South Korea North Korea€¦ · Contents 3 Summary 5 Inter-Korean relations South Korea 9 Political...

COUNTRY REPORT

South Korea

North Korea

4th quarter 1997

The Economist Intelligence Unit15 Regent Street, London SW1Y 4LRUnited Kingdom

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Contents

3 Summary

5 Inter-Korean relations

South Korea9 Political structure

10 Economic structure11 Outlook for 1998-9917 Review17 The political scene21 Economic policy 25 Production and demand27 Wages and prices29 Money and finance32 Foreign trade and payments35 Business news

North Korea38 Political structure39 Economic structure40 Outlook for 1998-9942 Review42 The political scene48 The economy, trade and investment

54 Quarterly indicators and trade data

List of tables15 South Korea: forecast summary16 South Korea: economic results and forecasts25 South Korea: expenditure on gross domestic product26 South Korea: seasonally adjusted manufacturing production27 South Korea: construction indicators27 South Korea: wages in manufacturing industry28 South Korea: consumer and producer prices29 South Korea: money supply trends30 South Korea: stock prices, 199732 South Korea: exports of selected commodities33 South Korea: imports of selected commodities34 South Korea: current- and capital-account balances45 North Korea: Kim Jong-il’s top 2051 North Korea: main trading partners, 1996

1

EIU Country Report 4th quarter 1997 © The Economist Intelligence Unit Limited 1997

54 South Korea: quarterly indicators of economic activity55 South Korea: foreign trade57 South Korea: foreign trade58 South Korea: direction of trade59 North Korea: direction of trade

List of figures17 South Korea: gross domestic product17 South Korea: won real exchange rate30 South Korea: stock-market index and the exchange rate32 South Korea: semiconductor exports, 199735 South Korea: foreign exchange reserves

2


October 20, 1997 Summary

4th quarter 1997

Inter-Korean relations: The KEDO process is making progress but the four-way talks have come to a temporary halt. The north’s ambassador to Egypt hasdefected to the south with his brother and their families. The two Koreas haveconcluded an agreement allowing South Korean aircraft to use the north’sair space.

South Korea Outlook for 1998-99: The ruling NKP may lose the presidential election inDecember. Alliances between politicians could determine who wins. Real GDPgrowth will start to recover, at first modestly to 5.8% in 1998 and then morerobustly to 6.7% in 1999. Inflation will moderate. The won will appreciateagainst the dollar, but continue to depreciate against the yen. As a proportion ofGDP the current-account deficit will shrink to 2.5% in 1998 and 2.1% in 1999.

The political scene: The NKP’s presidential hopeful, Lee Hoi-chang, has beendamaged by allegations that his sons shirked military service. Mr Lee’s rival forthe NKP nomination, Rhee In-je, has entered the presidential race as an inde-pendent. This could split the NKP’s votes. The president, Kim Young-sam, hasreplaced half his 22 ministers in yet another cabinet reshuffle. Mr Kim’s secondson has been sentenced to three years in prison for bribery and tax evasion.

Economic policy: Kim Young-sam has urged legislation on financial reform tobe passed this year, but his weak position makes it highly unlikely that this willbe achieved. The government has proposed a 5.8% budget rise for 1998, thelowest annual increase for 14 years. Trade friction with the USA has increased.

Production and demand: Domestic demand remained sluggish in thesecond quarter of 1997. The weakness of the won against the dollar has madeexports more competitive. Industrial output is recovering. The high-tech in-dustries are performing best. The value of construction orders is rising rapidlyand much more quickly than the area of new permits issued for buildingconstruction.

Wages and prices: Wage inflation eased in the first quarter of the year, butremains positive. Consumer price inflation fell to a ten-year low in the firsteight months of 1997. Producer price inflation, however, has been on a risingtrend. The won terms of trade have improved.

Money and finance: M2 growth has remained high as the Bank of Korea hasmaintained plentiful liquidity. Corporate jitters have pushed interest rates upagain. The benchmark Korea Composite Stock Price Index has fallen to a five-year low. Some South Korean banks have seen their financial health deteriorateas non-performing loans increase.

Foreign trade and payments: The trade deficit has steadily shrunk over theyear, due in part to rising merchandise exports. Rising domestic interest ratesare encouraging South Korean companies to borrow offshore. The foreign ex-change reserves have been run down to defend the won.

3


Business news: The Kia group continues to totter. Kia has accused theauthorities of wanting it to go under so that a rival chaebol, Samsung, can buyit up. Samsung cars will start rolling off the production line next year.

North Korea Outlook for 1998-99: North Korea must reform in order to survive in themedium term, and may establish relations with Japan to sustain itself. Thestalled four-way talks may resume in 1998 once Kim Jong-il’s succession for-malities are complete. There could be an inter-Korean summit after a newSouth Korean president is installed next year.

The political scene: Kim Jong-il has been appointed general secretary of theruling Korean Workers’ Party, but so far there is no indication of when or if hewill become state president. Mr Kim is still courting favour with the military.Relations with Japan have thawed slightly as North Korea says it will allowJapanese wives of North Koreans to return to Japan for visits, but relations withRussia are still chilly.

The economy, trade and investment: North Korea has relaxed restrictionson business in the Rajin-Songong free zone. Drought and a tidal wave havedamaged crops. China is playing an important role in propping up the northwith food aid. JETRO estimates that North Korea’s trade fell by 6.7% in 1996,but border trade with China and inter-Korean trade are buoyant.

Editor:All queries:

Robert WardTel: (44.171) 830 1007 Fax: (44.171) 830 1023

4


Inter-Korean relations

KEDO breaks ground— The Korean Peninsula Energy Development Organisation (KEDO) and the four-way talks are multilateral initiatives, the main rationale of which is to fosterinter-Korean relations. As of August both seemed to be making progress. OnAugust 19 a windy hill at Kumho on North Korea’s east coast witnessed aground-breaking ceremony for the construction of two 1,000-mw light-waterreactors by the KEDO consortium, whose board members are the USA, Japan,South Korea, and—as of September 20—the EU. (The site was formerly referredto by the district name of Sinpo or Shinpo, but Kumho is more precise.)

—which calls forcelebration

As the EIU has long argued, the KEDO process is both vital and positive forinter-Korean relations. It is rare enough to see North and South Koreans clinkglasses, but the implications go much deeper. Almost 100 South Korean engi-neers now live at the Kumho site, and when construction proper begins (it isonly site preparation so far), this number will rise to hundreds, if not thousands.North Korea has agreed to their having full quasi-diplomatic protection, andhome comforts include the first ever open inter-Korean telephone lines (albeitby satellite and via Japan rather than directly). Much as Pyongyang will try totreat Kumho as an isolated enclave, these southerners work alongside theirnorthern counterparts. Such everyday contact is bound to have wider effects. Insome ways it is a miracle that the KEDO process has survived the wider ups anddowns (mainly downs) of inter-Korean relations. It must be hoped that allconcerned will continue to ring-fence it thus, whatever their other quarrels.

Four-way talks fail, so far By contrast the other major initiative of the last quarter has failed, at least for thetime being. The four-way talks—between, in effect, the main belligerents of the1950-53 Korean War—were first proposed by Washington and Seoul in April1996, as a device to break the impasse of Pyongyang insisting that it would talkonly to the USA and not with the south. The north took over a year to ponder,trying behind the scenes to win large-scale food aid as a precondition for attend-ing. Beijing also seemed lukewarm at first.

Nonetheless, the foursome finally got together for preliminary talks in New Yorkon August 5. They agreed on a site for full-dress talks (Geneva) and someprocedural matters, but the agenda proved more contentious. When theyreconvened in mid-September, the agenda was once again a sticking-point. Thistime they adjourned indefinitely, with the USA not hiding its irritation withNorth Korea (the more so since it had hastily held prior meetings with the northin Beijing, to soothe any ruffled feelings over the Jang brothers’ defection;see below).

Troops out There are three sticking-points. Pyongyang is still holding out for massive foodaid in advance, still insists on a purely bilateral peace treaty with the USA, andwants the withdrawal of US forces—not just from South Korea but the widerregion, presumably meaning Japan—as an immediate item of discussion. Inother words they are not seriously ready to talk. Irritation aside, this is not

Inter-Korean relations 5


really surprising, nor perhaps a cause for as much gloom as in some commentat the time. The precedent of KEDO’s protracted negotiations, with Pyongyangfighting every inch of the way, would suggest that the four-way process willtake months or even years to complete.

Besides, at the moment the north has other fish to fry. Kim Jong-il has at lastbecome general secretary of the ruling Korean Workers’ Party (KWP) and there-fore official ruler of the country. Overtures to Japan are under way (althoughTokyo has said that the four-way talks, in which it is not directly involved,must make progress first). Dire though the food shortage is, with the harveststarting to come in the immediate need for aid may have eased. Above allSouth Korea will soon have a new president; and whoever he is, the northcannot but prefer him to the hated Kim Young-sam. Hence the four-way pro-cess will probably stay on hold until early 1998.

Two-way defectors Once again inter-Korean relations have been ruffled by high-level defections,this time in both directions. In late August North Korea’s ambassador to Egypt,Jang Sung-gil, was spirited to the USA along with his brother Jang Sung-ho,a diplomat in Paris, and their families. Pyongyang accused the US CentralIntelligence Agency of being involved. As of the middle of October the brotherswere still under wraps, and it was not clear whether they will remain in the USAor proceed to South Korea. Jang Sung-gil is expected to know all about NorthKorean arms exports to the Middle East. In response North Korea cancelled talksit had been due to hold with the USA about its missile programme.

The north’s gain was smaller beer, although still quite a coup. Oh Ik-je,who surfaced in Pyongyang in the middle of August, was a former head ofChondogyo, an indigenous Korean religion. He had also been an adviser to themain opposition party, the National Congress for New Politics (NCNP), a factwhich the ruling New Korea Party (NKP) was not slow to use to red-bait KimDae-jung, the leader of the NCNP. While Mr Oh, at age 68, may have pined forrelatives in the north, his defection also renewed fears in opposition circlesabout the alleged “Hwang Jang-yop list”. Mr Hwang, who defected to the southat the beginning of this year and is the highest ranking North Korean to havejumped ship so far, is rumoured to have brought a list of South Koreans whohave allegedly worked clandestinely on Pyongyang’s behalf, and the opposi-tion fears such allegations may be raised by the ruling party for partisan pur-poses in the forthcoming election.

Open skies soon Talks brokered by the International Civil Aviation Organisation and held inBangkok in early October to open North Korean air space resulted in the twoKoreas agreeing to open their flight information regions to one another’s air-craft. This will mean that South Korean airliners flying to and from Seoul canuse North Korean air space, thus reducing flying times and costs on severalroutes. It is not clear, however, whether this would permit overflying NorthKorea as such, or merely its 200-mile territorial waters. The North Koreanmilitary might not be keen on the former.

Either way, north and south will have to talk to each other; or more precisely,their respective air control centres in Pyongyang and Taegu would obviouslyhave to be in touch as they track the trajectories of particular planes. Pyongyang



is expected to be rewarded not only with fees (perhaps as much as $5m per year)but also aid to upgrade its air traffic control technology.

Hotlines: less than 20%are in use

The more the two Koreas talk the better, in whatever context, but it is not easy.The south’s unification ministry in October revealed details of the hotlines thatlink north and south. These total 26, but only five are currently operational;22 lines connect Seoul and Pyongyang, but only three are in use: one betweenthe two Red Crosses, one for consulting on economic issues (interestingly), anda third simply for maintenance of the other lines. The position at Panmunjomis better, with two out of four lines up and running. Again, the ones that workare between Red Cross offices on each side; while the inoperative pair connecteach side’s liaison offices, opened in the early 1990s, but not used since thenorth closed its office in November 1996. One might think it desirable, and evenurgent, that the respective political and military authorities should also haveconnecting hotlines—just in case.

Southern visitors gonorth—

An encouraging sign in September was that Seoul allowed an unusual numberand range of its citizens to visit North Korea. These intrepid travellers includedthe following.

• Four journalists from the Joong-Angilbo, a daily newspaper owned bySamsung. Perhaps out of deference to their hosts, their brief was confined tomatters cultural and historical; politics and famine were off-limits. Seoul alsorather undermined the liberalism of this gesture by insisting it could and wouldcensor their despatches.

• Two clerics from the Korean National Council of Churches, who were tomeet their northern opposite numbers to discuss food aid.

• The most senior and intriguing was Daewoo’s chairman, Kim Woo-choong,who was revealed only after the event as having spent a week in the north. Theostensible reason, no doubt real enough, was to visit Daewoo’s export factoryin Nampo. The first and so far the only southern joint venture in the north tocome on stream, this had reportedly “fallen into mismanagement”. Given thehaste and secrecy with which it was arranged, however (the unificationministry allegedly waived its normal procedures), the rumour in Seoul is thatthis trip may also have had some political purpose. Kim Woo-choong hasvisited North Korea at least twice before, and is thought to have also madeother, secret trips.

—and tourists willfollow soon

Reports from Seoul in late September suggested that South Korean tourists maysoon be able to visit Mount Paekdu in the north, which is the highest peak onthe peninsula and has almost mystical status as a national symbol. The south’srecently formed maritime affairs ministry is said to be talking to both NorthKorea and China about a ferry route between the southern port of Sokcho andRajin-Sonbong, with onward connections by land to Mount Paekdu. Aprojected flow of 50,000-100,000 tourists annually could boost the north’srevenue by some $25m-50m.

There are obstacles, however. Other ministries in Seoul are less keen, and maylink any such move to Pyongyang first returning to the four-way talks. From

Inter-Korean relations 7


the northern viewpoint Mount Paekdu’s location in remote Ryanggang mayprove problematic, since rumour has it that this is the province worst hit byfamine. In any case South Koreans already can and do climb Paekdu from theChinese side of the border.

But just in case ... Both Koreas also continue to prepare for war—and to accuse the other of doingso offensively. The South Korean news agency, Yonhap, reported on October 2,quoting South Korea’s national defence ministry, that North Korea “isstrengthening war preparedness in the rear area”. It added that the US-SouthKorean Combined Forces Command are looking at 12 possible scenarios for aNorth Korean attack, including chemical weapons. A day earlier, the NorthKorean news agency, KCNA, accused “the South Korean ‘civilian’-veiled warmaniacs” of putting the country “on a war footing”.



South Korea

Political structure

Official name Republic of Korea

Form of state Presidential system; president and National Assembly directly elected, both on afirst-past-the-post system

The executive The president (elected for a single term of five years) appoints the State Council(cabinet) composed of the president, prime minister and between 15 and 30 ministers.The State Council is not entirely composed of members of the National Assembly; lastreshuffle March 1997

Head of state Elected president

Legislature Unicameral Kuk Hoe (National Assembly) of no fewer than 200 members (currently299) elected for four-year terms; currently 253 seats are filled by direct election; theremaining 46 are distributed between parties in proportion to their share of the vote

National elections December 1992 (presidential) and April 1996 (National Assembly); next elections dueby December 1997 (presidential) and April 2000 (National Assembly)

National government The ruling Democratic Liberal Party, itself formed by merger in 1990 of the then rulingDemocratic Justice Party with two opposition parties, changed its name to New KoreaParty (NKP) in December 1995. The NKP gained only 139 seats in the April 1996election, but has since won over independents and others, giving it 157 seats and anoverall majority of seven

Main political organisations Government: New Korea Party (NKP); opposition: National Congress for New Politics(NCNP); United Liberal Democrats (ULD); Democratic Party (DP)

Main members of StateCouncil

President Kim Young-samPrime minister Koh KunDeputy prime minister & minister of finance & economy Kang Kyung-shikDeputy prime minister & minister of national unification Kwon O-kie

Key ministers Agency for national security planning Kwon Yong-haeConstruction & transportation Lee Hwan-kyunDefence Kim Dong-jinEducation Lee Myung-hunEnvironment Yoon Yeo-joonForeign affairs Yoo Chong-haGovernment administration Shim Woo-youngHealth & welfare Choi GwangHome affairs Cho Hae-nyongInformation & communications Kang Bong-kyunJustice Kim Jong-kooLabour affairs Lee Ki-hoPolitical affairs Hong Sa-dukScience & technology Kwun Sook-ilTrade, industry & energy Lim Chang-yuel

Central bank governor Lee Kyung-shik

South Korea 9


Economic structure

Latest available figures

Economic indicators 1992 1993 1994 1995 1996

GDP at market prices W ’000 bn 240.4 267.1 306.0 349.0 386.6

Real GDP growth % 5.1 5.8 8.6 8.9 7.1

Consumer price inflation % 6.3 4.8 6.2 4.5 4.9

Population m 43.7 44.1 44.5 44.9 45.2

Exports fob $ bn 75.2 81.0 93.7 123.2 128.3

Imports fob $ bn 77.3 79.1 96.8 127.9 143.5

Current-account balance $ bn –3.9 1.0 –3.9 –8.3 –22.2

Reserves excl gold (Dec) $ bn 17.1 20.2 25.6 32.7 34.0

Total external debt $ bn 44.2 47.2 54.5 74.5a 94.9a

Exchange rate (av) W:$ 780.7 802.7 803.5 771.3 804.5

October 17, 1997 W915:$1

Origins of gross domestic product 1996b % of total Components of gross domestic product 1996b % of total

Agriculture, forestry & fishing 6.4 Private consumption 52.9

Mining & quarrying 0.3 Government consumption 8.9

Manufacturing 30.0 Fixed capital formation 37.9

Electricity, gas & water 2.5 Change in stocks 0.8

Construction 11.3 Exports of goods & services 44.1

Trade, restaurants & hotels 12.4 Imports of goods & services –45.0

Transport, storage & communications 8.4 Statistical discrepancy 0.4

Financial & business services 17.4 GDP at market prices 100.0

Government services 3.6

GDP at market prices incl others 100.0

Principal exports 1996 $ m Principal imports cif 1996c $ m

Transistors, semiconductors etc 17,305 Machinery & transport equipment 54,675

Textiles & fabrics 10,173 Mineral fuels & lubricants 24,284

Passenger cars 9,089 Chemicals 13,231

Ships & floating structures 7,127 Raw materials 10,965

Clothing & accessories 4,221 Food & live animals 7,265

Main destinations of exports 1996 % of total Main origins of imports 1996 % of total

USA 16.7 USA 22.2

Japan 12.2 Japan 20.9

Hong Kong 8.6 Germany 4.8

Singapore 5.0 Saudi Arabia 4.4

Germany 3.6 Australia 4.2

a EIU estimate. b 1990 constant prices. c Customs basis.

