Under the Loving Care of the Fatherly Leader
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There seemed little problem with the process Clinton had started of easing some economic sanctions against North Korea, pending further negotiation of a possible freeze of Pyongyang’s missile development program. Most analysts agreed that following through on the gesture would not result in a major immediate windfall to Pyongyang. While Americans would become legally free to invest in the country, other reasons besides sanctions restrained them from looking upon North Korea as a high-priority investment target. Poor infrastructure was one. Another was that trust of a country that had repeatedly failed to pay its foreign debts was close to non-existent. The bigger, political-military question was where former U.S. defense secretary William Perry’s “comprehensive” approach might lead—-with regard, for example, to Japan.
Kim Jong-il naturally saw the missiles program as his other card, besides nuclear weapons. He would not relinquish it cheaply. North Korean representatives would demand large sums of cold cash. In talks with Washington they were reported to have said the price for suspending missile exports would be $1 billion a year. Pyongyang had little production of any sort left to export, other than missiles. Thus the regime schemed to find new ways of earning foreign exchange. It needed hard currency at the most basic level, to buy weapons that it could not make at home and to maintain the standard of living of the ruling class and military. Restoring the devastated manufacturing and agricultural sectors to the levels of the 1980s—not to mention achieving a real takeoff into third-generation Asian tigerdom—-was no more than a dream, barring a huge influx of foreign exchange.
Pyongyang knew that it would be all but impossible both politically and legally for the Clinton administration to pay cash to a blackmailing country. In the North’s calculations, this was where Tokyo came in. In the wake of the Clinton commitment on sanctions, Prime Minister Keizo Obuchi said Japan would consider lifting its own sanctions—including its freeze on diplomatic normalization talks—“in the event the North clearly shows a positive attitude” by suspending a planned missile launch. Any renewed Tokyo-Pyongyang normalization talks would, of course, quickly focus on money. Pyongyang had resumed demands for Japan to compensate the North for the colonization of Korea in the first half of the twentieth century, among other offenses. Japan had sent South Korea more than $500 million in grants and loans following their 1965 normalization of relations. Factor in generous amounts for inflation and interest on that sum and such compensation to Pyongyang could mount up to as much as $5 billion, by some South Korean and Japanese estimates. Pyongyang was demanding $10 billion, with the extra amount to represent compensation for damage caused by Japan’s backing of the United Nations side in the Korean War.
Compensation or aid in the billions of dollars could serve in part as a payoff for an end to North Korea’s missile threat to Japan. But Japan would not be an easy sell. When North Korea lobbed a rocket over the Japanese archipelago on August 31, 1998, the effect was not—as Pyongyang almost certainly expected—to soften up the Japanese people and frighten them into a submissive mood. Rather, the launch electrified many Japanese and got their backs up. With public opinion finally amenable, the government in Tokyo was able to push ahead with a defense buildup intended to make constitutionally pacifist Japan a more “normal” country. Among other things, Japan planned to launch its own spy satellites and it formally agreed to do joint research with the United States on a missile defense system. A law passed in May 1999 authorized the Japanese Self-Defense Forces, during a regional crisis, to give stronger support to the U.S. military than had been permitted formerly.
But there was considerable Japanese interest in resolving longstanding problems with North Korea. And to make it easier for Tokyo to agree to a payoff, Pyongyang—in a show of newfound flexibility—embarked on a program to smooth off some of the hard edges of the image it presented to the Japanese. To a visiting group of Japanese parliamentarians in August 1999 North Korean authorities suggested that a joint Red Cross effort could be mounted to search for missing Japanese. Searchers would seek not only those who had been abandoned in northern Korea in the confusion following 1945’s surrender. They would look also for at least ten other Japanese who were suspected of having been abducted by North Korean agents in more recent years. Pyongyang’s refusal during earlier bilateral talks to discuss the abduction charges—-which so far it was denying—had led to the failure of those talks.
Should Tokyo take the bait and reach for its wallet? A clue to what Pyongyang might do with a windfall came in reports that the country had imported parts for assembly into MiG 29 and MiG 21 fighter planes. MiG 29s, ten of-which reportedly-were imported in knockdown form, were selling for $50 million each, used—suggesting a possible outlay of $500 million. The question facing Tokyo was similar to one that faced the South Korean government: Should Seoul permit the Hyundai group to continue sending tens of millions of dollars a year to Pyongyang as “fees” for Hyundai’s tours to Mount Kumgang? For weeks the South Korean press tried to pin down whether it was Hyundai’s money that paid for MiG imports. The question was a naive one. Foreign exchange income from any source—from Hyundai, from Japan, from wherever—would increase the total amount of foreign exchange available to the regime. If there were not strictly verified external controls, such income would facilitate big military purchases. And that was true regardless of precisely-which account the money might go into initially. But the case against what some Washington hardliners were calling “appeasement” was by no means open and shut. The theory behind Perry’s comprehensive report and behind South Korean President Kim Dae-jung’s sunshine policy was that, yes, North Korea would strengthen as a result of aid. However, it would strengthen not just militarily but also economically. In the process it would begin to join the global market economy. With its security guaranteed by no less a power than the United States, its interests would grow intertwined with those of its old enemies. It seemed at least conceivable that the attempt to engage Pyongyang could work that way although North Korea had an impressive history of refusing to change itself in any fundamental way As Perry himself emphasized, it would be necessary to maintain strong military deterrents; any aid given to Pyongyang should be tied to particular projects in the non-threatening civilian sector and supervised closely to thwart diversion to the military.
