International Business: KOREA
IN SOUTH KOREA, A DIFFERENT KIND OF DREAD
After more than four decades of worrying about North Korean President Kim Il-Sung, residents of Seoul spent the days following the announcement of his death on July 9 dreading life without him. The emergence of Kim Jong-Il, the mysterious son of the "Great Leader," as the new boss in Pyongyang did little to reassure South Koreans. Many envision the younger Kim presiding over an economic and political meltdown--a collapse that would force the south to spring for a multibillion-dollar bailout. "I worry about us having to suffer together with them," says Son Woong-Hee, a 22-year-old office clerk in Seoul.
The death of Kim Il-Sung and the rise of Kim Jong-Il in Pyongyang has many South Koreans reconsidering their plans for the north. For years, the South Koreans figured they could concentrate on building their economy into a regional powerhouse. Then, after joining the world's industrial elite, the south would turn to the huge task of assimilating the north. By then, North Korea would have reached an economic level that would make the cost of reunification less painful.
Now, the turmoil in North Korea could force Seoul to step up its engagement with its old enemy. Some of South Korea's industrial giants, such as Hyundai Corp. and Daewoo Corp., are already developing trade and manufacturing links with the north. Such deals are laying the foundation for gradual unification. But South Korea's companies may be forced to do much more.
HUMMING AGAIN. Going too fast would jeopardize South Korea's goal of becoming a regional economic power by the end of the decade. Before Kim Il-Sung's death, South Korea seemed right on course. After several years of sluggish growth, the economy is humming again (table). Exporters are thriving as the yen's strength gives South Koreans an edge over Japanese rivals. The chaebol, or industrial conglomerates, are splurging on investments throughout Asia. Back home, they are charging into technologies such as satellites and nuclear power plants. And the government has mapped out ambitious plans to spend more than $100 billion on telecommunications, high-speed railways, and other infrastructure projects.
Just how many of those plans will need to be shelved depends on whether Kim Jong-Il--or whoever eventually replaces him at the top of the Pyongyang regime--can revive a northern economy already in crisis. It has contracted sharply in the '90s, and foreign visitors to North Korea have returned describing mass starvation in rural areas. Some North Koreans are resorting to increasingly desperate measures to stay afloat. Perhaps the only industry that's growing is the smuggling trade. In one thriving business, North Koreans buy East European cars, sneak them across the border into China, and resell them at prices that don't include Chinese tariffs.
While nuclear talks between Washington and Pyongyang are set to resume soon, the greatest fear among neighboring nations is not military conflict but economic mismanagement so severe that desperate North Koreans will stream out of the country. "We're not ready to accept a deluge of refugees from the north," frets one South Korean government official. Likewise, China and Russia are worried about Korean refugees reaching their bordering regions by land. Japan, home to 700,000 bitterly divided Koreans, also is anxious to prevent shock waves from disturbing its vaunted social stability. "We don't know how or when [North Korea] will explode, but it will," says one Japanese government official in Tokyo.
That's why South Korea, Japan, China, and Russia all believe that stabilizing the north's economy is more important than thwarting its nuclear program. Even before Kim's death, they were quietly cultivating economic ties with Pyongyang which could accelerate now. That is bound to complicate U.S. efforts in upcoming talks in Geneva: The U.S. wants to link any consideration of North Korean economic aid to major concessions on nukes.
SPOOKED. Before his death, Kim Il-Sung appeared on the verge of slowly cashing in his nuclear chips in exchange for economic gains. Even for a Stalinist like him, that would have required very skillful management over a period of years to avoid alienating hard-liners or igniting an explosion of expectations among 20 million hungry North Koreans. Few experts believe that the erratic Kim Jong-Il, who lacks the charisma and revolutionary credentials of his father, can reverse the north's problems on his own.
"The new leadership will be more vulnerable to economic difficulties," says South Korean Foreign Minister Han Sung-Joo.
In the event of chaos north of the demilitarized zone, South Korea will certainly be forced to shift more of its trade, aid, and investment northward. Having been spooked by the difficulties following Germany's reunification, Seoul wants to avoid a sudden rush of immigrants and a complete shift of the financial burden to the wealthier south. The cost of speedy reunification would be exorbitant. Estimates on the price of bringing the north's tiny $20 billion economy up to the south's level range anywhere from $250 billion to $400 billion.
That would drain resources from the south, which is running short of capital for its ambitious spending plans. Even now, to pay for $17 billion in rail and airport projects, Seoul is considering new laws opening them to foreign investors. With fast-forward reunification, the chaebol might also be obliged to seed the north with light-assembly plants. That would mean shifting investment from big pushes into Vietnam and other emerging markets.
Yet the chaebol also recognize the long-term benefits of closer ties with the north. With average wages of just $50 a month, its workers are one-tenth as expensive as those in the south. Moreover, they are much less demanding than members of South Korea's sometimes militant unions. Hyundai is working on plans to use North Korean laborers on construction projects in Southeast Asia and the Middle East. Getting through a loophole in South Korean law, Daewoo has begun using third parties in Hong Kong and China to send designs and fabric to North Korea. It then buys the garments assembled by northern workers. Daewoo also has bigger plans. Chairman Kim Woo-Choong is negotiating to build an assembly complex in the North Korean city of Nampo for luggage, shirts, shoes, and toys.
FAMILY TIES. On another front, the south, poor in most natural resources, would like to tap big coal deposits and lumber reserves in the north. The problem is that taking advantage of those resources will take time and money. Daewoo President Yoo Ki-Bum says the quality of the apparel assembled for his company in the north "is a problem," and that his engineers and technicians would have to train the northerners. Tapping the north's raw materials would require establishing an infrastructure where none exists today. North Koreans are also likely to push for better living conditions, imposing new social and housing costs.
The first signs of a north-south rapprochement could show up in a new immigration policy. Allowing selective family reunifications would signal Kim Jong-Il's desire to continue down the path of reconciliation. Reuniting families would not cost much, but would reveal the stark gap between north and south. "The problem with the soft-landing scenario is that it requires the North Koreans to open up," says Robert Manning, senior fellow at the Progressive Policy Institute and an East Asia adviser in the Bush Administration State Dept. "That would unveil 40 years of myth-building." With the Great Leader now gone, many more myths will surely be exposed before the two Koreas reunite.Laxmi Nakarmi and William J. Holstein in Seoul, with Joyce Barnathan in Beijing and Amy Borrus in Washington