10 South Korea


Outlook for 1998-99

Kim Dae-jung forpresident?

The outlook for South Korea’s presidential election, to be held on December 18,has been transformed since our last report. The ruling New Korea Party (NKP)candidate, Lee Hoi-chang, who had looked a safe winner, has seen his popular-ity plummet for two reasons: a hint of scandal has besmirched his imageas “Mr Clean”; and the entry into the fray of two further popular candidates—including Mr Lee’s main rival for the NKP’s nomination, Rhee In-je, the youth-ful governor of Kyonggi province—has drawn away some of his support (see Thepolitical scene).

As a result the previously unthinkable has happened, and Kim Dae-jung isleading in opinion polls. The veteran leader of the main opposition party, theNational Congress for New Politics (NCNP), who has run three times before, cancount on a solid 25-30% of the vote, on his home turf of the Cholla provincesin the south-west, and in Seoul (partly from Cholla migrants). Hitherto, whenLee Hoi-chang was scoring 40% and more, this had looked too little to challengethe NKP, South Korea’s only real national party. But now that there are fourclosely bunched candidates each in the 20% range—Mr Lee, Mr Kim, Mr Rhee,and another late entrant, the mayor of Seoul and former economics minister,Cho Soon—in South Korea’s first-past-the-post system, 30% or even 25% mightjust be enough to win.

The prospect of losing— These developments have thrown the ruling camp into disarray. As its formername (Democratic Liberal Party, DLP) suggests, with an obvious nod to Japan’sLDP, the NKP is a coalition of groups united by little except reluctance to giveup power. Its two main factions are the Minju group, which supports theoutgoing president, Kim Young-sam, and the Minjung old guard associatedwith two former presidents, Chun Doo-hwan and Roh Tae-woo, who are nowin jail for coup-making and corruption. Neither group supports Lee Hoi-chang,who as a political novice lacks a base of his own; but most backed him as theNKP presidential candidate because he looked the man most likely to winthe election for them.

—throws the NKP intoconfusion

The NKP thus faces an agonising dilemma. On the one hand, rallying behindLee Hoi-chang may lose it the election. On the other, dumping him, which hasbeen openly discussed as an option, might only lead to further fragmentation.Mr Lee’s installation as party president on September 30 in place of KimYoung-sam suggests that the risk of his being pushed aside has passed,although his retention in post of the party’s main office-holders bespeaksweakness: the Korean way would be to appoint his own men, if he had any.Individual NKP MPs, or blocs, may, however, break away and support RheeIn-je, who challenged Lee Hoi-chang for the ruling party’s nomination, and isnow standing as an independent.

In such a close race the obvious question is whether any of the contendersmight join forces so as to ensure victory. Past omens are not encouraging. In1987, notoriously, neither of the democrats Kim Dae-jung and Kim Young-samcould bear to stand down in favour of the other, thus ensuring that they bothlost to ex-general Roh Tae-woo.

South Korea 11


Kim Jong-pil couldwithdraw

The obvious candidate to withdraw is Kim Jong-pil of the United LiberalDemocrats (ULD), whom the polls are giving no more than single figures (aswhen he ran in 1987 and got just 8% of the vote). The ULD and NCNP haveworked together as a coordinated opposition in the National Assembly andhave discussed a joint candidacy. But Kim Dae-jung (DJ) and Kim Jong-pil (JP)make strange bedfellows at the best of times, and it is far from clear that fans ofeither could stomach voting for the other. Instead, JP is more likely to danglehis 8% in front of either of the new entrants, Mr Rhee and Mr Cho—or justconceivably the NKP—in exchange for a commitment to move from presiden-tial to cabinet government, a cause which he has long championed.

Cho-Rhee: a potentialdream ticket

An extra 8% may not, however, suffice. What would really clinch the race wouldbe if two of the four front-runners were to join forces. (The fact that South Koreahas no vice-presidency makes the mechanics of this difficult.) Given thatideological differences are few, in principle just about any combination is con-ceivable. Particularly intriguing is the idea of a Rhee In-je/Cho Soon “dreamticket”, combining political charisma with tested economic prowess and repre-senting a real break with the past. As polls show Mr Cho falling behind the otherthree, the incentive for him to strike a deal may grow.

A non-NKP presidentwould face a hostile

parliament

Should the NKP lose, in principle it would still retain a majority in the NationalAssembly, the elections for which are on a separate four-year cycle: the next isdue in April 2000. Any opposition president might thus face the prospect oftwo years of cohabitation with a hostile parliament. Alternatively, given thefluidity of party labels and allegiances in South Korea, not to mention thecentripetal lure of power and its spoils, it is by no means impossible that thenext president will be able to fashion a working majority by enticing enoughmembers to join a new coalition—just as Roh Tae-woo tempted Kim Young-sam and Kim Jong-pil across the floor in 1990, to form the new DLP.

DJ woos hawks andspooks—

Either way it would be beneficial and another milestone for South Korea’s youngdemocracy, still barely a decade old, if the presidency were to pass for the firsttime from the ruling party to the opposition. There seems no reason in principlewhy this could not happen. The military gives every appearance of being firmlyback in barracks for good; and while the prospect of serving Kim Dae-jung aspresident may upset some in the military, it is no longer unthinkable. DJ for hispart has gone out of his way to pitch for the hawk vote: sounding tough onNorth Korea, going on the stump in North Kyongsang, and even recruitingformer employees of the Agency for National Security Planning, which in its oldincarnation as the Korean Central Intelligence Agency tried to kill him.

—and Pyongyang,perhaps?

Kim Dae-jung’s harder line on the north has been reciprocated. Pyongyangmedia, which in the past have tended to like him (a fact which of course didhim no favours in the south), have recently dismissed him as a “thoroughlyobsolete conservative politician”. Even so, North Korea may well regard him—correctly—as someone who, unlike Kim Young-sam, takes unification and thenorthern question seriously and has given it much thought.

12 South Korea


With friends like these ... The spectre of a possible North Korean collapse, and the immediate task ofgetting Pyongyang back to the table for four-way talks (see Inter-Koreanrelations), will put a premium on strengthening Seoul’s three major foreignpolicy orientations: the bedrock alliance with Washington, the always touchyrelationship with Tokyo and the thriving new ties with Beijing. The need tobalance these is a structural given, and there is no obvious difference betweenthe contenders here. It is, however, unfortunate that, as 1997 draws to a close,the USA and South Korea seem to be squaring up for one of their intermittentlow-intensity trade squabbles. These benefit neither side. Worse, they distractfrom, and may risk damaging, the serious business of cooperating to defangPyongyang.

Economic policy: fewdifferences

From a business viewpoint it makes little difference who becomes South Korea’snext president. None of the four front-runners grinds an ideological axe: all arecommitted to a market economy. Cho Soon may be more deeply committedthan the others, and is the only one whose grasp of economics is clear. Con-versely, although Kim Dae-jung’s image (studiously cultivated by his enemies)as a leftist is almost completely mythical, it is in part a self-fulfilling prophecy.DJ is the most likely to be tempted to populism. Nonetheless, all four would,if elected, continue the familiar Korean pattern of gradual reform and marketopening.

A Big Bang for thefinancial sector

One adverse effect of the election campaign is that, as in any country, it hasmeant that tough decisions on the economy are being fudged or postponed.The goodwill or at least momentum which propels a new president makes 1998(and perhaps 1999) a vital opportunity to grasp those nettles which in 1997have been handled with kid gloves or ignored altogether. Above all the finan-cial sector requires root and branch reform. The banks must be merged,slimmed down and recapitalised urgently, or once the market opens in 1999they will lose out to foreign competition. The dilemma is who, if not the largeconglomerates (the chaebol), has the capital and management skills to under-take this monumental task.

Ministries andbureaucracies must

cooperate—

Another issue left over from the presidential commission on financial reform(few if any of whose recommendations now look likely to get through theNational Assembly before the election) is the division of labour between vari-ous regulatory agencies. The next president must act to stop the unseemlypublic wrangling between the Bank of Korea (the central bank) and Ministry ofFinance and Economy, to name but two. For their part officials need to developa wider sense of the public interest than simply fighting to maximise thepowers of their own particular ministry or agency. Developing such teamworkis arguably more important than the technical pros and cons of any particulardistribution of responsibilities.

—to achieve a newconsensus

More fundamentally perhaps, South Korea’s next president faces the challengeof creating a new political economy and culture. Under the old Korea Incauthoritarian presidents took expert economic advice and instructed bureau-crats accordingly, who in turn instructed banks, which lent as they were told tochaebol, which grew fat. It is all different now. Externally, this kind of statism is

South Korea 13


out of favour and illegal for a member of the World Trade Organisation (WTO)and OECD, while at home it is discredited as dictatorial and corrupt. Mean-while the chaebol have grown too big to be pushed around, while bureaucratsfear that globalisation will erode their role and power. It is a recipe for fractious-ness. Any new model must be consensual, not easy in a political culture ad-dicted to brinkmanship and confrontation. Yet without some such consensus,it will be hard for South Korea to sustain economic growth, still less tackle therestructuring it so badly needs.

The economy will start torecover in 1998

Real GDP growth will slow in 1997 to 5.7% from 7.1% in 1996—a poor perform-ance for a country used to more dazzling rates of growth, but still good by thestandards of many fellow OECD countries. The main reason for this downturnwill be the fall-off in domestic demand growth, which will drop to 2.5% (sharplydown from the figure of 7% recorded in 1996) as consumer and investor confi-dence ebbs in the wake of the problems afflicting South Korea’s corporate sectorand the concurrent sluggish growth in real incomes and job insecurity.

Economic growth will recover over the forecast period—rising slightly to 5.9%in 1998 and then more rapidly to 6.7% in 1999—owing to improving consumersentiment and to stronger private-sector investment as the outlook for profitsbrightens and domestic interest rates continue to follow a downward trend. TheEIU expects private consumption growth to rise to 5.4% in 1998 and to 6% in1999, compared with a mere 4.8% in 1997. Private-sector investment growthwill rise even more markedly from the nadir of 1997—when we expect thiscomponent of GDP actually to contract by 1.5%—to 5% in 1998 and then to7.5% in 1999.

Exports will make apositive contribution

to growth

Exports are growing quite fast in volume terms as exporters take advantage ofmore favourable demand conditions in key foreign markets, while imports arebeing held back by weak investment. We expect net exports to make a positivecontribution to growth in both 1998 and 1999.

In 1998 the troubles experienced by some chaebol are likely to create supply-side problems with exports. Cars, for example, will be in shorter supply becauseof the difficulty of resolving the problems of Kia Motors. We therefore expectthe rate of export growth to slow slightly in 1998 to 11%, from 15% in 1997,before rising again in 1999, to 12.2%. Import growth, meanwhile, will pick upover the forecast period particularly as private-sector investment expands,growing by 10% in 1998 and 12.5% in 1999.

Fiscal policy will be loose— Although the government was talking boldly earlier in the year of holding therise in total budgetary expenditure to a nominal 4% in 1998, this soon ran foulof the defence ministry—defence accounts for the largest chunk of SouthKorea’s budget as the country technically remains at war with North Korea.The president ordered the prime minister to raise planned defence spending bymore than 5% in 1998 and unless many government programmes, notablyinfrastructure projects, are to stand still or slow down sharply, it now seems thatspending will have to rise further, probably by 6-8%, after an expansionary13.4% in 1997.

14 South Korea


South Korean governments can still afford fairly hefty rises in annual spendingin these harder times because of past prudence, and what some would see aslittle short of meanness in the provision of infrastructure and social services. Inthe heady post-electoral atmosphere of 1998 fiscal policy is unlikely to berestrictive, whoever is installed in the Blue House. A Kim Dae-jung victory,however, might produce greater fiscal stringency, or at least lip-service to thisprinciple, as Mr Kim would be anxious to establish market-friendly credentialsand so counter claims by opponents of his left-wing sympathies.

—but monetary policywill have to tighten

Although there is likely to be a moderately expansionary fiscal stance nextyear, monetary policy will need to be tightened over the forecast period. Whilethe option of tightening monetary policy significantly in the short term isruled out for political reasons and because of the plight of chaebol struggling tomeet interest payments, some rises in interest rates will have to come in late1997 or early 1998 to help stem the weakness of the won. Nor can the author-ities continue to pump liquidity into the financial sector as they have beendoing to prop up ailing banks.

South Korea: forecast summary(% change year on year unless otherwise indicated)

1996a 1997b 1998c 1999c

Real GDP 7.1 5.7 5.8 6.7

Consumer prices 4.9 4.7 4.5 4.3

Merchandise exports fob ($ bn) 128.3 140.4 156.8 181.5

Merchandise imports fob ($ bn) 143.5 147.6 163.9 189.2

Trade balance ($ bn) –15.3 –7.3 –7.1 –7.7

Current-account balance ($ bn) –22.2 –14.1 –13.6 –13.2

Average exchange rate (W:$) 804.5 900.0 880.0 850.0

a Actual. b EIU estimates. c EIU forecasts.

Inflation will be higher Although we continue to expect consumer price inflation to moderate over thenext two years, we have made modest upward revisions to our forecasts forSouth Korean inflation to take account of the ongoing depreciation of the wonand the large liquidity injections by the Bank of Korea to ease the shortage offunds caused by the problems in the country’s corporate sector. We now expectconsumer prices to rise by 4.5% in 1998 (up from 4.4% in our last report) andby 4.3% in 1999. Downward pressure on prices over the forecast period willalso be exerted by weak oil and non-oil commodity prices and by continuingspare capacity in industry from past over-investment.

The won will appreciateagainst the dollar

After depreciating by some 11% against the dollar in 1997 to an annual averageof W900:$1, owing to the strength of the US currency and worries about theSouth Korean economy, we expect the won to creep back against the dollarduring the forecast period. We are forecasting an annual average rate ofW880:$1 and W850:$1 in 1998 and 1999 respectively. This recovery will besupported by increasing portfolio flows as South Korea’s capital markets areopened and by better news on the current account. Against the yen, however,the won will continue to decline gently.

