its two largest shareholders; this is true with respect to observer status at the WTO as well. 5 Normally members are granted observer status as a transitional status during accession negotiations. In some unusual circumstances typically involving post-conflict or new states (the Palestinian Authority, post-Khmer Rouge Cambodia, East Timor), direct lending activities began before full membership, and this idea has been floated with respect to North Korea. Whatever the specific arrangements, it is important that observer status not be exploited as a permanent mechanism to sidestep membership obligations. 6 Japanese officials have signaled that normalization could include a multiyear package of grants, low-interest loans, and trade credits of as much as $10 billion, consistent with the value of Japan’s 1965 settlement with South Korea, appropriately adjusted for inflation and other factors. Japan will certainly argue that its $1 billion contribution to KEDO should be credited against this bill, and it has been speculated that Japan might even claim credit for the costs of recapitalizing failed Chochongryun-affiliated financial institutions.

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To the extent that a new regional entity is warranted, one possible approach would be to focus the emerging Northeast Asia Peace and Security Mechanism on economic issues that are of more enduring interest to all of the six parties. These would be addressed either by seeking common denominators that transcended an explicit focus on engaging North Korea, or that have a variable speed geometry under which North Korea would be included but could participate as it chose to do so. A range of issues fit the idea of a “variable speed geometry” in which parties are not constrained to act in a common way. These include maritime and air transport (and its externalities), the spectrum of transborder environmental issues (acid rain, dust, and haze), and technical trade facilitation, such as customs clearance and regional support for new export-oriented industrial parks in North Korea. Two issues that deserve somewhat greater attention are ground transport and energy. The continued economic growth of Northeast Asia will clearly depend in part on the ongoing development of the major transportation corridors in the region (Tsuji 2003; Na 2007). Two of these are directly related to the integration of the Korean Peninsula: the western corridor or Gyungui Line, which would not only link North and South but also provide a rail link for South Korea to China; and the eastern corridor, which could link both Koreas to each other and on to Europe via Russia. The investment required to rehabilitate North Korean rail infrastructure and to manage issues such as differences in track gauge are nontrivial. Yet all of the continental countries stand to benefit from such investments directly, and Japan would as well. Rail transport might therefore constitute a useful early issue for discussion, particularly given the fact that it is relatively undemanding on North Korea but could nonetheless yield easy rents even if not linked to wider reforms that would exploit the links more directly. Similarly, multilateral support for an improvement of roads would get strong support from the DPRK, China, South Korea, and Russia. Energy shipments to the DPRK have played a crucial role as a short-run inducement in the Six-Party Talks. The February 2007 Joint Statement promised an initial shipment of “emergency energy assistance” in the form of 50,000 tons of heavy fuel oil (HFO) to be followed in the next phase by up to one million tons of HFO or their equivalent following denuclearization. Energy cooperation is often highlighted as one that could benefit from broader multilateral cooperation, particularly given the strategic jockeying over energy supplies in the region. Yet the energy agenda for both North Korea and the region is by no means straightforward and is littered with potential pitfalls. North Korea has repeatedly asserted its right under Article IV of the Nonproliferation Treaty to a peaceful nuclear program and has continually revisited the issue of the light water reactors promised under the Agreed Framework. These reactors faced delays in construction and now stand – unfinished – as a testament to the risks of large-scale, politically motivated projects. The most thorough analyses of the LWR project conclude that they are a costly and inappropriate way for meeting North Korea’s vast energy needs; given the poor state of North Korea’s electricity grid, the energy generated by LWRs might even have to be exported (Hayes et al. 2002)! Nonetheless, Pyongyang is likely to return to this issue either as a possible security hedge or as a bargaining tactic for extracting resources, for example through

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tabling an “LWR equivalent” package. These discussions should not simply be deferred to a later date, as the United States did at the time of the September 2005 Statement of Principles; this strategy sends a misleading signal. Rather these demands should be rechanneled altogether into proposals that are more cost effective and directly complement the reform process: encouraging the development of energy markets and appropriate pricing, reducing waste, rehabilitating coal supply and transport, opening the energy sector to foreign investment, and developing small-scale renewable energy sources (Hayes 2003). Beyond the rehabilitation of North Korea’s energy sector, attention has been given to ventures that might engage all of the parties in the region, including regional power grid interconnection and the development of oil or gas pipeline networks (Babson 2002; Gulidov and Kim 2007; Von Hippel and Hayes 2008). These ideas face daunting technical constraints (for example, with respect to interconnection), extraordinarily high capital costs, and very long time frames for public and private investment to gel. Moreover, both pipelines and grid interconnection remain vulnerable to the hold-up problem: that North Korea could easily disrupt and render worthless extraordinarily large investments. However, a preliminary agreement between Russia and South Korea at the October 2008 summit in Moscow suggests that the net importers of energy – Japan, South Korea, and China – might be willing to underwrite such investments in return for increased energy security. If this agenda is adequate to engage the parties, how would the proposed Peace and Security Mechanism emerge and be structured? Before the process stalled in 2008, US Secretary of State Rice signaled that a clean resolution of the nuclear crisis might be followed by a ceremonial foreign minister-level meeting that could endorse further multilateral steps. The Six-Party Talks could itself become the new institution, with the established working groups as the nucleus of new forms of multilateral cooperation. The Energy and Economic Working Group would transit from its present focus on provision of heavy fuel oil to the items on the broader agenda of economic cooperation just outlined.7 The committee would ideally configure itself not as a mere funnel for aid, but a venue to engage North Korea as well as the other parties in a discussion of the regional economy, the benefits of a more open trade and investment regime, and the physical, legal, and financial infrastructure that would support deeper integration.

Conclusion For engagement to be fruitful and politically sustainable, it must support reform in North Korea; if not, efforts could have perverse effects. Yet at the same time there is clearly a critical role for the public sector in providing depoliticized technical assistance and financing for infrastructural rehabilitation. 7 Alternatively, the Working Group on the Northeast Asian Security and Peace Mechanism may be the locus for the negotiation of a new entity that would encompass both a new security agenda, such as confidence building measures, as well as the economic issues highlighted here.

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We are skeptical about reproducing at the subregional level the capacities of existing global and regional institutions such as the World Bank or Asian Development Bank. However, functional working groups on some of the topics we have outlined – the environment, maritime transport, technical barriers to trade, road and rail links, and energy – could provide the locus for integrating multilateral and bilateral assistance with increased private involvement. Moreover, these issues engage not only North Korea but other parties as well. Given the importance of private sector involvement in achieving sustainable economic development in North Korea, modalities will have to be developed to integrate private sector actors when possible. It bears underlining that the entire Northeast Asian economic agenda depends on significant progress toward resolving the nuclear issue, which as of this writing is once again stalled. The governments of the region, and particularly China and South Korea, may continue support on a bilateral basis as a hedge against North Korea’s collapse or as inducements in the context of the nuclear talks. However, without significant progress toward a satisfactory resolution of the nuclear issue, it will be difficult to sustain a political consensus within South Korea or the other four parties for engagement and impossible to mobilize significant multilateral resources. It is important for the new administration to remind Pyongyang that a divide-andconquer strategy is not an option and that there will be no separate peace with the United States in the absence of progress in inter-Korean relations.

References Babson, Bradley O. 2002. Searching for the Right Side of History in Northeast Asia: Potential Role of Energy Cooperation with North Korea. Economic Research Institute for Northeast Asia Report 46: 20–23. Funke, Michael, and Holger Strulik. 2005. Growth and Convergence in a Two-Region Model: The Hypothetical Case of Korean Unification. Journal of Asian Economics 16 no. 2: 255–279. Gulidov, Ruslan, and Kyuryoon Kim. 2007. Northeast Asia and North–South Energy Cooperation. In New Linkages in Northeast Asian Regional Cooperation ed. Kyuryoon Kim. Seoul: Korea Institute for National Unification. Haggard, Stephan, and Marcus Noland. 2008. North Korea’s Foreign Economic Relations. International Relations of the Asia-Pacific 8, no. 2: 219–46. Haggard, Stephan, and Marcus Noland. 2009. Famine in North Korea Redux? Journal of Asian Economics, 384–395. Hayes, Peter, David Von Hippel, and Nautilus Team. 2002. Modernizing the US–DPRK Agreed Framework: The Energy Imperative. Asian Perspective 26 no. 1: 9–28. Hayes, Peter. 2003. DPRK Energy Security Without Rewarding Bad Behavior. Nautilus Institute PFO 03-2A. http://www.nautilus.org/DPRKBriefingBook/energy/issue.html (accessed January 13, 2003). Na, Hee-Seung. 2007. Regional Cooperation on Transportation in Northeast Asia. In New Linkages in Northeast Asian Regional Cooperation ed. Kyuryoon Kim. Seoul: Korea Institute for National Unification. Noland, Marcus 2000. Avoiding the Apocalypse: The Future of the Two Koreas. Washington: Institute for International Economics. Noland, Marcus 2004. Korea After Kim Jong-il. Washington: Institute for International Economics.

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Noland, Marcus, Sherman Robinson, and LiGang Liu. 1998. The Costs and Benefits of Korean Unification. Asia Survey vol. XXXVIII, no. 8: 801–814. Noland, Marcus, Sherman Robinson, and LiGang Liu. 1999. The Economics of Korean Unification. Journal of Policy Reform 3: 255–299. Noland, Marcus, Sherman Robinson, and Tao Wang. 2000. Modeling Korean Unification. Journal of Comparative Economics 28 no. 2: 400–421. Tsuji, Hisako. 2003. An International Logistics Infrastructure for Northeast Asia. Economic Research Institute for Northeast Asia (ERINA) Discussion Paper no. 0307e. Nigata: ERINA. Tsuji, Hisako. 2004. The Tumen River Area Development Programme: Its History and Current Status as of 2004. Economic Research Institute for Northeast Asia (ERINA) Discussion Paper no. 0404e. Nigata: ERINA. Von Hippel, David and Peter Hayes. 2008. Future Northeast Asian Regional Energy Sector Cooperation. ERINA Report 82: 40–55.

Chapter 11

Inter-Korean Cooperation in Special Economic Zones: Developments and Perspectives Ralph Michael Wrobel

Cooperation on the Korean Peninsula Already in 1998 then South Korean President Kim Dae-Jung had articulated the new “Sunshine Policy” calling for peaceful coexistence of the two nations, including the prospect of aid and bilateral economic cooperation as well as a long-term unification proposal (Ahrens, 2003, p. 53). The historic summit between Kim Dae-jung and Kim Jong-il in June 2000 gave additional hope for a gradual and peaceful integration of both the Koreas (Kim, 2003, p. 118). Consequently, political contact between the two Koreas evolved and various cooperative projects were initiated. Two Special Economic Zones (SEZs) have been established in North Korea close to the border with the South: the Kaesong Industrial Complex (KIC) and the Mt. Kumgang Resort. These SEZs have to be mentioned as the core of the current Korean economic cooperation (Lim and Lim, 2006, pp. 48–49). In contrast to the two other SEZs in North Korea, the Rajin-Sonbong and the Sinuiju SEZ, these two were quite successful during the “Sunshine” period (2000–2007) and hope is still high. But since the 2008 inauguration of the new administration in South Korea, North– South relations have deteriorated dramatically. The Lee Myung-Bak government tied further cooperation to demonstrable steps toward ending the North’s nuclear weapons program. Previous progress made began to unravel further when the Mount Kumgang Special Tourism Zone was closed in the summer of 2008 after North Korean guards shot and killed a South Korean tourist and after the imprisonment of a South Korean staff member in the Kaesong Industrial Complex by North Korea in the spring of 2009. The Mount Kumgan SEZ and the Kaesong Industrial Complex, as the core of economic cooperation on the Korean Peninsula, can be considered as trust building exercises. But while Mount Kumgang is simply a source of revenue for the North Korean government, the Kaesong Industrial Complex can be seen as real economic cooperation; a combination of inexpensive land and labor from the North and R.M. Wrobel (B) Faculty of Economics, West Saxon University of Applied Sciences, 08066 Zwickau, Germany e-mail: [email protected]


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Fig. 11.1 North Korean Special Economic Zones Source: Kim (2007b, p. 8)

capital, technology and business savvy from the South. As an ongoing exercise in trial-and-error cooperation, the Kaesong project may be very important for further economic development in North Korea. In this chapter, first the past development of both zones – their aims, foundation, and expansion – will be described. Then, the benefits of both the zones in terms of security and growth on the Korean Peninsula will be evaluated. Finally, the outlooks for both SEZs under the changing political circumstances will be discussed (Fig. 11.1).

Economic Cooperation in Special Economic Zones Mount Kumgang Tourism Zone At the June 2000 summit President Kim’s administration pursued “Five Economic Cooperation Projects” with North Korea: the linking of roads and railroads between North and South Korea, developing Mount Kumgang in North Korea as a tourist attraction, enabling travel to these mountains through land routes, and the Kaesong Industrial Complex (Lim, 2007b, p. 6). Indeed, the showcase of economic cooperation with North Korea was the opening of the Kumgang Mountains and the shipping line to these mountains is dear to Koreans on both sides of the border. In 2002 a “Special Tourism Zone” could be established in this area. Hyundai Asan was given

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exclusive rights in this zone for the next 30 years (Jeffries, 2006, p. 432). Because of accumulated deficits in operating the project, the South Korean government permitted using money from the Inter-Korean Cooperation Fund in the Mount Kumgang Tourism Zone. Shortly after, fund managers invested in Hyundai Asan’s Kumgang project (Lim and Kim, 2006, p. 40). Legally, the project is under the control of the North Korean Mount Kumgang Tourism Corporation and Hyundai Asan. The official currency is the US dollar (Lim and Lim, 2006, p. 56). The Mount Kumgang Tourism Zone has had different effects on North Korea than the other SEZs because the necessary infrastructure was largely there or has since been built. Here, Hyundai Asan and the North Korean government have various economic relations: An agreement for cultivating agricultural products, supplying live fish, and participation in hotel management must be mentioned. Incidentally, the North Korean people at the complex came to experience a capitalist market economy for the first time. In addition, Mount Kumgang can be seen as the starting point of an east coast economic development axis which will connect South and North Korea. This axis can be extended to Wonsan and the SEZ in Rajin-Sonbong close to the Russian border in the northeast (Lim and Lim, 2005, pp. 36–37). Up to January 1997, South Korean organizations invested USD369.5 million in the Kumgang Mountains. While Hyundai Asan invested USD228.3 million in piers, hotels, rest houses etc., the Korea National Tourism Organization spent USD93.1 million for hot spring spa or cultural centers (Hyundai Asan, 2007). After the initial hype wore off, interest in Kumgang mountain tourism slowed down in the South. High prices; complicated logistics, having to take a ship from a remote South Korean harbor; the near-military rules for tourists, who could only travel in large groups; and a route surrounded by barbed wire combined to lower the trip’s appeal. The opening of a land-based route in 2003 and subsequent use of buses have lowered costs considerably (Seliger, 2006, pp. 99–101). As result, in 2005 the number of visitors to Mt. Kumgang exceeded approximately 300,000 (Cho, 2006, p. 28). And the total number of South Korean visits surpassed one million as of June 7, 2005. In September 2005, the total investment in the Mt. Kumgang zone has reached at $170 million (Lim and Kim, 2006, p. 40). Surprisingly, in the same year North Korea’s “Dear Leader” Kim Jong-Il opted to halve the number of tourists to Mt. Kumgang after a personal disagreement with Hyundai-Asan over the resort’s operations (Auer, 2006, p. 160). But as one can see in Table 11.1 after a drop in 2006, Mt. Kumgang tourism achieved a new maximum of 345,006 tourists in 2007. As will be discussed later, in 2008 the project came to an abrupt end for the time being.

Table 11.1 Total Mount Kumgang tourists per year Year

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Total 10,554 148,074 213,009 57,879 84,727 74,334 268,420 298,247 234,446 345,006 Source: Ministry of Unification (http://www.unikorea.go.kr)

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Kaesong Industrial Complex The Kaesong Industrial Complex is located only five km from the demilitarized zone off a major road that now runs once again from Seoul to Pyongyang. From a South Korean point of view this location is optimal for a production-oriented industrial estate in the North. With a planned total area of 66 km2 it will be far bigger than any industrial zone in either China or South Korea (Kim, 2008, p. 4) (Table 11.2). As far back as December 1998, the ambitious idea to establish a “West Coast Industrial Park” in North Korea was seriously discussed during South Korean Hyundai Group founder Chung Ju-yung’s first visit to Pyongyang (Park Suhk-sam, 2004a, p. 41). Chung was a native of North Korea who fled to the South during the war. On August 22, 2000, Hyundai initiated the Kaesong Industrial Complex project after signing an agreement with the North Korean Chosun Asia Pacific Peace Committee (APPC) regarding an industrial park encompassing more than 16,000 acres (Lim, 2007b, pp. 6–7). Both sides agreed to give Hyundai exclusive rights for constructing and operating the KIC as a special economic zone. It was determined that the complex’s size should be gradually expanded, as needed in the future. Land routes would promptly be provided for the transport of labor and goods. Railroads would also be utilized. In addition, development of the city of Kaesong was included in the agreement (Lim, 2007b, pp. 17–18). Later, because of subsequent financial difficulties, Hyundai Asan handed over some of its rights to the Korean Land Corporation (KLC), a state-invested, South Korean business concern (Park Suhk-sam, 2004b, p. 90). In this manner, the South Korean government became directly involved in what had previously been a private project. During a three-year preparation period, both sides worked to ensure quick and easy border crossings and establish basic rules and regulations for taxes, accounting, banking, and employment within the KIC (Kim, 2006a, p. 2). Hyundai Asan officials attended the ground-breaking ceremony for the Kaesong Industrial Park in the summer of 2003. Construction began in April 2004 (Park Suhk-sam, 2004b, p. 89). The plan envisioned building the complex in three stages over eight years. In the first phase, one million pyeong (one pyeong = 3.594 square yards) of land was set Table 11.2 Kaesong Industrial Complex master plan (as of 2006) Development zone (acres) Classification First phase

Industrial zone 817

Supporting zone

Companies

Second phase Third phase Expansion zone

1, 225 2, 859 1, 634

3,268 (Urban 300 Kaesong Area) 817 700 1, 634 1, 000 4, 085

Total

6, 536

9, 805

Source: Ministry of Unification (2006, p. 11).

2, 000

Employees (workers)

Development schedule

70, 000

2002–2007

130, 000 150, 000

2006–2009 2008–2012

350, 000

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aside for mostly labor-intensive manufacturing sites, comprised of textile and leather production as well as simple general manufacturing goods. In the second phase, 1.3 million pyeong was designated for manufacturing and service industries. The third phase comprised 6.2 million pyeong for high-tech and chemical industries. In this way, technology-intensive industries are expected to establish a presence only in the final phase. At that time, industries like electronics, software, printing and publishing, as well as the original textile and leather factories will be established in the KIC (Kim, 2006b, p. 64). The Kaesong Industrial Complex is separated from the rest of North Korea not only physically but also legally: General North Korean laws do not apply to KIC. Under the guidance of market principles, it has economic autonomy (Kim, 2006b, p. 63). The Basic Law allows individuals to own private property. It articulates the development implications for a “one country – two systems” strategy. Because the KIC is established to induce direct investment from South Korea, the law articulates specific provisions for South Korean investors, such as special immigration procedures or residential status. It guaranties the unrestricted usage of inter-Korean postal and communication services as well as free movement within designated routes between South Korea and the business complex. In addition to the Basic Law, the North Korean government enacted several supplementary guidelines, including for instance the Development and Investment Provision and the Taxation and Labour Provision in 2003 (Lee, 2004, pp. 125–126). Theoretically, investment conditions are favorable in the KIC: 14 percent income tax for general businesses and 10 percent for targeted sectors (e.g., light industry or ultramodern science) as well as an exemption for the first five years since generating profits and a 50 percent deduction for another three years (Lee, 2005, p. 97). The basic wages of North Korean workers are $57.5 per month (social insurance and pension included). Pay increases are limited to a maximum of five percent a year, and work time cannot exceed 48 hours per week (Park Suhk-sam, 2004a, p. 42). The land use term is 50 years but extendible. The acquisition, transfer, leasing, and inheritance of land is permitted. In addition, there are no restrictions on Internet or phone use. Foreign currency and credit cards are freely accepted. For entry and departure no visa is necessary. The whole complex is a duty-free zone (Hyundai-Asan, 2007). Infrastructure, such as electricity, phone lines, and Internet service (since 2007) have been constructed and guaranteed by South Korea (Kim, 2006b, p. 66). The development of the Kaesong Industrial Complex started successfully. After the preparatory stage, construction of the first industrial plants began in December 2004 (Ministry of Unification, 2008). And the first product “Made in Kaesong,” a cooking pot (!), was sold in April 2005 (Auer, 2006). Already, as of 2005, nearly 6,000 North Koreans and several hundred South Koreans were employed there. In August 2006, 15 companies were in operation, 14 in a model complex and 1 in the main complex. At that time, workers comprised about 10,000 from the North and 800 from the South (Cho, 2006, p. 28). Exports produced from April to December 2005 generated USD866,000. In 2006, the figure jumped dramatically to more than USD19 million worth of products shipped to overseas markets (Bae, 2007, p. 52). Production worth more than USD184 million was reached in 2007, but even at this

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level production was far from the USD3 billion in annual output at the end of the first phase of development that was anticipated in Hyundai Asan’s master plan. The number of enterprises and workers in Kaesong fall equally far from the target numbers as well. Nevertheless, the outlook for further development of the KIC project has absolutely been positive. A lot of necessary infrastructure for the KIC was completed in December 2007. Facilities for water treatment, waste water, and waste disposal have been built. From May 2007, a transmission substation with the capacity of 100,000 KW began to supply the KIC with electricity (Nanto and Manyin, 2007, p. 5). While telecommunications service started with 303 lines in December 2005, 653 telephone and fax lines were available by the end of June 2008. In addition, in 2007 both the Koreas agreed to build accommodations to make it easier to house the needed North Korean workforce. Moreover, they agreed to simplify the inspection process of entering and leaving the complex and to improve the system of customs clearance (Kim, 2008, pp. 4–6).

Benefits of Economic Cooperation Cooperation on the Korean Peninsula can be divided into economic as well as political benefits. Both countries stand to benefit from cooperation – but of course in different ways. Hopes for the success of Kaesong are especially high in South Korea. This SEZ seems to be the most direct parallel to the Chinese model of economic development as it began in Shenzen or other SEZs. But the establishment of Special Economic Zones in North Korea must be evaluated ambiguously. On the one hand, the implementation of all SEZs in North Korea seems to be a first step in the direction of an economic transformation. Especially through the Kaesong project, North Korea may get a chance to learn foreign technology and management skills and, as a result, more easily move along the path of openness and reform (Cho, 2006, p. 28). In addition, all North Korean SEZs have the advantage that they can absorb foreign investment without affecting the domestic economy while they can support the learning processes in North Korea and allow time to build up foreign economic relations with neighboring countries without the need to engage in major economic transformation at the moment (Ahrens, 2003, p. 59). Such a process of learning has already started, for example, in the North Korean financial sector. The Kaesong project has forced North Korea to introduce new financial programmes into the SEZs out of necessity. Article 8 of the Central Bank Law, which was adopted in 2004, reads: “Financial projects in the special economic zones shall be conducted in compliance with laws and regulations concerned.” This can be interpreted as the establishment of a “golden delta bank” in the zones to help facilitate their construction. Measures actually taken by North Korea following the enactment of the Central Bank Law – like the State Budget Revenue Law (2005) or the Commercial Bank Law (2006) have indicated it is earnest in taking finance-related steps to backup earlier reform measures. In this way, North Korea can use the Commercial Bank

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Law to abolish the financial partitioning of the domestic and external sectors (Bae, 2007, pp. 48–49). This development appears to have been initiated by the Kaesong project. But the KIC has also provided direct benefits to the South Korean economy. Successful economic development in South Korea has greatly increased domestic wages over the past few decades. The South Korean economy suffers from labor– management disputes, unstable political conditions, poor performance in attracting investment due to militant labor unions, a widespread dualism between domestic and export enterprises, as well as a hollowing out of manufacturing industries (Kin, 2008, p. 5). The KIC satisfies the urgent labor demands of different South Korean companies. During establishment of the first stage, it became a lifeline for labor-intensive industries in the South. Especially, small- and medium-sized companies were being forced by competition to either hire foreign labor from China or Southeast Asia or transfer their manufacturing plants to those countries. The KIC has provided them with a viable alternative: hiring inexpensive North Korean workers who also speak the same language as the managers and owners (Lee, 2005, p. 97). As result, most of the investors in the KIC are small- and medium-sized South Korean companies that require labor-intensive production (Kim, 2006b, p. 66). However, economic success in Kaesong is so deeply dependent on the South Korean government’s ability and willingness to subsidize the projects that all economic activity there can be described as nonmarket based (Flake, 2007). For instance, the South Korean government offered low-interest loans to companies establishing operations in the KIC at rates equal to those applied to public works projects (Nanto and Mayin, 2007, pp. 3–7). Also economic benefits for North Korea are obvious. First of all, the Kaesong Industrial Complex helps North Korea facilitate trade with other countries worldwide and is helping to relieve North Korea’s severe external imbalance. The KIC as well as Mt. Kumgang project also induce foreign direct investment (Kim, 2006b, p. 64). In this way, North Korea benefits from the expansion of its industrial and tourist-related infrastructure, its capital equipment, and factory opening rates as well as by the growth in its production and export volumes. The latter case in particular increases foreign currency reserves (Kim, 2008, p. 5). It is possible to view the establishment of the KIC and Mount Kumgang SEZs as more a means to safeguard the North Korean political regime than a pursuit of Chinese-style economic transformation. Reportedly, the communist government in Pyongyang is aware of the advantages of these zones but fears the political consequences of any liberalization of the economy. As a consequence, it must be suggested that the regime has only little interest in integrating the SEZs into the rest of the economy; they prefer to remain isolated enclaves (Nam, 2005, p. 208). That becomes obvious also in the geographical position of all North Korean SEZs, which are all located at the periphery of the country and far away from each other (Wrobel, 2007, p. 490). In all, it must be mentioned that the regime prefers package projects, whereby it can earn foreign exchange without making any significant changes in its domestic economic system (Kim, 2003, p. 124). In addition, it is argued that the North Korean regime exploits its workers in Kaesong. The North

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Korean regime retains a large share of the $57.50 per month paid to each North Korean worker, with some estimates putting the workers net monthly wage at less than $3 (Lim, 2007b). While the Kaesong Industrial Complex can be considered a real “reform” project in North Korea, Mt. Kumgang must be criticized as no more than a way to give money to North Korea (Choi and Lee, 2006, p. 30). Yet, both projects are important for keeping inter-Korean cooperation active and preventing North Korea from a collapse which could induce a “big-bang-reunification” with higher costs than the German case. In this way both cooperation projects are useful to improve the political situation on the Korean Peninsula as well as institutional economic development in North Korea. Both the Koreas have turned former battle grounds into “peace zones”. Most notably, they opened peace corridors on the west and east ends of the demilitarized zone. Roads and railroads have been reconnected to transport persons, materials, and final products to and from the Kumgang Mountains and the South on one side of the peninsula and the Kaesong Industrial Complex and the South on the other (Cho, 2006, p. 28). Before worsening of North–South relations, about 300 busses and trucks traveled to North Korea daily from the South (Lim and Kim, 2006, p. 40). By expanding, contacting, and diffusing tension, these projects have a positive impact. In addition, it must be mentioned that both Koreas are joint participants in the KIC case. In the long run, such economic cooperation will certainly contribute to favorable inter-Korean relationships as well as to a more peaceful situation on the Korean Peninsula (Kim, 2008, p. 5).