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Desperation had driven North Korea to tone down its boast of having created a communist paradise. During a January 2000 cabinet meeting, Kim Jong-il and industry leaders had pledged that this would be the year for mending the economy.
Hyundai had given Pyongyang a sample of just how much the North stood to gain. The Mount Kumgang project was bringing North Korea nearly $200 million a year in hard-currency tourist revenues. The giant conglomerate, by far North Korea’s largest outside investor, promised to pay the country $950 million spread out over the five-year period from 1998 through 2002 in exchange for a thirty-year monopoly on tours to the resort. In addition, Hyundai planned to invest as much as $1 billion more at Mount Kumgang for an airport, shopping malls, restaurants, dutyfree shops, golf links, condominiums, ski facilities and an amusement park. Hyundai officials were vague about when they expected to make money on the venture. For the time being they treated the project as a loss leader ?while they negotiated other deals, such as the development of an industrial complex on the west coast of North Korea. Expecting eventually profitable North-South relations, Hyundai officials were eager to get a head start on competitors.
Worker salaries of about $1,500 a month had priced South Korea out of the markets for many labor-intensive goods, such as shoes and apparel. Now South Korean companies wanted to get back into those markets by teaming their capital with the cheap labor of the North, where workers for foreign-invested joint ventures earned $100 to $400 a month. With cost savings like those, “we can even overcome the Chinese,” predicted Hong Yeon-dal, a Hyundai executive.
Before many non-Koreans could consider the North a viable investment, there would have to be improvements
in energy services, railroads, high-ways and ports. North Korea’s infrastructure had deteriorated badly during the 1990s. Power shortages remained a constant problem, and logistical complications still out-weighed the labor cost advantage. North Korea looked to Japan for one solution to the infrastructure mess. After months of talks, many observers believed Tokyo and Pyongyang would agree to establish diplomatic relations by the end of 2000. At that point, Japan was thought likely to pledge billions of dollars for infrastructure projects. Big money from Japan and South Korea was “really the only thing that’s going to save them,” a diplomat in Seoul said of the North Koreans.
Many Japanese and Western lenders continued to believe that Pyongyang could meet its obligations if it would stop pouring money into its military. Now, in particular, outsiders were demanding that North Korea stop developing weapons of mass destruction. “What we all want them to cough up,” said a diplomat in Seoul, “is to reduce their threat.” Indeed, declaring a moratorium on long-range missile tests had been the quid pro quo for Washington’s easing of sanctions.2
Historical guilt was not the motive for what the South was offering: a combination of public and private investment plus assurances that Seoul would not interfere in Pyongyang’s domestic affairs. Other South Korean companies were starting to follow Hyundai’s lead. Samsung Electronics Company and LG Company had begun assembling television sets in North Korean plants. A joint venture 30 percent owned by the Unification Church’s Tong-il Heavy Industries Company and 30 percent by North Korea was gearing up to assemble Fiat automobiles in the western port city of Nampo, using components shipped from Tong-il’s joint venture with Fiat in Vietnam. And a pharmaceuticals plant sponsored by the South’s Korea Welfare Foundation was under construction in the Rajin-Sonbong Free Economic and Trade Zone in northeastern North Korea. Still, Hyundai was by far the most visible corporate agent of the South’s policy up to that point.
Before the North-South border cut it off the Mount Kumgang region had been a popular getaway destination for residents of Seoul. But the old infrastructure was long gone. It had been necessary for Hyundai to start from scratch to build what was needed to handle its tours. Company officials admitted to having spent about $30 million on roads, port facilities, the spa, the stadium, food and souvenir stands and a customs and immigration building equipped “with computers and metal detection devices. Outsiders guessed that the cost was several times higher.
Despite its investment, the company—and its customers—had to put up with inconveniences that could not be fixed. Because the resort had only a Spartan, 150-room hotel, Hyundai had decided to turn its tours into three-day cruises between the South Korean port of Tonghae and North Korea’s Kosong. Tourists, most of them South Koreans, slept on their ships and disembarked twice for all-day excursions. Thus each person had to pass four times through North Korea’s rigid immigration and customs. (The North Korean officials checked them with state-of-the-art security devices that Hyundai had donated.)