South Korea 15


The current-accountdeficit will moderate

After peaking at 4.6% of GDP in 1996 the current-account deficit will fall bothas a share of GDP—2.5% in 1998 and 2.1% in 1999—and in nominal dollarsover the forecast period. This improvement will be underpinned by graduallyimproving terms of trade, particularly given a rise in prices for key exports, suchas semiconductors. We forecast that the dollar price of manufactured goods willrise in 1998 and 1999 by 1.5% and 4% respectively, after falling by 4.9% thisyear, thus boosting South Korea’s dollar earnings. This will help to keep themerchandise trade deficit under $8bn for both years of the forecast period.Unfortunately, however, the good news will not extend to the invisiblesbalance. The continuing uncompetitiveness of the South Korean services sector,together with rising travel spending by South Koreans travelling abroad andhigher transport costs as exports increase, means that there will only be amodest improvement in the services balance from a deficit of $1.7bn in 1998 toa surplus of $1.1bn in 1999. The deficit on the income balance will deteriorateover the next two years, to $5bn in 1998 and $5.7bn in 1999, because of thegrowing outflow of interest on the country’s growing stock of overseas debt.The resulting current-account deficits of $13.6bn in 1998 and $13.2bn in 1999will present no financing problems and the debt-service ratio will remain com-fortably in the 10% range.

South Korea: economic results and forecasts(W bn at constant 1990 prices; % change year on year in brackets unless otherwise indicated)

1996a 1997b 1998c 1999c

Private consumption 148,034 155,139 163,517 173,328

(6.9) (4.8) (5.4) (6.0)

Public consumption 24,668 26,025 27,326 28,692

(7.1) (5.5) (5.0) (5.0)

Gross fixed capital formation 104,675 103,104 108,260 116,379

(6.6) (–1.5) (5.0) (7.5)

Final domestic demand 277,376 284,268 299,102 318,399

(7.0) (2.5) (5.2) (6.5)

Change in stocks 2,330 1,800 1,800 2,000

(0.9)d (–0.2)d (0.0)d (0.1)d

Total domestic demand 279,706 286,068 300,902 320,399

(7.9) (2.3) (5.2) (6.5)

Exports of goods & non-factor services 121,751 140,014 155,415 174,376

(14.1) (15.0) (11.0) (12.2)

Imports of goods & non-factor services 124,011 133,392 147,326 165,741

(14.8) (8.0) (10.0) (12.5)

Net exports –2,261 6,081 8,089 8,634

(–0.3)d (3.0)d (0.7)d (0.2)d

Statistical discrepancy –1,596 –600 –500 0

GDP 275,850 291,550 308,492 329,034

(7.1) (5.7) (5.8) (6.7)

Net factor payments abroad –3,526 –3,700 –4,000 –4,320

GNP 272,324 288,465 307,490 324,714

(6.9) (5.7) (5.8) (6.6)

a Actual. b EIU estimates. c EIU forecasts. d Change as a percentage of GDP in the previous year.

16 South Korea


Review

The political scene

Mr Clean besmirched The contest to become South Korea’s next president—who will be elected onDecember 18, and take office in February 1998—has suddenly become exciting.Until August it had looked a foregone conclusion that the ruling New KoreaParty (NKP), the only party with nationwide organisation and support, wouldretain power despite the unpopularity and lame-duck status of the outgoingincumbent, Kim Young-sam. The NKP had chosen as its standard-bearer LeeHoi-chang, a former prime minister and career judge widely seen as incorrupt-ible (his nickname was bamboo-pole, for uprightness), who had spearheadedKim Young-sam’s crusade against corruption in 1993-94 as head of the Board ofAudit and Inspection. A decade younger than his two opponents, the veteranopposition leaders Kim Dae-jung and Kim Jong-pil, both of whom had mainlyregional rather than national followings, Mr Lee seemed to represent a changeto new politics and clean government. Opinion polls consistently put supportfor him in the 40-50% range, well ahead of his rivals.

Bamboo pole yes,beanpoles no

All that changed in August, with the revelation that both of Lee Hoi-chang’ssons had avoided military service by being underweight. Mr Lee’s protestationsthat nothing underhand was involved fell on deaf ears among a public withample reason to be cynical about politicians. At a stroke Mr Lee’s poll rating fellto below 20%, and as of early October it had hardly recovered. Even sendingone of his sons to do two years of voluntary work in a leper colony on a remoteisland did not assuage public opinion.

Suddenly the NKP had to confront the prospect that it may have picked a loser.Lee Hoi-chang—who, not being a career politician, has no secure base in eitherof the ruling party’s main factions—began to look vulnerable within his ownparty, never mind the electorate. The question of dumping him was openlycanvassed. Nonetheless on September 30 Mr Lee duly inherited the party’spresidency from Kim Young-sam; although this does not preclude continued

5

6

7

8

9

1995 96 97(a) 98(b) 99(b)

South Korea

Asia (excl Japan)

South Korea: gross domestic product% change, year on year

(a) EIU estimates. (b) EIU forecasts. (c) Nominal exchange ratesadjusted for changes in relative consumer prices.Sources: EIU; IMF, International Financial Statistics.

80

90

100

110

120

1990 91 92 93 94 95 96 97 98 99

South Korea: won real exchange rate (c)1990=100

W:$W:$W:$W:$W:$W:$W:$W:$W:$W:$W:$W:$W:$W:$W:$W:$W:$W:$W:$

W:¥

W:$

W:¥W:¥

W:DMW:DMW:DM

W:$

W:¥

W:$

W:¥W:¥

W:DMW:DMW:DM

97(a) 98(b) 99(b)

W:$

W:¥

W:$

W:¥

W:$

W:¥

W:$

W:¥

W:$

W:¥

W:$

W:¥

W:$

W:¥

W:$

W:¥

W:$

W:¥

W:$

W:¥

W:DM

97(a) 98(b) 99(b)97(a) 98(b) 99(b)97(a) 98(b) 99(b)

South Korea 17


rumblings and perhaps ructions against him within what even the officialnews agency Yonhap described as “his divided and estranged party”.

Cho Soon chosen A further blow to Lee Hoi-chang was the entry into the fray of two furthercandidates, each with a strong following and likely to take votes away from theruling party. On August 20 Cho Soon, the first elected mayor of Seoul indecades, announced that he would run for the Democratic Party (DP)—whichgratefully hastened to endorse him. The DP was until 1995 the main opposi-tion party, but was reduced to a rump when Kim Dae-Jung (DJ) led his followersout and formed the National Congress for New Politics (NCNP) in July of thatyear. It now has only 11 members in the National Assembly.

Mr Cho, however, is personally popular as a former economics minister andgovernor of the Bank of Korea (the central bank)—before that, he was a profes-sor of economics—who has resisted being pushed around by big Kims. Heresigned as head of the central bank over Kim Young-sam’s efforts to imposepolicy on the bank. Elected mayor of Seoul in 1995 on the DP ticket with KimDae-jung’s support, he pointedly refused to follow DJ into the NCNP. Hisinitial poll ratings are close to 20%.

Rhee In-je joins the race When Lee Hoi-chang won the NKP’s nomination in July, his rival in the run-offswas a politician little known until early this year, who shot to prominencemainly because he was a good television performer—and looked like the latepresident, Park Chung-hee (1961-79), for whose firm hand more than a fewSouth Koreans now feel nostalgic. An ex-lawyer aged only 49, Rhee In-je, gover-nor of Kyonggi province (which surrounds Seoul) also projects an image ofyouth and new politics—even though for a decade he has been a close ally ofKim Young-sam (whom he served as minister of labour in 1993 before beingelected governor of Kyonggi).

Like most of the rest of the “six dragons” who lost the NKP’s nomination to LeeHoi-chang, Mr Rhee conspicuously failed to rally to the winner’s standard.After apparently failing to persuade Mr Lee to agree to a virtual duumvirate(Mr Rhee was thought to want the NKP’s powerful presidency), the lure ofopinion polls suggesting he could beat the entire field if he ran, proved irresist-ible. On September 13 Rhee In-je duly threw his hat into the ring and an-nounced he will run as an independent.

A boost for DJ— These developments had contrasting implications for the two opposition lead-ers whose candidacies were already declared. For Kim Dae-jung his bedrocksupport of some 25-30% has been transformed from a liability to an asset.Having not been within striking distance of the NKP while Lee Hoi-chang wasriding high, the effect of now having three other candidates all able to com-mand around 20% of the vote suddenly makes the man with 30% look like apotential winner. (South Korea does not have proportional representation orany system of second preferences and transferable votes: it is a simple race to befirst past the post.)

—but RIP for JP? By contrast the entry of Mr Cho and Mr Rhee only serves to highlight how vainthe prospects for the third of South Korea’s perennial “three Kims” are. Last

18 South Korea


time Kim Jong-pil stood for president, a decade ago, he received just 8% of thevote, mainly in his home region, the conservative Chungchong provincessouth of Seoul. Since then this veteran coup-maker from way back in 1961,right-hand man of the late Park Chung-hee and founder of the Korean CentralIntelligence Agency (KCIA), has led his followers into the ruling party and outof it again. His United Liberal Democrats (ULD), with 45 MPs, are currently thesecond largest opposition party.

There is not the slightest sign that Koreans will be any keener to vote for sucha has-been in 1997 than in 1987. Yet as of early October Kim Jong-pil was stillin the race—although widely expected to withdraw eventually in favour of anycandidate who would support his pet hobbyhorse of a change from presiden-tial to cabinet government. In so close a contest the ULD’s 8-10% support,while hopeless in itself, may suffice to secure victory for one of the four seriouscontenders.

What about the workers? A curious aspect of South Korean political parties and elections is that differ-ences over policy, let alone ideology, count for little. What matters—althoughthis is very traditionally Korean—are regional, factional and personal loyalties.One candidate aims to challenge this. Kwon Young-gil heads the militant anduntil this year illegal Korean Confederation of Trade Unions (KCTU), and isrunning on behalf of a coalition of dissident organisations. It will be interestingto see how he fares. The KCTU led the successful backlash against new labourlaws earlier this year, revealing Mr Kwon as a skilful operator. Yet a furtherparadox of South Korean politics is that labour militancy has rarely if ever beenreflected in elections, where region rather than class is the divide that counts.The dissident candidate at the last election, Paek Ki-wan, received less than 1%of the vote.

The TK vote will bedecisive

A further consequence of the new closeness of the electoral race has been tointensify the competition to get the TK (Taegu city, in North Kyongsangprovince) vote. For the first time ever, there is no candidate or party from oridentified with the Kyongsang provinces in south-eastern Korea. This regionhas furnished all South Korea’s previous presidents, and boasts the largestelectorate outside greater Seoul (the population of which also includes manyKyongsang migrants). While Kim Young-sam has his base in Pusan in SouthKyongsang, the country’s second city and biggest port, the main question markhangs over the loyalties of the TK region, the home turf of two former presi-dents, Chun Doo-hwan and Roh Tae-woo. Hence it was not by chance that theNKP chose Taegu as the site of its convention on September 30, at which LeeHoi-chang took over from Kim Young-sam as party president; nor that theNKP’s new executive chairman is Lee Han-dong, a figure closely associated withthe Chun-Roh era of the 1980s.

Jailed ex-presidents willbe released

Mr Chun and Mr Roh were jailed last year for their 1979-80 military coup andsubsequent corruption. While it is almost certain that they will be freed beforethe election as a sop to TK voters, the timing of such a pardon is delicate as itmight backfire. In early September Kim Young-sam snubbed his would-be suc-cessor when he refused a plea by Lee Hoi-chang for an early release forMr Chun and Mr Roh. A further twist is that Kim Young-sam, whose son has

South Korea 19


just been jailed for three years for bribery and tax evasion, must be wonderinghow best to minimise the risk that he in turn may fall victim, once he stepsdown next February, to the perhaps unfortunate precedent that he has set, of apresident persecuting or at least prosecuting his predecessors.

On September 30 the cabinet recommended an amnesty for 23 businessmen,including seven of South Korea’s top tycoons, who had been convicted ofoffences mainly in connection with Mr Chun and Mr Roh’s slush funds. Thisis widely seen as preparing the ground for the two ex-presidents also to bepardoned before long.

Yet another reshuffle On August 5 Kim Young-sam replaced half of his 22 ministers in what mustsurely be the last of all too many cabinet reshuffles. This time the purpose waspurely political, namely to have a cabinet that is or at least looks non-partisanin the run-up to the election. Those removed were all either MPs or members ofthe ruling party. The key economic and foreign policy and security teamsremain in place.

Students: no longerrevolting?

A political non-event must also be recorded, happily. In recent years August 15—the anniversary of Korea’s liberation from Japan in 1945, and as such the onlypublic holiday shared by both Koreas—had become a focal point for demon-strations by radical students demanding unification. They usually ended inbattles with the riot police. Last year’s jousting had been especially fierce: onepoliceman died, and Yonsei university’s campus experienced serious damage.

This year, nothing. The main reason was public revulsion against two incidentsearlier in the year, when students beat to death young workers whom theysuspected of being police informers. This finally galvanised the silent majorityof students, and one university after another disaffiliated from Hanchongryon,the umbrella student federation proscribed by the government as allegedlypro-Pyongyang. Even within Hanchongryon’s own ranks, their chosen dele-gates to visit North Korea (illegally, of course) and a communist youth congressin Cuba both had second thoughts and turned back halfway.

So the middle of August in Seoul passed without tear gas, for once. Whileearlier generations of students fought valiantly against dictatorship and fordemocracy, both the extremism of Hanchongryon’s views and the violence oftheir methods (plus that of the authorities in quashing them) did nothing todeepen democracy in South Korea. Perhaps students will now turn green ratherthan red: there is certainly plenty to exercise them on that score.

Kims woo troops Visiting the troops may be Kim Jong-il’s speciality, but it is not unknown southof the demilitarised zone (DMZ) as well. As Seoul’s self-proclaimed first civilianpresident in modern times, who jailed his two military predecessors, KimYoung-sam has been careful to reassure the armed forces of his support. Hepraised them fulsomely in a speech on October 1, their 49th birthday, much ofwhich could have come from the lips of Kim Jong-il. For instance: “The ardentpatriotism of our armed forces worked as the motive power for attaining to-day’s stability and prosperity.” Or again: “Today, the world is waging a fierceeconomic war. The national interest we must safeguard faces dangers every-where” which calls for “active military diplomacy.”

20 South Korea


A political minefield US and South Korean hostility to a worldwide ban on landmines receivedwidespread publicity (and much criticism) in September, in the context of theOslo conference on this issue. It should not be assumed that mines are uncon-tentious in South Korea. Pressed by an opposition MP, Chong Tong-yong,Seoul’s defence ministry admitted on October 2 that since 1992 landmines hadcaused 35 deaths and 43 injuries, including 29 children. The MP claimed thateven the military did not know the exact location of more than 1 millionmines laid in or near the DMZ. A further twist is that last year’s floods sweptmany mines southwards down the Imjin and Han rivers.

Economic policy

Reform programmefounders

Kim Young-sam urged on September 1 that legislation on financial reform bepassed by the end of this year. He set the same deadline for the repeal or easingof over 12,000 regulations. There is scant hope on either count. It would havebeen difficult at the best of times for an outgoing president to keep up thereform momentum (which was flagging in any case) in his final year—andthese are anything but the best of times for either Mr Kim or the country. Justabout every possible chicken has come home to roost in Seoul this year, fromrevelations of continued corruption in high places (those jailed includeMr Kim’s own son) to bankruptcies of major chaebol (large conglomerates).Small wonder then that, with an election looming and faced with immediatecrises like the near-bankruptcy of South Korea’s eighth largest chaebol, the Kiagroup, the government has in effect abandoned its longer-term reform effortsand opted to patch and prop up as best it can.

White paper or perhapsblack book

Evidently with an eye to the judgement of posterity (or perhaps the moreimmediate risk of recriminations once he leaves office), Kim Young-sam inSeptember instructed officials to compile a white paper about his adminis-tration’s reform efforts. This could be written as follows. Certainly there wasinitial progress, especially in banning false-name accounts and crusadingagainst corruption. Yet even these early successes had their downside. Personalgestures by the president (for instance in declaring the value of his assets, andthus forcing others to do likewise) were preferred to the more solid, if lessglamorous, task of legislation. Enforcing real names in practice proved difficult,while the crusade against corruption blatantly targeted the president’s politicalfoes (above all, Mr Chun and Mr Roh) even before it became clear this year thatthe medicine had failed and Mr Kim’s own circle was just as tainted.

Kim Young-sam deserves credit for taking South Korea into the World TradeOrganisation (WTO) and the OECD, even if both processes were under waybefore he took office. In making segyehwa (globalisation) his slogan, he encour-aged his people to move beyond gut economic nationalism and absorb the newrealities of reform and market opening, albeit little by little. Yet here too therewas backsliding, such as ill-judged “frugality” campaigns in which the govern-ment tried to discourage South Koreans from buying “luxury” imports.