Perspectives for Korean Economic Cooperation At the end of 2007 some optimism was justified. Seventy-two South Korean companies were at work in the KIC. The entry of an additional 195 companies was in the design phase. So KIC officials estimated that by the end of 2008, some 150–200 enterprises would be producing in the zone (Flake, 2007). The 2007 annual output of the KIC amounted to USD184.78 million, a 2.5-fold increase and more than a tenfold increase compared to 2006 and 2005, respectively (Kim, 2008, p. 5). The number of tourists visiting the Mt. Kumgang SEZ yearly crossed the 340,000 mark in 2007 before the dramatic turn of events in 2008. The new conservative South Korean government of Lee Myung-bak has a far different North Korea policy than the two previous ones. President Lee’s approach toward North Korea, called “Vision 3000,” was formulated during his election campaign and has now been implemented. Economically, it is designed to provide conditional assistance to North Korea over the next decade. The purpose is to help the DPRK to boost its annual per capita national income from an estimated $1,800 to $3,000 during this decade. No doubt, this would turn North Korea’s economy into an export-driven one. However, there exists the conditionality. The plan is built on the premise that the joint statement adopted at the fourth round of the Six-Party Talks on September 19, 2005 in Beijing must be completely implemented before any developmental and financial aid is offered to the DPRK. In this way the issue of

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denuclearization turns into the primary policy goal which will dominate the speed and direction of inter-Korean cooperation (Petrov, 2008). President Lee’s proposal to create a man-made island “Na-deul” at the estuary of the Han River and build a joint economic complex there to combine North Korean labor and South Korean capital caused additional irritation. Also the new administration in Seoul divided all inter-Korean cooperation projects into three categories relative to their importance and cost. Humanitarian aid (first category) will be continued and commercially viable ventures directly benefiting South Korea, like cooperation in transport and communication (second category), will be saved but regulated by the new Inter-Korean Cooperation Fund. In contrast all projects requiring significant financial investment, including reconstruction of the dilapidated North Korean infrastructure and the creation of special “peace and cooperation zones” in the Yellow Sea (third category), are suspended. In this way, almost everything agreed to between Kim Jong-Il and former South Korean President Roh Moo-Hyun at the October 2007 inter-Korean summit has been cancelled by the new South Korean administration (Petrov, 2008, Lim, 2009). Disappointed by the political change in the South, Pyongyang suspended bilateral talks; expelled most of the South Korean officials from the inter-Korean office in the KIC on March 27, 2008; and fired Styx ship-to-ship missiles into the West Sea one day later. In the summer of 2008, tours to Mt. Kumgang were halted after a female tourist from South Korea was shot to death (Kim, 2008, p. 6). The worsening in inter-Korean relations during 2008 also slowed down the development of the KIC. As of July 4, 2008, still only 72 South Korean companies were operating there, employing 30,084 North Korean workers (ICNK, 2008a). At the end of November 2008, the North Korean government announced further limitations on the South Korean work force in the KIC. According to the announcement, the normal South Korean workforce is restricted to 880 workers. In addition, North Korea restricted cross-border travel on December 1, 2008. If South Korean newspapers, magazines, or other banned materials are found, the result will be immediate expulsion from the KIC (ICNK, 2008b). Pyongyang went still further in the spring of 2009, imprisoning a South Korean KIC staff member on charges of subversion. While the Mt. Kumgang SEZ has been kept closed, the Kaesong Industrial Complex is still working. As of December 2008, all 93 South Korean businesses in the KIC were operating, and 38 more businesses were under construction. Currently, approximately 36,650 North Korean workers are employed in the KIC. But only 953 South Korean workers are residing in the complex. By contrast, in November 2008, there were 1,370 workers from the South. After the restrictive measures enforced by North Korea in December 2008, complaints from businesses in the KIC over customs and other issues grew sharply, but at the same time, the businesses have worked hard to adapt. At the moment, the biggest problem is still the lack of steady availability of North Korean workers. The South Korean firms in the complex are facing a shortage of manpower, but because the supply of workers from the city of Kaesong is limited, without construction of a dormitory and other facilities, the gap between demand and supply of workforce by the North will continue to grow. As a result, actual factory output within the KIC has fallen since implementation of the North Korean government’s December 1 measures (Lim, 2009).

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A second problem for the Kaesong Industrial Complex’s development is the integration of free trade agreements signed by South Korea. At the moment, the customs tariff rate is high for products from the KIC. All products manufactured in North Korea are subject to very high tariff rates that constrict export potential. For instance, the United States imposes a 65 percent customs tariff on ties made in North Korea, while a 7.6 percent tariff applies to ties made in other countries. Therefore, products made in other countries have a price advantage over those manufactured in the KIC (Yoon, 2007, p. 940). While South Korean enterprises like to sell their products from Kaesong as “Made in Korea,” the United States and EU insist North Korea be listed as the country of origin (Kim, 2007b). In some ways, the South Korean government has been successful. For instance, the still-pending KORUS FTA (Korea–US Free Trade Agreement1 ) explicitly stipulates that from 2007 products made in Kaesong would be treated as South Korean made goods (Kim, 2007a, p. 51). Of course, there are a few preconditions: (1) progress toward the denuclearization of the Korean Peninsula, (2) environmental as well as labor standards and practices in the KIC, and (3) the impact of the KIC (so-called “outward processing zone”) on intra-Korean relations. In this way, the economic future of the Kaesong project hinges on the normalization of relations not only between North and South Korea but also on improved relations between North Korea and the United States (Lim, 2007b, pp. 6–7, see also Nanto and Manyin, 2007). On the other hand, due to a variety of US economic sanctions, it is still difficult for US companies to invest in the Kaesong Industrial Complex (Lim, 2007a). Third, some international agreements controlling exports from and imports to North Korea, like the Missile Technology Control Regime or the Wassenaarprotocol, which replaced the Coordinating Committee on Multilateral Export Controls (COCOM) list in 1994, have to be taken into consideration (Yoon, 2007, p. 940). For instance, a Pentium-level PC may not be provided to North Korea (Lee and Baek, 2003, p. 94). Even current versions of personal computers commonly available in South Korea are restricted, and if their export is approved, they must be kept under lock and key in an SEZ (Nanto and Manyin, 2007, p. 15). In this way, export and import of especially high technology between Kaesong and South Korea may remain problematic for some time into the future, severely thwarting the planned tech-industry phase of its master plan.

Outlook At the moment, the future of the KIC as well as the Mt. Kumgang SEZ is very unclear. First, political wrangling must be pushed aside and a constructive dialogue between North and South Korea must be implemented again. From an economic

1 Concerning Kaesong and the KORUS FTA see Wook (2006), Kim Suh (2007), Nanto and Manyin (2007), etc.

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point of view, only the KIC project should be supported by South Korea in the future. But from a political point of view, both projects are important for cooperation and trust building on the peninsula. Whether North Korea will shift into the type of a transitional country that China was 30 years ago remains uncertain. Actually, North Korea has been reducing contact with the world, locking up its economy as well as the whole of its society. The South Korean government has to decide if it will abide by cooperation or not. On the one hand, North Korea seems to be gambling with crises again, consequently exacerbating the noncooperative situation. But the alternative to economic and political cooperation – the total severing of all ties – would increase future costs for the South Korean government. By this reasoning, a cautious, positive strategy toward North Korea – leaving Mt. Kumgang closed but supporting the KIC – may be the best decision at the moment.

References Ahrens, Joachim. 2003. Prospects and Problems for Korean Economic Integration. In North Korea in the World Economy eds. Choi E. Kwan, Kim E. Han, and Yesook Merril, 53–73. London and New York: Routledge. Auer, Claus. 2006. Industriepark Gaesong – Ein Projekt mit vielen Fragezeiche. In Korea 2006 – Politik, Wirtschaft, Gesellschaft ed. Patrick Köllner, 157–162. Hamburg: Institut f. AsienkdeBae. Bae Chong-ryel. 2007. Changes in North Korea’s External Economic Sector Since the July 2002 Reform Measures: Evaluation and Prospects. Vantage Point (August):44–55. Cho, Young-suk. 2006. The Inter-Korean Economic Cooperation: Achievements and Outlook. Korea Policy Review (December):27–29. Choi, Julia and Lee, Karin. 2006. North Korea: Sanctions and U.S. Department of Treasury Actions 1955–September 2006. http://www.nautilus.org/fora/security/0687ChoiLee.pdf. Flake, Gordon. 2007. A Vision for the Korean Peninsula at Kaesong Industrial Complex. http//:english.hani.co.kr/arti/english_edition/e_opinion/255152.html Hyundai Asan. 2007. Inter-Korean Cooperative Business, Power Point Presentation, February 2007. ICNK/The Center for International Cooperation for North Korean Development. 2008a. Monthly Recap: July, NK Brief no. 08-8-1-1. ICNK/The Center for International Cooperation for North Korean Development. 2008b. DPRK Announces Workers Restrictions for KIC. NK Brief no. 08-12-5-1. Jeffries, Ian. 2006. North Korea: A Guide to Economic and Political Developments. London: Routledge. Kim, Dong-geun. 2006a. Gaesong Industrial Complex: Past, Present, Future. Manuscript of luncheon speech, KEI-AEI Forum, April 18, 2006. Kim, Dong-ho. 2007a. A Clear Case of Bounded Awareness: Kaesong Industrial Complex. The Korean Journal of Defense Analysis XIX no. 2:47–62. Kim, Suh. 2007b. A Proposed Korea–U.S. Free Trade Agreement and the Kaesong Industrial Complex. Policy Forum Online 07-007A. http://www.nautilus.org/fora/security/07007Suh.pdf (accessed January 25, 2007). Kim, Won-bae. 2003. Inter-Korean Cooperation in Infrastructure Development and Territorial Integration. In North Korea in the World Economy eds. Choi E. Kwan, Kim E. Han, and Yesook Merril, 118–134. London and New York: Routledge. Kim, Youn-suk. 2006b. An Increasing Inter-Korean Economic Integration: The Case of Gaesong Industrial Park. North Korean Review (fall):62–74.

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Kim, Young-yoon. 2008. Gaesong Industrial Complex: Current Status and Prospects. In KINU Insight no. 7:4–7. Lee, Chang-won. 2005. Entrepreneurial Opportunities in Gaesong Industrial Park: An Inter-Korea Business Perspective. North Korean Review 1 (fall):95–100. Lee, Jong-woon. 2004. Economic Opening of the Hermit Kingdom: Current Status and Future Tasks of the New SEZs in North Korea. Journal of International Economic Studies / Taeoegyeongje-yeongu 8 no. 2:121–144. Lee, Seon and Baek, Nakki. 2003. Prospects for Developing a North–South Joint Venture Complex. In North Korea in the World Economy eds. Choi E. Kwan, Kim E. Han, and Yesook Merril, 83–95. London and New York: Routledge. Lim, Eul-chul. 2007a. Kaesong Industrial Complex: History, Pending Issues, and Outlook. Seoul: Haenam. Lim, Eul-chul. 2009. Stalled Inter-Korean Relations & the Impact on the Kaesong Industrial Complex. ICNK Forum No. 09-2-11-1. Lim Kang-taeg and Lim Sung-hoon. 2005. Strategies for Development of a North Korean Special Economic Zone through Attracting Foreign Investment, Seoul: KINU – Korea institute of National Unification. Lim, Kang-taeg. 2007b. Opportunities and Challenges of the Gaesong Industrial Complex. KINU Insight no. 2 (August):5–8. Lim, Kang-taeg and Kim, Kyu-Ryoon. 2006. North Korean Economic Reform and InterKorean Economic Cooperation – Prospects for Future Development. Korea and World Affairs (spring):31–46. Lim, Sung-hoon and Lim, Kang-taeg. 2006. Special Economic Zones as Survival Strategy of North Korea. North Korean Review (fall):47–61. Ministry of Unification. 2006. Introduction to & Implications of Gaesong Industrial Complex Project, Power-Point-Presentation April 2006. Ministry of Unification. 2008. Welcome to GIC – Gaesong Industrial Complex Development Project, Flyer. Nam, Chang-woon. 2005. Free Economic and Trade Areas (FETA) as an Instrument of Economic Transformation: The North Korean Experience of Najin-Sonbong. In Regional Competition Under Transformation Conditions ed. Peter Friedrich, 195–210. Heidelberg: Springer-Verlag Berlin. Nanto, Dick and Mayin, Mark. 2007. The Kaesong North–South Korean Industrial Complex. CRS Report for Congress. Park, Suhk-sam. 2004a. An Analysis of Economic Effects of the Kaesong Industrial Park. Vantage Point (August):40–50. Park, Suhk-sam. 2004b. Creating a Visible Bridge: The Economic Impact of Kaesong Industrial Complex Construction. East Asian Review 16 no. 3(autumn):87–104. Petrov, Leonid. 2008. President Lee Myung-bak’s North Korea Policy: Denuclearization or Disengagement? Nautilus Institute ed. Policy Forum Online 08-025A. http://www.nautilus.org/ fora/security/08025Petrov.html (accessed March 27, 2008). Seliger, Bernhard. 2006. Towards a North Korea Boom? Special Economic Zones in North Korea and Their Effects on the North and South Korean Economies. In The Unification Research and Strategy in Korea and Germany: Affinity and Specifity eds. Yean-Cheon Oh et al., 93–122. Seoul: Hakrimsa. Wook, Yoo. 2006. The Gaesong Industrial Complex and the Korea-U.S. FTA: Part 1. ICNK Forum no. 06-7-28-1. Wrobel, Ralph. 2007. North Korea After the Nuclear Crisis: The Future of the Economic Reforms. Post Communist Economies 12 no. 4:483–504. Yoon, Seok. 2007. An Economic Perspective of Kaesong Industrial Complex in North Korea. American Journal of Applied Sciences 4 no. 11:938–945.

Part IV

Implications for South Korea’s Economy

Chapter 12

Toward a Northeast Asian Security Community: Implications for South Korea’s Economic Growth Deok Ryong Yoon

Introduction At the beginning of the 1990s, there was a period when most people expected North Korea to collapse soon. To the contrary, North Korea has survived. There remain just a few experts now that argue for North Korea’s downfall in the near future; even with its economy fallen, the North has managed its regime since the 1990s. Even if North Korea has survived harsh times since the 1990s, it still remains in a critical economic condition. Economically, the North has fallen in a poverty trap, from which the country cannot escape without help from others. An interesting thing today is that no country is in favor of North Korea’s abrupt collapse. It seems to be paradoxical that most countries do not want North Korea to collapse or to become stronger. Instead, they just want it to stay as is: keeping the status quo. South Korea has paid the costs raised by the political risks on the Korean peninsula since its division in 1945. South Korea has been paying two kinds of costs. The first is the costs raised by the division of the country itself. Confrontation over 60 years required huge amount of economic and social costs. The Korean War and the status of armistice after the war increased direct costs such as defense costs as well as indirect costs for the risk premium on the capital market. The other costs came from the limited economic potentials by the confrontation. Economically the South has been isolated from the Asian continent. Regional cooperation and even inter-Korean cooperation has been repressed by the confrontation and its risk. A new possible source of costs in the future would be a financial burden in the case of the North’s political collapse, regardless of whether it would lead to the Korean unification or not. The amount of all these costs will change according to the political condition. A peace regime on the peninsula may reduce these costs and open new opportunities for economic growth using the restricted economic potential for South Korea.

D.R. Yoon (B) Korean Institute for International Economic Policy, Seoul, Korea e-mail: [email protected]


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This chapter will review at first all the costs and new opportunities for the South Korean economy that a “security community” would bring about. Second, the next chapter will deal with the possible reduction of unification costs that South Korea would benefit from in case of a stable security in the region. Third, the idea of “security community” will be compared with the Sunshine Policy to see its practicability. The final concluding chapter provides a brief summary of the study and discusses how to combine the idea of “peace community” and the potential benefits from it.

Reducing Economic Costs from Political Tension The best benefit South Korea would enjoy from a “security community” would be the reduction in the economic costs from the political tension on the peninsula. This chapter will discuss the costs that South Korea has been paying due to the visible and invisible confrontation between the two Koreas. All these costs will be the sources of benefit from a “security community.” Risk factor influences all the economic activities. Especially, the financial sector responds sensitively to the changes in the risk factors. The risk factors of a country are usually reflected in the country credit rating. North Korea has been a constant burden to the rating of South Korea’s country risk. There are many possible risks related to the North. Among various possible risks, the extreme case would be a war between the two Koreas. The cost of a war will be immeasurable, because it would include not only immense economic costs but also the social costs and human lives. Even if the probability of a war may be very low, the expected costs will be extremely high. This has caused the so-called “Korea discount” on the capital market. The discount has been reflected in many economic activities and indicators explicitly as well as implicitly. In the event that North Korea has aggravated political tension on the Korean peninsula and caused a deteriorated economic relationship, the representative negative impacts through increased political tension are as follows: Increasing capital costs: North Korea has been an important factor influencing country risk, which plays a decisive role in determining South Korea’s credit risk. The risks related to North Korea can be classified into two categories – the risk of military conflict and the unification risk. The risk of military conflict implies a retrieval risk or valuation risk on invested capital if a military conflict were to break out. The unification risk means the valuation risk that would result from the shock of unification. For instance, Standard & Poors or Moody’s (Fig. 12.1) adjusted the credit rating of South Korea a few times according to the North Korean problem.1 The increase in the country’s risk level will increase the interest rate of the

1 Moody’s reduced the credit rating by two grades from positive to negative due to the North Korean nuclear problem in February 2003, while Standard and Poors raised the credit rating by one grade, commenting that the risk of military risk as well as the unification risk went down because of reopening of the 6-party dialogue in July 2005.

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Fig. 12.1 ROK: Country credit rating by Moody’s

bonds issued in foreign currency and expand the spread of currency swaps. This will increase the cost of interest and currency swaps, while a fall in risk will reduce those costs. According to an empirical analysis, an increase by one stage of credit rating will reduce 35 bp of bond interest and save $500 million in interest costs. Decreasing investment: If the country risk increases, not only will the portfolio investment decrease but so will the direct investment. Then, the liquidity of the financial market will be scarce, causing domestic interest rates to go up. The relative high cost of capital will weaken investments and lower the economy. The increase of credit ratings by one grade is estimated to raise the investment inflow by $500 million.2 Investors hate uncertainty in the market. North Korea’s unpredictable behavior annoyed not only the political world but also the market participants. North Korea’s nuclear test on October 9, 2006, caused several suspensions of dealing on the Seoul stock market to avoid market disorder. North Korea’s provoking acts have been the most important factor in producing long- and mid-term uncertainty in the Korean market. A survey of 23 fund managers around the world made by a research institute confirms that North Korea still influences their decision making when investing in Korea.3 According to the survey, 26 percent answered North Korea’s nuclear situation has influence in their decision making when investing in Korea. Fiftysix percent of the surveyed managers acknowledged that the improving economic relation between the two Koreas affects their investment in Korea positively (Fig. 12.2). Destabilizing the financial market: An increase in a country’s risk level will destabilize the exchange rate of Korean currency. An unstable exchange rate will increase the spread of currency swap and the possibility of an abrupt capital outflow. For instance, when North Korea aggravated nuclear problem in 2003, the exchange rate of Korean won/US dollar had reached 1,258 won, reversing the decreasing

2 Hankook

Kyungje Shinmun February 11, 2003. to the press release of the Institute of Global Management on July 13, 2008. ( http://www. igm.or.kr)

3 Refer

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Q. How much impact did the factor of the most recent development in North Korea's nuclear situation especially that of exploding the cooling facility has in your decision to invest in Korea?

Not at all Very much Somewhat

Not much

Don't know

Q. Despite the worsening of political relations between South Korea and North Korea the trade volume between parts of Korea increased by 30% between January and May as compared to the previous year. How would this kind of development affect your decision to invest in Korea?

0% 4% 43% 53%

Very positive Positive Not much impact Negative Very negative

Fig. 12.2 Survey on North Korea’s influence in decision making to invest in Korea Source: Institute of Global Management

trend since currency crisis in 1997. Instability of Korean won can be measured by CDS premium and premium for governmental bond selling in terms of US dollar. Figure 12.3 shows the abnormal movement of CDS (credit default swap) premium in 2003. The CDS peaked at 195 bp far exceeding the average 43 bp in the period from September 2001 to December 2007. Governmental bond issued to stabilize foreign exchange market has responded similar to CDS. Figure 12.4 shows the market’s reaction to North Korea’s nuclear problem. The premium to sell the bond due

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Fig. 12.3 CDS Korea (five year) (2001/9 ∼ 2007/12). CDS (Credit Default Swap) Premium for governmental bond for foreign currency with five year maturity Source: Korea Center for International Finance

Fig. 12.4 Premium for governmental bond in US dollar due 2013 (2003/5 ∼ 2007/12) Source: Korea Center for International Finance

in 2013 reached its peak in August 2003 at 128 bp, much higher than the average 71 bp. All these data describe the destabilizing effect of political tension on the financial market. High defense costs: South Korea’s defense expenses occupied 11.7 percent of the total budget and 2.8 percent of the GDP in 2007. The budget for 2008 reaches about $26.5 billion. Compared to other countries, the South has a relatively large proportion in its budget allotted toward defense expenses. The country has the 9th strongest defense power and 12th biggest defense budget in the world. The army has

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670,000 soldiers and reserve army amounts to over 3 million. The high direct and indirect costs have been maintained due to the possibility of military conflict with North Korea. Peace on the Korean peninsula would enable the country to save on its military expenses to a certain degree. Demise of geoeconomic strength: The Korean peninsula has the advantage of a location that bridges the Asian continent and the Pacific. However, South Korea has been geographically separated from the continent in such a way that it may not have direct access to China or Russia on land because of North Korea in between. South Korea has been an island in effect since the separation into two Koreas in 1945. Transport to the continent has to be made via sea or air causing higher costs than that by land. The tension on the Korean peninsula has degraded Korea’s geoeconomic advantage. All these costs may reduce or disappear if the two Koreas get along without any concern on security.