Pyongyang was so insistent on controlling North Koreans’ exposure to outsiders that Hyundai’s buses traveled on an exclusive road bordered on both sides by chain-link and barbed-wire fences. The North Koreans who were cleared to work as park rangers, tourists and Hyundai staff had been instructed to discuss nothing beyond innocuous subjects such as the weather—although the rule did not prevent one senior female guide from asking me earnestly to urge American investors to bring their dollars. (I had entered on a tourist visa arranged by Hyundai—thus perhaps avoiding once again any lingering consequences of my 1989 blacklisting as a journalist. But I made no secret of the fact I was on assignment to write an article for a financial magazine.3)
The low-wage manufacturing model for developing an economy definitely had drawbacks. Why pack your people into sweatshops to inhale fumes from the benzene used for gluing together athletic shoes? After all, the greedy foreigners who financed and oversaw such enterprises and sold the products abroad “would grab the lion’s share of the profit. And as soon as your people started demanding higher wages and better treatment, those foreigners would close up shop and head off to Somalia or some other godforsaken place where they could hire workers even cheaper.
A top North Korean official considering the matter would have added another argument: Those foreigners, if you let them into your country to oversee their manufacturing businesses, would corrupt your hitherto carefully isolated and indoctrinated people with alien notions sure to highlight the enormous gap between the regime’s teachings and reality as known to the rest of the world. The process eventually would threaten the continued existence of the regime. And if the businesspeople coming in happened to be South Korean—as were a large percentage of outsiders entering the North to do business—the problems would boil up sooner rather than later. South Koreans, sharing a language with the North Koreans, would be harder than other outsiders to isolate.
Pyongyang officials appeared to have pursued some such line of reasoning. Oh Seung-ryul, a research fellow at Seoul’s Korea Institute for National Unification, reported in 1999 that the North was consciously deemphasizing manufacturing as its key legal means of earning foreign exchange. (The turnaround was by no means complete, and apparently it had no effect on the illegal means of bringing in hard currency, such as manufacturing and smuggling heroin or printing and passing hard-to-detect counterfeit U.S. dollars, the “Super-Ks.”) More prized than manufacturing was tourism. The shift was particularly evident in the Rajin-Sonbong free economic zone. There a new casino opened, mainly targeted at people coming across the border from China. “North Korea is modifying the function of the Rajin-Sonbong area from a manufacturing base to a tourist attraction and center for transit trade,” Oh said. He added that the Pyongyang regime had banned South Koreans from visiting the zone and had begun taking down advertisements for Western businesses there.
In the Rajin-Sonbong case, the danger of ideological contamination probably was not the only factor militating for a change. (There was some question as to why it should have been a factor at all, if one credited the earlier reports that the regime had moved all the original residents out and replaced them with people considered super-loyal to Pyongyang and relatively immune to foreigners’ blandishments.) Another big factor was that outside investors had not been enthralled with the zone’s remote location. Their investments from 1991 to 1997 had totaled only a disappointing $62 million, according to South Korean government statistics.
Corruption by the previous team of officials also seemed to play a role. A 1998 report quoting Chinese sources in Beijing said North Korean authorities had arrested seven officials including the head of the Rajin-Sonbong Special Development Project, who had been investigated by central party officials on corruption charges. Allegedly they had extorted money from foreigners who hoped to do business there. The report said the project office in Yanji, just across the border in China, had been closed.4 While it was too early to predict whether tourism and gambling would do the trick for Rajin-Sonbong, advantages to the regime of relying on tourism could be seen clearly in the Mount Kumgang case. Try to earn that kind of money manufacturing textiles or assembling television sets.
But didn’t South Korean tourists pose the same sort of “contamination” threat as businessmen? Not since June 1999. That was when North Korean authorities arrested and questioned for several days a touring Seoul house-wife and mother. They accused the woman—-who said she innocently chatted to a North Korean park ranger about the lives of North Korean defectors in the South—of being a spy. Reported to have begun psychiatric treatment for the trauma she endured, she told interviewers for The Korea Herald that she believed she had been set up. Indeed there were indications that Pyongyang had been looking for a tourist who could be made an example, in order to scare future tourists into reticence. If that was the intention, it certainly worked. The tour was suspended for forty-five days. When it resumed, a columnist for Chosun Ilbo went along and later reported: “On the cruise ship, on the bus and w
henever there were a small number of people gathered together, Hyundai personnel continuously asked the Kumgang mountains tourists not to say anything to the North Korean tour guides other than ‘hello’ and ‘thank you.’” The tourists complied.
As we have seen, steps toward rationalizing economic management and luring outside investment in the early 1990s had clashed with the aims of the military men whom Kim Jong-il was cultivating. Those steps had essentially come to a halt when South Korea turned its back on the North during the first nuclear crisis. The years of mourning and extreme famine that followed the death of Kim Il-sung in 1994 saw few indications of a renewed push to reform the economy. But on September 5, 1998, the Supreme People’s Assembly adopted a new constitution for the Democratic People’s Republic of Korea. Its third chapter covered the economy. Article 33, radical by past standards, read: “The State shall introduce a cost accounting system in the economic management … and utilize such economic levers as prime costs, prices and profits.” Article 37 added that the state should encourage “joint venture enterprises with corporations or individuals of foreign countries within a special economic zone.”5 The following year the country enacted an elaborate External Economic Arbitration Law.