Ambivalent on bothlabour and capital

Elsewhere the record is more mixed. On labour issues Mr Kim cut an odd figurefor South Korea’s first wholly civilian president by wielding the big stick like his

South Korea 21


military predecessors, before bringing in a belated, botched reform bill—andthen beating a hasty retreat from the backlash (1st quarter 1997, pages 17-18).A wiser man would have legalised the KCTU at once and begun early on theadmittedly tough task of introducing more consensual patterns (which are nothis style in any case) and an awareness of the need for flexibility if South Koreais to maintain its prosperity in a rapidly changing global economy.

As for big business, any consistent policy seems absent. Having begun as achaebol-basher (always popular in the hustings), Kim Young-sam took an anti-trust line in ordering the conglomerates to focus on three core business areaseach—only to make a nonsense of this by letting Samsung, one of the largestchaebol, go into cars. Thereafter, the chaebol could do no wrong (perhaps arealistic appraisal of their real power), although some were more equal thanothers. The recent amnesty of several executives from Hyundai, another topchaebol, tacitly confirms that there had been a vendetta against Hyundai, seem-ingly to punish the group’s founder, Chung Ju-yung, for having dared to runfor president in 1992.

Needed: a new Koreanmodel

What Kim Young-sam patently failed to do was to change either the structure orthe culture of business in South Korea. A president more attuned to economicissues, which have never been his forte, would have striven much harder andsooner to get companies to borrow less and banks to lend more wisely. Thecollapse of the Hanbo group, South Korea’s 14th largest conglomerate, underdebts of some $6bn cast a searing light, not only on endemic corruption butthe ultimately suicidal recklessness of a major conglomerate and the bankingsector alike.

Mr Kim’s successor, whoever he is, will need to be more robust in what hedoes—but less so in how he does it. On the one hand, restructuring needs to beboth bolder and more consistently pursued. On the other, in what is now ademocracy this ought to be done by consent rather than fiat, and by extendingthe rule of law rather than ruling in a manner personalised at best, authoritar-ian at worst. It will not be an easy change.

1998 budget: a smaller rise On September 18 the deputy premier in charge of the economy, Kang Kyung-shik,proposed a budget for 1998 totalling W75.56trn ($83bn), only 5.8% above thisyear’s figure. This is the lowest annual increase for 14 years and compares witha 13.4% rise in 1996. Between 1985 and 1997 the year-on-year increase wasnever less than in double figures, ranging from 10.2% to as much as 21.8%.

In a society accustomed to growth, it may be hard to win acceptance for tighterfiscal policy. (Next year’s budget still presupposes growth of 6.5% and inflationat 4%, both well above OECD norms.) To be sure, neither government spend-ing nor debt looms as large in South Korea as in, say, the mature welfare statesof western Europe. Civil servants will, however, bridle at a pay increase of 3%,which is below the inflation rate; and generals will cavil at a defence allocationwhich is up by only 6.2%, less than half the 12.7% increase they got this year.(Even so, at W15.2trn Seoul’s defence spending is equivalent to the entireNorth Korean economy.)

22 South Korea


Other areas targeted for cuts include subsidies to provincial governments andeducation. On the other side of the ledger, the tax load per head next year isprojected at W2.17m, an increase of 11%. While this too may be unwelcome,in an ever wealthier country it does not seem an excessive burden—and isnothing compared with what paying for unification will one day be like. Thereis the problem of tax evasion, and one problem for the government is to ensurethat its tax take is actually delivered: this year will see a shortfall.

Fear of firing Among the varied aspects of restructuring which the South Korean economyneeds, downsizing looms large but contentious. The union backlash against anarguably one-sided new labour law at the beginning of the year in the form ofstrikes and demonstrations forced the government to put off the introductionof management rights to hire and fire more freely for two years. Since then thewell-publicised financial woes of several large conglomerates have highlightedthe urgent need to cut costs. The Federation of Korean Industries (FKI), whichrepresents the chaebol, has been pushing for an immediate right to lay offworkers in case of merger and acquisition (M&A), a stand backed by the financeand trade ministries, MOFE and MOTIE. Interestingly this is opposed notonly by the two union groupings, Federation of Korean Trade Unions and themore militant KCTU, but also by the labour affairs ministry and the KoreanEmployers’ Federation (KEF). KEF represents smaller firms, which fear that abacklash by the unions could lead to crippling strikes and further depressthe economy.

Still, there can be few countries where an employers’ group calls on govern-ment to “ease the anxiety of salaried workers over their job security”. Theanxiety is real. A survey in Seoul in July among white-collar workers showedthat 55% feared losing their jobs. In another blow to labour the ConstitutionalCourt ruled in August that in the event of corporate bankruptcy, repayment ofbank loans takes precedence over severance pay and pensions to workers whothereby lose their jobs.

A shake-out cannot, however, be avoided. Indeed it has already begun. Five ofthe bankrupt (or near-bankrupt) chaebol—Hanbo, Sammi, Woo Sung, Jinro andKia—have between them shed 13,000 jobs this year. Since July 2,000 workershave left Kia alone, and Kia has promised creditors to cut 8,800 jobs by the endof the year. Ssangyong, with large debts but so far keeping above water, reducedits workforce by 1,000 in the first half of 1997. In 1996 a wider delayering ofmiddle management had already begun, with the top 50 chaebol shedding over4,000 posts under a so-called honorary retirement system. All this may be smallbeer by global standards, as witness fears that the number of jobless men (sic)“is likely to surge to over 700,000”—this in a total population of 46 million.But in the Korean context this is painful stuff, and there is surely more pain tocome once the presidential election is over.

Car wars South Korea seems set for a further bout of conflict with some of its majortrading partners. Although the “frugality campaign” has eased, the ill-will thatit created earlier this year has been a major factor in prompting other countriesto take a tougher line with Seoul. Cars are an especially contentious area, giventhe vast gulf between South Korea’s torrent of exports and its trickle of imports.

South Korea 23


Talks with the USA on this failed to iron out differences, and in late SeptemberWashington duly announced that South Korea will be targeted under Super301 legislation.

This seems bound to lead to increased tetchiness over a wide range of issues,perhaps spilling over into politics. Coincidentally or not, Seoul promptlybanned beef from Nebraska (South Korea is the fourth biggest export market forUS beef) on the grounds that it had found the E Coli bacterium in one ship-ment. All this is not encouraging.

On cars, while Seoul’s position is scarcely defensible, they do have two points.First, South Korea, uniquely in the region, runs a massive trade deficit with theUSA (over $8bn in the first nine months of this year). Any attempt by the USAto open South Korean markets further to US imports will therefore be seenagainst this background. Second, the run-up to a presidential election is not atime when any government can afford to be seen to be buckling to foreigndemands—particularly when a leading car firm, Kia Motors, is on the brink ofbankruptcy.

Foreigners at the helm In a radical move for a culture that is widely perceived as nationalistic if notxenophobic, the government has decided that at least one of the four largeststate-owned corporations—Korea Telecom, Hanjung (alias Korea Heavy Indus-tries and Construction), Korea Tobacco and Ginseng, and Korea Gas—shouldhave a foreign chief executive officer (CEO). The other three will also be“encouraged” to appoint foreigners as vice-presidents, directors or auditors.Advertising and head-hunting will be done in October, with appointmentexpected by the end of November. A three-year contract is guaranteed, plus abasic salary of up to W200m ($222,000). Some state-invested banks may also bepressed to appoint foreign chairmen.

Such drastic steps reflect a frank recognition by the finance and economyminister, Kang Kyung-shik—a genuine reformer, but with only a few monthsin which to make a difference—that these two sectors above all stand in needof a drastic shake-up in management if they are to survive globalisation andmarket opening. Kim Young-sam had originally planned to privatise the statecorporations, but was prevented by two main obstacles: the conundrum of howto stop the chaebol buying them, plus a sluggish stock market already awashwith new issues. Hence the focus has shifted to getting them better managedbefore they are launched in the market.

Needless to say the backlash has already begun. A Hanjung executive remarkedthat a foreign CEO “will create a lot of problems”, such as the risk of leakingcommercial secrets and failure to understand Korea’s “unique corporatepractices”.

Korea Telecom:privatisation postponed

As discussed in previous reports, privatisation is an area of reform where KimYoung-sam has accomplished very little. Deadlines have been regularly post-poned, on a variety of grounds: fears of labour backlash; a stock market alreadylacklustre and overloaded with new offerings; and the problem of how to stopthe chaebol buying up everything in sight.

24 South Korea


One way round at least the latter two problems might be to sell to foreigners.Thus Korea Telecom (KT) had planned a global share offering for Octoberworth $1.2bn; but this was put on hold after two earlier and much smallerissues by its rivals, Dacom and SK Telecom, were postponed in Septemberbecause investors regarded them as overpriced. The same charge was levelled atKT, given the current state of sentiment and apprehension about the health ofthe corporate sector in South Korea. The offering may now be postponed until1998, even though the government had hoped to use the proceeds to plug arevenue gap this year of some W3.5trn.

Production and demand

Domestic demand isweak—

Domestic demand remained sluggish in the second quarter of 1997. Althoughslightly stronger than in the first quarter of the year, private consumption andfixed capital formation, the main engines of domestic demand, were both slowby recent standards. Growth in the former was only 4.8%, while the latteractually contracted by 0.1%, the second consecutive quarter of shrinkage. Theprincipal reasons for this slow growth are threefold: industrial unrest at thebeginning of the year sparked by the government’s labour legislation fiasco;bankruptcies and rumours of insolvency hitting chaebol and their creditorbanks over the year; and slumping demand and prices for key exports continu-ing from 1996.

South Korea: expenditure on gross domestic product(% change, year on year; constant 1990 prices)

1996 1997 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr

Private consumption 7.7 7.4 6.2 6.5 6.9 4.4 4.8

Government consumption 6.8 5.9 6.3 9.1 7.1 4.6 6.1

Gross fixed capital formation 8.2 5.2 8.0 7.2 6.6 –1.2 –0.1

Exports of goods & non-factor services 20.3 10.0 8.2 18.5 14.1 15.2 24.0

Imports of goods & non-factor services 16.3 12.5 12.6 17.6 14.8 8.8 7.3

GDP 7.8 6.9 6.6 7.2 7.1 5.4 6.3

GNP 7.5 6.9 6.5 6.8 6.9 5.0 5.6Source: Bank of Korea, Monthly Statistical Bulletin.

—as exports gathermomentum

Boosted by gains in competitiveness arising from the weakness of the won,exports were strong in national accounts terms during the first half of 1997, upnearly 20% on the same period in 1996. Poor demand conditions at home haveforced South Korean companies to seek market share abroad, even though thedollar terms of trade have continued to move in an unfavourable direction.This has in turn contributed to falling profits for South Korean companies: inthe first six months of 1997 the net earnings of the 581 companies listed on theKorea Stock Exchange fell by 28% to W2.1trn ($2.6bn).

In the second quarter of 1997 export volume growth accelerated to 24%, thehighest year-on-year quarterly growth rate in seven quarters. Imports, mean-while, were subdued by the weakness of domestic demand conditions and theirgrowth in national accounts terms remained in single figures in both the firstand second quarters of 1997.

South Korea 25


Industrial productiongrowth show signs of

recovery

A detailed breakdown of industrial output is now available for the first half ofthis year. Once again high-technology products outperformed the rest of thesector by a large margin. Output of radio, television and communications equip-ment rose by 32.7% year on year in the second quarter of 1997. Output growthof office, accounting and computing machinery over the same period was evenhigher at 34.9% year on year. This well-established trend will continue in theshort term, particularly as South Korea upgrades its mobile phone network andas sales of the Windows ’98 series get under way. Output of motor vehicles andtrailers rebounded in the second quarter, growing by a healthy 14.1%. Thiscompares favourably with the dismal performance in the first quarter of the yearwhen output actually contracted by 9%; this drop was largely due to the prod-uction lost during the industrial unrest at the beginning of the year. Among theworst performers were—as ever—textiles and clothing, which saw their outputcontract by 9.1% and 33.1% respectively in the second quarter of this yearcompared with the same period in 1996. These low value-added and labour-intensive sectors will continue to decline as South Korean manufacturersincreasingly move production abroad to maintain competitiveness.

South Korea: seasonally adjusted manufacturing production(1990=100; period averages)

1996 1997 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr % changea

Food & beverages 123.6 122.5 123.1 123.1 124.1 0.4

Textiles 77.6 74.8 73.0 71.1 70.5 –9.1

Clothing 81.3 73.1 70.6 61.9 54.4 –33.1

Chemicals & products 185.9 196.2 203.1 202.9 210.4 13.2

Rubber & plastic products 139.9 141.6 139.8 136.3 143.1 2.3

Basic metals 162.6 165.6 169.2 170.7 173.7 6.8

Fabricated metal products 140.3 141.6 141.3 141.8 136.6 –2.6

Non-electrical machinery 158.3 162.5 169.1 162.3 168.9 6.7

Radio, television & communications equipment 255.1 262.6 284.5 324.6 338.6 32.7

Office, accounting & computing machinery 322.3 349.9 408.1 432.2 434.6 34.9

Electrical machinery 162.5 175.2 171.5 173.7 173.8 7.0

Motor vehicles & trailers 236.6 252.7 249.6 216.4 269.9 14.1

Other transport equipment 203.5 205.3 229.5 203.7 214.2 5.3

Manufacturing 160.1 164.9 169.2 169.5 175.8 9.8

a 2 Qtr 1997/2 Qtr 1996.

Source: Bank of Korea, Monthly Statistical Bulletin.

Construction orderscontinue to rise in value

The value of domestic construction orders rose by a robust 34% in the secondquarter of 1997. In contrast, the area of new permits issued for building con-struction only managed a modest increase of 3.6% over the same period. Onceagain this would suggest significant inflation in construction costs.

In national accounts terms, the depressed condition of the construction sectorwas manifest in a rise of only 0.2% in construction output in the first half ofthis year, after growth of 6.7% in 1996 as a whole. On the demand side, theconstruction component of fixed capital formation grew by the same meagre0.2% in the first six months of 1997.

26 South Korea


South Korea: construction indicators(period totals)

1996 1997 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr % changea

Permits for building construction (m sq metres) 30.86 29.16 30.14 22.85 31.98 3.6

Domestic construction orders received (W trn) 134.06 130.48 229.48 138.41 179.67 34.0

a 2 Qtr 1997/2 Qtr 1996.


Wages and prices

Wages are still underupward pressure

The rate of growth of nominal wages in manufacturing slowed in the firstquarter of 1997 compared with the whole of 1996, but remained quite stronglypositive. Official data for the second quarter of 1997 have not been publishedat the time of writing. A sample survey conducted by the Ministry of Financeand Economy (MOFE) in 3,900 workplaces, each with more than ten employ-ees, showed, however, that nominal wage levels during the first five months ofthis year rose by 11.7%, not far below the 12.5% rise reported a year earlier. Bysector, transportation, warehousing and communications had the highest riseat 13.9%, followed by wholesale and retail trade, restaurants and hotels with13.5%, manufacturing with 13.1%, construction 12.3%, banking, insurance,real estate and business services with 10.4%, social and personal services with10.4%, and electricity, gas and waterworks with 4.6%.

MOFE ascribed the continuance of these relatively high nominal wage in-creases in the gloomy economic climate of 1997 to the fact that most of theworkplaces surveyed were still applying wage agreements negotiated during1996. The rate of wage rises is expected to slow from the second half of 1997,as this year’s negotiations have resulted in lower settlements. The difficultieswhich the chaebol and their suppliers and banks are facing in the currenteconomic climate are producing a rise in the level of officially recorded unem-ployment, which reached 2.5% at the end of the second quarter of 1997, upfrom 1.9% in the same period of 1996. There has also been an increase in theproportion of the workforce in temporary employment, although this is still avery small share of the total.

South Korea: wages in manufacturing industry(Won per month; period averages)

% change,Earnings year on year

1994 1,022,496 15.5

1995 1,123,895 9.9

1996 1,261,168 12.2

19971 Qtr 1,287,076 9.9Apr 1,286,444 11.0May 1,151,781 13.1Source: Bank of Korea, Monthly Statistical Bulletin.

South Korea 27


The scope of theminimum wage is widened

The Ministry of Labour Affairs has announced that, probably from September1998, the minimum wage will be extended to apply to workplaces withmore than five employees. This extension is expected to apply to about450,000 workers and will increase the total number of workers entitled to mini-mum wages from 5.78 million to 6.24 million out of a total economically activepopulation of 21.9 million in mid-1997. The minimum wage was introduced in1988, initially only for manufacturing enterprises with more than ten workers.In 1989 minimum wages were applied to construction and mining and allenterprises with more than ten workers were brought into the minimum wagessystem in 1990. From September 1996 to August 1997 the minimum wage wasset at W1,400 (about $1.55) per hour.