New Benefits Through “Security Community” Accelerating Economic Cooperation in Northeast Asian Region Korea sees many new opportunities for economic growth in Northeast Asian region. Fareast Russian area has abundant natural resources which are not developed yet. Especially, energy resources like natural gas and crude oil in Russia will help South Korea ease the tightness of energy supply. Growing Chinese market and abundant labor provides Korea with another chance to improve growth expectancy. The underdeveloped Russian Siberia can be for Korea a destination to invest to secure natural resources as well as a new market. South Korea, however, does not have a direct access to the Northeast Asian region because North Korea lies halfway between them. Northeast Asian energy and railway cooperation have been much discussed without any tangible result due to North Korea. The first step of the Northeast Asian railway cooperation should therefore be the linking railways between the two Koreas. It will open the opportunity to link the trans-Korea railway to the TCR (Trans-China Railway) and TSR (Trans-SiberianRailway). (See Figure 12.5, for possible ways of railway connection). The two Koreas have agreed to reconnect the Gyeongeui line on July 31, 2000, and Donghae line on April 5, 2002. The construction work to relink the Gyeongeui line leading to China via Shineuiju was completed on December 31, 2002. The Donghae line running to Russia via Wonsan was reestablished on December 31, 2005. In the second summit on October 4, 2007, the leaders of the two Koreas have agreed to open the Gyeongeui line between Munsan and Bongdong to freight traffic. Since December 11, 2007, regular freight train service has been offered every Monday through Friday between Munsan in the South and Bongdong, near Gaesung in the North.

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Fig. 12.5 Railway connection between TKR, TSR, and TCR

South Korea also has a plan to link the Gyungwon and Geumgang lines, which will connect the Gyeongui and Donghae lines (Table 12.1). Linking these four railways will enable the two trans-Korean railways to access TSR and TCR. With the completion of these railways, South Korea will have necessary infrastructure to make use of growth potential in Northeast Asian region. However, the outdated railway condition in North Korea and political problems between the two Koreas block further progress of railway cooperation. Energy has been an achilles heel for South Korea’s economic growth. The hike in oil price this year has caused unusual current balance deficit for nine months

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D.R. Yoon Table 12.1 Reconnected sections of inter-Korean roads and railways

Corridor

Link

Southern side

Northern side

Total extension (km)

Gyeongui Railway 12 km from Munsan to 15.3 km from Gaeseong 27.3 (Seoul-Shinuiju) Imjin River, Dorasan to Sonha, Panmun, and MDLa and MDL Road 12.1 km from northern 7 km from Gaeseong to 12.1 end of Tongil bridge MDL to MDL Donghae (East Coast)

Railway 7 km from Jejin to MDL 18.5 km from Mt. Geumgang to Samil Lake Road 4.2 km from 20 km from North Songhyein-ri to MDL Gosong to MDL

25.5

24.2

a

Military Demarcation Line. Source: Ministry of Unification.

in succession. The high price of oil put a strong pressure on the Korean economy, pushing it into stagflation. Korea’s energy structure relies on foreign resources by around 96.5 percent. It implies how important it is for South Korea to secure energy resources to increase economic growth. South Korea has tried to solve the energy problem with energy cooperation in Northeast Asian region. The most probable project may be to use the Siberian oil and gas. Russia has unexplored oil and gas in Siberia. The estimated oil reserve in eastern Siberia amounts to 21.4 billion barrels.4 The oilfields are distributed in three regions: Krsyanorsk Krai (12.2 billion barrels), Irkutsk Oblast (1.7 billion barrels), and Sakha Republic (2.4 billion barrels). The suggested possible routes of pipelines from Siberia to regional countries are as listed in Table 12.2.

Table 12.2 Possible routes of gas pipelines Siberian region

Possible routes

Irkutsk

Russia–China–South Korea Russia–Mongolia–China–North Korea–South Korea Russia–China–North Korea–South Korea

Yakutsk

Russia–China–North Korea Russia–North Korea–South Korea

Sakhalin

Russia–China–North Korea–South Korea Russia–North Korea–South Korea Russia–China–South Korea

Source: Kim, Kyuryoon (2005, p. 38).

4 Kim,

Kyuryoon (2005, p. 37).

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The South Korean President Lee Myung-bak agreed with the Russian President Dmitry Medvedev to push forward the 100 billion contract at the summit meeting on September 30, 2008 in Moscow. According to the agreement, South Korea will import 7.5 million tons of natural gas annually, beginning as early as 2015, possibly through a pipeline running across North Korea. South Korea will be able to secure a stable supply of oil and gas by diversifying energy providers and spurring its own resources development. The leaders also agreed to accelerate the project to link railways stretching from the peninsula to Russia and to Europe. President Lee secured Russia`s promise to support its participation in infrastructure and energy development in the Russian Far East and Siberia. The linkage with eastern Russia promises South Korea to realize the envisioned Asia–Europe corridor through the rail links. (See Figure 12.6 for envisoned Eurasian railway network). To put the railway and pipe line projects into reality, the two countries face high investment costs as well as tough challenges to persuade Pyongyang to cooperate sincerely. The North may demand significant economic rewards and security guarantees.5 The projects would require long-term endeavor for negotiation and development.

Fig. 12.6 Eurasian railway network

5 Experts estimate North Korea will be able to secure $100 million per year for gas passage fee. Korea Herald October 1, 2008.

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Intensive Inter-Korean Economic Cooperation After the start of inter-Koran economic cooperation, it has increased very rapidly with the support of government especially after the DJ (former President Kim Dae-jung) government. Inter-Korean economic relations have been steered mainly by trade. Since 2001, South Korea has become the North’s second largest trade partner after China. The total trade volume of $697 million in 2007 included US$348 million worth of products processed on commission and commercial transactions, as well as US$349 million in noncommercial transactions including humanitarian aid. If nontransactional trade would be excluded, the main motive of Korean companies participating inter-Korean economic cooperation is to employ relative cheap labor. The high proportion of commission-based processing trade (CPT) reflects the intention of the South Korean companies. The volume of CPT amounted to $176 million last year accounting for 50.6 percent of transactional trade and 25.3 percent of total trade. The South Korean companies bring all the materials needed for production into the North while the North provides just labor and land. However, the general trend of CPT growth has been somewhat stagnant since 1996 due to the lack of electricity, high transport costs, and difficult communication. Despite the slowing growth trend, CPT constitutes a sizeable and important portion and has the potential for rapid expansion. Investment, however, did not grow as rapidly as trade due to political and practical restrictions. In addition to poor infrastructure in the North, the lack of an institutional framework in particular blocked the expansion of inter-Korean economic cooperation. Gaeseong Industrial Complex made another way to use North Korean labor, providing better investment conditions (Table 12.3). Acquiring cheap labor in Gaeseong helps the South Korean companies to undertake industrial restructuring in a less painful manner. Especially the labor-intensive manufacturing sector facing strong pressure from increasing wage rushed into the special economic zone established just 40 km away from Seoul. Another important beneficial factor in inter-Koran economic relation will be the natural resources in North Korea. High price of natural resources in recent years attracts South Korean investment. The Korea Resources Corporation has already invested to develop lead mine and the produced lead was transported to the South. Development of natural resources will be a “win–win model” for interKorean economic cooperation. The North hopes to get investment, technology, and

Table 12.3 Gaeseong Industrial Complex

Companies Production ($1,000) North Korean labor

2005

2006

2007

Total

11 14, 910 7, 621

30 73, 730 11, 189

65 184, 780 22, 804

65 273, 420 22, 804

Source: Ministry of Unification

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infrastructure in exchange for natural resources. Development of natural resources in the North is estimated to bring five times as much as profit than the import from outside.6 North Korean natural resources include gold, silver, coal, lead, tungsten, zinc, graphite, magnesite, iron ore, copper, gold, pyrites, salt, fluorspar, and others (Table 12.4). The total estimated deposit of natural resources in North Korea exceeds 30 times as much as South Korea’s.7 South Korea can turn instable supply of natural resources to secured supply using self developed mines in the North. One of the most competitive iron and steel industry relies on imported iron ore by 99.5 percent while the North has abundant iron deposits. Cooperation to develop natural resources may enable to finance North Korea’s economic rehabilitation. However, Gaeseong Industrial Complex as well as investment to develop natural resources has stagnated since the Lee Myung-Bak government came into power. Mt. Geumgang tourism project has stalled after a shooting accident that left a South Korean tourist dead. Political conflict continues to threaten the inter-Korean economic projects contrary to the expectation that economic interaction would prevent political dispute as the European countries have experienced.

Table 12.4 State of main mineral resource possession State of main mineral resource possession Mineral reserves Type of mineral (scale)

North Korea

South Korea

Reliance on import (%)

Gold (ton) Silver (ton) Copper (thousand ton) Lead (thousand ton) Zinc (thousand ton) Iron (100 million ton) Tungsten (thousand ton) Molybdenum (thousand ton) Manganic (thousand ton) Nickel (thousand ton) Graphite (thousand ton) Limestone (100 million ton) Barite (thousand ton) Magnesite (100 million ton) Soft coal (100 million ton) Anthracite coal (100 million ton)

2,000 5,000 2,900 10,600 21,100 50 246 54 300 36 2,000 1,000 2,100 40 160 45

41 1,532 56 386 560 0.2 127 14 176 − 69 85 842 − − 13.7

96.2 94.9 100 99.9 100 99.5 100 99.9 100 100 99.4 2.13 100 100 100 64.2

6 Kim, 7 Oh,

Young-yoon (2005). Hee-chan (2005).

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Saving Unification Costs8 Unification Costs Unification poses great risks that could destabilize South Korea’s economy, because unification will inevitably bring forth a transfer of resources from the South to the North, which is generally called the unification cost.9 Given the big difference in the living standards of the two Koreas, the amount of transfer will become enormous and will negatively affect the South Korean economy. Therefore, the unification cost can be defined as the amount of resources South Koreans must spend publicly to bring North Korean living standards up to a targeted level. The main concern with the unification cost lies in its volume. If the volume of necessary financial transfer per year surpassed the financing capacity of South Korea, unification would destabilize its economy. An estimation of the expected volume of unification cost has attracted public attention. Estimating the unification costs requires many assumptions, as well as a target for a unified Korean society to pursue. Due to the wide range of possible assumptions, numerous estimates of unification costs have been made by different institutes and analysts. The main factors included in those calculations consist of different targets, different unification dates, different initial conditions, and different methodologies. On account of all these differences, the various estimated volumes of unification costs do not bear the same results. Most of the studies of unification costs deal with the capital costs of reaching an economic target.10 They usually take a certain degree of convergence of income level between the South and the North as a target. Young Sun Lee (2002) and Noland et al. (1997) set the convergence of the North Korean income level to the level of 60 percent of the South Korean as a target, while Bae (1996) targets complete

8 This part relies on Yoon, Deok Ryong (2006), “North Korea as a Source of Regional Turbulence” presented at the conference on “Security Dynamics of Northeast Asia & Its Impact on Regional Prosperity” organized by the Korea–Australia Foundation on 7∼8 September 2006 in Seoul. 9 The transfer of resources is regarded as necessary for social and economic integration. The transfer of resources on a public level is regarded as means to avoid chaos from a possible massive migration as well as to maintain unification. For instance, Young Sun Lee (2002) explained the necessity of transfer in relation to migration as follows: “If the border between the two Koreas is abolished, massive migration of North Koreans into South Korea is expected, given the relative poverty of the North Korean economy. This will lead to greater confusion in South Korea and will negatively affect the South’s living standards. Keeping North Korean residents in the North by providing aid or guaranteeing North Korean residents certain living standards while allowing migration may be the cure for social instability. In either case, South Korean residents will be required to pay to improve living standards in North Korea.” Young sun Lee (2002, p. 14). 10 Even though the unification cost must encompass diverse costs like capital costs, education costs, social costs, and many other costs, most researchers deal with just capital costs, due to the difficulties of measuring the other costs. See Wolf and Akramov (2005, p. 46).

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economic convergence. Other studies that do not make convergence a target still include in the unification cost increasing North Korea’s income to a certain level. Wolf and Akramov (2005), the most recent work on the unification cost, set the doubling of per capita income in four to five years as a goal. Time spans to realize the target differ as well. Joon-Koo Lee (1995) puts the time span needed to reach the target at 10 years, while Bae (1996) assumed 20 years, and Wolf and Akramov (2005) 5 years. The methodologies used for estimation make the results differ as well. Noland et al. (1997), Shin et al. (1998), and Young sun Lee (2002) use the Computable General Equilibrium (CGE) model. Wolf and Akramov (2005) use a simulation model for their estimation. Although the different assumptions and the diversity regarding estimations of the unification cost have generated confusion in understanding and interpreting the estimates, the general consensus from these estimates is that the unification costs will be a great burden to South Korea. If the financing capacity cannot cover the necessary volume of resource transfers, South Korea’s economy will suffer macroeconomic instability and economic depression, as well as social disorder. Furthermore, simplistic presentations of the seemingly large costs, without any appropriate supporting explanation, have produced passive attitudes toward unification on the part of the South Korean people (Table 12.5).

Table 12.5 Estimates of unification costs Definition of unification costs Costs

Source

Incremental investments Total investment costs in 1990 prices over 10-year period Present discounted value of capital transfers from South Korea to North Korea Additional fiscal burden on South Korea Present discounted value of expenditures Present discounted value of capital expenditures Transfers to North Korea from South Korea and other donors

$41.2 trillion–$2.4 trillion $360 billion–$1.13 trillion

Hwang (1993) Joon-Koo Lee (1995)

$290 billion–$389 billion

Young Sun Lee (1994)

$332 billion

Jin-Young Bae (1996)

$1.4 trillion–$3.2 trillion

Noland et al. (1997)

$754 billion–$2.2 trillion

Noland et al. (1997)

Capital costs of doubling the North Korean GDP in four or five years

0.25–5% of the South’s GDP annually at Frecaut (2003) the beginning; cumulative cost may vary from 55 to 190% of South’s GDP over 20 years $50 billion–$670 billion Wolf and Akramov (2005)

Note: There are also other estimates of reunification costs. For example, Shin et al. (1998) and Young Sun Lee (2002) pursue to calculate the unification cost in case the capital would be invested optimal.

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The German Experience and Implications Although East Germany suffered a deep recession during the first phase of unification, West Germany enjoyed a small economic boom due to the new demand from East Germany. Many East Germans preferred consumer goods and food from West Germany. Many Easterners went to the West to work. The strong demand to construct a new economy in the East increased imports abruptly so that the worldfamous exporter with the greatest trade surplus fell into a trade deficit. The sudden financial shifts between the East and West, the sharp rise in the monetary supply, and the government deficit from large expenditures in East Germany made the German Bundesbank take antiinflationary policy measures. The Bundesbank raised shortterm interest rates sharply between 1989 and 1992, from 7.1 percent in 1989 to 9.5 percent in 1992.11 The growth rate of West Germany slowed down from 4.2 percent in the first quarter of 1991 to 0.8 percent in the last quarter of 1992, with an increasing interest rate. The West German economic growth rate was 1.5 percent in 1992. The number of employed people in West Germany decreased for the first time in ten years by 89,000 persons. The recession continued to record a negative growth rate of – 1.2 dollar in 1993. The growth rate returned to 2.4 percent after the Bundesbank lowered the short-term interest rates in 1994. However, unemployment rate didn’t go down as much. Since 1995, West Germany has remained as an economy with a small growth rate. Even though West Germany faced a strong boost after the German unification in 1990, Germany subsequently lost its momentum for economic growth. The West German economy had deteriorated by 1992 and remained dismal for the reminder of the 1990s. During the 1990s, the unemployment rate almost doubled and the average growth rate of GDP marked only 1.5 percent per year. The government had to raise taxes and increase the civil contributions to the social security system to finance East German demand. However, public financing drew on the deteriorating budget deficit and soaring public debt. The most severe challenge of German unification was fiscal. Official estimates of fiscal transfers from the West to the East reached about DM 180 billion per year during the 1990s, which amounts to 6.5 percent of West Germany’s GDP. If the federal revenues in East Germany form this figure, the net transfers were estimated to be DM 120–140 billion per year since 1991. This explains about 4.5 percent of West Germany’s GDP. Now Germany suffers from overdebt and uses 25 percent of the government budget to pay for the unification costs, comprised of interest and repayment of accumulated debt. The high debt ratio caused by unification paralyzed German fiscal policy, while the European monetary union deprived Germany of an independent monetary policy. That is why Germany cannot respond against a weak economic growth.

11 Refer

to http://www.germanculture.com.ua/library/facts/bl_unification_impact.htm

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It is generally accepted that the cost of Korean unification would impose a much higher burden than Germany’s unification. The reasons are as follows: First, the relative income levels of both the Koreas are much lower than that of the two Germanys. Second, the relative populations between the North and the South are much greater in comparison to that of East and West Germany. And, third, the per capita GDP of North Korea is estimated to be less than 10 percent of that of South Korea, while East Germany’s per capita GDP was about one third of West Germany’s. South Korea has low financial capacity to mobilize the necessary capital compared to West Germany. West Germany has been a capital exporting country since the 1960s. The country therefore accumulated capital assets abroad in great volume, which guaranteed Germany’s the credibility. Germany’s credit rating, therefore, was not affected, despite the enormous volume of debt. The traditionally sound and strong German economy had become feeble from its unification costs. This implies that the Korean unification costs may induce a much stronger negative impact on the economy. The “security community” may be able to save the unification costs because the two Koreas would integrate economically before unification. If there is not any threat to any country under a security community in Northeast Asia, it would encourage free trade and economic integration, which will lead to an economic convergence.

Security Community and Economic Community: Which Is first? Since the Kim Dae-jung Administration, South Korea has adopted an engagement policy named the “Sunshine Policy,” which tries to change the fundamental framework between the two Koreas. The Kim Dae-jung Administration wanted to end hostilities and establish a peaceful relationship through economic engagement. The Sunshine Policy proclaims the desire for peaceful coexistence instead of confrontation or absorption. The philosophical background of this policy was picked up from the German “Ostpolitik,” which turned confrontation between the two Germanys into a peaceful relationship. Germany also used economic engagement as an instrument to materialize this policy. German “Ostpolitik” succeeded in establishing a peaceful paradigm and laid the foundations for German unification. South Korea expanded economic relations and increased humanitarian aid as a means of carrying out its engagement policy. South Korea has now become the biggest provider of humanitarian aid and is the second largest trade partner for the North. The South undertook enormous investment projects to develop North Korea’s economy, such as the Mt. Geumgang project and the Gaeseong Industrial Complex. After launching this engagement policy, exchanges between the two Koreas have increased significantly.

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However, the problem is that the North has not stopped strengthening its military. North Korea has provoked neighboring countries with continuous missile tests and nuclear programs. Criticism of the South’s economic engagement with the North has said that the North used South Korean money to develop WMDs rather than its economy. Now, South Korea cannot expand its economic engagement without guaranteed suspension of further military provocation. Considering the given conditions, the engagement policy as well as the containment policy have their own utility in reducing the conflict potential. But the peace in the region can be secured only when the United States, South Korea, North Korea, and other related parties can cooperate and join. The idea of the “security community” may become the alternative to which all the related parties can join. The idea of the “security community” pursues to change the logic of economic engagement policy under the Sunshine Policy. The Sunshine Policy was based upon the assumption that economic assistance and cooperation would bring about peaceful coexistence through creating common interest.12 However, the discussion on the “security community” tackles the mechanism to establish peace regime first and then (or simultaneously) economic cooperation, because the Sunshine Policy could not improve the security on the Korean peninsula. This idea of the “security community” endorses the merits of Sunshine Policy and tries to make up for its weak points. The “security community” would be a good option to exclude economic and political uncertainty on Korean peninsula and in Northeast Asian region. The problem with this idea is that it does not show yet how to establish “security community” without an economic community. The “security community” can be realized only with establishing an economic community together. The Six-party dialogue has played the role of “security community” in Northeast Asia with regard to the North Korean nuclear issues. It does not have a clear economic incentive to induce North Korea to join the “security community” further. To put the idea into practice, it must be discussed how to include the North in the economic community and who should pay, and how much and so on. This will be an important hurdle for “security community” idea in the future.

Conclusion It is clear that a stable and peaceful “security community” in Northeast Asia would contribute to South Korea’s economic growth. If a “security community” would function to prevent possible conflicts on the Korean peninsula and Northeast Asian 12 Sunshine

Policy was criticized from the beginning due to the lack of clear mechanism between engagement policy and peace regime. After ten years of engagement policy, economic and social exchanges have expanded enormously. The peace on the Korean peninsula, however, stands still on a fragile basis as before. In fact, North Korea did not halt missile development and nuclear weapons program during past ten years. Some argue that the unilateral transfer of resources from the South may have helped Kim Jong-il regime survive.

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region, South Korea will enjoy the benefit. The first tier of benefit will come out of disadvantages resulted from security problem. If a security community would be established, the disadvantages until now will be turned into normal or advantage. The second tier of benefit will be made from utilizing new economic potential. Northeast Asian region will provide South Korea with big growth potential through, for instance, railway cooperation and energy cooperation. Inter-Korean economic cooperation will face new era if the political hazard would disappear. South Korea will be able to make use of labor, land, and natural resources in the North. The third tier of benefit will come from saving unification costs in the future. If two Koreas would be able to integrate economically through active cooperation before unification, it will reduce the unification costs when it occurs. The Sunshine Policy of Kim Dae-jung Administration aimed at introducing peace on the Korean peninsula. South Korea has used economic engagement as an instrument to change the paradigm of inter-Korean relations from confrontation to peace. It has increased economic and social exchanges, while, in fact, it did not succeed in preventing North Korea’s continuous missile development and nuclear programs. The idea of security community seems to be a possible alternative that may make up for missing link between economic community and security community in Sunshine Policy. The idea of a security community, however, does not include economic incentives attractive enough to induce the North. The success of the security community presupposes that South Korea, the United States, North Korea, and other related countries would join. Probably, that is the issue all the related parties should discuss from now on.

References Bank of Korea. 2004. Economic Impact of Gaesung Industrial Complex. The Bank of Korea. http:// www.bok.or.kr Bae, Jin-Young. 1996. The Fiscal Burden of Korean Unification. Joint US–Korea Academic Studies, vol. 6. Washington, DC: Korea Economic Institute of America. Bibow, Jorg. 2001. The Economic Consequences of German Unification: The Impact of Misguided Macroeconomic Policies. Levy Economic Institute, Public Policy Brief no. 6. New York: Annandale-on- Hudson. BMWi. 1990. Wirtschafliche Hilfen für die bisherige DDR. Bonn. Frecaut, Dominique Dwor. 2003. Korean Unification: One Country Two Systems? In Confrontation and Innovation on the Korean Peninsula, 60–70. Washington, DC: Center for Strategic Institute. Hong, Soon-Jik. 2004. Economic Meaning of Gaesung Industrial Complex and Tasks for Success. Korea: Hyundai Economic Institute. Hwang, Eui-Gak. 1993. The Korean Economies: A Comparison of North and South. Oxford: Clarendon Press. Kim, Kyuryoon. 2005. Energy Cooperation with North Korea: Issues and Suggestions, Korea Institute for National Unification. Seoul. Kim, Young-yoon. 2005. Exploring North Korean Minerals: Strategy and Framework. Promotion Mining 2005 No. 2. P. 12. KINU. 2005. The meaning of Peace: Cost and Benefit. Analysis of Unification Environment 200517. Seoul: Korea Institute for National Unification.

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Lee, Joon-Koo. 1995. Reflections on Korean Unification Cost Studies. In Germany and Korea: Lessons in Unification eds. Myong-Kyu Kang and Helmut Wagner, 96–121. Seoul: Seoul National University Press. Lee, Young Sun. 1994. Economic Integration of the Korean Peninsula: A Scenario Approach to the Cost of Unification. In Korean Economy at a Crossroad ed. Sung Yeung Kwack. Westport, CT: Praeger. Lee, Young Sun. 2002. The Cost and Financing of Korean Unification. In Handbook of Korean Unification eds. Jung-In Moon and J. B. Roh. Seoul: KERI. Noland, Marcus, Sherman Robinson, and Monica Scatasta 1997, Modeling Economic Reform in North Korea. Journal of Asian Economics 8, No. 1 (Spring):, 15–38. Oh, Hee-chan. 2005. Deposit of North Korean Minerals and Status of Development. Promotion Mining 2005 No. 2. P. 16. Peter, Gey. 2005. Money for the Reds – How Much and Why Did the Federal Republic of Germany Pay Money into the National Budget of the Federal Republic of Germany? FES-Information Series no. 2005-07. Korea: Friedrich-Ebert Stiftung, Korea. Shin, Dong Cheon, Deok Ryong Yoon and Young Ju Jeong. 1998. Economic Cooperation and Unification Cost – Comparative Analysis Between Germanys and Korea Policy 97-15-336. Korea: Samsung Economic Institute. Wolf, Charles Jr. and Kamil Akramov. 2005. North Korean Paradoxes: Circumstances, Costs, and Consequences of Korean Unification. Santa Monica, CA: RAND Corporation.

Chapter 13

The Development of a Northeast Asian Security and Economic Community Soon Paik

Introduction This chapter has three purposes. First, to analyze the present circumstances and to present perspectives of existing Northeast Asian Security Community. Second, to develop the three scenarios concerning the possibilities and probabilities of developing the Northeast Asian security regime. Third, to present the implications these scenarios will provide in terms of Northeast Asian economic institutions. The economic implications are related to the economic benefits and costs/issues to be delivered from the development of the Northeast Asian Security Community in the process of three scenarios. Since World War II, Northeast Asian economic circumstances have been historically developed in three phases. In the first phase, just after World War II to later 1960s, Japanese economy developed tremendously through US after-war recovery plan and its own US bound export-oriented economic policies on the basis of its modern industrialized capitalistic structure which was imported from Western economies in late nineteenth century. And in this phase, North Korean economy also developed by an advanced step into a developed socialistic economy. Joan Robinson, one of the famous British economists after John Maynard Keynes, visited North Korea in early 1960, praising the North Korean economic development from the ashes of World War II. In the second phase, during the period of early 1970s to early 1990s South Korean economy developed by the double digit growth rate due to the government-led and export-oriented development strategies. In the third phase after the late 1980s, Chinese economy has shown a big jump as a world manufacturer of most kinds of goods, due to its so-called Open Economic Policy started in early 1970s.

S. Paik (B) U.S. Department of Labor-Bureau of Labor Statistics, Washington, DC, USA; Washington Baptist University, Annandale, VA, USA e-mail: [email protected]


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S. Paik

In the dynamic economic phenomena existing in the Northeast Asian community, the current security environment of the Northeast Asian countries and its possible prospects would provide significant implications for the Northeast Asian economies and at the same time for South Korea’s economy.

Northeast Asian Security Community: Perspectives and prospects The present Northeast Asian Security Community is based on the two-tiered foundations: one tier is the bilateral security alliances such as United States and South Korea, United States and Japan, and China and North Korea; the second tier is the so-called Six-Party Talk framework. The first tier is still the fundamental foundation of Northeast Asian Security Community, which was developed after World War II and the Korean War. This security foundation is characterized as a strictly bilateral nature including the Cold War type of political isms. It still finds the justification of its existence at the presence of the existing Socialistic Communism political structure in North Korea and China. The second tier, a Six-Party Talk, is a temporal, but institutional, security arrangement, whose main objective is to resolve North Korea’s nuclear issue and to provide a nuclear-free peace in the Korean Peninsula. However, the Six-Party Talk security framework has great potential, being developed into the various forms of Northeast Asian Security Community. In this context, three scenarios are proposed concerning the prospects of the Northeast Asian Security Community. The first scenario is the Six-Party multilateralism. It implies the permanent structure of the existing Six-Party Talk framework, which might be developed into setting a permanent office at some place near the borderline between the two Koreas. In this framework, there will be continued and developed bilateral, trilateral, quadrilateral, and multilateral security dialogues, which would be in advanced forms from the current status. The second scenario is the extended multilateralism. It should be more in institutionalized form than in the form of establishing a permanent office of the Six-Party Talks and should also expand the membership toward the Northeast Asian security interests such as Australia, Canada, Mongolia, and so on. The third scenario is organized multilateralism, which implies establishing a Northeast Asian security alliance such as NATO, based on the Six-Party Talks and its developed organization. The implications of the Northeast Asian Security Community for South Korea’s economy would be illustrated in terms of the already stated three scenarios for its perspectives and prospects.

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Six-Party Talks Multilateralism and Its Implications for South Korea’s Economy Even though a permanent office of the current Six-Party Talks framework is installed at some place of the Korean Peninsula, the current bilateral economic relations among the six countries continue to be developing into a more advanced status in terms of the volume of trade and foreign direct investments and of economic connections. According to the KEI statistics, South Korea’s GDP has shown an impressive but moderate growth at the annual rates of 10.0 percent, 8.5 percent, 3.8 percent, 7.0 percent, 3.1 percent, 4.7 percent, 4.2 percent, 5.0 percent, and 5.0 percent, during the period of 1999–2007. This growth has been pushed by three factors: first, the reform of Chaebol and financial structure after the so-called IMF crisis, second, the increased trade with the double digit developing China, and third, the increasing foreign direct investments from various countries. In 2003, China surpassed the United States as South Korea’s number one trading partner with increasing trade surpluses. After the 1997 crisis, Kim Dae Jung government moved aggressively to eliminate most restrictions on foreign firms’ long-term investments in local subsidiaries and controlling interests in local companies. The figures of the foreign direct investments into ROK shows the impressive statistics such as 15.3, 11.3, 9.1, 6.5, 12.8, 11.6, 11.2, and 10.6 in US billion dollars for the period of 1999–2007.

South Korea and United States Economic Relations The South Korean and US economic relation has been essential for the development of the South Korean economy since World War II and the Korean War, in terms of economic aids and the number one trading partnership of the United States until 2002. There are two benefits to be delivered and two costs or issues to be burdened by the development of the KORUS economic relation under the Six-Party Talks multilateralism: (1) The first benefit is the ratification of the KORUS Free Trade Agreement by both the ROK Assembly and the US Congress in a short period. The semipermanent Six-Party Talks multilateralism provides the incentive base both for the ROK and the United States to improve and reinforce their economic ties in the Northeast Asian region. According to the United States International Trade Commission, after four years of the KORUS FTA, the US exports to Korea and Korean export to the United States were estimated to increase by 54% and 21%, respectively. The US and Korean GDP would rise by 0.2% and 0.7%, respectively. (2) The second benefit is the strategic position to enhance the economic status of South Korea in the two countries’ economic environment.

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The present economic circumstance is that the economic position of South Korea is claimed to be sandwiched between the number 2 world economic power, the Japanese economy, and the most rapidly developing economic giant, the Chinese economy. South Korea might leverage its security alliance of the Six-Party Talks multilateralism to enhance its economic power and at the same time to coordinate and further lead the ROK–US economic cooperation. (3) The first cost or issue is an increase in South Korea’s security burden related to the United States. At present, the costs for stationing the US Armed Forces in South Korea has been shared by both countries. Once the Six-Party Talks multilateralism is to be settled as a semipermanent condition, it is highly probable that the United States will pass over all its stationing costs to South Korea. (4) The second cost or issue is the probability for revival of the protectionism movement and policy against the United States. The semipermanent Six-Party Talks multilateralism leads to the assumption for the part of South Korea that the United States alone is not so much weighted in terms of both the security and economic issues, which might develop into the protectionist movement and policy in South Korea.

South Korea and Japan Economic Relations In 1965, South Korea and Japan signed the Basic Treaty, which normalized the economic relationship between the two countries. However, from the beginning of the economic normalization, South Korea’s trade with Japan showed increasing trade deficits, contrasting the surpluses with the United States and China. The two benefits and one cost concerning South Korea–Japan economic relations are as follows: (1) The first benefit is that the coordinating position of the South Korean economy is enhanced with Japanese economy. Since the 1965 Basic Treaty, South Korea has utilized Japan’s past wrongs and/or South Korea’s security contribution to Japan especially issues related to North Korea as a means of bargaining leverage over Japan. However, after the late 1990s, the economic status changing from “dependent” to “coordinator” has been perceived by both governments and developed in reality. The semipermanent establishment of the Six-Party Talks multilateralism would provide the political and economic ties between Japan and North Korea, and at the same time improve the economic relationship between Japan and South Korea too. (2) The second benefit is that South Korea’s economy might obtain some advantages from South Korea and Japan economic relationship by utilizing South Korea’s security and economic arrangements with United States, China, and/or North Korea as a leverage.

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Japanese economic position in the Northeast Asian economic community would not be strengthened without developing its positive economic relationships with South Korean, North Korean, and Chinese economies. (3) However, there would be one cost to South Korea and Japan economic relationship due to the Six-Party Talks multilateralism in terms of competition among four economies such as South Korean, North Korean, Chinese, and Japanese. Japanese economy is characterized as an advanced economy with high technology and complex economic structure, while that of North Korea as an underdeveloped one with an abundant low-cost labor, and the Chinese economy as a developing one with many manufacturing industries. However, South Korean economy is a highly developing one, but in the process of moving to toward an advanced economy, it is being “being hollowed,” due to the developing gap between the manufacturing and hitech economies. Japan would improve the positive economic ties with North Korea and China, but not with South Korea as a rival economic entity.

South Korea and China Economic Relations Since the diplomatic recognition in 1992, the two countries have developed their relations from “friendship and cooperative relationship,” “collaborate partner,” (under President Kim Dae-jung) “comprehensive collaborate partner,” (under President Roh Moo-hyun) to “strategic relationship” (under President Lee Myung-bak). The two benefits are as follows: (1) South Korea’s economic relations with China would be more closely improved under a more settled Northeast Asian security community like the semipermanent Six-Party Talks multilateralism. South Korea utilizes a huge market of China for its economic growth and China uses more freely the development strategies of South Korean experiences such as SeaMaeulUnDong. (2) Seoul may develop the security and/or economic leveraging strategy against China to an advanced level under the Six-Party Talks multilateralism by utilizing the three bilateral economic relationships with United States, Japan, and North Korea. KORUS FTA would have a huge role as a powerful leverage. The two costs or issues are as follows: (3) South Korea’s economy is rapidly and broadly becoming dependent on China’s economic well-being in terms of diminishing South Korea’s competitive advantage. The Korea Development Bank estimated in 2006 that China’s technology already reached 95 percent of Korean levels and could surpass them in almost all areas in five years. This process would be developing more in terms of time and/or scope.

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(4) Chinese economic influence on North Korea would be greater than at present. This development would deteriorate the expected economic benefits to be gained from the economic relationship between the two Koreas which could be enhanced through the Six-Party Talks multilateralism.

South Korea and Russia Economic Relations The first benefit is the increasing volume of trade between two countries under a more safe Northeast Asian security community. Two countries established diplomatic relations in 1990, and since then their trade turnover has soared from less than 1 billion to estimated 20 billion dollars in 2008. Two countries are now planning a strategic assault on Asian and European markets. The second benefit is the increases in the bilateral capital investments. The main issues are related to (1) South Korea’s direct investments in Russia such as Hyundai Motors, Samsung Electronics, Lotte Group, and others; (2) construction of three new silk routes; (3) green route of agriculture; and (4) natural gas pipelines. One cost/issue is that Russia might be utilizing its political tie with North Korea in order to obtain more the economic benefits from the highly developed economic environment of South Korea rather than the bilateral ones.

South and North Koreas Economic Relations The first benefit is that South Korea could be a first trading partner to North Korea. At present, South Korea is the second trading partner to North Korea economy after China. Since 2001, the two Koreas’ trade increased from $400 to $700 millions in 2004. Thereafter, their trade showed a big jump to more than $1 billion in 2005, including Kaesong Industrial Park and Keum Gang San tourist project. The second benefit is that South Korea’s economy utilizes the low-cost labor and raw resources being abundant in North Korea in the exchange of the industrial structure and investments of South Korea with North Korea. The costs/issues are as follows: The first issue is how much to give economic aids to North Korea in terms of the benefit–cost calculation. The second issue is how to balance Chinese economic dominance in North Korea’s economy in terms of four bilateral economic interests between the Korean Peninsula and the United States/Japan/China/Russia. The third issue is how to integrate North Korea’s economy with Northeast Asian economic community in terms of economic reform and international financial loans. North Korean economy needs not only South Korean economic assistances but also various international economic aids, including the education of market economies to North Korean leaders.

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South Korea, more importantly, should develop a strategy for making North Korean economy reformed in terms of not only its legal system but also of economic structure.

Extended Multilateralism and Multilateral Economic Cooperation The multilateral economic cooperation advanced from the Six-Party Talks framework will be feasible as the current Six-Party multilateral institution corrects some caveats in the structural adjustment. On September 19, 2005, the Joint Statement referred to new “Ways and Means for Promoting Security Cooperation in Northeast Asia.” On February 13, 2007, Joint Statement created a “Working Group on a Northeast Asia Peace and Security Mechanism” (NEAPSM). This arrangement might provide the feasibility of the extended multilateralism in the Northeast Asia region. The directions should be taken for institutionalizing the multilateral economic cooperation beyond the bilateral economic relationships enhanced through the semipermanent Six-Party Talks multilateral framework. The first benefit is that the economic integration could be reinforced for strengthening the security integration among the extended multilateral partners and vice versa. The economic cooperation could enhance the security alliance, while the economic cooperation could also be promoted by the security alliance among the partners. The second benefit is that there would be an expansion of the bilateral Free Trade Agreements among the extended partners and possibly with other regional countries such as ASEAN countries. There are however three major issues to be resolved for the successful multilateral economic cooperation among the countries in the extended multilateral security framework: First, the top-down bureaucratic economic planning approach used so far should be modified so that (a) the economic ministers should manage the economic issues by talks and (b) the representatives of major firms should be invited. Second, the other multilateral institutions such as APEC should be interrelated. Third, the areas of common interests among the participants should be itemized on the table such as depoliticized infrastructure, transportation, energy, and so on.

Organized Multilateralism and Multilateral Economic Organization The following is the fundamental question related to the Northeast economic community: Is it feasible to formulate the Northeast Asian Union (NEAU) like the European Union? There have been many arguments against the feasibility of the

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NEAU. However, in a moderate functional form, a Northeast Asia Free Trade Agreement, especially South Korea–Japan–China Free Trade Agreement, has been argued to be feasible through the extensive multilateral approaches. The argument is based on the fact that the economic interactions among these three countries have been increased tremendously in recent years. China became not only the number one trading partner to South Korea in 2003 but also the number one trading partner to Japan in the first half of 2007. Regional trading among South Korea, Japan, and China accounts for about 55% of total trade of these three countries. There are three benefits: First, a successful South Korea–Japan–China FTA would be implemented due to their secure organized multilateralism. Regional division of labor among the three economies could be arranged according to each economy’s comparative advantages. There is a great possibility that each of three economies promotes its own comparative economic advantage based upon their different stages and patterns of economic growth. Second, a South Korea–Japan–China free trade zone might be established for helping the three countries maintain competitiveness in the global market. Third, the South Korea–Japan–China FTA could be extended to the Northeast Asian FTA through “10+3” cooperation with ASEAN. The NEAFTA would promote its competitive strength against the NAFTA and the European Union. There are two issues to be resolved: First, a tendency that Japan and China would be dominant and would have the most advantag among the three economies. Japan is the second largest economy and Chinese economic growth potentials are enormous with double digit growth rates in recent years. Second, under the organized security multilateralism, there is a possibility of including North Korea extending to the four-country FTA. There exist several areas of common interest among the three countries, while it is hard to find some areas of common interest from North Korea’s economy.

Conclusion Three prospects scenarios are considered for the development of the Northeast Asian Security Community in perspective: a Six-Party Talks multilateralism, an extended multilateralism, and an organized multilateralism. Under a Six-Party Talks multilateralism, the bilateral economic relationships between South Korea and the United States/Japan/China/Russia/North Korea would be enhanced, including the rapid ratification of the KORUS FTA. The bilateral economic relationships could be improved into the upgraded levels such that South Korea could utilize its security position in the Northeast Asian security community under the Six-Party Talks multilateralism as a leverage in obtaining more economic benefits from its partners.

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It is probable that the Six-Party Talks multilateralism would lead to serious competitions in the bilateral economic relationships. By extending the current Six-Party Talk multilateralism, the multilateral economic cooperation entity might be established in enhancing various economic benefits for the Northeast Asian economic community. The economic integration to be established through the multilateral economic cooperation could also strengthen the Northeast Asian security integration. In order to establish the multilateral economic cooperation, three issues have to be resolved. First, the top-down bureaucratic planning approach should be modified. Second, the other multilateral economic institutions should be interrelated. Third, the areas of common interest among the participants should be itemized. As an organized security multilateralism is in the process of being developed, the first step is the establishment of the three-country FTA of South Korea–Japan–China and the second step is the expansion toward the Northeast Asian FTA. In the three-country FTA or the Northeast Asian FTA, there might be a good possibility that Japanese and Chinese economies have the tendency to be dominant and be getting most economic advantages from this organized economic multilateralism.

References Bajoria, Jayshree, “The China–North Korea Relationship,” June 18, 2008, Council on Foreign Relations. Chung, Ok-Nim, “Solving the Security Puzzle in Northeast Asia: A Multilateral Security Regime,” November 22, 2008. Haggard, Stephan and Norland, Marcus, “A Security and Peace Mechanism for Northeast Asia: The Economic Dimension,” April 2008, Peterson Institute. Klingner, Bruce, “S. Korea’s Uncertain Path with China,” May 22, 2008, The Heritage Foundation. Ku, Yangmo, “Perceptual Change, Institutionalization and South Korean Foreign Economic Policy Toward Japan,” April 12–15, 2007, Annual Meeting of the Midwest Political Science Association. Manyin, Mark E., “South Korea–U.S. Economic Relations: Cooperation, Friction, and Prospects for a Free Trade Agreement (FTA),” February 9, 2006, CRS Report for Congress. Snyder, Scott, “Lee Myung-bak and the Future of Sino-South Korean Relations,” April 10, 2008, Nautilus Institute. Chinastakes.com, “China–Japan–South Korea FTA Saga: More Thunder, Little Rain,” May 5, 2008. Redorbit.com, “South Korean Agency Previews President’s Visit to Russia,” September 28, 2008. Russiatoday.com, “Russia–South Korea Trade Ties Look Beyond Energy,” September 30, 2008.

Chapter 14

Fractured Strategic Alliance, Restructured Economic Cooperation: Korea at the Helm of the Emerging Northeast Asian Order Jitendra Uttam

Introduction An increasingly fractured alliance system comprising the “strategic triangle” – the United States–Japan–Korea – based on the San Francisco Treaty (1951) and the US–Korea Mutual Defense Treaty (1953) has unleashed dormant economic forces actively seeking regional economic cooperation in Northeast Asia.1 In the post– Cold War period, four disjunctions – the Asian financial crisis of 1997; September 11, 2001, attack on New York and Washington; the rise of China and emerging Sino-Russian rapprochement; and the global financial crisis of 2008–2009 – have caused serious damage to the Northeast Asian strategic calculations based on the “US hub and various spokes” model. These disjunctions have caused the emergence of strategic interest divergence, leading to Korea’s ambivalent attitude toward the Cold War era alliance structure; Japan’s fresh beginning aimed at “re-entering Asia”; China’s exclusionary regionalism, falling under the concept of “Asia for Asians”; Russia’s renewed push for multilateralism in Northeast Asia; and the increasing fear of US “strategic abandonment” due to its increasing involvement in combating the global terror menace in Iraq, Afghanistan, and Pakistan. We argue that the current state of strategic disequilibrium in the region has eroded long-held barriers that have hindered regional economic interaction. Joint declaration on tripartite cooperation; the Greater Tumen Initiative (GTI), supported by the United Nations Development Fund (UNDP); the Northeast Asian Economic Council; Northeast Asian Energy Community; Chiang Mai Initiative (CMI), which started in 2004 at the ASEAN+3 Finance Minister’s meeting in Jeju, Korea; and 1 The Cold War era predominance of strategic issues over vital economic issues has long overlooked Northeast Asia’s economic reality. Recent regional initiatives powered by demand and supply dynamics in the field of energy, agroforestry, transportation, and finance are pointing to the fact that powerful economic forces are gathering momentum and old strategic structures may not hold for long.

J. Uttam (B) Korean studies at the Centre for East Asian Studies, School of International Studies, Jawaharlal Nehru University, New Delhi, India e-mail: [email protected] B. Seliger, W. Pascha (eds.), Towards a Northeast Asian Security Community, The Political Economy of the Asia Pacific, DOI 10.1007/978-1-4419-9657-2_14, C Springer Science+Business Media, LLC 2011

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the Asian Bond Market Initiative (ABMI) – all of these have direct correlation with the shifting strategic priorities in the region. With “realists” in retreat, “idealists” have envisioned a freight corridor connecting Europe and East Asia via a vast trans-Siberian railway network, and the “functionalists” see the meeting of enormous resource-rich regions of the Russian Far East with the resource-poor global manufacturing core that comprises Japan, Korea, and China. Thinking beyond the “hub and spoke” model, we found multiple approaches articulated in the context of Northeast Asian regionalism. The community-first approach promoted by the political left in Japan and Korea is based on the belief of an idealistic union that would bring states together, including resurgent China. Without trying to solve urgent security questions or reconcile sharp differences over values, this approach excludes the United States as it tries to reach beyond the one-sided dependency of the alliance system (Rozman 2008). Among the other innovative approaches, the East Asia Summit process, initiated by Japan, was a successful reaching out to Australia, New Zealand, and India to demonstrate its obvious disinterest in the ASEAN+3 approach supported by China and South Korea. Another vision for regionalism arose in 2005–2007, which envisioned the US alliance system at its core. In the late 1990s – keeping focus on Northeast Asia – the United States and Japan strengthened their alliance around new guidelines and persuaded the Republic of Korea (ROK) to broaden three-way cooperation as symbolized by the TCOG (Trilateral Coordination and Oversight Group). Based on the exclusion of China, the Japanese proposed “arc of freedom and prosperity” and envisioned a “NATO of the East,” but it was shot down by Korea’s Roh Moo-hyun administration that refused to join the proliferation security initiative (PSI) – a core idea of this plan. Given India’s reticence, this notion lacks immediate prospects. The other alternative to Northeast Asian regionalism is the extension of the tenuous SixParty Talks, which was agreed in February 2007 in the form of a working group on establishing a multilateral security framework. These differing approaches point to the fact that Northeast Asia is earnestly seeking a regional identity capable of utilizing existing complementarities. Nonetheless, painfully slow progress by many of these initiatives points to diverging strategic interests and, in turn, indicates the fact that the formal institutional approach to Northeast Asian regionalism might confront structural barriers as countries in the region witness the simultaneous emergence of contradictory strategic priorities and the rise of nationalism in core members, that is, China, Korea, and Japan. In the absence of institutional infrastructure and supporting policies to guide regional integration, Northeast Asian regionalism has started taking shape in a piecemeal fashion based on mutually beneficial economic issues and projects in the field of agroforestry, metal commodities, hydrocarbon resources, and so on. In other words, uncertainty caused by diverging strategic priorities has found relative stability in the form of converging economic priorities. Thus, it seems that the time is ripe for Northeast Asia to move forward on mutually beneficial economic issues that can form an informal pole of regional economic integration around which a formal process could begin. Addressing the question of facilitator to the Northeast Asian regional integration process, we argue that the ROK with its new found attraction to multilateralism

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and “safe-distance” from other powers in the region has acquired reasonable credentials to become an engine of the regional locomotive. Historically, the ROK’s attitude to the alliance with the United States has been shaped by the fear of “strategic abandonment”; however, the nation’s success at consolidating democracy, bold steps toward engagement with the Democratic Peoples Republic of Korea (DPRK), and the growth of Korean nationalism have provided ample space in the last decade for Korea to significantly shift from its historical position. Increasingly, the ROK has gravitated toward a multilateral strategy. Beginning with Roh Taewoo’s Nordpolitik that indicated a diversification of the ROK’s relations with the other great powers, Kim Dae-jung’s Sunshine Policy (1998–1999) launched with his tour of Washington, Tokyo, Beijing, and Moscow, and the leadership role played in the formation of ASEAN+3 grouping by gaining an intermediate position between China and Japan and taking charge of drafting the statement of East Asian Vision Group (EAVG) on regionalism, Korea has demonstrated its ability to be in the driver’s seat.2 Ideas and arguments included in this chapter are organized in the following manner. The section “Increasingly Fractured “Alliance System” in the Post–Cold War Era” points to a structural shift causing strains in the established alliance system that provided decades of peace and prosperity to the Northeast Asian region. It outlines four major disjunctions that are creating strategic priorities to shift among and between the countries of the region. The section “Shifting Strategic Priorities of Northeast Asian Powers” examines how these disjunctions have contributed to changing the strategic priorities and perceptions of the powers involved in the Northeast Asian region. It indicates how diverging strategic perceptions are increasingly moving toward multilateralism. The section “‘Punctuated Equilibrium’ and the Economics of Strategic Disequilibrium” outlines a theoretical framework – “punctuated equilibrium” – to explain the nature and pace of changes and shifting strategic priorities in the region. It argues that fundamental shifts in the global political, economic, and strategic structures in the post–Cold War period may punctuate equilibrium, leading to a fractured alliance system. There is a clear possibility of equilibrium being disrupted, leaving great powers to vie for influence over rivals. It argues that in a state of disequilibrium, a functional approach purely based on a demand-and-supply matrix may push for issue-based, sector-specific economic regionalism. The section “Contours of Northeast Asian Regional Economic Order” outlines how the fractured strategic triangle is paving the way for restructured economic

2 After successfully following the policy of Nordpolitik to entice Moscow and then Beijing into normalized relations and then launching the Sunshine Policy by rallying support from these two capitals as well as Washington and Tokyo, Korea was steering the region on the shoulders of giants. For details regarding Korea’s position as a facilitator, see Gilbert Rozman, “South Korea and Sino-Japanese Rivalry: A Middle Power’s Options Within the East Asian Core Triangle,” The Pacific Review, Vol. 20, No. 2 (June 2007): 197–220; and Rozman, Gilbert, “Regionalism in Northeast Asia: Korea’s Return to Center Stage” in Charles K. Armstrong, Gilbert Rozman, Samuel S. Kim, and Stephen Kotkin, eds., Korea at the Center: Dynamics of Regionalism in Northeast Asia (Armonk: M.E. Sharpe, 2006): pp. 151–166.