Inflation falls to aten-year low

Consumer price inflation has been on a declining trend since the latter part of1996, thanks to the strength of the won against the yen in late 1996 and early1997 and also to subdued domestic demand. Consumer price inflation for thefirst eight months of 1997 was 4.2%, the lowest rate recorded since the firsteight months of 1987. (The changes to quarterly 1996 consumer price figuresin the table below from our last report are due to a change in the base year from1990 to 1995).

Producer price inflation, however, has responded more rapidly to the weaknessof the won during 1997, which has raised the prices of inputs to manufactur-ing. Average producer price inflation during the first eight months of the yearstood at 3.5%, somewhat higher than the figure for the same period in 1996 of2.4%.

Both consumer and producer price inflation will come under upward pressurein the second half of 1997, partly as a result of the ongoing weakness of thewon against both the dollar and the yen. The following will also exert upwardpressure on prices during this period: the large amounts of liquidity to bereleased by the Bank of Korea to support South Korean banks and to fundbail-out programmes between September and November; higher fees andcharges across a range of public services (from September, for example, medicalinsurance fees and postal charges increased by some 9% and 11.4% respec-tively); and the possible release of large amounts of money to coincide with thepresidential election at the end of this year.

South Korea: consumer and producer prices(% change, year on year)

1996 1997 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr

Consumer prices 4.7 4.9 5.1 5.1 4.7 4.0

Producer prices 3.1 1.8 2.3 3.5 3.7 3.8

Export prices (won terms) –1.3 –1.9 1.8 3.5 5.7 9.5

Import prices (won terms) –2.4 –3.9 1.5 5.1 6.6 8.5Source: Bank of Korea, Principal Economic Indicators.

The won terms of tradeimprove

After deteriorating in late 1996 and early 1997, the terms of trade in wonmoved in Korea’s favour during the second quarter, with export prices rising1 percentage point faster than import prices year on year. This is partly due todollar appreciation against the yen, which made South Korea’s exports more

28 South Korea


competitive and its imports cheaper. Japan is the source of many of SouthKorea’s imports, a large proportion of which consist of the parts and machineryand equipment needed for the country’s production of items such as cars,television sets and semiconductors. The USA is South Korea’s most importantexport destination, especially for dynamic random access memory (DRAM)chips, one of the country’s principal exports.

Money and finance

Liquidity is plentiful— During the first six months of 1997 South Korea’s monetary authorities main-tained an accommodating stance. In the context of corporate sector difficultiesthe Bank of Korea took steps to maintain plentiful liquidity in order to avoidinterest rate rises (3rd quarter 1997, pages 28-29)

As a result, despite a slowdown in the economy and a corresponding fall-off indemand for funds for investment, the rate of growth of M2 remained high in thefirst half of 1997, boosted by the establishment of a fund to help South Koreanbanks suffering from the insolvency or near insolvency of many debtors to gainaccess to foreign exchange without paying exorbitant interest premiums.

South Korea: money supply trends(W trn unless otherwise indicated; end-period)

1996 1997 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr

M1 342.70 345.88 380.62 395.42 352.46 362.84 % change, year on year 10.8 9.4 21.3 1.7 2.9 4.9

M2 1,516.91 1,597.54 1,697.60 1,783.12 1,821.21 1,877.91 % change, year on year 15.1 17.2 21.5 15.8 20.1 17.6Source: Bank of Korea, Principal Economic Indicators.

—as the authorities moveto help ailing companies

Although it is government policy to seek to lower South Korean interest ratestowards OECD norms, the pressures in the domestic financial markets and thesteep decline of the won in the middle of 1997 have pushed interest ratesupwards. By the end of September the yield on overnight won had risen to14.2%, up from a low of 10.6% at the beginning of June. Similarly, as of thesame period, the yield on the benchmark three-year corporate bond had risento 12.6%, compared with a low of 11.3% again at the beginning of June.

In response to the state of near-crisis which the corporate insolvencies broughtto the financial markets, especially from the middle of the year, the Bank ofKorea announced plans to supply about W5trn ($5.5bn) to the market to helpthe domestic corporate sector. These funds, along with additional liquiditywhich will probably be pumped into the system as a by-product of the presi-dential election, will keep money-supply growth buoyant to the end of 1997.

Stock-market gloomintensifies and foreign

investors are pessimistic

The benchmark Korean Composite Stock Price Index (KOSPI), contrary to theexpectations of many, including the EIU (3rd quarter 1997, page 28), hassuccumbed to the wobbles that have afflicted the South Korean corporatesector this year. Bankruptcies, liquidity problems, declines in corporate profits,a weakening currency and a generally less sanguine view of South-east Asianmarkets have hit the stock market hard. In mid-October, with news of financial

South Korea 29


troubles at the Ssangbangwool group and New Core, a retailing group, theKOSPI slid to below 600 points, its lowest level in five years.

South Korea: stock prices, 1997(end-period)

Apr May Jun Jul Aug Sep

KOSPI index 703.2 756.8 745.4 726.1 695.4 647.1Source: Bloomberg.

Perhaps not surprisingly in the light of these negative factors, foreign investorshave been heavy sellers of South Korean shares. In September, for example,foreign investors sold W298.3bn ($33.16m) of shares on a net basis, the highestfigure since March 1995. This was the second month in a row that foreignershad sold more shares than they bought. The government had hoped that thelifting of the ceiling on foreign stock ownership from the current 23% to 26%later this year would produce a large inflow of funds—as much as $1.2bnaccording to some estimates. However, given the lack of confidence on the partof foreign investors in the South Korean stock market, the actual inflow offunds may be significantly smaller.

The financial health ofsome banks isdeteriorating

According to the Office of Bank Supervision, reporting in September, thecapital-adequacy ratio (the percentage of net worth to risk-weighted assets) ofthe 25 commercial banks improved during the first half of 1997, to 9.42%. But15 banks, among them Korea First, Korea Exchange, KorAm, Donghwa,Daedong, Boram and Peace, saw their capital-adequacy ratios deteriorate, be-cause of large rises in their risk-weighted asset portfolios as their non-performingloans soared in the wake of this year’s corporate bankruptcies. Pressure willintensify particularly for the weaker South Korean banks to rationalise toimprove asset quality.

Estimates put total non-performing loans at South Korean banks during thefirst half of this year at W5trn ($5.6bn), more than 100% higher than the figureat the end of 1996. Not surprisingly, this has led to reappraisals of the credit-worthiness of South Korean banks, some of which have had trouble raisingfunds on international markets as a result. On September 8 the Bank of Koreastepped in with a W1trn ($1.1bn) emergency loan to the troubled Korea FirstBank (KFB), the main creditor of the bankrupt Hanbo and Sammi groups andthe largest lender to the almost bankrupt Kia group. This special loan will carryan annual interest rate of 8% per year, rather lower than the average rate of12.5%. In return, KFB has pledged to cut 1,800 jobs by 2001, close 40 branchesand sell seven subsidiaries.

As the ratings agencies’new judgements loom—

Two US credit rating agencies, Moody’s and Standard & Poor’s (S&P), havedowngraded the ratings of Korean chaebol and banks during 1997. Havingput five South Korean banks on credit watch in July, in August S&P changedHyundai Motor’s rating outlook to negative, because of the problems in theKorean car sector triggered by the problems in the Kia group. S&P also putPohang Iron and Steel Co (POSCO), the world’s second largest steel maker andcurrently rated A+, on watch, wary of the implications of its quest to acquire theassets of Hanbo Iron and Steel, which KFB is planning to dispose of privately,having failed to raise acceptable bids at three public auctions. Also in August,

920

900

880

860

840

820

800

640

660

680

700

720

740

760

Nov Jan Mar May Jul Sep

South Korea: stock-market indexand the exchange rate

Source: Bloomberg.

199619961996199619961996199619961996199619961996199619961996199619961996199619961996199619961996199619961996 971996 979797

Stock market index; right scaleStock market index; right scaleStock market index; right scale

1996 971996 971996 971996 971996 971996 971996 971996 971996 971996 97

Stock market index; right scaleW:$; left scale, inverted

1996 97

Stock market index; right scale

1996 97

Stock market index; right scaleStock market index; right scaleStock market index; right scaleW:$; left scale, inverted

30 South Korea


S&P reaffirmed the sovereign AA- foreign currency credit rating, but changed theoutlook to negative from stable. Moody’s said in August that it might lower theratings for foreign currency deposits placed in South Korean banks.

Despite the higher costs that they may face in the current climate, applicationsby South Korean companies to issue foreign currency bonds abroad were worth$2.29bn in the fourth quarter, 80% above the third quarter. This flurry ofapplications was made in anticipation of more difficult conditions ahead.

—a bank bond offeringdoes well

In September Korea Development Bank braved the Euromarkets and successfullyplaced $1.5bn of paper: $900m four-year bonds at a spread of US Treasuries plus98 basis points and $600m of seven-year bonds at a spread of 115 basis points.This placement was seen as establishing a new benchmark for South Koreandebt in the aftermath of the currency and stock market strains in South-eastAsia. This shows that a well-regarded South Korean borrower can still commandfavourable terms on the international debt markets.

Financial reform plods on Short-term deposit rates were liberalised in July this year. Under the measures,interest rates on banks’ savings and deposits with a maturity of less than threemonths, excluding demand deposits, were deregulated. Mutual savings andfinance companies and credit unions were allowed to set their interest ratesfreely on short-term savings deposits. Interest rates on commercial paper andbills issued by merchant banks and securities companies, with a maturity of lessthan one month, were also liberalised, along with the stock-savings products ofinvestment trust companies. Minimum deposit amounts and maturity limitson some short-term products, such as commercial paper, certificates of depositsand repurchase agreements were also removed.

Implementation of this stage in the process brings the so-called liberalisationratio in all financial institutions to 92%, from 81.6%. The aim is to stiffen compe-tition between banks and non-banking financial institutions. Commercialbanks may now offer a high-return, short-term financial instrument, themoney market deposit account (MMDA), allowing banks to compete with suchproducts as the cash management account (CMA) and the money-market fundoffered by merchant banks, and investment and finance firms.

Meanwhile, to help banks secure funds for investments in project financingthe MOFE has allowed banks to issue financial debentures up to 50% of share-holders’ equity. For the first year after the introduction of this measure, how-ever, the ceiling will be 25%. Previously only such specialised banks as KoreaDevelopment Bank and Korea Long Term Credit Bank could issue bonds. It isexpected that the 25 commercial banks will issue about W4.8trn in such bonds,with a minimum maturity of three years, about 13.3% of a total bond issueestimated at W36trn. At the same time MOFE lowered the mandatory lendingratios for some banks. The mandatory lending ratio indicates the government-set standards by which banks are urged to extend the guided ratio of theirtotal loans to small and medium-sized companies. In particular MOFE allowedIndustrial Bank of Korea to lower its mandatory credit allocation ratio to smalland medium-sized firms to 80% from 90%.

South Korea 31


The role of the Bank ofKorea remains unclear

The government announced a revised reform package for the financial sectorin July (3rd quarter 1997, pages 22-23), which by and large gave the Bank ofKorea control of monetary policy, to the consternation of MOFE, while up-holding the role of the proposed unitary Financial Supervisory Board, whichwill report to the prime minister’s office, not MOFE or the Bank of Korea.Despite the pledge to put the proposals to the National Assembly before theelections, however, there has been no sign of them, and it remains unlikelythat action will be taken by this government. Battle will doubtless recommencewhen the new government is installed in February next year.

Foreign trade and payments

The trade deficit isstill large as exports are

hit by poor prices

Although exports grew rather more quickly than imports in national accountsterms in the first half of 1997 (see The economy), the trade deficit (customsbasis) rose to a hefty $9.1bn over the same period. While this is higher than the$8.1bn deficit recorded in the first half of 1996, the aggregate figure disguisesthe steady monthly improvement in the trade deficit, from a high of $3.5bn inJanuary, when export production was hit by industrial unrest, to just over$400m in June. In late September MOFE said that it expected the current-account deficit to fall from $23.7bn (Bank of Korea figures) in 1996 to $15bn in1997, as a result of strong growth in export volumes, boosted by continuingcurrency depreciation, combined with a sustained downturn in imports asinvestment is curbed and inventories are run down. The weakness in prices forkey exports that was apparent in 1996 continued to manifest itself in the firsthalf of this year, so that the overall rise in export values in the January-Juneperiod was only 0.8% in dollar terms. As well as continued low internationalprices for some of South Korea’s key exports, the low rise in the value of exportscan also be attributed to price-cutting over and above that implied by exchangerate movement to maintain market share in the face of stiff internationalcompetition. By July and August, however, exports had begun to show a strongrebound in dollar value; in August exports rose by 14.9%, after a 19.3% year-on-year rise in July. Among exports that accelerated in these two months weresemiconductors, steel and petrochemicals. Exports of vehicles were held backby the problems at Kia Motors.

South Korea: exports of selected commodities($ m)

Year % Jan-Jun %1995 1996 change 1996 1997 change

Apparel & accessories 4,958 4,221 –14.9 1,991 1,841 –7.5

Passenger cars 7,242 9,089 25.5 4,294 4,394 2.3

Footwear 1,506 1,236 –17.9 619 537 –13.2

Textiles & fabrics 8,735 8,703 –0.4 4,510 4,247 –5.8

Transistors, chips etc 19,373 17,305 –10.7 9,170 9,030 –1.5

Iron & steel 5,107 4,549 –10.9 2,196 2,449 11.5

Office machines 4,967 5,673 14.2 2,573 3,094 20.2

Telecommunications equipment 4,244 4,404 3.8 2,056 2,178 5.9

Refined petroleum products 2,291 3,678 60.5 1,482 2,512 69.5

continued

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10

20

30

40

50

60

Jan Feb Mar Apr May Jun Jul

South Korea: semiconductorexports, 1997% change, year on year


32 South Korea



Chemical elements & compounds 2,955 2,967 0.4 1,436 1,721 19.8

Television receivers 1,901 2,207 16.1 1,109 812 –26.8

Sound equipment, VCRs etc 1,824 1,747 –4.2 968 642 –33.7

Radios 909 530 –41.7 279 211 –24.2

Ships etc 5,533 7,127 28.8 3,595 2,558 –28.9

Household electrical goods 1,685 1,909 13.3 926 976 5.3

Textile yarn 1,331 1,470 10.4 705 924 31.1

Musical instruments & parts 1,385 1,451 4.8 713 602 –15.6

Rubber tyres & tubes 1,130 1,549 37.1 797 705 –11.5

Electric power machinery 1,322 1,621 22.6 775 810 4.5

Power-generating equipment 1,212 693 –42.8 368 371 0.8

Total incl others 125,058 129,715 3.7 64,671 65,202 0.8Source: Bank of Korea, Monthly Statistical Bulletin.

Imports are slowingsharply

Import growth in the first six months of the year was marginally faster in dollarterms (customs basis) than export growth, at just over 2%. This was chiefly amatter of the dollar terms of trade; oil prices, for example, were still high,producing a 45.1% increase in their dollar cost in the first half of the year.

South Korea: imports of selected commodities($ m)


Machinery & transport equipmentTransistors, chips etc 9,838 11,448 16.4 5,336 6,636 24.4Power-generating machinery 3,891 3,666 –5.8 1,833 4,594 150.6Electric power machinery 2,181 2,301 5.5 1,119 1,232 10.1Telecommunications equipment 2,659 3,069 15.4 1,489 1,409 –5.4Office machinery 3,570 3,992 11.8 2,005 807 –59.8Metalworking machinery 2,341 3,192 36.4 1,413 1,077 –23.8Textiles machinery 1,087 744 –31.6 396 253 –36.1Motor vehicle parts 1,304 1,245 –4.5 632 569 –10.0Aircraft 2,479 2,766 11.6 915 1,159 26.7

Measuring & controlling instruments 3,607 3,886 7.7 1,813 1,837 1.3

Chemicals, pharmaceuticals & plastics 9,437 9,237 –2.1 4,877 3,880 –20.4

Mineral fuelsCrude petroleum 10,809 14,432 33.5 6,232 9,042 45.1

Inedible raw materialsHides & skins 991 891 –10.1 428 477 11.4Iron ore, copper ore & ferrous waste 2,312 2,174 –6.0 1,110 1,082 –2.5Timber 1,047 963 –8.0 497 442 –11.1Raw cotton 771 714 –7.4 396 319 –19.4

Food 2,575 3,212 24.7 1,563 1,449 –7.3

Non-ferrous metals 4,617 4,126 –10.6 2,131 170 –92.0

Total incl others 135,119 150,339 11.3 72,745 74,344 2.2Source: Bank of Korea, Monthly Statistical Bulletin.