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cooperation. It argues that the strategic triangle was constructed at the dictates of a hegemonic power to exercise its hegemony, not to promote regional economic interests. However, with the end of the Cold War, the basic rationale behind the construction of this strategic triangle lost its relevance. At this juncture, suppressed economic issues powered by demand–supply dynamics are taking center stage and compelling countries in the region to think pragmatically about available policy options. It outlines an emerging web of regional economic ties weaving the future Northeast Asian economic order. The section “Korea at the Helm of a Northeast Asian Regional Order” argues that given Korea’s new found attraction to multilateralism coupled with its “safe distance policy” from the great powers, it can be assumed that Seoul is in position to maneuver among great powers to help realize an economically integrated Northeast Asia. It notes that given the task at hand and the capabilities at its disposal, Korea can play the role of a facilitator. The final section concludes that the strategic disequilibrium due to the fractured alliance system in Northeast Asia has provided space for economic issues of mutual benefit to come to fore. The demand and supply forces are motivating countries of the region to redefine their national interests. Given the complementarity in terms of resource-rich and resource-poor Northeast Asian subregions, areas such as hydrocarbon, metal commodities, and agroforestry are showing a greater potential to leapfrog in the process of regionalism. This area-specific, issue-based economic cooperation approach could be a building bloc for the coming Northeast Asian regional integration.

Increasingly Fractured “Alliance System” in the Post–Cold War Era The San Francisco Treaty of 1951 between the United States and Japan paved the way for an alliance system to emerge in East Asia that worked as a bulwark against communist expansionism in other parts of Asia (Calder 2004, Hara 2001). Later, through the 1953 mutual defense treaty between the United States and the ROK, a new member was constituted, thus giving birth to one of the most enduring strategic alliance systems. The US–Japan–Korea strategic triangle helped the United Sates to articulate its “containment policy” against the Soviet Union. However, it also helped alliance members Korea and Japan promote their economic interests, though often at the cost of their political interests. A well-defined institutional architecture under the San Francisco system served Northeast Asia effectively for the Cold War period, but it obviated the need for any significant regional arrangement (Aggarwal & Koo, 2008). Beginning in the 1970s, the United States’ open embrace of China initiated a gradual modification in the aims and objectives of its triangular alliance. Though, the alliance system remained remarkably Japan centered, Washington dominated during most of the Cold War period (Calder 2004). With the end of the global Cold War and the subsequent changing balance of power in the region, the system started to witness heavy strains. Four major disjunctions after the end of the Cold War,

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namely, (1) the Asian financial crisis of 1997; (2) the September 11, 2001, attack on New York’s World Trade Center and Washington D.C.; (3) the rise of China and emerging Sino-Russian rapprochement; and (4) the global financial crisis of 2008– 2009 – have caused rifts in strategic perceptions leading to an increasingly fractured alliance system.

Asian Financial Crisis of 1997 The political fallout of the Asian financial crisis undercuts the crucial basis of the San Francisco system. The handling of the Asian financial crisis by the International Monetary Fund (IMF) along with unfavorable US responses to Asian initiatives aimed at containing the crisis created a breach of trust between the United States and its East Asian allies. Furthermore, the crisis signaled the end of an era when national capital got unconditional support and the beginning of a new phase when international capital moved swiftly to take control of crisis-ridden firms in the region.3 It is important to note that Cold War-era strategic constraints worked in favor of national capital, giving it priority over the cost of international capital interests. This shocking transformation in the equation of the relative strength of national and international capital affected the core of Northeast Asia’s wealth creation system. In the financial crisis-ridden countries, including Korea, public opinion became critical to the role played by the IMF and the United States due to the number of conditions attached to the bailout packages (Stiglitz 1998, Bergsten 2000, Wade 2000). Korea witnessed an unprecedented wave of anti-Americanism, reflecting the suspicion and anger accumulated during the financial crisis when ordinary Koreans suffered enormously. The Korean public particularly felt cheated when the United States virtually stopped Japan from providing bilateral financial support to Korea to fend off the crisis or when the United States undermined the initiative to form an Asian Monetary Fund (AMF) backed by $100 billion that Japan lined up in commitments to the region.4 Moreover, the role of APEC, a formal institution to facilitate economic integration, was undermined due to its inability to deal with the financial crisis in the region (Aggarwal & Koo 2008). The ill will generated by the 1997 financial crisis severally undermined the basis of the alliance system. Increasingly disillusioned by the US response, countries in the region started to negotiate preferential trade arrangements. In October 3 Among the crisis-hit economies of the Asian region, Korea, which vigorously promoted national capital by instituting a “high-debt, high-growth model” centered on big business, often known as Chaebol, lost more than 40% of the corporate ownership to international capital. Remarkably, prior to the financial crisis, Korean nationals owned 98% of corporate Korea. The symbolic term, “vulture capitalism” came into prominence to highlight the dramatic change in the hands of ownership. For details about the relevant debates, see Jayati Ghosh and C. P. Chandrasekhar, eds., Work and Well-Being in the Age of Finance (Tulika Publishers, New Delhi, 2003). 4 The Chiang Mai Initiative came in response to the region’s inability to establish an Asian Monetary Fund. The CMI in 2000 created a network of bilateral swap agreements to provide short-term liquidity for the region’s economies facing financial problems.

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2001, the Japan–Singapore Economic Partnership Agreement (JSEPA) was the first post–World War II preferential trade agreement, which led to host of other FTAs in the region.5

September 11, 2001 Attacks on the United States The American euphoria of victory in the Cold War evaporated when terrorists flew passenger jets into the twin towers of New York’s World Trade Center on September 11, 2001. In a retaliatory mode, the United States invaded Afghanistan and Iraq and declared a global war on terror. The terrorist attacks on New York and Washington D.C. mark a decisive turn in the global strategic calculus, including the security environment of Northeast Asia. Following the incident, the US global war on terror called into question the “balance of power” politics in Asia. With new demands arising from counterterrorism initiatives, the United States started to review and rethink its traditional security policy in Northeast Asia for strategic and logistical reasons, clearly showing a significant deviation from its Cold War era security underpinning that was based on bilateral security ties in the framework of a “hub and spokes” model. In a major departure from its bilateral/unilateral approach, the United States started to solicit multilateral cooperation against terrorism. The Proliferation Security Initiative (PSI) announced under the Bush administration created international agreements and partnerships enabling the United States and its allies to search planes and ships carrying suspected cargos and seize illegal weapons and missile technologies. The two key developments in the US defense posture were (1) the US defense planning transformation from the clear threat-driven model of confronting a defined enemy, such as Cold War adversary USSR, to unknown future threats and (2) the Global Posture Review (2002), which focused on realigning US forces to face these new threats. These two developments brought significant changes in the US deployment of troops in both Korea and Japan. In particular, the US decision to move away from a trip wire strategy by bringing troops south of Seoul, that is, away from the demilitarized zone, has raised questions about the joint command issue and the eventual number of US troops in the ROK. In the wake of the September 11, 2001, attacks, US strategy on the DPRK shifted from preserving the international nuclear nonproliferation regime to preventing terrorist and rouge states from acquiring fissile material or nuclear weapons (Aggarwal & Koo 2008).

5 In its report, the EAVG calls for an “East Asian Community” with a vast and diversified East Asia Free Trade Area (EFTA). Recently, many countries are negotiating FTAs with a host of other countries in the region, creating a “spaghetti bowl phenomenon”; however, all efforts may lead to one encompassing regional free trade area.

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The United States’ focus on terrorism, combined with Bush’s characterization of North Korea, Iraq, and Iran as an “axis of evil” in his 2002 State of the Union Address, as well as his negligence of Kim Dae-Jung’s Sunshine Policy, created a deeper rift in the US–Korea alliance. In this new uncertain world, the strategic US– Japan–Korea alliance lost its meaning. In many ways, September 11, 2001, changed the threat perception and the basis of this alliance system.

Rise of China and the Emerging Sino-Russian Rapprochement The dramatic rise of China as a great power is putting pressure on US-led alliances. Korea, a loyal ally in the San Francisco system, has already started to feel the impact of rising Chinese power. From 1979 (when economic reforms were first introduced) to 2006, China’s real gross domestic product (GDP) grew at an average annual rate of 9.7 percent, the size of its economy increased over 11-fold, its real per capita GDP grew over eightfold, and its world ranking for total trade rose from 27th to 3rd. By some measurements, China has become the world’s second largest economy, and it could be the largest within a decade.6 In 2002, China replaced the United States as the world’s number one destination for FDI (Fishman 2004). Historically, Korea has been very much part of the “Chinese World Order” and received a massive influence from Chinese sociocultural values and norms. In 1993, only one year after the normalization of relations between China and the ROK, China had already become the ROK’s third largest trading partner, behind the United States and Japan. In 2001, China became the number two destination for ROK exports, second only to the United States. In 2003, China (excluding Hong Kong and Macao) finally surpassed the United States as the ROK’s top export market. The share of China trade in the ROK’s total trade rose from 2.8 percent in 1990, to 6.4 percent in 1995, to 9.4 percent in 2000, and 15.2 percent in 2003 (Chung 2005). Not only Korea but also Russia has started to view China as a strategic partner aiming to balance its relations between the West and the East. Sino-Russian trade climbed tenfold in a decade to $58 billion in 2008. Raw materials such as oil and timber provide the bulk of Russian exports, while China largely ships machinery, electrical appliances, and high-tech goods to Russia. From 1990 to 2002, 17 percent of Russian exports to China consisted of military equipment. During the post-Boris Yeltsin era, Russia’s increasing distance from the West provided an ever-closer proximity to China. The Sino-Russian proximity with positive gestures from the Korean Peninsula indicates the arrival of a new strategic understanding in Northeast Asia, one capable of mounting a long-range challenge to US strategic interests in the region.

6 For further details, see CRS Report for Congress, “Is China a Threat to the U.S. Economy? (2007)” http://ftp.fas.org/sgp/crs/row/RL33604.pdf (file accessed May 15, 2009).

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Global Financial Crisis, 2008–09 If the war in Iraq undermined the political credentials of the United States, the global financial crisis of 2008–09 centered on the US subprime bubble undermines US global economic credibility. This has created a crisis of confidence among the US allies and encouraged strategic rivals to confront unforeseen challenges. The rising deficit in the confidence of US ability to face growing political and economic challenges coincides with the economic rise of Northeast Asia as a new pole in the global economy. The recent global financial crisis also marks an end to the era of unprecedented surpluses, which many East Asian countries accumulated with the United States and other Western economies. This massive economic shift from the West to the East has the potential to alter strategic arrangements that reflects the balance of power of an earlier era. The West as a “demand-side pole” importing billions of dollars of goods and services from the East Asian “supply-side pole,” which has long mastered the art of mass production, may not be viable in the future. With the indications of dwindling economic benefits in the form of trade surpluses from the West, countries in Northeast Asia are seeking a greater voice in strategic matters. The US unwillingness to accommodate concerns of regional powers may result in its old strategic triangle being ineffective at the time of a regional crisis. Part of what is increasingly the most important pillar of the global economy, US allies in Northeast Asia may no longer accept the dependent status institutionalized under the San Francisco system. Realizing the paradigmatic shift in the global political economic balance, serious efforts have already been taken to establish regional currency swaps under the CMI, an Asian Monetary Fund has been proposed, and negotiations are underway to form free trade agreements (FTAs) between and among economies of Northeast Asia with the eventual aim of an EAFTA. This creeping economic independence from the West has made Northeast Asia to opt for pragmatic policies that further the cause of regional integration by exploiting existing complementarities between economies, for example, the resource-rich Russian Far East and resource-poor manufacturing giants Japan and Korea. In brief, Northeast Asian security, which was kept in balance by bilateral strategic arrangements, now faces a structural shift due to powerful events that are causing major disjunctions. Clearly, this structural shift is toward multilateral arrangements in parallel with the existing bilateral organizations.

Shifting Strategic Priorities of Northeast Asian Powers The forces emerging from the already mentioned four disjunctions have seriously undermined the core objectives and basic rationales of the strategic arrangements established by the San Francisco system. The realities of the post–Cold War structures have started to impact the strategic behavior of countries in the Northeast Asian region. Contemporary Northeast Asia is headed for strategic disequilibrium with

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countries deviating from historically adopted positions. These complex shifts in the strategic understanding of the region are summarized as follows:

The ROK Historically, Korea has leaned toward the dominant powers involved in the Northeast Asian region – for centuries toward China under the tributary system, then toward Japan under colonialism, and finally toward the United States through the tripartite alliance system. The ROK’s Cold War era dependence on the US-led alliance system, which was primarily dictated by the fear of “strategic abandonment,” has undergone a profound change in recent times. In response to the crumbling of the communist bloc, Roh Tae-woo’s Nordpolitik for the first time diversified the ROK’s relations with great powers. Seoul tried to gain Moscow and Beijing’s backing for the DPRK at the cost of alliance loyalty and trust. Reversing the Cold War era “containment policy” toward the DPRK, Kim Dae-Jung administration inaugurated “Sunshine Policy of engagement” in 1998–1999. By enlisting the support of Washington, Tokyo, Beijing, and Moscow, the Sunshine Policy gravitated the ROK toward a multilateral strategy. Moving faster to the new approach of multilateralism, the ROK seized the initiative on the ASEAN+3 grouping to gain a middle position between China and Japan, and took charge of drafting the East Asian Vision Group’s statement on regionalism. The ROK’s shift from a bilateral to multilateral strategy was aimed at achieving a clear path to engage the DPRK, finding a balance with Korea as a middle power in the midst of assertive great powers; a new balance between the intensifying rivalry between China and Japan, and achieving a national identity focused on overcoming the successive historical periods marked by a dependency on one great power or another (Rozman 2007b). Seoul asserted its role as a central actor in the reunification process by convening the 2000 Inter-Korean Summit, seeking keen support from China, Japan, and Russia to check US unilateral responses. Later, the August 2003 establishment of the SixParty Talks provided a suitable platform for the Roh Moo-hyun administration to boost multilateralism. It is true that Korea fully supports a multilateral approach, but in fact it seems rather supplementary as relations with the United States are too important to ignore. In a bid to find a new balance between unfettered multilateralism and the earlier era of bilateralism, the Lee Myung-bak administration is trying to address issues cautiously.

The United States After the end of the Cold War, the DPRK was left lurching, near collapse and in desperation launched reforms, hoping that fraternal feelings in the ROK would bring relief. Japan’s ambition to become a pivot in the strategic triangle after the 1989 Tiananmen Square incident and Korea’s hope that Nordpolitik would pave the way for regional diplomacy and reduce Seoul’s dependence on Washington remained

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unfulfilled. The United States during the Clinton administration had no regional security strategy for Northeast Asia, barring responses to some events.7 The Agreed Framework was followed by the Nye Report that pledged that the United States would maintain 100,000 troops in East Asia. Two summit meetings between Clinton and Jiang Zemin arising out of the Taiwan missile crisis of 1996 created the momentum to explore the possibility of a strategic partnership. Clinton tolerated the rise of regionalism in East Asia. Going against the realities on the ground in the region, the Bush administration sought regime change in the DPRK while actively rejecting the Sunshine Policy and pressing the ROK for a full-fledged triangular alliance. In 2005, US skepticism about the East Asian Summit and the pursuit of an East Asian Community came into the open (Rozman 2007a). However, since the DPRK’s reported nuclear weapons test in October 2006 and confirmed May 2009 test, the United States has shown some inclination toward multilateralism.

Japan With the end of the Cold War, Japan’s irrational expectation of providing leadership to East Asia was dashed due to its economic stagnation, the resurgence of China, continued dependence on the United States, and uncertainties on the Korean Peninsula (Rozman, Togo, & Ferguson 2006). Even the establishment of ASEAN+3 and the Japanese proposal for an Asian Monetary Fund in 2007 failed to bring Japan a leading role in East Asia. Increasingly, Japan became isolated in Northeast Asia; however, in late 2007 under the Yasuo Fukoda administration, things started to take a turn in the right direction. As one of the spokes in the US hub, Japan’s strategic approach to the Northeast Asian region was at best inconsistent. In the late 1980s and early 1990s, Japan witnessed initial success in its dealing with China, culminating in the Japanese Emperor’s visit to the mainland in 1992. Yet, the failure to address the pressing history issue and unrealistic expectations about moving Sino-US relations forward left Japan with clear disappointments (Gries 2004). Japan’s relations with Russia reached an impasse as the focus remained on efforts to secure the return of four islands seized by the Soviet Union at the end of World War II (Rozman 2000). An upswing came only in the second half of the 1990s in a breakthrough for regionalism in the form of working with the ROK and PRC via ASEAN+3, rapprochement between the ROK and the DPRK, and success in engaging Russia with Japan’s Eurasian diplomacy. This provided Japan a sense of achievement, which later hit a roadblock due to the distrust generated by the Sino-US strategic partnership and discord with the ROK over the Sunshine Policy. During the Koizumi administration, increased cooperation with the United States raised skepticism among its neighboring countries. 7 During the early 1990s, the Clinton administration promoted an informal Northeast Asia Cooperation Dialogue between the countries that are now participating in the Six-Party Talks. This process continues today, but it has never been elevated to a formal level.

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Inauguration of the Six-Party Talks provided impetus to Japan to move out of the compartmentalized bilateral relations of Northeast Asia. In 2003–2004, Japan moved to engage itself with the linkages created by the Six-Party Talks, including three-way coordination in the TCOG with the ROK and the United States, continuation of bilateral diplomacy with the DPRK on the basis of the Pyongyang Declaration in September 2002, and Koizumi’s initiative with Russia to shift the construction of an oil pipeline starting in Western Siberia from Daqing, China, to the Pacific coast with implications for geopolitics as well as energy security (Rozman 2008). However, Japan reverts to its old position of isolation when the Six-Party Talks encourage some sort of multilateral framework. In 2005, Japan clung to the United States at the cost of straining ties with the ROK, PRC, as well as the DPRK and Russia. Preoccupied with the issue of its citizens abducted by the DPRK, Japan seemed disappointed with the security maneuvering in the background of the talks as it lacked a strategic approach to Asia (Rozman 2008). The United States – though it showed considerable understanding over the abduction issue – was at the same time unwilling to let Japan spoil the hard-earned normalization of relations with the DPRK and the critical progress made in the Six-Party Talks. Japanese premier Abe’s visit to India indicated Japan’s willingness to work for wider strategic consideration in Asia under the framework of the US–Japan strategic alliance. The Fukoda leadership maneuvered Japan back into the folds of multilateralism in Northeast Asia with emphasis on normalization talks with the DPRK. His initiatives helped Japan to end its isolation in the region to a certain extent; however, Japan may take a decisive turn only when some status quo shattering event occurs in the region.

China Historically, China was too suspicious of the international system, which it considered deeply linked to an imperialism that victimized and humiliated Chinese people. However, from the mid-1990s, China started to accept limited multilateralism in Asia (Rozman 2008). With its enormous economic rise, China felt the need to demonstrate to neighboring countries that it was increasingly responsible within the regional system (Sutter 2005). Nonetheless, the test for China’s multilateralism came in 2003, when the Bush administration unilaterally branded the DPRK as part of an “axis of evil” and discarded the Agreed Framework. China’s positive response to the appeal by Secretary of State Colin Powell to put pressure on the DPRK to agree to verifiable, irreversible denuclearization as an entry point for negotiations created a favorable environment. At this critical juncture, China agreed to serve as a facilitator and gradually succeeded in steering the process toward a compromise (Funabashi 2007). China’s tilt toward multilateralism has been expressed on various other occasions. The Chinese premier’s visit to Japan gave the message that China is determined to treat Japan as a partner in building regional institutions in Northeast Asia. In the second round of Six-Party Talks, China was upbeat not only about resolving the crisis but also toward establishing a peace regime on the peninsula and

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later a multilateral security system in Northeast Asia. Apart from China’s growing interests in multilateralism, doubt still persists about Beijing’s response to globalization. A formal communist state lacking transparency could not succeed in reassuring other great powers about its future motives. The loud pronouncements by China regarding its “peaceful rise” lost their meaning when in 2007 the Shanghai Cooperation Organization put Hu Jintao together with the autocrats of Central Asia, including Iranian president Ahmadinejad. In the end, China is not a promoter of a multilateral security framework that could accept the US–Japan–Korea strategic triangle as a stabilizing force in the region.

Russia After the collapse of the Sino-Soviet alliance in the early 1960s, leaders in Moscow proposed a multilateral structure in Northeast Asia. With the inauguration of the Vladimir Putin administration, Russia enthusiastically sought regional influence to counter US global hegemony. Putin’s personal relations with DPRK’s Kim Jong-il seemed to open the door to regional influence, but during the nuclear crisis, Russia failed to capitalize on these relations. However, with Russia as chair of the working group to establish a multilateral security framework in Northeast Asia, things look bright. Furthermore, Russia’s huge deposits of hydrocarbon resources in Siberia provide it with the capacity to become an energy superpower and may put weight behind Russia’s resolve to develop multilateral structures in Northeast Asia. In sum, the rise of China as a formidable regional power and the resurrection of Russia with increasing Sino-Russian cooperation have complicated regional power equations to the degree that a single power dominance is nearly impossible (Buzan 2003, Friedberg 2005, & Christensen 2006). Korea in the absence of any single power domination has clearly moved from a bilateral to multilateral approach. Thus, the United States may have no other alternative but to recognize this fundamental shift toward multilateralism that is causing the San Francisco system to lose its luster.

“Punctuated Equilibrium” and the Economics of Strategic Disequilibrium The explanation of Northeast Asia’s turbulent strategic environment requires a refined theoretical framework. Our theoretical search matches the requirements of other disciplines to understand, analyze, and explain the process of change. Gersick (1991) describes recent shifts in theorizing about the development of human individuals, groups, and organizations and links them to concurrent theoretical developments in evolutionary biology, physical sciences, and the philosophy of science. The core issue in all these fields is how to conceptualize and understand change. The older, better established gradualist proposition maintains that change unfolds in a piecemeal fashion through the incremental accumulation of many infinitesimal changes. However, the “punctuated equilibrium” view maintains

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that short bursts of quantum change are interspersed between long periods of stability. Gould and Eldredge (1993) characterize punctuated equilibrium as changes that occur in large leaps. These changes follow a gradual accumulation of stress, which a system resists until it reaches a breaking point or until a triggering event precipitates discontinuous change. Past applications of punctuated equilibrium theory in management literature have focused not only on change at the organizational level (Romanelli & Tushman 1994, Gersick 1991, Miller 1992, & Gresov et al. 1993) but also on change in the external environment (Anderson & Tushman 1990). In studies of organizational change, punctuated equilibrium theory depicts organizations as evolving through relatively long periods of stability (equilibrium periods). Organizational transformations take place when “normal” patterns of activity are punctuated by relatively short bursts of fundamental change (revolutionary periods) (Romanelli & Tushman 1994). These punctuations can arise for a variety of reasons. For example, they may be caused by political events such as the rise and demise of great powers, unpredictable elections, commercial events such as the development of new technologies (Anderson & Tushman 1990), or social discontinuous changes. Punctuated equilibrium theory has also been used by political scientists to describe the policy making process. Baumgartner and Jones (1993) suggested that the policy-making process is characterized by long periods of stability, which are interspersed with periods of instability and major policy change. They argue that punctuated equilibrium theory provides an explanation of why a political system can be both incrementally conservative and subject to more radical phases of policy making (Parson 1995). Thus, punctuated equilibrium theory shows explanatory potential not only for the study of organizational change but also for the broader social, political, and strategic changes of our time. For the purpose of this study, we argue that punctuated equilibrium theory is a useful parameter that can refine our understanding about evolving strategic divergence among and between the countries involved in the Northeast Asian region. The weakening of the Cold War glue that was instrumental in binding together differing national and global/regional interests under a “US hub and many Asian spokes” has created diverging strategic interests. With the end of the Cold War and drastically reduced threat perception, national aspirations started to question the logic behind an alliance system that may not work in a time of regional crisis. A test to this hypothesis came during the Asian financial crisis when facing financial meltdown some alliance members expected support from partners that never materialized. Together with the Asian financial crisis of 1997, the US invasion of Iraq, and the specter of unilateral regime change, the rise of two authoritarian capitalist powers in the region – China and Russia – created visible cracks in the alliance system with the potential to punctuate the old equilibrium with short burst of quantum change. The coming punctuated equilibrium has the potential to force countries in Northeast Asia to resort to a pragmatic approach when redefining national interests. Given the vast natural resource base in the Russian Far East and the huge demand for commodities in the mass manufacturing belt of China, Japan, and Korea, the Northeast Asian region has enormous pull to be economically integrated. The possible economic windfall generated by cross-border economic interaction may very well trigger a “gold rush.”

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Contours of Northeast Asian Regional Economic Order In the absence of formal regional integration, a firm’s network worked as an informal economic community linking production, market, and technological know-how across the region. In a “flying geese” pattern, a Japan-centered industrial hierarchy came into practice in East Asia during the Cold War. In this model, Japan exported low-tech industries to other Asian countries, thereby creating concentric circles of investment by the early 1990s, with the ROK and ROC (Taiwan) in the inner circle and ASEAN and China in the outer one (Bernard & Ravenhill 1995, Hatch & Yamamura 1996). Along with this economic system, an informal overseas business network of Chinese in Hong Kong, Taiwan, Singapore, and other countries in Southeast Asia promoted trade and investment in China (Ernst 1997).8 However, with the end of the Cold War and visible cracks emerging in the Cold War era strategic triangle, serious contemplation about the economic future of the Northeast Asian region is underway. The Asian financial crisis of 1997 provided the needed push to start thinking about the region’s economic future beyond the simple “trading of economic rights for political rights.” Diverging strategic goals, often reflecting the interests of hegemonic powers, have led to a new realization in the region, signaling a pragmatic approach that can clearly decipher the signals of demand and supply from the resource-rich to the resource-poor subregions of Northeast Asia. The US stance on multilateralism in Asia has been erratic and contradictory. In the view of many East Asian countries, the United States and the US-influenced international institutions such as the International Monetary Fund and the World Bank exploited the crisis to push a pro-market agenda on Asia. When Japan proposed an Asian IMF in 1999, Washington swiftly rejected the idea but offered nothing in its place to act as an institutional coordinating mechanism capable of mitigating a future crisis. As a result, nations in the region have been building new multilateral organizations on their own (Fukuyama 2005). The erosion of their confidence is visible in the proliferation of free trade agreements9 and Chiang Mai Initiative, which allows the central banks from 13 countries to swap reserves in the event of a speculative attack, and the ASEAN+3 forum (Fukuyama 2005, Pempel 2005, Aggarwal & Koo 2008, Aggarwal & Urata 2006, Solis & Katada 2007). With the critical absence of formal regional institutions, emerging economic order in Northeast Asia tends to follow demand–supply matrix, and project or issuebased approach. The following are the areas where the subregions of Northeast Asia experience the pull and push from market forces.

8 The vast overseas Chinese business community network provided unconditional support to mainland China during and after the Tiananmen incident when foreign capital started to flee. 9 The East Asia Vision Group in its report submitted to ASEAN+3 in 2001 highlighted its vision for East Asian Community. EVAG recommended the formation of EAFTA well ahead of Bogor goals set by APEC.

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Hydrocarbon Sector The ever-increasing demand for energy in the ROK, PRC, and Japan sees Russia as a possible long-term source of oil and gas. Preliminary estimates suggest that proven and probable natural gas reserves in Sakhalin could be as high as 50–65 trillion cubic feet (Hartley et al. 2006). In July 2001, Russia and China talked about an agreement to pursue an oil pipeline project to bring Siberian oil to eastern China. What is known is that by January 2006, oil shipments from Russia to China totaled 790,000 tons. To supply oil and gas from Russia to Korea, there are three basic pipeline options available: First, a roughly 3,200-km pipeline from Sakhalin Island through the Russian Far East to the DPRK and ROK along Korea’s east coast and over to Seoul. This route has always been a central piece of the USSR’s Vostok Plan since the early 1990s (Valencia & Dorian 1998), due to its usefulness for supplying gas to major Russian cities such as Khabarovsk and Vladivostok along the way. Second, the Kovykta route, nearly 5,000 km, linking the Kovykta gasfield northwest of Lake Baikal to Chinese cities such as Beijing and Dalian before finally reaching Pyeongtaek in the ROK, via an underground pipeline below the Yellow Sea. The third and most attractive pipeline option is the Sakha Republic (Yakutia) route above 3,000 km North of Korea with the length of 6,600 km (4,125 miles). Two out of the three pipeline options will be trans-DPRK, thus requiring a relaxation of tension on the peninsula (Calder 2005).

Metal Commodities Sector As the core of global manufacturing, Japan, Korea, and China are heavily dependent on the import of metal commodities. To secure long-term supplies, the economies of Northeast Asia have gone global. From Australia to Brazil, the export-dependent economies of East Asia have bought mining rights worth billions of dollars. Having Russia’s Far East region – rich in natural resources, including oil, natural gas, gold (more than 70% of Russia’s output), timber, fish, coal, diamonds (almost 100% of Russia’s production), silver, platinum, tin, lead, and zinc – in close proximity, it does not make any economic sense to import metals from distant continents. Until recently, the region’s geopolitics has come in the way of the mutually beneficial geo-economics of metal commodities. However, with the changing strategic reality of the region, the geoeconomics is becoming less constrained by the dictates of geopolitics.

East–West Railway Corridor It is difficult to measure the economic gains to be accomplished from linking two pillars of the global economy – Western Europe and Northeast Asia – through a freight corridor using the extensive trans-Siberian railway network, but common knowledge says it is worth trying. Although there are several branches within the corridor,

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its general direction is longitudinal. The territory from the Russian Far East coast to its western borders makes up the central section of this corridor. The eastern section covers China, Korea, Japan, and other states of the Asian Pacific region. The western section includes European transportation corridors, Baltic waterways, the North, Black, and Mediterranean seas, and the Danube and the Rhine. The backbone of the “East–West” international corridor is the Trans-Siberian Railroad, thanks to which the Chinese northeastern provinces are linked to the town of Chita. Ulan-Ude is the starting point of another railway, which merges into the trans-Siberian route that crosses Mongolia into inner China. The political leadership in the ROK, PRC, and Japan is fully committed to the idea of freight corridor. A moderate breakthrough in the Six Party Talks may jumpstart the corridor project with enormous geopolitical and geoeconomic significance. The above-mentioned three sectors have the potential to create the needed momentum to “punctuate” an equilibrium long dominated by hegemonic strategic structures. On the back of creeping strategic disequilibrium, a new economic equilibrium has emerged in Northeast Asia, which is demonstrated by the cross-border economic interactions gaining momentum. The ROK has been able to initiate efforts to tackle regional economic issues such as extending the vast trans-Siberian railway network to include other countries in Northeast Asia and create a Northeast Asian business hub centered on Korea.10 China has signed contracts for oil from the Russian Far East, and Japan has secured a supply of LNG from Russia. On top of the demand–supply push, Korea, China, and Japan have agreed to cooperate in financial matters and in FTA negotiations. Thus, the broad trend in the region is certainly shifting from geopolitics to geoeconomics, signaling a decisive change in the approach to regionalism. With its key geostrategic location in Northeast Asia, the ROK lies at the cross-currents of regional economic interlinkages.

Korea at the Helm of a Northeast Asian Regional Order Historically, single power domination of Northeast Asia has left little room for the Korean Peninsula to assert itself (Rozman 2006). Korea under the Chinese tributary state system, Japanese imperialism, and US domination had to compromise its sovereignty. Korea became the venue for rivalry in the era of the relative balance of power. A newly unified Japan in the 1590s unsuccessfully tested its prowess by mounting a challenge to Chinese hegemony over the Korean Peninsula through a series of invasions. In the early 1900s, a rising Japan and Czarist Russia used the Korean Peninsula to test their expansionist resolve. A divided Korea was 10 Korea

as Northeast Asian Business hub was launched by Kim Dae-Jung in a New Year’s message in January 2002. In November 2002, the National Assembly passed the “Draft Law on Designation and Administration of Free Economic Zones.” The Business Hub plan included a logistics hub, financial hub, national innovation system, and strategic foreign direct investment. For further details, see Chang-hae Lee, “Korea as a Northeast Asian Business Hub: Vision and Tasks”, Joint U.S.–Korea Academic Studies Vol. 15 (2005): 35–56.

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again subjected to emerging rivalries between the Soviet Union, the newly established PRC, and the United States. Based on a Cold War era context, the ROK’s approach to trilateral strategic cooperation with the United States and Japan was guided by the fear of “strategic abandonment.” During the post–Korean War period, peace and stability on the Korean Peninsula has been maintained through the US alliance with the ROK and Japan, which played a balancing role with regard to the DPRK–PRC–Soviet coalition (Shin-wha Lee 2008). However, after the end of the Cold War, the increasingly fragmented strategic environment in Northeast Asia has placed Korea at the intersection of two competing strategic blocs – Sino-Russian versus the US–Japanese – offering unprecedented challenges and unseen opportunities. Having created a safe distance from both blocs, economically developed and politically democratic Korea has acquired the needed negotiating skills to become the centerpiece of a regional power balance, often to the discomfort of the United States. The rise of the ROK’s diplomatic stature among the great powers of Northeast Asia came by making difficult choices between hard policy options. Moscow in 1990 abandoned the DPRK for the ROK, but in 1996 Russia started to woo the DPRK again, and in early 2000, with blessings from Seoul, it became a balancing power between both Koreas. In 1992, Beijing recognized Seoul and in 1994, its pivotal role increased during the first nuclear crisis between the North and the United States. Extraordinary growth in the bilateral economic interaction between the ROK and the PRC facilitated a higher profile for Beijing as an indispensable force for the peninsula. In 1998, Korea and Japan reached agreement on the sensitive issue of history books, and in the fall of 2000, Japan made new overtures to the DPRK. Being positive and supportive to all these initiatives, the ROK positioned itself firmly to manage the basic antagonism between the DPRK and the United States. In the meantime, developments in inter-Korean relations have contributed to the process of building a peace regime on the Korean Peninsula. In a direct contrast to the Cold War period, the ROK’s political outreach has extended to all four of the remaining actors in peninsular affairs. The acceptance of Russia as a special partner, political and cultural reconciliation with Japan, economic integration with China, and the Sunshine Policy toward the DPRK – the experiences gained from these combined to form a Korea able to say “No” to the United States. When it comes to securing peace, the South Korean people have come to trust the power of multilateral diplomacy as much as that of the US military (Rozman 2006). Korea’s success on the diplomatic front lies in its early assessment that China would become more important than America in terms of investment, production, and markets. Anticipating strategic shifts, the ROK rejected the Bush administration’s early push for a strong triangular alliance and delayed response to a possible bilateral FTA with Japan. Seoul’s concern about national unity, shared Confucian traditions, and regional interests all eclipsed democracy and US-led globalization as principles guiding ROK foreign policy (Rozman 2006). The ROK keenly diversified relations with the great powers. Roh Tae-woo’s Nordpolitik, Kim Dae-jung’s Sunshine policy and Roh Moo-hyun’s “cooperative and independent national defense” led to the consolidation of a multilateral approach. Undoubtedly, the ROK has played a more proactive role in promoting

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multilateral cooperation in the region. In 1994, the ROK proposed a NEASED (Northeast Asian Security Dialogue) as a part of its diplomatic policy. The ROK played an active role in promoting regional multilateral cooperation to not only address the DPRK issue but also discuss the establishment of a Northeast Asian community. The more pronounced example of the ROK’s sincere effort to promote regionalism was the ASEAN+3, where the ROK gained the strategic middle ground between China and Japan by establishing the EAVG and East Asian Study Group (EASG) in 1999 and 2000, respectively. The EAVG was established at the Track II level as a result of a proposal made by the Kim Dae-Jung administration at the ASEAN+3 Summit held in Hanoi, Vietnam, in 1998. The EAVG comprised eminent persons from the region and was given the task of presenting a long-term vision for East Asian Cooperation in the twenty-first century. In 2001, the EAVG submitted its final report. Entitled “Towards an East Asian Community: Region of Peace, Prosperity and Progress,” the report incorporated various recommendations for promoting economic, financial, political, strategic, environmental, sociocultural, educational, and institutional cooperation in this diverse, vast region, including suggestions for turning the annual ASEAN+3 Summit into an East Asian Summit.11 In a decisive step toward the creation of an East Asian Community, ASEAN+3 countries in 2004 decided to hold the first East Asian Summit in 2005 in Kuala Lumpur, Malaysia. A proposal made by the Kim Dae-Jung administration at the 2000 ASEAN+3 Summit helped establish the EASG, which was organized at the Track I level and had a secretariat from 2001. At the ASEAN+3 Summit held in Cambodia in 2000, the EASG submitted its final report, which included the Group’s assessment of EAVG recommendations and its implications for the East Asian Summit. These two important reports suggest that apart from the importance of political and strategic issues, regional economic cooperation will be the cornerstone for building an East Asian Community. The ROK’s increasing tilt toward multilateralism has made a triangular strategic understanding with the United States and Japan rather questionable. The interKorean Summit of 2000 provided a powerful boost to Seoul’s capacity to acquire a central position in the eventual unification process without seriously undermining its alliance with the United States. In the first stage of the DPRK’s nuclear crisis in 2002–2003, the ROK sought support from China, Japan, and Russia to check the Bush administration’s unilateral responses. By successfully establishing Six-Party Talks since August 2003, the ROK demonstrated the leadership qualities needed to move forward in a multilateral direction, which has been discussed as a sustainable platform for promoting regionalism in Northeast Asia. The ROK’s success in putting Northeast Asia on a multilateral track has encouraged Japan and China to negotiate a free trade area. The ROK has initiated a “business hub” plan to integrate

11 East Asia Vision Group Report, Towards an East Asian Community: Region of Peace, Prosperity

and Progress, October 31, 2001. http://www.aseansec.org/viewpdf.asp?file=/pdf/easg.pdf accessed on May 16, 2009.

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regional economic activities. Also, it has envisioned a freight corridor through the DPRK to the trans-Siberian railway network, linking Asian and Western markets. These economic initiatives supported by a multilateral diplomatic push provide the ROK a rare opportunity to facilitate greater regional economic interaction. It is true that the Northeast Asian economic community is unlikely to advance without an active role for the United States. However, its progress will largely depend on how the Northeast Asian Community affects the US-shaped world order.

Conclusion By indicating the coming “punctuated equilibrium” leading to short phases of sudden changes adversely affecting the US–Japan–Korea strategic triangle, this chapter concludes that the state of strategic disequilibrium in Northeast Asia arguers well for its economic integration. It confirms that the earlier strategic equilibrium was based on bilateral/unilateral approaches imposed by hegemonic power, which clearly undermined regional economic cooperation. However, in the post–Cold War period, the changed regional dynamics has given way to a multilateral approach. From the days of Roh Tae-woo’s Nordpolitik to the Sunshine Policy of Kim Dae-Jung, to the Six-Party Talks in Beijing, everything points toward increasing multilateralism steered by the ROK. Not to lag behind in the evolving regional consensus, Russia has also initiated a multilateral approach based on its energy diplomacy and has stressed the geoeconomics of an East–West freight corridor. Contributing to the multilateral approach, China is reaching out to other powers in the region. By playing a key role in organizing the Six-Party Talks in Beijing, China openly demonstrates its multilateral approach to regional issues. In order to move out of regional isolation, Japan needs to realize the importance of the increasingly crucial multilateral approach to resolving regional issues. The ongoing global war on terror has made the United States come to terms with growing multilateralism in Northeast Asia. It has concluded that multilateralism is here to stay in the region, at least for the time being, and perhaps without formal institutions. In the absence of institutional infrastructure, Northeast Asia is moving in the direction of issue-based, informal regional integration. It confirms that keeping a safe distance from great powers involved in the region affords Korea the opportunity to walk a tightrope of diplomatic maneuvering and possibly succeed in shaping the destiny of the region.

References Aggarwal, V.K., and M.G. Koo. 2008. Economic and Security Institution Building in Northeast Asia. Joint U.S.–Korea Academic Studies 18: 167–194. Aggarwal, V.K., and S. Urata, eds. 2006. Bilateral Trade Arrangements in the Asia Pacific: Origins, Evolution and Implications. New York, NY: Routledge. Anderson, P., and M.L. Tushman. 1990. Technological Discontinuities and Dominant Designs: A Cyclical Model of Technological Change. Administrative Science Quarterly 35 no. 4: 604–634

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Baumgartner, F.R., and B.D. Jones. 1993. Agendas and Instability in American Politic. Chicago IL: Chicago University Press. Bergsten, F. 2000. East Asian Regionalism: Towards a Tripartite World. Economist (July): 23–26. Bernard, M., and J. Ravenhill. 1995. Beyond Product Cycle and Flying Geese: Regionalization, Hierarchy, and Industrialization of East Asia. World Politics 47 no. 2: 171–209. Buzan, B. 2003. Security Architecture in Asia: The Interplay of Regional and Global Levels. The Pacific Review 16 no. 2: 143–173. Calder, K.E. 2004. Securing Security Through Prosperity: The San Francisco System in Comparative Perspective. The Pacific Review 17 no. 1: 135–157. Calder, K.E. 2005. Korea’s Energy Insecurities: Comparative and Regional Perspective. Special Studies Series 3. Chung, J.H. 2005. The ‘Rise’ of China and Its Impact on South Korea’s Strategic Soul-Searching. Joint U.S.–Korea Academic Studies 15: 1–11. Christensen, T.J. 2006. Fostering Stability or Creating a Monster? The Rise of China and U.S. Policy Toward East Asia. International Security 31 no. 1: 81–126. Ernst, D. 1997. Partners for the China Circle? The Asian Production Network of Japanese Electronics Firms. BRIE Working Paper no. 91. Berkeley: University of California. Fishman, T.C. 2004. The Chinese Century. New York Times. July 4 edition. Friedberg, A.L. 2005. The Future of U.S.–China Relations: Is Conflict Inevitable? International Security 30 no. 2: 7–45. Funabashi, Y. 2007. The Peninsula Question: A Chronicle of the Second Korean Nuclear Crisis. Washington, DC: Brookings Institution Press. Fukuyama, F. 2005. Re-Envisioning Asia. Foreign Affairs 48 no. 1 (Jan–Feb): 75–87. Gresov, C., H. Haveman, and T. Oliva. 1993. Organizational Design, Inertia and the Dynamics of Competitive Response. Organization Science 4 no. 2: 181–208. Gries, P.H. 2004. China’s New Nationalism: Pride, Politics, Diplomacy. Berkeley: University of California. Gersick, C. 1991. Revolutionary Change Theories: A Multilevel Exploration of the Punctuated Equilibrium Paradigm. Academy of Management Review 16 no. 1: 10–36. Gould, S.J., and N. Eldredge. 1993. Punctuated Equilibrium Comes of Age. Nature 366: 223–227. Hara, K. 2001. Fifty Years from San Francisco: Reexamining the Peace Treaty and Japan’s Territorial Problems. The Pacific Affairs 74 no. 3: 361–382. Hartley, P., A.M. Jaffe, and K. Medlock. 2006. Economic Issues of Natural Gas Trade in Northeast Asia: Political Bridges and Economic Advantages. Joint U.S.–Korea Academic Studies 16. Washington, DC: KEI. Hatch, W., and K. Yamamura. 1996. Asia in Japan’s Embrace: Building Regional Production Alliance. Cambridge: Cambridge University Press. Lee, S.-w. 2008. South Korean Strategic Thought Toward Regionalism. In South Korean Strategic Thought Toward Asia Strategic Thought in Northeast Asia, eds. Gilbert Rozman, In-Taek Hyun, and Shin-wha Lee. New York, NY: Palgrave Macmillan. Miller, K.D. 1992. A Framework for Integrated Risk Management in International Business. Journal of International Business Studies 2: 311–333. Parsons, W. 1995. Public Policy. Vermont: Edward Elgar Publishing Company. Pempel, T.J., ed. 2005. Remapping East Asia: The Construction of a Region. Ithaca, NY: Cornell University Press. Romanelli, E., and M.L. Tushman. 1994. Organizational Transformation as Punctuated Equilibrium: An Empirical Test. Academy of Management Journal 37 no. 5: 1141–1166. Rozman, G., Togo, K., and Ferguson, J.P. 2006. Russian Strategic Thought Toward Asia, New York: Palgrave Macmillan. Rozman, G. 2008. Turning the Six-Party Talks into a Multilateral Security Framework for Northeast Asia. Joint U.S.–Korea Academic Studies 18: 149–166. Washington, DC: KEI. Rozman, G. 2007a. Reshuffling Priorities for Northeast Asian Security: Revisionism, Regionalism, Reunification, and Realism. Korea Observer 38 no. 2 (Summer): 259–283.

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Rozman, G. 2007b. South Korea and the Sino-Japanese Rivalry: A Middle Power’s Options Within the East Asian Core Triangle. The Pacific Review 20 no. 2 (June): 197–220. Rozman, G., ed. 2000. Japan and Russia: The Torturous Path to Normalization, 1949–1999. New York, NY: Saint Martin Press. Rozman, G. 2006. Regionalism in Northeast Asia: Korea’s Return to Center Stage. In Korea at the Center: Dynamics of Regionalism in Northeast Asia, eds. Charles K. Armstrong, Gilbert Rozman, Samuel S. Kim, and Stephen Kotkin, 151–166. Armonl: M.E. Sharpe. Solis, M., and S.N. Katada. 2007. Understanding East Asian Cross-Regionalism: An Analytical Framework. The Pacific Affairs 80 no. 2 (Summer): 229–258. Stiglitz, J. 1998. The Role of International Financial Institutions in the Current Global Economy. Address to the Chicago Council on Foreign Relations on February 27, 1998. Sutter, R.G. 2005. China’s Rise in Asia: Promises and Perils. Lanham, MD.: Rowman & Littlefield. Valencia, M.J., and J. Dorian. 1998. Multilateral Cooperation in Northeast Asia’s Energy Sector: Possibilities and Problems. San Diego, CA: Institute of Global Conflict and Cooperation. Wade, R. 2000. Wheels Within Wheels: Rethinking the Asian Crisis and the Asian Model. Annual Review of Political Science 3: 85–115.

Chapter 15

An Institutional Approach to Peace and Prosperity: Toward a Korean Fisheries Community Martyn de Bruyn and Sangmin Bae

Introduction The divided Koreas are considered an abnormal security hazard for Northeast Asia. They are still at war since the 1950–1953 conflict as the 1953 armistice was never followed by a peace treaty. At the same time, the Korean peninsula has a sensitive and geostrategic role in the region, surrounded by major powers pursuing their respective interests. In such a condition, the status quo has proven resilient for more than 45 years until the 1990s. Change occurred internally with the democratic transition and unification movement in the South and ongoing economic and political difficulties in the North and externally with the end of the Cold War and the euphoria over “the end of history.” These series of events encouraged social and political discussions over the possibility of Korean unification. In September 1991, both the Koreas simultaneously entered the United Nations. In December 1991, they signed “the Agreement on Reconciliation, Non-Aggression, and Exchanges, and Cooperation.” President Kim Dae-jung launched his “Sunshine Policy” upon taking office in 1998, which unfroze the relationship between the two Koreas. Inter-Korean relations had much improved during the Kim administration in part due to political support by President Bill Clinton and his foreign policy team, including Secretary of State Madeleine Albright and Ambassador Robert Gallucci. Although the process of reconciliation with the North continued under the Roh Moo-hyun government from 2003 to 2007, President Roh found it increasingly difficult to engage the North because of political pressure at home and from abroad. Restive conservatives in Korean society put pressure on his government to give up what they saw as leftist policies too sympathetic toward the North Korean regime. The Roh government, at the same time, had to face the hard-line policy of the Bush administration ever since President George W. Bush included North Korea as part of the “axis of evil” in 2001. Washington and Seoul had sharply contrasting visions with regard to the M. de Bruyn (B) Northeastern Illinois University, Chicago, IL, USA e-mail: [email protected]


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North, as it showed continuing ambitions for its nuclear weapons program. It is clear, nonetheless, that the Roh administration was willing and able to continue to take a conciliatory and pragmatic approach. In the words of President Roh Moohyun, “The possibility of a sudden collapse of North Korea is remote, and the South Korean government has no intention to encourage it.”1 Inter-Korean relations have certainly changed, since President Lee Myung-bak took office in February 2008. President Lee and his ruling Grant National Party have argued that the engagement policy has been a failure since much of the largescale economic support provided to the North over the course of the program was diverted to its nuclear experiments. Their renewed North Korea policy “Vision 3000, Denuclearization and Openness,” rendered South Korea’s economic aid conditional upon North Korea’s complete denuclearization.2 The North, disappointed and angered, threatened armed conflicts along the border, fired a series of long- and short-range missiles and conducted its second nuclear test. Tension on the Korean peninsula has newly escalated and the Korean détente made during the Kim Daejung and Roh Moo-hyun administrations has been jeopardized. During the Kim and Roh regimes the basic structure of the six-party process included the United States and Japan hewing to hard-line positions, while South Korea and China were considered as soft. The dynamic has shifted with conservatives once again returning to power in South Korea and taking a new hard-line stance whereas the Obama administration seems more willing to present diplomatic options. An important reason that inter-Korean relations returned to a particularly low point, including the danger of a military confrontation, is also tied to the lack of institutional infrastructure that functions as a stabilizer for the relationship. The current armistice between North and South Korea is but a temporary truce, not a means of more permanently preventing a return to military action. Unlike the ad hoc cease-fire pact, institutions can provide a far more secure system. Well-functioning institutions provide consistency for political actions among involved parties and these actions and their rationales are not isolated but woven into a broader fabric of anticipating norms and regulations. This chapter begins with a discussion of how institutions play a role in trust building among governments and why they can be more useful than a gradual approach to inter-Korean relations. It expands into an evaluation of the six-party talks and the Kaesong Industrial Complex (KIC), focusing on their progress and limitations. The six-party talks, despite its noble goal of resolving security concerns peacefully, have presented mixed results – to say the least. As the Kaesong Industrial Complex project became institutionalized, it made inter-Korean cooperation more resilient. But the project is also vulnerable to changes in the political climate and has been brought to a stalemate. Most importantly the KIC project lacks a spirit of equal partnership – as one party provides labor and the other predominantly plays a management role. The next section, addressing the importance of creating

1 President 2 Lee

Roh Does Not Want the North to Collapse (2005). Myung-bak (2007); Mary Kissel (2009).