From July, however, there have been signs that sluggish domestic demand wasproducing a downturn in import volumes. The value of imports fell by 0.6% in

South Korea 33


July 1997 and fell further by 11.2% year on year in August. Notable falls wereregistered in imports of capital and consumer goods, while lower oil pricesproduced a fall of 5.7% in August. There is not likely to be any rebound inimports until early in 1998, when the economy is expected to start recovering.

A higher current-accountdeficit

The faster rise in the value of imports than exports in the first half of 1997produced a higher current-account deficit of some $10.3bn on national defin-itions. While South Korea is able to meet its large financing requirementschiefly through additional borrowings and its debt-service ratio remains at amanageable level of around 10%, it does have a fairly large stock of short-termdebt, which we estimate represents about half of the $137bn in total foreigndebt outstanding at the end of 1996.

The recent upward drift in domestic interest rates and the liquidity problemsaffecting the domestic banking sector are encouraging South Korean com-panies to look offshore for their borrowing, despite the currency risks, whichthey are not accustomed to facing with dollar debt. The large foreign borrowingof South Korean entities is not a cause for particular concern, since, unlike thedomestic debt, it has been scrutinised by the markets. Many South Koreancompanies, despite high gearing, are highly profitable, innovative and flexible.But the current financial anxieties, against the background of pressure on someSouth-east Asian currencies and stock markets, do highlight the urgency offinancial sector reform, so that corporate Korea is less dependent on debt andbanks are more prone to evaluate lending decisions on market criteria.

South Korea: current- and capital-account balances($ m)


Merchandise exports 123,203 128,303 4.1 64,095 65,917 2.8

Merchandise imports –127,949 –143,609 12.2 69,738 71,975 3.2

Trade balance –4,747 –15,306 222.4 –5,643 –6,058 7.4

Invisibles balance –3,640 –7,645 110.0 –3,758 –3,895 3.6

Net transfers –561 –765 36.4 –416 –329 –20.9

Current-account balancea –8,948 –23,716 165.0 –9,818 –10,283 4.7

Long-term capital balance 7,827 11,797 50.7 5,730 7,517 31.2

Basic balance –1,120 –11,919 964.2 –4,088 –2,766 –32.3

Short-term capital balance 5,592 5,229 –6.5 4,060 3,968 –2.3

a Bank of Korea and IMF figures differ slightly in the computation of the services and income items in the current account. Bank of Korea figuresare reported here because they are more timely, but IMF figures are used as the basis for the projections in the Outlook for 1998-99 and forhistorical data on the Economic structure page.


The falling won reducesthe foreign exchange

reserves

In September the Bank of Korea disclosed that the foreign exchange reservesat the end of August had fallen by $2.53bn from July, to $31.14bn. This is alsobelow the end-1996 level of $33.2bn. The decline is attributed to the foreign ex-change support extended to the commercial banks that have been experiencingdifficulties borrowing money abroad, as well as to the central bank’s marketintervention to prop up the won.

34 South Korea


Proponents of the use of the reserves to defend the currency, who are plentifulamong the South Korean bureaucracy, would argue that it serves the valuablepurpose of smoothing the path of currency—in either direction. As the tablebelow shows, the won has been falling against the dollar throughout 1997,although it has recently gained on the yen and the D-mark. Some rebuilding ofthe reserves may take place this year if there is a favourable response to thehigher ceiling on foreign ownership of South Korean stocks. If not, it will haveto await the actions of a new government.

Business news

Hanbo: financially andmorally bankrupt

In this year when so many chickens have come home to roost in South Korea,the fates of two chaebol are especially symbolic. In the first half of 1997 thequickly coined term “Hanbogate” told its own story, which, while depressingin the corruption it revealed, was not hard to evaluate either economically ormorally. Clearly Hanbo was unwise to borrow vast sums to pour into a steelmill project which had been neither costed nor appraised properly for viability.South Korean banks were equally foolish to lend Hanbo the money, again withno proper checks or safeguards. Furthermore, as it turned out, both Hanbo andits banks were also criminally culpable, because the whole affair was steeped inbribery and corruption.

But Kia is more complex— The second half of 1997 has also been dominated by the saga of one chaebol,Kia. This time, however, the issues are both more complex and contentious.The story is also not over yet. As of early October Kia was still refusing demandsby its creditor banks (including a deadline which expired on October 6) toapply for court receivership. This would allow creditors to replace the existingmanagement—who have tenaciously resisted all such efforts—and start to selloff the group’s businesses as they see fit.

Instead, on September 22 Kia applied for what is widely described as courtprotection, but is better translated as conciliation or mediation (hwaeui inKorean). This would allow existing management to remain in charge whileseeking to renegotiate debts.

—and bad management isto blame

Politics and economics are inextricably intertwined in the Kia saga. In eco-nomic terms, South Korea’s eighth largest conglomerate is undoubtedly indeep trouble. With debts as high as W11.5trn ($12.6bn), its collapse would bethe country’s biggest ever bankruptcy. There can be little doubt that bad man-agement is to blame. Despite its distinctive history as a chaebol of rare focus,making only vehicles and related items, in recent years Kia followed the herdand branched out into pastures new, such as construction and steel—which isone reason for its present plight. But even in its core business it has been tepid,with a dull and stagnant model range. This allowed Daewoo to overtake itearlier this year as the second largest Korean car-maker (after Hyundai, whichis also much more dynamic).

Korea’s favourite chaebol— But Kia is also that rarest of beasts: a chaebol that inspires affection. It is un-usual, and had often been praised as a model for others to emulate, not only for

0

5

10

15

20

25

30

35

1990 91 92 93 94 95 96 97(a)

South Korea: foreign exchangereserves (excl gold)$ bn

(a) August. Source: IMF, International Financial Statistics.

South Korea 35


its focused business but also for its diversified ownership, which is widelyspread, including its workers and subcontractors, rather than being hogged bythe founder and his family dynasty in the usual South Korean way. For thisreason, as well as its sheer size, Kia was an obvious candidate for the bank-ruptcy protection measures hastily unveiled by the government earlier thisyear, which feared a domino effect of corporate collapses in the wake of Hanbo,Sammi and others.

—are accused of playingfor time

It is from this point on that interpretations diverge. The government is nowangry with Kia for allegedly abusing its two months of bankruptcy protection,which expired on September 29. Kia is accused of temporising—failing to talkseriously to its creditors, or to take meaningful steps to solve its problems. Itsunresolved status has in turn had a knock-on effect and has tarnished thereputation of the South Korean economy as a whole—not least the banks,several of which are very heavily exposed and have in consequence seen theircreditworthiness suffer.

The banks are hurting Official policy has therefore shifted towards protecting the banks, especiallyKorea First Bank (KFB), which was badly hit before the Kia wobbles by the bank-ruptcies of Hanbo and Sammi earlier in the year. KFB is to receive low-interestloans and the government will also subscribe to a W800bn rights issue which ineffect gives it a 49% stake. This support may have influenced S&P, which onOctober 2 downgraded three South Korean banks, Shinhan, Korea Exchangeand Hanil. Interestingly S&P stopped just short of demoting Korea First tospeculative (junk bond) status.

Samsung prowls inthe wings

Kia, however, denies temporising and insists that given time and protection itsself-rescue plans will work. Since these include raising W3trn ($3.3m) by sellingproperty onto a market already glutted by every other debt-strapped chaeboltrying to do the same, scepticism is in order. More plausible is Kia’s other claim:the accusation that the authorities actually want it to go under—so thatSamsung can buy it up.

Samsung’s foray into cars (the first are due to be available next year) has provedvery expensive. Its plan to finance this with profits from its electronics divisionfoundered with the plunge in chip prices during the last two years. Although itis already building its own plant, to buy up ready-made facilities and distrib-ution channels would help it to achieve critical mass. From the government’sviewpoint it would also reduce overcapacity in the South Korean vehicle sector.

Politicians weigh in Much as the administration denies it, this scenario is widely believed; and withthe presidential election just two months away, Kia’s fate has become a polit-ical issue. For the opposition Kim Dae-jung has publicly opposed any third-party takeover of Kia; while for the ruling party, Lee Hoi-chang has backed Kia’squest for court mediation. Indeed, the group’s political strategy is presumablyto survive at least until the election and to hope that a victory for Kim Dae-jungwould mean a reprieve.

Neither of these is assured. For now Kia is virtually running on empty as thebanks have cut off any further loans. It will have to rely on its reserves and cash

36 South Korea


flow, but this is risky. Despite an initial surge of public support when Kia’s woesfirst became known, and a rise in sales (boosted by heavily discounted prices),sales in October fell by 14%, the second consecutive monthly decline. Prod-uction is already being hit by shortages of components, made by small suppli-ers who have also been denied any further lines of credit; as well as by atwo-day protest strike by Kia workers, who have threatened to walk out againon October 16. This seems a perverse way to defend their company in thecircumstances.

As for politics: while Kia has a large factory in Cholla, Kim Dae-jung’s politicalstronghold, DJ will no doubt be mindful of the mud that stuck to Kim Young-samwhen he undermined his own professed policy that chaebol should specialiseby letting Samsung make cars—in Pusan, his own political base.

A Ford to lose? Yet another twist is that Kia’s largest single shareholder is Ford, which wouldlose some $60m in shares if Kia goes into receivership. Wearing a different hat asone of the big three US car-makers, Ford helped to press for the targeting ofKorean car imports under Super 301 legislation, which authorises the USA totake unilateral action against any country violating international tradeagreements or inhibiting US commerce. It is not yet clear how it will play theKia issue.

Merchant banks feelthe heat

About $5bn of Kia’s debt is owed to non-bank financial institutions, mainlyso-called merchant banks, a term with a somewhat different connotationin South Korea than elsewhere (they are mainly short-term lenders withoutcollateral). As of early October, seven such institutions (unnamed, under-standably) were said to be owed a total of $3.72bn by Kia and two otherinsolvent groups, Jinro and Dainong, a sum greater than their combined equitycapital. But while liquidity problems are admitted, a spokesman for themerchant banks’ association denied that any were at risk of actual insolvency.

South Korea 37


North Korea

Political structure

Official name Democratic People’s Republic of Korea

Form of government One-party rule, based on the ideology of juche (self-reliance)

The executive Since 1992, the National Defence Commission has ranked above the Central People’sCommittee, which in turn is above the State Administration Council (cabinet). All arenotionally responsible to the Supreme People’s Assembly

Head of state Indirectly elected president. Vacant since the death of Kim Il-sung in July 1994

National legislature Unicameral 687-member SPA directly elected for five-year terms. A StandingCommittee substitutes when the SPA is not in session

Regional legislatures Each province, city, county or district elects people’s assemblies or committees. Thesecommittees elect local officials to carry out centrally decided policies

National elections None since April 1990. The election due in 1995 was not held. The SPA has not metsince April 1994

National government The Korean Workers’ Party (KWP) controls all arms of the state. Since the death of KimIl-sung, military figures have had a growing influence. Kim Il-sung’s son Kim Jong-il isportrayed as supreme leader, but has yet to be formally appointed to the top state post

Main political parties Government: Nominally, the KWP is in coalition with the Social Democratic Party andthe Chondoist Chongu Party

Key holders of state & partypositions

President vacantVice-presidents Pak Song-chol; Li Jong-ok; Kim Yong-ju;

Kim Byong-sikPrime minister vacantVice-premiers Kim Yong-nam; Choe Yong-nim; Kim Bok-sin;

Kang Hui-won; Kim Yun-hyok;Kim Hwan; Kim Chang-chu; Chang Chol; Hong Song-nam; Kong Chin-tae

Politbureau presidium Kim Jong-ilKey politburo members Kye Ung-tae; Chon Byong-ho

Key ministers Chemicals industry Kim HwanDefence vacantElectronics & automation industry vacantFinance Yun Ki-chongForeign affairs Kim Yong-namForeign trade Li Song-daeMachine industry Kwak Bom-giMetal industry Choe Yong-nimPublic security Paek Hak-nimRailways Pak Yong-sok

Chairman of the StatePlanning Commission

Hong Sok-hyong

38 North Korea


Economic structure

Latest available figures

Economic indicators 1992 1993 1994a 1995a 1996a

Real GNP growth % –5.0a –3.5a –2.0 –4.2 n/a

Rice productionb ’000 tons n/a 1,330 n/a n/a 1,340

Population m 22.2 22.6 23.0 23.4 23.7

Exportsc $ m 1,020 1,020 840 590 791d

Importsc $ m 1,640 1,620 1,270 1,470 1,340d

Trade balance $ m –620 –600 –430 –880 –549d

External debte $ bn n/a n/a 9.8 n/a n/a

Exchange ratef (av) Won:$ 2.16 2.17 2.17 2.15 2.15

October 17, 1997 Won 2.2:$1f

Origins of gross domestic product 1994c % of total

Agriculture, forestry & fishing 29.5

Mining 7.8

Manufacturing 23.6

Electricity, gas & water 4.8

Construction 6.3

Services 27.9

Total 100.0

Main destinations of exports 1995g % of total Main origins of imports 1995g % of total

Japan 27.9 China 32.6

South Korea 20.8 Japan 17.2

China 5.2 Russia 4.7

Germany 4.0 South Korea 4.3

Russia 1.2 Germany 2.9

a EIU estimates. b UN Food and Agriculture Organisation (FAO) figures. c Bank of Korea estimates. d JETRO estimate. e Including rouble-zonedebt, at pre-1990 values. f Market rate. g Cited in Marcus Noland, The North Korean Economy, Institute for International Economics, WashingtonDC, 1995.

North Korea 39


Outlook for 1998-99

A coronation As North Korea approaches the year of its half centenary as a state—theDemocratic People’s Republic of Korea was proclaimed on September 9, 1948—its overall prospects remain as uncertain as ever. But, politically, there are at lastsome signs of a return to due process—or what passes for it in Pyongyang.Kim Jong-il’s assumption of the post of general secretary of the ruling KoreanWorkers’ Party (KWP) on October 8 (see The political scene) suggests that thismay happen at long last. As of early October, however, there was no indicationof when, or even whether, the “dear leader” might take on the other top postheld by his late father, Kim Il-sung, and become state president.

Perhaps a purge? While any sign of normalisation in North Korea is welcome, further questionsremain. One is whether Kim Jong-il’s accession to the top party post will beaccompanied by a reshuffle or even a purge of top state and party positions,which apart from the odd death have been strangely static by any standardsduring the three years since Kim Il-sung died. The extent and character of anysuch shake-up will be a further pointer as to how far Kim Jong-il is really incharge: for instance, whether he can pension off his father’s generation enmasse and promote younger officials. Any new appointees will also be scruti-nised for clues as to whether a turn to reform might at last be on the cards.There have been rumours that Kim Dal-hyon, a known reformer demoted in1993, may return as prime minister. That would be a very good sign.

Reform, even? Another question is whether, once he is formally in charge, Kim Jong-il mightbegin to exercise more substantive leadership, particularly over the economy.Despite being on record time and again as opposing reform, the depths ofNorth Korea’s crisis and some signs of relaxation on the ground raise thepossibility that what is already being proclaimed as the new “Kim Jong-il era”could be a cover for a de facto U-turn, even though official rhetoric insists oncontinuity with the past. But this may simply be the triumph of hope overexpectation.

The north must reformor die

One reason for expecting a possible turn to reform is that it is hard to see howNorth Korea can survive at all in the medium term without one. Nonetheless,despite dire warnings of famine and an as yet unknown number of deaths, ithas come through a third summer of food shortage with the regime apparentlyintact. While the EIU continues to believe that some form of eventual collapseis probable, this remarkable ability to endure (on the part of citizens andregime alike) is thought-provoking. Perhaps what we have previously termed“militant mendicancy”—ie browbeating foes and neighbours into proppingthe regime up, precisely for fear of collapse or worse—may yet have a good dealof mileage left for Pyongyang if it plays its cards skilfully.