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a more level playing field, proposes institutionalized economic cooperation in the shipping and fisheries industries. This section especially focuses on important economic and political reasons that both South and North Korea need to collaborate in the Yellow Sea (or West Sea, as it is known to Koreans). The concluding section emphasizes the functionalist logic of economic integration where both Koreas can build a balanced, equal partnership. Even modest integration of the nations’ shipping and fisheries sectors would substantially improve the level of trust between the two sides while providing essential goods and development to the malnourished North. As coal and steel were only a start for the European Union – clearly implemented with the greater goals of peace and prosperity in mind – so can the integration of the fisheries industry provide a similar starting point in the search for equally lofty goals for the Korean peninsula.

The Theoretical Context: Institutionalism over Gradualism Due to the immense disparities in economic welfare between South and North Korea, many scholars in the field have suggested that a gradual transition toward unification would be more desirable and less costly than instant unification.3 The gradual approach to unification refers to a “multistage process in which economic and political union will be gradually achieved through negotiations between North and South Korea.”4 Gradualism takes the form of limited unification in terms of economic integration, with a continued physical segregation of the two Koreas until full unification will no longer threaten to throw the South Korean economy into turmoil. Under the gradualism scenario, North Korea would be required to implement the degree of reform necessary to facilitate increasing economic cooperation between the two Koreas, while military confidence-building measures would be promoted to reduce the cost and size of respective force structures.5 These measures and the frequent meetings and talks they would necessitate, it is hoped, would then allow the relationship to progress to the point where a level of trust necessary for unification exists. Such gradualism in the case of Korean unification, however, is neither feasible nor desirable. The format of the six-party talks, for example, is a gradual approach to achieving consensus and narrowing differences. Meetings of the six parties are ad hoc and based for the most part on overcoming a series of crises in inter-Korean relations.6 Although the six-party talks have been successful in getting the interested

3 Brian

J. Barna (1998); Philip Young P. Hong (2008); Hak-Joon Kim (1993); Young-Sun Lee (2001). 4 Hak-Joon Kim, ibid., 48. 5 According to Jonathan Pollack and Chung Min Lee, the gradual approach is heavily reliant on “assumptions of expectations that seem highly optimistic,” because no evidence suggests that Kim Jong-il is capable or inclined to carry out such sweeping reform, and even if he did, there is no guarantee of success. Jonathan D. Pollack and Chung Min Lee (1999). 6 John S. Park (2005).

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regional parties to sit around the table and discuss their security concerns, they have done little to overcome the deep mistrust between the two Koreas, and the United States and North Korea in particular. The gradual approach to peace and security building, as practiced under the six part talks, has not been successful in creating trusting relations among the state parties involved. Can we then institutionalize the six-party talks? For the six-party talks to be successful, the agreements among the participating states need to be enforceable.7 Only an institution that is independent of the six parties can supervise the implementation of agreements. The institutionalization of the six-party talks, through norms, rules, and regulations, can enhance their effectiveness and build trust among the member states. It is, however, not surprising that the six-party talks have not been institutionalized because the parties involved are unlikely to surrender their decision making power over national security issues to an independent body. Success of trust building institutions is more likely in nonsecurity areas such as economic cooperation. According to Michael Schiffer, because of “legacies of negotiation past” North Korea and the United States are unlikely to trust the other party to faithfully adhere to commitments made.8 Mutual distrust in the past begets today’s uncertainty which again explains the complicacy of diplomatic engagement with a worrisome country like North Korea. Yet governments may engage in cooperation without trust. Institutional devices often substitute for trust relations: “We usually rely on and cooperate with each other, not because we have come to trust each other, but because of the incentives in place that make cooperation safe and productive for us.”9 Whereas mutual trust is associated with long-term, bottom-up gradualism, a thirdparty, institutional alternative is more top-down in that it relies on organizational rules and controls that create incentives against reckless opportunism. Institutions especially combined with strong political leadership can play a key role in encouraging collective action in the absence of mutual trust.10 When governments develop such habits of cooperation through institutions, ultimately trust can be built: “it is cooperation which leads to trust, not the other way around.”11 In this institutions are perhaps more trustworthy than trust itself. According to Karen Cook, Russell Hardin, and Margaret Levi, a lack of trust – or even outright distrust – may in many circumstances actually be more beneficial to creating cooperation. Due to the lack of trust, people become motivated to reduce risks and establish institutions that promote cooperation. For instance, a mistrust and distrust of government prompted America’s founding fathers to establish a system in which leaders are highly accountable to their constituents, and in which checks and balances keep the behavior of government officials in line with

7 Jae-woo

Choo (2005). Schiffer (2009). 9 Karen S. Cook (2007). 10 Leigh Raymond (2006). 11 Toshio Yamagishi, Satoshi Kanazawa, Rie Mashima, and Shigeru Terai (2005). 8 Michael

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the public will.12 Here, important lessons can also be learned from the process of European Union (EU) integration. The European Union was created not to unify separate political systems into a single body politic in Europe, but to integrate the region through resolving the active or latent conflicts stemming from two world wars. The postwar project in Europe was concentrated on economic integration, which is distinguished from Korea’s ultimate goal of political unification. Two major features set the European Union apart from other international or regional institutions. The first differentiating factor is the high level of integration. The initial competence of the European Union relied on the creating, developing, and policing of a common market with free movement for goods and capital, and common policies in agriculture, transportation, and foreign commerce. The EU’s power has progressively grown to include the transition to a single market and the Economic and Monetary Union with a common currency, a common control of EU frontiers and a foundation for common foreign and security policy, and police and judicial cooperation. The predecessor of the European Union, the European Coal and Steel Community, was successful in its dual goal of providing peace and prosperity to the European subcontinent in large part because its institutions fostered enduring relations between government officials of the six founding nations. The European Union successfully integrated ten former communist states and East Germany into the free market capitalist system of the EU. The European Union developed a set of institutions that governs relations between its member states. Through integration processes, European nations incorporated centuries-old enemies into an economic union, building friendship through institutionalized interdependence and trust. These institutions can be exported to the Korean peninsula to create an environment in which trusting relations can be built. An institutional approach, guided by the experience of the European Union, can assist in the development of trust as it provides the two parties with an “effective voice” and “breathing space” in the deliberative process.13 Effective voice guarantees all parties some influence on the final product of the deliberation, and breathing space allows leaders to compromise without suffering electoral consequences. Institutions provide leaders with a set of rules that set the terms of the negotiations and a framework for solving problems. This framework enables leaders to assert their “effective voice” and increases their stake in the outcome of the process. Institutions further allow leaders to make concessions at the supranational level even if such compromises are unpopular at the domestic level. Regular meetings between high-level government officials can be well prepared by diplomatic staff negotiating away from the watchful eyes of the media. Insulation from public opinion creates the necessary breathing space for decision makers. The EU might be considered an easy case because conditions in Europe favored cooperation and compromise.14 Trust building on the Korean

12 Cook,

Hardin and Levi, ibid. Hoffman (2007). 14 Hoffman, ibid., 308. 13 Aaron

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peninsula would represent a harder case in that the parties involved are still at war and political conditions for compromise are far less favorable. Given the nature of security relations in Northeast Asia, institution building would have to expand beyond the ad hoc framework of the six-party talks.15

Six-Party Talks: Progress and Limitations The aim of the six-party talks has been primarily the denuclearization of the Korean peninsula. The United States, Japan, South Korea, China, and Russia are concerned that a nuclear North Korea poses a threat to the security of the region. A military conflict between the two Koreas would have direct consequences for the neighboring states as well as for the United States which has over 28,000 troops stationed in South Korea. A nuclear North Korea could also lead to the proliferation of nuclear weapons in Northeast Asia with South Korea and Japan developing their own. For North Korea the aim of the six-party talks is to obtain its security guarantee while normalizing diplomatic relations with the United States and with its neighbors. North Korea was also promised to receive energy and economic assistance upon the realization of their denuclearization commitments. In 1994, the Clinton Administration made a deal with North Korea in which the United States would provide the North with heavy fuel oil and build two light water reactors (LWR) for peaceful nuclear energy in return for North Korea abandoning its nuclear weapons program. In the transition from the Clinton to the Bush administration the US foreign policy toward North Korea was reviewed and a new approach to the nuclear crisis was decided upon. This new approach became known as the sixparty talks in which China, and not the United States, would serve as broker between the different parties. By including the affected neighboring states, including North Korea’s longtime ally China, US officials hoped that the pressure on North Korea to conform to the decisions made during the negotiations would be far greater than if they were negotiating with the United States alone. Washington consciously opted for a regional solution to the problem instead of going through the United Nations Security Council (UNSC), which has the power to single out a nation and force it to conform to international agreements by way of sanctions. The Bush administration perceived that a combined policy of engaging the North Korean regime in regional security cooperation while leaving the threat of UNSC sanctions on the table would far more likely succeed. During the first two rounds of the six-party talks in August 2003 and February 2004, no real achievements were made. The United States was willing to provide North Korea with a security guarantee if they agreed to end their nuclear weapons program. The United States, at the same time, did not commit itself to a normalization of Washington–Pyongyang relations which made the North Koreans

15 Park,

ibid.

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believe that the US talk about a security guarantee was not sincere.16 The six countries committed to a nuclear-free Korean peninsula, but continued friction between Washington and Pyongyang stood in the way of a breakthrough. The pressure on Washington increased during the third round of negotiations in the first half of 2004 when Pyongyang improved its relations with Seoul and Tokyo.17 Washington did not want to be seen publicly as the stumbling block for a possible deal in the nuclear impasse. Furthermore, the upcoming reelection bid of President Bush made him anxious to get a result in Northeast Asia, especially at a time when the situation in Iraq had deteriorated rapidly. Washington’s first concrete proposal was however rejected by Pyongyang who wanted to postpone negotiations until after the 2004 US presidential elections.18 After having won reelection, President Bush had his North Korea policy during his first term reevaluated. While not publicly stating so, the administration eventually came to the conclusion that its policy had failed.19 The Bush administration was in need of a new approach and Secretary of State Condoleezza Rice asked career diplomat Christopher Hill to lead the US delegation in the six-party talks. During the fourth round of negotiations in July 2005 no compromise could be reached between Washington and Pyongyang. The main point of contention was the desire of Pyongyang for an LWR to cope with its urgent need for energy. The Bush administration, unlike its predecessor, was unwilling to provide the North Koreans with a nuclear power station. When a fifth round of negotiation in November 2005 also broke down without a tangible result, the trust between the different parties was deeply undermined. With no immediate solution at hand, the six parties decided to call a recess in the fifth round of negotiations. Pyongyang must have realized that the only way for it to win the kind of concessions desired from the other parties, especially Washington, was to continue their brinkmanship. In July 2006, North Korea launched seven missiles as part of a military drill. The missile test was described as “regrettable” by the Chinese and as an “unnecessary provocation” by US government officials.20 The governments of the United States and Japan jointly sponsored United Nation Security Council Resolution 1695 which condemned the missile tests. The resolution does not invoke Chapter VII of the United Nations Charter which allows the UNSC to take whatever action – implicitly including military measures – necessary to “restore international peace and security.” UNSC Resolution 1695 passed unanimously after a reference to Chapter VII of the UN Charter was removed at the request of China and Russia. North Korea strongly rejected the Resolution arguing it was a “hostile foreign policy towards 16 Charles

L. Pritchard (2007). Prime Minister Koizumi visited North Korea in 2002 and 2004 to discuss the normalization of diplomatic relations between Tokyo and Pyongyang. The incentive for Koizumi to visit Pyongyang was to negotiate the return home of Japanese citizens abducted by North Korea between 1977 and 1983. 18 Pritchard, ibid., 105. 19 Ibid., 107. 20 David Stout (2006). 17 Japanese

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the DPRK.”21 The North Koreans knew very well that the unanimity at the UNSC was only present at the surface. The United States and Japan were unsuccessful at lobbying other members to accept a more aggressive resolution. Resolution 1695 signaled to North Korea that there were no serious consequences to its brinkmanship. The resolution called on North Korea to return to the six-party talks which led them to believe that they could up the ante by conducting a nuclear test. In October 2006, North Korea conducted its first nuclear test. While there has been debate about the level of success of the test, it certainly did send a clear message to the other members of the six-party talks. North Korea was now a nuclear state and it would not easily surrender this technology. The international condemnation took place again in the UNSC which unanimously adopted Resolution 1718. The resolution passed under Chapter VII article 41 of the UN Charter imposing economic sanctions on North Korea. While the use of force is allowed under Chapter VII, there was no agreement on sanctions that could potentially require the use of force, such as the inspection of North Korean vessels. The nuclear test did put a lot of pressure on the six-party members to find a solution to the nuclear crisis before North Korea would turn into a permanent nuclear power. An agreement was reached after a few months which required North Korea to shut down and seal the Yongbyon nuclear facility and invite back the International Atomic Energy Agency (IAEA) personnel. In return, the other five members would provide North Korea with 50,000 tons of heavy fuel oil. In addition, the United States promised to take North Korea off its list of state sponsors of terrorism and it would terminate application of the Trading with the Enemy Act on trade with Pyongyang. North Korea announced in July 2007 that the nuclear facility was closed which IAEA inspectors verified. Furthermore, according to the deal, North Korea was required to hand over an inventory list of all its nuclear assets. After some months of delay the inventory list was handed over to the members of the six-party talks. At that time President Bush announced that the United States would remove North Korea from the list of countries covered under the Trading with the Enemy Act. North Korea would also be removed from the list of state sponsors of terrorism soon thereafter. Washington took these steps despite the fact that there was some disagreement with Pyongyang over the inventory list of nuclear assets. Washington claimed that the list was incomplete, while Pyongyang denied this. In the meantime, the relationship between North and South Korea quickly deteriorated with the election of President Lee Myung-bak. Between the summer of 2007 and the winter of 2009 all progress that seemed to have been made was quickly dissipating. When North Korea announced in March 2009 that it would launch a satellite, the United States, Japan, and South Korea believed that this was a cover up for yet another missile test. North Korea launched its satellite (missile) soon after the announcement, which again drew the condemnation of the UNSC. North Korea continued to argue that it had the right to launch a satellite and strongly rejected the UNSC condemnation. In response North Korea vowed never to take part in the six-party

21 DPRK

Foreign Ministry Refutes (2006).

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talks again. Additionally, North Korea vowed to return to its nuclear program and summarily expelled all IAEA inspectors. In May 2009, North Korea conducted its second nuclear test at an underground location. Just as in the 1990s, when progress seemed imminent, the agreement between the six parties dissolved and North Korea continued to work on its nuclear program. While parties are willing to take “action for action,” there is no real trust building taking place. Without a central authority that can issue binding rules that apply to all parties involved trusting relations will not be formed. The process of the six-party talks lacks three fundamental qualities necessary for creating a peace and security regime in East Asia: First, the talks are highly dependent on leadership styles among the six different countries. With the exception of Japan, the political systems of all six-party states are essentially presidential in nature. Personal characteristics play a disproportionate role in the politics of presidential systems. It is difficult for the diplomats negotiating during the six-party meetings to succeed if the personalities of different heads of state clash. Personality clashes have been particularly detrimental to the process when they involve leaders from Washington and Seoul or leaders from Pyongyang and Seoul. The creation of an institution that has a level of independence from these political leaders, in which diplomats can compromise without having to worry about domestic political pressure, can alleviate this problem. Second, the “action for action” approach does not produce trusting relations between the participants of the talks. The chance that one of the parties will find fault with the implementation of the agreement is too high for real success to occur. For example, as soon as Pyongyang disabled its nuclear facility in Yongbyon, it started to complain that Washington was not living up to its obligation by taking it off the list of state sponsors of terror. Similarly, when Pyongyang produced its inventory statement of all its nuclear facilities, Washington quickly dismissed the document as incomplete. Rather than building trusting relations the parties involved are almost expecting deviations from the agreement and are ready to retaliate. Instead of having cooperation being followed by cooperation, North Korea seems to have chosen for the “grim trigger” solution in which the US failure to live up to its agreements (from Pyongyang’s perspective) results in the decision never ever to cooperate again – that is to say, the threat to never participate in the six-party talks again. Third, the six-party talks never developed beyond a roundtable discussion of representatives from six governments. No institutional infrastructure was developed, such as an autonomous East Asian denuclearization agency. Once an autonomous institution, that is to say an institution independent from national governments, has been created, it can pressure the different parties to live up to the agreements. An autonomous institution can function as a neutral broker or mediator to settle disputes. It is not surprising that no such autonomous institution was created because when it comes to national security, nation-states are rarely willing to surrender part of their sovereignty. However, as the European experience shows, nation-states are more willing to share their sovereignty with an autonomous arbiter when the interest is not national security related but economic. The six founding nations of the European Coal and Steel Community (ECSC) were willing to provide its executive branch, the High Authority, with significant powers over the member’s coal and

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steel industries. Peace and security were thus promoted through economic cooperation that was autonomous from the day-to-day politics in the ECSC’s six member states. The choice of economic cooperation over political or military cooperation was essential, because it was the only area in which national leaders were willing to make the type of concessions necessary for its success. The next section discusses why economic cooperation projects are more successful in building trusting relation between the two Koreas as evinced by the Kaesong Industrial Complex. It further highlights the Kaesong project’s limitations with regard to becoming a catalyst for peace and security in Korea.

Economic Cooperation at Kaesong: Progress and Limitations Institutional development is not the end goal but only an instrument for building a sustainable peace on the Korean peninsula. Then what institutions would help the two Koreas in their quest for peace and security? As discussed in the previous section, the six-party-talks’ format has lacked continuity and thus has led to a chain of short-lived successes that were quickly followed by accusations of betrayal from both sides. The most promising confidence building measure between South and North Korea thus far is the Kaesong Industrial Complex project. As of July 2009, 109 factories are operating with about 40,000 North Korean workers and 1,000 South Korean staff working side by side. The aggregate output of the complex from January 2005 to May 2009 was $617,200,000. Exports totaled $105,360,000 from April 2005 to May 2009.22 While the KIC consists of private enterprises, its operations are run by the respective governments in Seoul and Pyongyang. The grand plan for the KIC calls for a three-phase development of the Kaesong Special Economic Zone. The Special Economic Zone is a separate administrative unit in North Korea in which state sponsored capitalism is allowed to develop. The first phase is devoted to developing labor intensive manufacturing industries. South Korean companies are able to benefit from the very low labor costs while the North benefits from earning hard currency. The South Korean government pays for the costs of building the necessary infrastructure. The service industry is developed during the second phase, while high-tech and chemical industries are planned for phase three.23 Products made during the first phase is labeled “made in Korea” and sold in South Korea, China, and Russia.24 Besides benefiting from low North Korean wages, the KIC is more attractive for South Korean companies than China or Southeast Asia because they share a common language, transportation costs are lower, and there are no tariffs between North and South Korea.25

22 Ministry

of Unification of South Korea, “Kaesong Gongdan,” http://www.unikorea.go.kr/ Youn-Suk (2006). 24 Thomas F. Cargill (2009). 25 Kim Youn-Suk, ibid., 65. 23 Kim

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North Korea’s experiment with state sponsored capitalism differs from Chinese capitalism in that it is completely dependent on outsiders. South Koreans provide the investments for infrastructure and facilities and they purchase the final products assembled at the complex. While China has opened its economic development zones to international capitalism, the KIC is only accessible to South Korean firms. In China the special economic zones have in effect caused an internal industrial revolution in which Chinese and foreign entrepreneurs have flourished. China as manufacturing house of the world has become more dependent on domestic consumption in addition to its exports. The KIC, contrary to the Chinese economic development zones, is an island that does not interact with the rest of North Korean society. As long as North Koreans cannot start their own businesses in the KIC and they cannot purchase the products produced on site, we cannot truly speak of an economic transition toward a market system.26 South Korea has invested large amounts of money in the KIC in the hope that economic cooperation might alleviate tension on the peninsula. Additionally, South Korea purposefully invests in the North in order to lower the significant costs of a future unification. The KIC can achieve these two goals if the commitment of both Koreas to its success is equally strong. The imbalance in the financial commitment to the KIC has allowed the North to threaten closure of the complex when it feels under pressure by the South Korean government. The costs of closure of the KIC are extremely high for South Korea, whereas the North would lose relatively little.27 When tensions between the two Koreas increased after the election of Lee Myung-bak, the North knew that it could use the KIC as a bargaining tool. The hardened approach toward North Korea by the Lee administration led the North to sharply reduce the number of South Korean workers at Kaesong. It also decided to eliminate cross-border tours to Kaesong city for South Koreans altogether. In reaction to joint US–ROK military exercises in March 2009, North Korea expelled more South Korean officials from the KIC and arrested one South Korean employee for allegedly offending the North Korean state. Relations between the North and South continued to deteriorate when in May 2009 the North demanded a renegotiation of all contracts with South Korean companies stationed at Kaesong. The North demanded a significant increase in workers’ pay amounting to the equivalent of wages in China while productivity still lags far behind that of China or Southeast Asia. Additionally, the North also demanded that South Korean companies start paying rent for land use by 2010 instead of 2014 as was originally agreed. These events

26 Kim

Youn-Suk compared North Korea’s status with that of Eastern Europe after the collapse of the Soviet Union. With help from international institutions and the European Union, Eastern European states were able to successfully transition to market economies. Contrary to Eastern European states, North Korea has not abolished its Marxist ideology or its planned economy. The KIC is therefore not comparable to this transition as North Korea still suffers from international sanctions and does not have access to loans from international financial institutors such as the World Bank or the IMF. 27 Troy Stangarone (2009).

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show the inherent weakness of the KIC as a stable tool to ease tensions on the peninsula. With much less of a stake in the KIC than its Southern neighbor, Pyongyang is willing to use the KIC to drive up the price of bargaining over inter-Korean cooperation. The deterioration of relations between Seoul and Pyongyang has some Koreans wondering whether the KIC, as a grand strategy to bring peace and security to the peninsula, has completely failed. While recognizing its inherent weaknesses, a discontinuation of the KIC makes neither economic nor political sense. From an economic point of view, the KIC still allows South Korean companies to produce labor-intensive products at a fraction of the costs at home. Even if wages are increased to levels similar to Southeast Asia, the KIC still provides South Korean companies the special benefits of language and low transportation costs. Closing Kaesong also does not make political sense because it shuts down a channel of communication that can otherwise be used to manage inter-Korean relations. The contribution of the KIC to improved relations between Seoul and Pyongyang is not as significant as some of its proponents had envisioned. Partly this is explained by the isolated nature of Kaesong in the North Korean state, and partly by the worsened political climate between the two Koreas since the Lee administration took office. The KIC has an important role to play in the improvement of inter-Korean relations, but at the same time alternative institutions of economic cooperation should be developed. The next section presents the idea of a Korean Fisheries Community, which we believe will provide similar benefits to inter-Korean relations as the KIC while overcoming its weaknesses.