Japan: a peach for adying snake

One option in principle available for North Korea to sustain itself would be toestablish relations with Japan. Tokyo has agreed that, if and when this hap-pens, it will offer Pyongyang an aid package as “reparation” for Japan’s colonialrule earlier this century, just as it did when it tied the knot with Seoul in 1965.The not inconsiderable figure of $10bn has been widely mentioned, most

40 North Korea


recently by the northern defector Hwang Jang-yop who has been questionedby officials from Japan, as well as South Korea and the USA. Mr Hwang went sofar as to claim that cementing ties with Japan in order to get the money arePyongyang’s top priority, and relations with the USA are mainly a means tothis end. He added that Kim Jong-il has told his negotiators to be high-handed“in the belief that Japan could easily compromise because it is afraid of a war”.He also advised against any such aid, which he likened to “giving a dying snakea peach”.

Old wives pave the way? Nonetheless, a thaw appears under way. The projected visit home by theJapanese wives of some North Korean returnees (perhaps only ten or 15) inOctober (see The political scene) will be a key test. It could easily backfire: itwould take only one of these women to refuse to return to Pyongyang for thewhole trip to poison rather than promote relations (the chosen few will doubt-less be carefully selected to minimise this risk). If it succeeds, the trip will buildup a momentum for further such visits—each of which will carry the same risk.Even if this hurdle is successfully overcome, there is no sign that Pyongyangwill be any less dismissive than in the past about the various knotty issues—missile deployment, drug smuggling into Japan and alleged kidnapping ofJapanese citizens—that have bedevilled relations with Tokyo until now. Yet ifNorth Korea wants to lay hands on the $10bn, it will have to learn to compro-mise and meet others half way.

Four-way talks: notuntil 1998?

Pyongyang’s mood at the second round of preliminary four-way talks inSeptember was far from compromising. While profoundly irritating to theother three dialogue partners, this break-up may not bode as ill as somecommentators have suggested. In all probability it is connected to politicalsuccession, on both sides of the demilitarised zone (DMZ) that divides the twoKoreas. It would not be the first time that North Korea has put foreign affairson hold while it concentrates on domestic politics—in this case, the formalaccession of Kim Jong-il as KWP general secretary. This is coupled with a strongantipathy towards South Korea’s outgoing president, Kim Young-sam, whoseparty Pyongyang will have no desire to boost in the run-up to South Korea’spresidential election in December. The north may wish to wait until a newpresident is installed in the Blue House. Depending on who he is and howthings go, 1998 might even see the first ever inter-Korean summit.

De facto reform Characterising the present state of the North Korean economy, let alone pre-dicting its future course, poses a number of challenges. At one level it mightseem easy. There is no doubt that, overall, industry and, above all, agricultureare in deep crisis. It is also clear that there has so far been no officially pro-claimed restructuring or reform. What is happening on the ground, however,may be more diverse than what is officially proclaimed, and could thus containthe seeds of future change.

There is no doubt that the famine of the past three years has caused a large risein the number and variety of markets that are de facto tolerated. The govern-ment seems to turn a blind eye to its citizens doing whatever they have to doto stay alive, be this travel or trade, or both. For that matter earning foreign

North Korea 41


exchange has long been encouraged, if not mandated, as a patriotic duty forenterprises everywhere.

Not green shoots butmushrooms

The question is how far all this has gone or may go, and how to interpret it. Itcertainly represents a big change from the North Korea of old, when everythingand everyone knew their place and stayed there. Some observers assess this as defacto reform and go so far as to see the trend towards markets as fresh greenshoots springing up in the cracks between the stones of the formal plannedeconomy—itself all but dead and so bypassed. Perhaps so, but a better analogymight be to view the new phenomena as mushrooms sprouting on a dying treetrunk, at a time when the people are reduced to stealing scrap metal in order tobuy food.

Our view remains that real reform in North Korea would require a positive andexplicit commitment to comprehensive economic restructuring, as opposed toshort-term and often desperate survival strategies the benefits of which aremarginal at best. However, we do not underestimate the political significance ofcurrent trends; arguably it would be impossible for Pyongyang ever to imposecentral planning again, even if Kim Jong-il were so inclined. To that extent thefuture is bound to be different. Nor does it much matter under what auspicesreform comes about. North Korean discourse being what it is, excuses will nodoubt be required in order to pretend that everything remains in accord withjuche, the north’s ideology of self-reliance, and the late “great leader”, and is nota break from the past. All ideologies are elastic, so this could probably be done.The point is, it is not being done yet—except in Rajin-Sonbong (see below).Ultimately hidden reform cannot be reform, since both foreign investors anddomestic entrepreneurs need a political guarantee that their property and in-vestments will not be stolen from them if the political wind should shift again.

Review

The political scene

Party time After more than three years of formal limbo and speculation, Kim Jong-ilfinally succeeded his late father, Kim Il-sung, as general secretary of the rulingKorean Workers’ Party (KWP) on October 8. As yet, however, there is no indi-cation of when Mr Kim might assume his late father’s other position, that ofpresident, and become North Korea’s formal head of state.

Unique talents On October 5 North Korea’s nine provinces and three cities rounded off a seriesof provincial party conferences endorsing the elevation of Kim Jong-il to partychief. The various speeches proposing his inauguration were full of characteris-tic North Korean hyperbole. The party secretary, Kim Ki-nam, called him: “Thebest political leader, military strategist, and elder statesman of the world social-ist movement of the present day ... a great thinker and theoretician who gaveentirely scientific answers to all practical and theoretical questions ... and theincarnation of the politics of benevolence who embraced all people in his

42 North Korea


broad bosom with the loftiest moral virtue and human love [Applause].” Mean-while, the political chief of the Korean People’s Army (KPA), Cho Myong-nok,described Mr Kim as “a great genius of the army and general coming downfrom heaven [who] blocked the headwind of history by himself”. On Septem-ber 30 the mouthpiece of the party Central Committee, Rodong Sinmun, calledKim Jong-il “the top brain and great standard-bearer of the Korean revolution[whom] our people are defending ... in the spirit of human bombs ... Even if wedie while resolutely safeguarding the general, it is glory”.

Simple dress Elsewhere, more mundanely, the “dear leader” was praised for having “visitedchicken plants and rough roads ... not caring about holidays or his birthdays”;and for having “sent the soy milk of love” to children. He “even personallyadjusted the rush hour time” in Pyongyang (a phenomenon that was notwidely observed). The North Korean news agency, KCNA, waxed lyrical abouthis childhood gifts: “He found out why chickens raise their bills when theydrink water and why there is no black flower. He also thought that one addedto one makes two but it makes greater one in some cases.” But modest with it:he “would go to school by foot, wearing simple dress and rubber shoes”.

New leader, new era Sometimes all this persiflage conceals real changes. Periodisation is important inNorth Korea. First came the era of Kim Il-sung; then the three years of mourning;and, according to Kim Ki-nam: “We are now entering a new historical era, theKim Jong-il era.” Names matter too. Cho Myong-nok twice endowed Kim Jong-ilwith the title of “great leader” (widaehan suryong), hitherto strictly reserved forhis late father. It remains to be seen whether this appellation becomes perma-nent, and whether his promotion plus being in charge of his own era willprompt North Korea’s leader to dare to exercise the substantive leadership hiscountry so desperately needs.

Pear blossoms andsea-cucumbers

Nature has also shown its approbation. On September 29 KCNA reported that“mysterious natural phenomena” have occurred throughout Korea. Pear, cherryand apricot trees have blossomed out of season, and fishermen off Chongjincaught a rare white sea-cucumber. All of which proves that: “Comrade KimJong-il is indeed the greatest of great men produced by heaven.”

Still visiting the troops Heaven-sent or not, Kim Jong-il continues to consider it necessary to visitmilitary bases far more often than anywhere else. His most recent such trip wason September 28, to the KPA’s 576th Unit. As usual, his entourage includedCho Myong-nok, who is clearly the most powerful man in the military, and thechief of general staff, Kim Yong-jun. Five days earlier he had inspected theresort at Mount Kuwol, south-west of Pyongyang, freshly completed ahead ofschedule “due to the struggles and efforts of soldier-builders”. Even the firstlocal party meeting to endorse him heard So Yun-sok—one of the Politburo’smore obscure members, with no military connection himself—emphasise KimJong-il’s “unique idea of attaching great importance to the military, whichstresses that the party is the very army and the army is the very party”.

Who’s who The Seoul daily newspaper, Joong-Angilbo, on September 29 compiled a check-list of posts held and vacant in Pyongyang. The overall picture is one of many

North Korea 43


vacancies and little movement. Some posts, however, have been rotatedfrequently, and a process of filling the vacancies has now begun—and willaccelerate. Highlights include the following.

• At the top, the state presidency still remains vacant. In the Politburo presid-ium, where the triumvirate of Kim Il-sung, Kim Jong-il and O Jin-u used to rule,the “dear leader” now presides alone.

• Two party secretaryships are vacant. So Kwan-hi (agriculture) was sacked lastyear, while Hwang Jang-yop (international affairs) now resides in Seoul.

• The State Administration Council (cabinet) has been run since Februaryby one of the vice-premiers, Hong Song-nam, as the prime minister, KangSong-san, is ill. Several vice-premiers, including the chemicals industry min-ister, Kim Hwan (a leading technocrat), “have not been seen working”—whichsuggests they have been purged.

Many vacancies Posts left vacant since the death of the incumbent include that of prosecutor-general (Ri Yong-sop died in November 1995) and chairman of the CentralAuditing Commission (Ri Nak-pin died in April 1997). The longest vacancy is inthe Committee for the Peaceful Reunification of the Fatherland, which has beenwithout a chairman since Ho Dam, a former foreign minister, died in 1991.

Those ministries or commissions (a kind of super-ministry) currently without aminister or chairman include agriculture, electronics and automation, naturalresources development, and shipping. Posts recently filled (the new incum-bents were not named) include those of the fisheries minister, and the heads ofthe Academy of Sciences and the General Department of Atomic Energy.

Agriculture has been in turmoil, unsurprisingly. Both the national and regionaltop jobs “have changed hands very frequently”. The chairmen of the ruraleconomic committees in ten out of 12 provinces and cities have been replaced,the exceptions being Chagang, on the northern border, and Pyongyang.

Joong-Angilbo also claimed that “many” regional officials have been sacked, butgave only two examples. Kim Pyong-hae has succeeded Kim Hak-pong as partysecretary in North Pyongan, while Kim Chung-il (no relation) has been dis-placed as administrative chairman in North Hamgyong by Pak Su-gil. On theother hand, the regional meetings to elect Kim Jong-il as party leader haveconfirmed the political survival of at least two former prime ministers oncesacked for (it is thought) harbouring reformist leanings, then sent to run prov-inces: Yon Hyong-muk in Chagang, and Li Gun-mo (who is believed to havebeen jailed at one point) in North Hamgyong.

The reshuffle begins? Although Joong-Angilbo judges that “vacancies in the military have been filledrelatively quickly”, this seems an odd way to describe the nine months in 1995that elapsed between the death of the defence minister, O Jin-u, in February,and Choe Gwang’s appointment as his successor in October. CoincidentallyChoe in turn died in February of this year, and has yet to be replaced. Granted,the deputy defence minister (who also died earlier this year) was quickly re-placed, and the military as a whole has so far seen much more movement andpromotions in the upper echelons than either the state or party hierarchies.

44 North Korea


Academic and research bodies are said to be undergoing “large-scale personnelreshuffles”. Tae Hyong-chol is now president of the Academy of SocialSciences, a post vacant since the death of Kim Il-sung in 1994. Kim Ku-sik hasreplaced Chon Kum-chol as director of the Reunification Institute, whilethe director of the (presumably different) Fatherland Reunification Institute isRi Jong-hyok. The latter is one of Pyongyang’s most personable envoys, whoonce headed North Korea’s mission to the UN Educational, Scientific andCultural Organisation (Unesco) in Paris. His involvement in unificationmatters looks hopeful.

Who’s really who A week earlier, on September 20, the same paper offered a theory as to how KimJong-il has managed for the past three years of political limbo. It claimed thatthe “dear leader” has simply bypassed the formal hierarchies of party and state,ruling instead through a private organisation of 20 close aides meeting two orthree times a week. This cabal is listed below. It was not stated whether this isin order of seniority or actual power, but this would seem to be the case for atleast the top six, who are split evenly between the party and army. (To citeO Guk-ryol as a party figure is misleading if not erroneous: he is a general andformer chief-of-staff.)

North Korea: Kim Jong-il’s top 20

1 Kye Ung-tae, party secretary for public security

2 Kim Kuk-tae, party secretary

3 Chon Byong-ho, party secretary for munitions

4 Cho Myong-nok, KPA political director

5 Kim Yong-jun, KPA chief of general staff

6 O Guk-ryol, director of party operations department

7 Kang Chu-il, director of party social and cultural affairs dept (real name Kang Kwan-ju; real job in charge of anti-South Korea operations)

8 Kim Yong-nyong, first deputy director, national security department

9 Won Ung-hui, director, security department

10 Ri Myong-che, first secretary, secretariat

11 Kim Tong-un, director, No 39 office (Kim Jong-il’s finances)

12 Chong Ha-chol, chairman, broadcasting committee

13 Kim Si-hak, department director, KWP (party) central committee

14 Chang Song-taek, 1st deputy director, (Kim Jong-il’s brother-in-law)

15 Mun Song-sul, 1st deputy director of a department of KWP CC

16 Yom Ki-sun, (ditto)

17 Ri Su-yong, deputy director, organisation and guidance dept

18 Pak Song-pom, deputy director for workers’ organisations

19 Kang Sok-ju, first vice foreign minister

20 Chong Sun-k, first vice-minister of machine building

Both the concept of such a group and some of the names seem plausibleenough. What is striking is not only how many of Pyongyang’s elderly formalpower holders are excluded—all four vice-presidents, for example, three ofwhom are nominally full Politburo members—but that numbers seven to 20 arehardly known at all, except for Chang Song-taek (see below) and Kang Sok-ju

North Korea 45


who negotiated the Geneva agreed framework with the USA. This dozen areNorth Korea’s new elite, Kim Jong-il’s men (all appear to be male), and as suchpresumably in the running for formal promotion once the “dear leader” isconfirmed in post. Their country’s fate may hinge on what kind of leaders they turnout to be. Ominously, they include no known reformers and only one apparenttechnocrat (number 20). The rest look like apparatchiks or hatchet men.

Brother-in-law goes public It has long been known that Kim Jong-il’s right-hand man is his brother-in-law,Chang Song-taek, the husband of his younger sister, Kim Hyong-hui (herselfincreasingly powerful in economic matters). Hitherto Mr Chang has beensomething of an éminence grise, but this year his name has appeared moreoften accompanying Kim Jong-il on guidance visits.

Now he seems to be turning his hand to foreign affairs, or at any rate the sensi-tive issue of homeland visits by Japanese wives of North Koreans (see below). Inan interview with a Japanese magazine, Aera, in September, the chairman of theNippon Foundation, Yohei Sasagawa, who visited North Korea in June to discussthe issue, revealed that it was with Mr Chang that he had negotiated in amarathon session lasting from 10.30 am one day until 2.20 am the next. ChangSong-taek is said to have visited Japan in 1991, under an assumed name. Hiselder brother, Chang Song-woo, is thought to be in charge of the “dear leader”’sbodyguards.

Making their blood boil North Korea’s media continue to churn out the same old rhetoric. “Ideologydecides all,” proclaimed Rodong Sinmun on August 6. Despite an alleged focuson economic issues, and the odd flash of insight (such as urging party cadres to“thoroughly [do] away with the five-minute heat-type workstyle”), the partypaper had nothing to offer except ever more efforts of will. “Indoctrination infaith”, to promote “revolutionary optimism”, must be done “more aggressively... singing the revolutionary songs all the more loudly when faced with difficul-ties” to create a “merry and lively atmosphere”. The article recommended “themodel of firing-line work style”—not to be confused with the five-minute kind,evidently: “We must go deep among the masses, kindling fire in their heartsand making their blood boil.”

Let them eat mushrooms Amid all this bombast, the few pieces of practical advice included the promotionof animal husbandry and large-scale fish farming; and to “encourage everyorganisation, every enterprise, and every home to grow mushrooms”. Overallwhat is missing here, as ever, is any suggestion that either problems or solutionsare structural and managerial in character; and hence not soluble simply bysome people shouting at other people to show more enthusiasm and willpower.