Korean Fisheries Community: Cooperation Beyond Six-Party Talks and Kaesong An Inter-Korean Summit was held on October 4, 2007, in Pyongyang between President Roh Moo-hyun and North Korean leader Kim Jong-il. This was only the second meeting between leaders of the two Koreas since the country was divided more than half a century ago. At this summit, the two Korean leaders signed the eight-chapter “Declaration on the Advancement of South–North Korean Relations, Peace and Prosperity”. In it, the two leaders reconfirmed the principle set out in the first inter-Korean summit in June 2000 – reducing tension on the Korean peninsula and advancing peace and prosperity through economic, social, and cultural exchanges. They also agreed to create a special peace and cooperation zone in waters just off their west-coast border. President Roh Moo-hyun understood the crippling cost of unification that will be imposed on South Korea should it be achieved through a hard-landing scenario. A far better scenario, and the only one likely to afford some degree of self-determination in the process, was preservation of the status quo including the avoidance of policies that may provoke a North Korean collapse. For him waiting for the North Korean system to collapse or looking like you are trying to make that happen does not in any way help the work of unification. His pragmatic approach

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to this issue was reflected in a bundle of economic and social programs that were implemented and further developed in working with North Korea including the construction of the Kaesong Industrial Complex, joint tourist industries in the mountain Geumgang, and cross-border railway travel. President Roh returning to Seoul after the summit said that “the core point, the one critical point of the summit was the declaration calling for a peace and economic cooperation zone at the Koreas’ maritime border in the Yellow Sea.”28 Since he came into office, Roh put great emphasis on inter-Korean security and fisheries talks through which the two governments could prevent further military clashes in the Yellow Sea. At the summit, Roh suggested to link the issue of the joint fishing zone to the creation of a joint industrial complex in the North’s port city of Haeju. The two leaders also agreed that the maritime border area from the Han River estuary to the Yeonpyeongdo islands would be designated as a “peace sea.” They agreed not to permit any military activities in the waters, but only peaceful uses, such as maritime farming, rare species preservation and eco-friendly business development.29 The border area would be incorporated into a broader inter-Korean economic development project. As a follow-up plan, then South Korean Minister of Maritime Affairs and Fisheries Kang Moo-hyun stated in October 2007 that “the historic summit between the two leaders has made possible the peaceful utilization of these controversial waters. Comprehensive details, such as the size, location, and number of ships and a management plan for the joint-fishing zone will be [soon] addressed.”30 The cooperation plan with North Korea through maritime and fisheries affairs goes back to November 1988 when South Korea’s Hyundai Corporation imported 40 kg of corb shell from the North. Since then various fishery products, including Alaska pollack, clam, and giant octopus, have been increasingly exported to the South, making the ratio of fishery products 25 percent of the total imports from North Korea in early 2000. This is a great increase compared to the early 1990s when the ratio was only about 3 percent.31 Since the June 2000 summit between Kim Jong-il and Kim Dae-jung, officials of the two governments have discussed economic and political collaboration in maritime and fisheries affairs (see Table 15.1).32

28 Andrew

Salmon (2007). Peace Zone to Expand Inter-Korean Economic Cooperation (2007).

29 Maritime 30 Ibid. 31 Jong-hee

Kang et al. (2006).

32 At the nongovernmental level, the initiative role of the Hanns Seidel Foundation (HSS) is worthy

of note. As part of the assistance program to North Korea’s capacity-building, HSS Korea proposed to create “the Integrated Fisheries Foundation Center” (IFFC) in North Korea. The activity plans include sharing “the German experience with maritime and fisheries cooperation before unification and the course of fishery policy after unification” and continuing assistance to the IFFC “through exchange programmes and training programmes in Germany.” Sun-hee Um, Sung-gul Hong, and Soo-jung Choi (2008).

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M. de Bruyn and S. Bae Table 15.1 Inter-Korean dialogue on maritime affairs and fisheries

Level of meeting

Date and place

Agenda

Ministerial talks

December 2000, Pyongyang

Ministerial talks

October 2002, Pyongyang June 2005, Seoul

Agreed to collaborate on fisheries at the governmental level; The North expressed the offer of an East Sea fishing zone Agreed to further discuss the use of the East Sea

Ministerial talks Economic cooperation committee Fisheries committee

Defense Ministers meeting Economic cooperation committee Economic cooperation committee

July 2005, Seoul

Agreed to formulate and operate working-level consultations for maritime cooperation Signed and exchanged the Inter-Korean maritime agreement and subsequent agreement

July 2005, Kaesong Agreed to designate a joint fishing zone, cooperate to prevent illegal fishing vessels from entering, develop maritime products and technology; cooperate over third-party entry into the fishery zone June 2006, The North insisted its position on the NLL; the Panmunjom previous plan on the joint fishing zone in the Yellow Sea was practically broken off June 2006, Jeju Agreed to set timetables for a working-level consultative meeting on the fisheries area December 2007, Seoul

Agreed to promote entry of vessels and fishing in a designated area in the Northern side of the East Sea and cooperate with fish farming

Source: Ministry of Unification of South Korea, “Inter-Korean Dialogue,” http://www.unikorea. go.kr/eng/default.jsp?pgname=AFFdialogue_agreements; Hankyoreh, “Inter-Korean Prime Ministers’ Meeting Considers Joint Economic Cooperation Projects” (November 16, 2007), http://english.hani.co.kr/arti/english_edition/e_national/250539.html (file accessed July 1, 2009)

Economic Significance of the Yellow Sea The Yellow Sea is a strategically significant area as it can advance inter-Korean peace and security as well as economic prosperity. From an economic perspective, the following three major points can be addressed. First, collaboration in the Yellow Sea can greatly contribute to easing North Korea’s food shortage. North Korea’s west coast stretches about 2,500 km along a jagged coastline. The flat, shallow seabed of the Yellow Sea combined with a mixture of warm and cold ocean currents and rich supplements from several large rivers, lakes, and streams make this among the world’s most productive fishing grounds. In addition, this area has not been overdeveloped commercially, as have many other coastal areas off the peninsula, and still contains natural marine conditions and abundant fisheries.33 The fisheries 33 Dae-suk

Kang and Chong-ho Nam (2003).

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industry fits North Korea’s economic need and conditions at the moment because it does not require a great amount of high-tech investment. Unlike the agriculture industry that necessitates fertilizers and pesticides, production costs of the fisheries industry are relatively low. At the moment, the most abundant fisheries zone in the Yellow Sea only gets limited access because this area is a politically sensitive marine border.34 Second, marine products can be an important source for North Korea’s foreign currency income. While North Korea desperately needs foreign currency, it has faced a variety of barriers for imports and exports. The Western world led by the United States adopted a general policy of military containment, diplomatic isolation, and economic sanctions against North Korea while the Soviet Union completely stopped the subsidized oil shipments and the monetary aid to North Korea. In spite of such political difficulties, however, North Korea’s national environment provides a positive perspective for the development of fisheries. North Korea is already equipped to export marine products by utilizing Kimchaek, Hungnam, Shinuiju, Wonsan, and other major ports as well the three main rivers – Taedong, Tuman, and Yalu – which not only contain considerable commercial fish themselves but are also efficient means of transportation, Third, inter-Korean cooperation can combat illegal fishing in waters by Chinese boats. Since the enactment of the United Nations Convention on the Law of the Sea (UNCLOS) in 1994, costal states were granted the right to declare sovereign rights and resource control over an Exclusive Economic Zone (EEZ) up to 200 nautical miles off its coastline.35 China and South Korea quickly ratified the UNCLOS and signed a Sino-South Korean agreement for cooperative fisheries management in the Yellow Sea in 1998 (which took effect in 2001). Through this agreement, South Korea and China reaffirmed each country’s exclusive rights over fishery resources and fishing activities in its own EEZ, while in the waters where their EEZ claims overlap, they agreed to exercise equal rights and manage species through the Korea– China Joint Fisheries Committee. Yet, the number of Chinese boats caught poaching in South Korea’s EEZ has actually increased since 2001. According to South Korea’s maritime police and coast guard, South Korea captures several hundred Chinese fishing vessels violating the EEZ each year. Hundreds of South Korean fishermen sued the Beijing government in March 2005, claiming they suffered a huge loss of fish due to illegal Chinese fishing.36 The demand for tougher sanctions against this illegal activity has risen when a coast guard officer was found dead in the sea off the southwestern port city of Mokpo in September 2008 after a clash with illegal Chinese fishermen.37 Within the same month but in a separate incident, a North

34 Jong-hee

Kang et al., ibid., 182 United Nations (2009). 36 Chinese Boats (2009). 37 Illegal Chinese Fishing (2008). 35 The

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Korean patrol fired on another Chinese fishing boat wounding the vessel’s captain.38 The violation of the agreement by Chinese fishing boats has been of great concern for both South and North Korean authorities because it could bring unwanted clashes and diplomatic friction. Kim Jong-il and Roh Moo-hyun in their 2007 summit agreed to establish a joint fishing zone near the disputed maritime border in the Yellow Sea which would also help prevent Chinese vessels from illegal intrusion and fishing.

Political Significance of the Yellow Sea The Yellow Sea border between North and South Korea has been the stage of numerous direct confrontations between the military forces of both nations. The maritime border between the two Koreas is known as the Northern Limit Line (NLL), which was established unilaterally by the US led UN Coalition Forces in 1953. North Korea was not consulted on the establishment of the NLL, and has never officially recognized the NLL as maritime border. The North, however, did not protest against the NLL until 1973, 20 years after its establishment.39 The North Korean protest against the NLL did not lead to an immediate confrontation between the two sides. The situation escalated in June 1999 when North Korean fishing boats crossed the NLL during the peak of the blue crab fishing season. During an exchange of fire between North and South Korean patrol boats at least two North Korean vessels sank and about 30 sailors perished. A few months later in September 1999, North Korea declared that it no longer recognized the sea border with the South adding that “the North Korean army would defend a new border by what it called various means and methods.”40 In June 2002, again during the blue crab season, two North Korean patrol boats crossed the NLL setting off a confrontation with the South that killed six South Korean sailors and wounded nine others. The third incident between Navy ships of the two Koreas near the NLL occurred in November 2009. South Korean officials reported that a North Korean naval vessel had crossed the NLL and had been fired on by South Korean warships. This skirmish reportedly killed one North Korean sailor and injured three others while seriously damaging the North Korean vessel. North Korean authorities denied that the vessel had crossed the NLL and demanded an apology from South Korea for what Pyongyang described as a “grave armed provocation by the South Korean forces in the waters of the north side.”41 North Korean authorities suggested that the vessel had been investigating an unidentified object that intruded into its side of the NLL. An observer argues that

38 John

M. Glionna (2008).

39 Sung-kul Hong, Hun-dong Lee, and Hak-bong Jang (2006); Terence Roehrig (2009); Jon M. van

Dyke (2003). 40 South Korea Resolute on Sea Border (1999). 41 Korean Navies Exchange Fire (2009).

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illegal Chinese fishing boats were in fact in the area, suggesting North Korea may have been chasing them out of its waters.42 Before a fisheries community can be established, the situation surrounding the NLL should be resolved. This is, however, not that easy for two reasons: First, the North has a legitimate claim that the NLL has been drawn to close to its border; second, South Korea has a strategic interest in the status quo of the current NLL. Under international law the maritime border between two adjoining states is of equal distance from the coastline of both states, and the maritime border of one state cannot block another state from having access to international waters. North Korea has a legitimate claim on both counts against the NLL as drawn up by the UN Coalition: “the NLL would probably not stand as a legitimate maritime boundary under the ‘equitable principles’ that have evolved from the decisions based on Articles 74 and 83 of the Law of the Sea Convention, because it denies North Korea access to adjacent sea areas.”43 As Terence Roehrig suggests, an international court would likely find that the NLL would have to be shifted southward.44 Similarly, international ocean law scholar Jon van Dyke argues that “South Korea should be prepared to give some maritime area to North Korea, because the Northern Limit Line cannot be justified as a legitimate maritime boundary.”45 South Korea is not likely to agree to accept international arbitration on the NLL because it deems an extension of the North’s territorial waters a direct security threat. South Korea will only be willing to shift the NLL southwards when doing so does not increase its vulnerability to an attack from the North. The establishment of an official Korean Fisheries Community may be just the type of initiative that can diminish the tension in the Yellow Sea and allow both states to draw up a mutually beneficial maritime border. Once the conflict over the NLL has been settled, the point of the fisheries community is to develop a joint fisheries zone in which the fishermen of both nations cooperate.

Conclusion In the landmark inter-Korean summit in October 2007, President Roh Moo-hyun and North Korean leader Kim Jong-il agreed that leaders of the two Koreas should meet “frequently” in the future to discuss pending issues and hold regular interKorean summits.46 Because President Roh left office soon after the summit, the bulk of the implementation of the ambitious agreement was left to his successor, President Lee Myung-bak. Upon his return from the summit, President Roh said: “I don’t want to set an additional burden on the next government but to facilitate

42 John

Pike (2009). Dyke, ibid., 531. 44 Roehrig, ibid., 17. 45 van Dyke, ibid., 536. 46 Two Koreas Issue Peace Declaration (2007). 43 van

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future progress for the next government and North Korea.”47 President Roh and his advisors believed that peace and security in Northeast Asia depends on improved relations between the two Koreas. Building trusting relations cannot be achieved by frequent summits or grand designs alone. In order to improve security relations between the North and South, two options can be considered as discussed previously in this chapter. A rather obvious option is to strive to remedy security concerns by building a security community. The six-party talks are primarily aimed at the denuclearization of the Korean peninsula. North Korea is offered a number of incentives, including economic and energy support, and the normalization of its relations with the United States, in exchange for abandoning its nuclear weapons program. The six-party talks have been established as a crisis management tool in response to Pyongyang’s nuclear proliferation, but they can potentially be institutionalized into a Northeast Asian Security Community. This can, however, not be done overnight. As the European experience suggests, a common security community is much more difficult to establish than a trade-based regional community. In the 1950s the European Coal and Steel Community and later the European Economic Community were successfully launched while simultaneously the European Defense Community failed. The second way to improve security relations between the two Koreas is through economic cooperation. We discussed the grand design of the Kaesong Industrial Complex and how economic cooperation by encapsulating critical industries produced peace and security in postwar Europe. The KIC project is important for both the Koreas because it provides a platform for inter-Korean development, and it can prove to be a great investment in a future united Korea. Three important limitations of the KIC project, however, need to be considered: First, the relationship between the North and the South is one of workers versus managers. This unequal setting makes trust building more challenging. Second, the KIC is disconnected from the rest of the North Korean economy. In other words, no real economic integration, with the benefits of technical and functional spillovers, is taking place. Third, economic interdependency between the two Koreas is not occurring. The cost of failure of the KIC is far greater for South Korea than for the North. While continued cooperation is beneficial for both the Koreas, the North will suffer rather minor losses if the KIC were abandoned relative to the South. North Korea uses this weakness in the relationship to drive up the price of cooperation. The Korean Fisheries Community would be an alternative, or supplement, to the two ways currently employed to diffuse tensions on the Korean peninsula. The Fisheries Community is modeled after the European Coal and Steel Community. The six founding nation of the ECSC used cooperation in these basic industries as a starting point for European integration on a much greater scale. Jean Monnet, the chief architect of European unity, knew instinctively that the history of two world wars could not simply be overcome by summits and the signing of grand plans. European economic integration would have to show real benefits to the citizens

47 Salmon,

ibid.

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of the six ECSC member states. Similarly, economic cooperation on the Korean peninsula cannot succeed without direct benefits for North and South Korean citizens. The Fisheries Community provides two direct benefits, namely food and security. The Yellow Sea has been the theater of direct military confrontations between both the Koreas. If this sea border can transcend into an area of peace and mutual prosperity, it will provide an impetus for further cooperation in other areas and industries.

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Index

A Agreed Framework of 1994, 55 Agreement on Reconciliation, NonAggression, and Exchanges, and Cooperation, 239 Anglo-Japanese Treaty of Alliance, 42 ASEAN, 230 ASEAN+3, 217, 219, 225–226, 230, 234 Asian Development Bank, 168, 170, 173 Asian Financial Crisis of 1997, 221, 230 Asian Tigers, 54 Association of NGOs for Humanitarian Aid toward North Korea, 111 Association for South-North Korea Exchange and Cooperation, 111 B Berlin Wall, 54 Bush Administration, 244–245 C China, 42, 46, 49, 103, 118, 173, 178, 223, 228 economic transition, 64 emerging Sino-Russian rapprochement, 223 energy importer, 172 energy project with Russia, 231 history, 46 investments in North Korea, 161 military spending, 102 policy towards DPRK, 157 rise, 223 suzerainty over Korea, 43, 45–46 China Model, 64 China-US Rapprochement, 54 Chinese Market in Korea, 194 Clinton Administration, 244

Cohen and Arato’s Three-Domain Model, 106, 109, 116 Cold War, 55, 99, 101–102, 105, 109, 219–222, 224–226, 229–230, 233, 239 Cooperative Threat Reduction Act of 1993, 101 D Declaration on the Advancement of SouthNorth Korean Relations, Peace and Prosperity, 250 DPRK relations with China and Russia, 233 E East Asia, 102, 120 Anglo-Russian rivalry, 42–44, 53 East Asia Study Group, 234 East Asia Vision Group, 234 economy, 231 emergent global powers, 52 history, 46 military, 102 Peace Dividend, 100 people, 53 regionalism, 226 regional stability, 53 Security Regime, 247 East Asian Summit, 234 East-European Revolutions, 65 East-West Railway Corridor, 231 European Coal and Steel Community, 243, 247, 256 European Economic Community, 256 European Union, 241, 243 integration, 243 Exclusive Economic Zone, 253

B. Seliger, W. Pascha (eds.), Towards a Northeast Asian Security Community, The Political Economy of the Asia Pacific, DOI 10.1007/978-1-4419-9657-2, C Springer Science+Business Media, LLC 2011

259

260 F Food and Agriculture Organization, 111 G Germany unification, 64 Global financial crisis, 224 Global War on Terror, 235 Goguryeo-Sui Wars, 42 Gradualism, 241–242 H Hermit Kingdom, 39 I Institutionalism, 241 Inter-Korea anticipated effects of reunification, 163 economic cooperation, 161, 175, 182, 198, 205, 241, 248–249 economic integration, 167 rapprochement, 54 reconciliation, 161 relations, 55, 240 roads and railways, 196 Inter-Korean Economic, 198 Inter-Korean Relations, 239, 250 Inter-Korean Summit, 109, 234 International Atomic Energy Agency, 246–247 International Vaccine Institute, 111 J Japan imperialism, 44 invasions of Korea, 40 naval strength, 44 suzerainty over Korea, 43 Joseon, 41–42 K Kaesong, 67 Kaesong Industrial Complex, 109, 111, 113–114, 163, 167, 175–176, 178–179, 181–184, 240, 248, 251 Kanghwa Treaty, 43, 47, 49 Kim Dae-jung Administration, 54, 109, 113, 175, 198, 203, 205, 225, 233–235, 239, 251 Kim Il-sung, 71 Kim Jong-il health scare, 64, 66

Index regime, 66, 74, 175, 177, 183, 228, 250–251, 254–255 Korea division, 53 early administrative and judicial system, 48 early legal system, 48 early relations with China, 45 early relations with Russia, 50 history, 39–48, 51, 223, 233 invasion by French Squadrons, 41 liberation from Japan, 52–53 military, 42 Peace Dividend, 99–100, 102, 109, 112, 116 people, 42, 49, 55 progressives, 50 reunification, 63, 65, 99, 203, 241 society, 49 unification costs, 65, 200–201 as victim of Anglo-Russian rivalry, 42 Korea-China Joint Fisheries Committee, 253 Korean Confederation, 63, 66–68 admission of North Koreans to South Korean Universities, 70 granting of General Amnesty, 69 integration of military structures, 70 Korean middle class, 70 problems, 71 reintroduction of land property rights, 68 Korean Fisheries Community, 244, 254, 256–257, 260 Korean Nationalism, 40, 47 Korean Peninsula, 39–40, 42 ancient period, 40 arms race, 101 Cold War, 99 conflict, 93, 240, 244 division, 51, 71, 214 economic cooperation, 176, 257 economic costs of tension faced by ROK, 190 integration, 171 Peace Regime, 101 political situation, 182 security, 176 status quo, 239 transition process model, 105 Korean Peninsula Energy Development Organization, 166, 169 Korean War, 189–190 Korea’s Opening, 47–48 effects on China, 47

Index Korea Trade-Investment Promotion Agency, 169 Korea-US Free Trade Agreement, 184 L Law for South-North Korea Cooperation, 109 Lee Myung-bak Administration, 161, 175, 197, 225, 240, 246 policy towards DPRK, 161, 182, 203 Light Water Reactor Projects, 169 M Mokpo incident, 253 Mount Keumgang Special Tourism Zone, 109–111, 113, 167, 175–177, 181–184, 199, 203 Multilateral cooperation, 168 Multilateralism, 228, 230, 234 N NGOs, 110, 115, 117, 161 types, 111 Nonproliferation Treaty, 171 Nordpolitik, 54, 219, 225, 233, 235 Northeast Asia, 100, 224–226 cooperation, railways, 194 economic cooperation, 194, 220, 234 economic order, 219–220, 230 economy, 231 energy problem, 196 FTA Negotiations, 232 future, 116 geography, 39 history, 39, 43 international rivalry, 51 multilateralism, 218–219 regionalism, 234 regional order, 220, 232–234 regional security, 53, 57, 100–101, 105, 203–204, 224, 244 security threat, 239 strategic priorities, 224 transportation, 171 Northeast Asian Development Bank, 170 Northeast Asian Regional Members, 230–233 Northeast Asian Security Community, 57, 149, 256 Northeast Asian Security Dialogue, 234 Northeast Asia Peace and Security Mechanism, 165, 171 Northern Limit Line, 254 issues, 255 skirmishes, 254

261 North Korea defectors, 65–66 denuclearization, 144 economic problems, 63 economy, 64, 157–158, 161, 163–165, 167, 170, 175–176, 189 energy and shipments, 171 foreign investments, 161–163 humanitarian aid, 166, 169 infrastructures, 166, 169 market compatible engagements, 168 military, 70 military spending, 102 natural resources, 194 nuclear crisis, 113, 138, 172, 234, 244, 246 nuclear facilities, 56, 246 nuclear program, 55–56, 104, 110, 131, 171, 247 nuclear tests, 56, 191, 246 reforms, 68 regime, 55, 66–67, 69–71, 117, 153, 161 relations with U.S., 104 society, 65 special economic zones, 175–176, 178, 180 state-sponsored capitalism, 248–249 sustainable economic development, 173 telecommunications, 162, 169 trading partners, 198 weapons of mass destruction, 55 O Obama Administration, 240 Opium War, 41 Ostpolitik, 203 P 38th parallel, 57 Peace Dividend, 99 definition, 100 East Asia, 100 Northeast Asia, 100–102 Pearl Harbour, 44 Policy of Reciprocity, 166 Policy towards DPRK, 203, 205, 223, 225, 233 political significance, 254 Progress and limitations, 244–248 Proliferation security initiative, 222 Punctuated Equilibrium Theory, 229 Pyongyang, 55–56, 63–64, 66 R Rajin-Sonbong, 175, 177 Reaganomics, 101

262 Roh Moo-hyun administration, 139, 183, 211, 218, 225, 233, 239–240, 250 policy towards DPRK, 233 Roh Tae-woo administration, 54, 109 policy towards DPRK, 225, 233, 235 ROK diplomacy with Northeast Asian neighbors, 233 ROK-US alliance, 233, 249 Russia interest on Korea, 50, 52 military spending, 102 presence in Korea, 52 Russo-Japanese War, 44 S San Francisco Treaty, 217, 220 September 11, 2001, attacks on the U.S., 221–222 September 2005, Statement of Principles, 172 Shanghai Cooperation Organization, 228 Sino-Japanese War, 43, 50 Six Party Talks, 55, 102, 161, 165, 168, 171, 182, 225, 227, 232, 234, 242, 250 progress and limitations, 244–248 South Korea contingency plan for nk, 66 cooperation projects with DPRK, 167 economy, 65, 190, 198, 200–201, 204 energy imports, 197 geography, 194 investments to DPRK, 167, 179 military, 190 military spending, 102 NGOs, 115 North Korea-related risks, 189–190 policy towards DPRK, 163–165, 173, 182 real estates control, 67 South Korea’s Free Trade Agreements, 184 South-North Korea Cooperation Fund, 103, 112–116, 120 Soviet Nuclear Threat Reduction Act of 1991, 101 Special Declaration for National Self-Respect, Unification and Prosperity, 109 The Strategic Arms Reduction Treaty, 101 Sunshine Policy, 54, 109, 113, 175, 190, 203–204, 219, 223, 225–226, 233, 239

Index T Taft-Katsura Agreement, 43 Thatcherism, 99, 101 Tumen River Area Development Project, 169 U Unification of Germany, 202 United Nations, 56 United Nations Charter, 245 United Nations Convention on the Law of the Sea, 253 United Nations Development Programme, 111 United Nations Fund for Population Activities, 111 United Nations International Children’s Emergency Fund, 111 United Nations Security Council, 244 UNSC Resolution 1695, 245 UNSC Resolution 1718, 246 UN Security Council, 244 U.S. approaches to North Korea-related issues, 173, 239, 244–246 military spending, 102 presence in Northeast Asia, 43, 224, 230 US-Japan Alliance, 227 US-Japan-Korea Strategic Triangle, 220, 224, 228, 235 US-Korea Mutual Defense Treaty, 217 US-Korea Treaty of 1882, 48 V Vietnam economic transition, 169–170 W Washington Consensus, 162 White Paper on the South-North Korea Cooperation Fund, 108 World Bank, 168, 170, 173 World Food Programme, 111 World Health Organization, 111 World Meteorological Organization, 111 World Trade Organization, 170 World War I, 44, 56, 102 World War II, 41, 52, 102 Y Yellow Sea economic significance, 252

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