A thaw with Tokyo— The past quarter has seen signs of improvement in what had become chillyrelations between North Korea and Japan. It was never wholly clear why Tokyohad switched from its generosity in 1995, when it sent 500,000 tons of rice toPyongyang, to refusing to give anything at all this year. Possibly internalmachinations in Japan’s ruling Liberal Democratic Party (LDP) were involved.In any event recent months have brought a thaw. The regular meetings be-tween diplomats were upgraded to bureau director level, and Red Cross talkswere held to discuss what will be the first ever home visits by Japanese married

46 North Korea


to North Koreans who moved back to North Korea from Japan, mostly in the1950s and 1960s. The first such group is expected to visit before the end ofthe year. Meanwhile, Japan has agreed to contribute $20m in food aid. (SeeOutlook for 1998-99.)

The Japanese news agency, Kyodo, reported on October 1 that a party missionof the LDP and its two policy allies, the Social Democratic Party and ShintoSakigake, is to accept an invitation to visit North Korea, possibly as early as thismonth. This would be the first such party visit since March 1995. It is expectedto speed up the improvement of relations on several fronts, including food aidand family visits.

—but insults continue However, for Pyongyang improved relations will not entail any reduction ineither its hostility towards Tokyo or the venom with which this is expressed. OnSeptember 30 KCNA attacked Japan’s bid for permanent membership of the UNSecurity Council, calling Japan “a political dwarf ... not entitled to become amember of the UN”, let alone of the Security Council. It added: “As for thewealth of Japan, an ‘economic power’, it is an offspring of criminal plunder ...That is why the world is keeping a vigilant eye on Japan, calling it ‘economicanimal’.”

Greeting China On other fronts there has been little visible change in North Korea’s foreignrelations. On September 30 Kim Jong-il sent a congratulatory message to theChinese president, Jiang Zemin, which although rather long and fulsome,managed to avoid any mention of economic reform. Then again, the messageclosed with a wish for success in “implement[ing] the resolutions of the 15thNational Congress of the CCP [Chinese Communist Party]”—which involvemoving ever further away from the true path as Pyongyang defines it. Perhapsthe “dear leader” has some surprises up his sleeve.

Moscow told not to pokeits nose in

In a throwback to the days when North Korea could not directly criticise theSoviet Union by name, on September 26 KCNA noted that “some countries arethese days exceedingly trying to poke their noses” into Korean affairs. It contin-ued: “Typical of them is Japan. What is all the more ridiculous is that there is a‘big power’ that sides with Japan, playing a cheap game.” This alludes to Russo-Japanese consultations about the four-way talks, to which neither Moscow norTokyo is a direct party. KCNA warned that, unlike in the late 19th century,Korea today is no longer “a theatre of big powers’ scrambles”.

IAEA: still not happy Officially, the October 1994 Geneva agreed framework signed with the USA,which begat the Korean Peninsula Energy Development Organisation (seeInter-Korean relations), is supposed to have resolved the alarms about NorthKorea’s nuclear programme that had the world worried in the early 1990s.However, not everyone is happy. The International Atomic Energy Agency(IAEA), which could be forgiven for feeling that its own role has been usurpedby Washington, announced at its general meeting in June this year that NorthKorea was still not complying with the safeguards accord of the NuclearNon-Proliferation Treaty and said it was not in a position to verify whetherPyongyang was in fact keeping its promise to freeze all nuclear activities.

North Korea 47


In September the IAEA’s director-general, Hans Blix, reiterated this last pointwhile reporting that the canning of spent fuel rods at the Yongbyon site shouldbe complete by November. (The next problem will be what to do with 8,000 orso cans.) Further discussions with Pyongyang are due in Vienna at the endof October.

The economy, trade and investment

Rajin-Sonbong: anythinggoes

It seems clear that North Korea has greatly relaxed, if not virtually abolished,most restrictions on business in what has thus become much more truly the freezone of Rajin-Sonbong in the north-east. Local residents may now set up andrun private enterprises in 14 sectors, including food processing, householdgoods and furniture, hotels, vehicle repairs and transport, and housing construc-tion. Meanwhile, state-run and other public enterprises are on an “independentaccounting system”, which apparently means they must sink or swim asself-supporting enterprises. It will be fascinating to see how this turns out;and whether, if deemed successful, such reforms will spread elsewhere inNorth Korea.

Some of the changes arguably constitute a bolder Big Bang than anything yetattempted in Seoul, above all the astonishing 100-fold devaluation of theNorth Korean won in the Rajin-Sonbong free zone (to bring it into line withthe black-market rate) discussed in our last report (3rd quarter 1997, pages48-49). It is unclear if the implications were fully thought through, since oneimmediate effect is to make it impossibly expensive for cadres from Pyongyangto visit the free zone.

Clashing reports on thefood shortage

It remains impossible to quantify North Korea’s food shortage and attendantsuffering. For the third successive year nature has been cruel, but whereas in1995 and 1996 the problem was flooding, this time drought and a tidal wavehave damaged crops. Overall, anecdotal evidence is still contradictory. On theone hand, the defector Hwang Jang-yop claimed that by last year 2,000 of the500,000 workers in military-related industry—a sector that might be expectedto be relatively privileged—had already died of starvation. On the other, thechairman of Daewoo, Kim Woo-choong, was quoted as saying that on his visitin September conditions did not seem as bad as portrayed in the media.

WFP faces both ways Even the World Food Programme (WFP), which has coordinated the inter-national relief effort, does not seem sure what it thinks. An optimistic note wassounded on September 30 by a WFP spokeswoman in Geneva, ChristianeBerthiaume, who claimed that a feared deficit of 800,000 tons of grain hadbeen largely covered by aid shipments totalling 750,000 tons. About half ofthis was provided bilaterally: 127,000 tons by China, 115,000 tons by SouthKorea, 95,000 tons by the EU, and 55,000 tons by the USA. The last three werealso major contributors to the WFP’s own appeal for $143m, with the USAgiving $38m, the EU $24.4m, and South Korea $20.5m.

Less than two weeks earlier, however, a press release from the WFP’s Romeoffice was headlined (in capitals): “WFP reports serious malnutrition amongNorth Korean children; warns many risk death this winter.” A WFP team of

48 North Korea


nutritionists in August surveyed 4,000 children in nurseries and kindergartensin four southern and central provinces, and found around one in six (17%) tobe seriously malnourished. The fear is that children at home or in hospitalrather than in nurseries may be in worse condition, as may those in northerlyprovinces to which the aid agencies have so far been unable to gain access.

Winter will be worse The WFP’s executive director, Catherine Bertini (a former US assistant secretaryof agriculture), who has consistently been at the more alarmist end of reportedopinion, was quoted as saying that: “The situation is extremely dangerous ...the data justifies our continued intervention. Adults as well as children are atrisk.” Even if this year’s harvest comes in at 2m tons (a very low figure), thiswill be sufficient to feed the country for only four months. The severity of theNorth Korean winter, coupled with an acute lack of medicines of all types,could bring renewed crisis very early in 1998. Ms Bertini warned that: “With-out adequate assistance we can expect massive mortality in the coming months.... Nutritionally North Koreans are already pressed to the limit.”

Horror stories Meanwhile, journalists in Yanji, the ethnic Korean district of China’s Jilinprovince which abuts North Korea, are reporting grim tales of cannibalism andmurder for this end. Jasper Becker, the author of a book on the famine in Chinaduring the Great Leap Forward, quoted many such stories in the South ChinaMorning Post on October 1. He also suggested that North Korea may be manipu-lating visiting aid workers into believing that the distribution system is stillworking, and cited a US-based charity, World Vision, as fearing that 15% of allNorth Koreans, or as many as 3 million people, have already died.

While most authorities would regard this as vastly exaggerated, it is sobering torecall that in China 30 million people starved to death and many people indesperation did resort to cannibalism. The true scale of North Korea’s faminemay not be known until it is over—and it is far from over yet. A likelier deathtoll so far would be in the thousands, perhaps rising into the tens of thousandsas time goes on and if deaths from hunger-induced illness are included. Cer-tainly the incidence is uneven, for both natural and political reasons. Few ifany in Pyongyang are starving; whereas it is fair to fear the worst for Ryanggangprovince in the far north, which is almost entirely mountainous and where noforeign aid workers have yet been allowed to travel.

More aid from China Even according to published figures, it is mainly China that is supportingNorth Korea with food aid (and more generally). Pyongyang radio reported onSeptember 25 the delivery in full of 80,000 tons of free food donated by Beijingto mark the third anniversary of the death of Kim Il-sung. This is presumablyin addition to two earlier tranches of 50,000 tons each. Chinese sources havealso confirmed, off the record, that there is more aid than appears in officialstatistics and announcements.

Pyongyang mulls overmultilaterals—

There are growing signs that North Korea is at least considering joining multi-lateral economic organisations. Earlier this year it put out feelers to join theAsian Development Bank, an initiative South Korea supported; but this fell foulof Japanese hostility. In early September the first ever IMF mission to NorthKorea visited Pyongyang. At this stage this is no more than mutual sniffing to

North Korea 49


get acquainted. But North Korea as ever would sorely like to get its hands on aidfrom any source; while both the IMF and the World Bank have precedentselsewhere, especially Vietnam, to map out what the successive steps in drawinga communist economy into involvement would look like.

—but are they reallyready?

What is less clear is whether the north is yet ready for, or even understands, thedemands membership of the Bretton Woods institutions would impose. For onething Pyongyang would have to furnish far more facts and figures about itseconomy than it has done for the past 35 years. (Even trade data remain a statesecret, although they can be constructed from partner countries’ statistics; seebelow.) It would also have to show a willingness to deal responsibly with its now20-year-old debts to Western banks, which it has not done for more than adecade. Most difficult of all, it would have to accept being ordered by foreignersto take unwelcome steps, such as explicit economic reform, opening and mar-ketisation. Even South Koreans tend to find this less than palatable at times.

It is questionable whether North Korea is ready for this. Informed sources infinancial circles, with comparative experience of other communist and trans-ition economies, tend to be sceptical. North Korean officials not only havescant knowledge of capitalism and international finance, which is under-standable, but they also show little inclination to acquire such knowledge, letalone apply it, which is more worrying. Rather, the old view—at best naive, atworst disingenuous—that the function of foreigners is to provide maximumcash with minimum conditionality (preferably none) is still widely held inPyongyang.

Trade fell 6.7% in 1996 In August Japan’s external trade organisation, JETRO, published estimates ofNorth Korea’s trade in 1996. The downward trend continued, with a drop intotal trade of 6.7%, to $2.14bn. Exports were down 6.1% to $791m, whileimports fell 7% to $1.34bn, leaving a trade deficit of $549m. China wasPyongyang’s biggest trading partner at 28.5% of the total ($609m), followed byJapan with 24.2% ($516m). South Korea took third place, some distance be-hind, with 11.4% ($242m). Singapore rose from ninth to fifth place (with$77m), while Russia dropped from fifth to seventh. No volumes for these lesserpartners were given, nor were any individual country balances.

These figures are broadly in line with those published by JETRO’s South Koreanequivalent, KOTRA, given in our last report (3rd quarter 1997, pages 46-47).The biggest difference is in data on China, where Seoul’s aggregate figure isonly $560m. Either way, Beijing is tolerating a large uncovered deficit fromPyongyang which, in so far as it can export at all, prefers to do so to hardcurrency countries such as Japan (see below). Moreover, Chinese sources tacitlyadmit that much additional aid to North Korea does not show up in the officialcustoms statistics from which these figures are computed.

Self-effacing Seoul On August 22 the South Korean news agency, Yonhap, gave yet another set offigures, this time with more detail (but still without balances). Although seem-ingly based on, or at least close to, JETRO’s data, Yonhap irritatingly toedSeoul’s line by not including inter-Korean trade as such (on the grounds that itis internal to Korea, a stance that causes raised eyebrows at the World Trade

50 North Korea


Organisation). Hence both the percentages and the total in this table excludewhat is in fact the north’s third largest trade partner.

North Korea: main trading partners, 1996

Country Total trade ($ m) % of totala

China 566 28.6

Japan 518 26.2

South Korea 252 –

India 116 5.9

Germany 75 3.8

Singapore 71 3.6

Russia 65 3.3

Hong Kong 62 3.1

UK 37 1.9

Sweden 37 1.9

France 36 1.8

Total incl othersa 1,976 100.0

a Excluding South Korea.

Source: Yonhap news agency, Seoul.

Peanuts and vagaries— Two things are striking about these figures. One is the aggregate magnitude,which would be respectable for Africa but by East Asian standards is positivelymicroscopic. Suffice it to say that even Pyongyang’s biggest partner, China,conducts 30 times more trade with South Korea ($19.9bn in 1996) than with thenorth; while, as noted in our last report, Seoul’s total trade is more than130 times larger than Pyongyang’s.

The other point to note is that, while the top three countries are fairly constant(although in 1995 Japan briefly took the number one spot from China),Pyongyang’s lesser trade partners vary considerably from year to year. In 1996Europe was more prominent than usual, while Asian partners are either down(Hong Kong) or out (Thailand, perhaps because 1995’s rice has yet to be paidfor). Such variations suggest that much North Korean trade consists of one-offdeals rather than stable patterns of trade; and perhaps that, having defaultedwith one partner, Pyongyang must perforce seek out others.

—but a bigger surpluswith Japan so far this year

Seoul’s unification ministry has given some figures on North Korea’s tradewith Japan in the first half of this year. The year-on-year trend looks positive.Pyongyang’s exports totalled ¥15.22bn ($7.1bn), up 16.3% from ¥13.09bn inthe same period last year; while imports were ¥9.62bn, down 16.6% from 1996’s¥11.54bn. As for composition, North Korea sold mainly clothing, marine prod-ucts, rice straw, minerals and electronics goods. The ministry quantified onlyone of these: men’s clothing, which, with a 30.7% share worth ¥4.67bn, was thelargest single item. (Joint ventures with the association of pro-north Koreansliving in Japan Chongryun, have carved out a lucrative niche in selling cheapmen’s suits to Japanese department stores.) As for imports, the only itemmentioned was cars from Japan, purchases of which had almost doubled, to justover ¥1bn.

North Korea 51


Border trade withChina up—

The South Korean government paper, Seoul Sinmun, reported on August 4 a“drastic increase” in local border trade between North Korea and China duringthe first four months of this year. The total passing through the five Chineseentry ports of Tumen, Hunchun, Jian, Chanbai and Linjiang surged from$2.85m in January to $9.71m in April. Aggregate trade for those four monthswas $25.81m, one-third higher than the same period last year. Chinese exportsrose 18% to $15.8m, while imports from North Korea were up 68%. Some portsfared better than others. Hunchun almost tripled its trade to a still small$3.92m, while Tumen was down one-third even while its figure of $6.02mremained the highest.

—as locals cut deals While all this forms only a small proportion of total Sino-North Korean trade,it is an interesting indication of what the adjacent locals, as opposed to centralauthorities, are up to. The list of commodities is revealing: “North Korea pur-chases mainly flour, fertiliser, cigarettes, petrol, light oil, coal, edible oil, andsweets from China. China buys timber, raw and half-made steel products, scrapmetal, fishery products and medicinal herbs from North Korea.” Timber loomslarge at $10.39m, said to be 65.4% of all trade (which does not add up, unlessNorth Korea also imports some wood).

As to why the trend is up this year, there are two possibilities that may both betrue. In the past Beijing had intermittently tried to rein in this border trade: itmay now have changed its mind or admitted defeat. On the North Korean sideit may reflect the emergence of new traders and commodities in the context ofthe famine, and amid the ruins of the old planned economy.

Inter-Korean trade up On North Korea’s other border—if not literally across it, which is not yetpossible—trade is also flourishing. According to Yonhap on July 29, quotingthe unification ministry, inter-Korean trade in the second quarter of this yeartotalled $86.7m, almost half as much again as the first quarter’s $58.7m and upa similar amount compared with the same period in 1996 ($56.7m). Seoulimported $58.7m worth of goods while exporting $28m, although the latterfigure includes what is really aid rather than trade, namely food via the RedCross and heavy oil bought by KEDO. Yonhap did not give a figure for these,but presumably they were excluded when it gave the proportion of textiles andchemicals within Seoul’s exports as 51% and 34% respectively.

Textiles also made up 16% of the flow in the other direction, which, however,was dominated by “iron, steel and metal”, which together accounted for some70%. A unification ministry source specified (but did not quantify) this furtheras largely comprising gold and zinc ingots, which are staples of inter-Koreantrade; and scrap metal, which is something new. The upward trend continuedin July, with North Korea exporting $19.35m while importing $17.23m. Thisunusually even balance was again somewhat artificial, in that Seoul’s “exports”included KEDO building materials as well as heavy oil.

Naphtha now Oil products are also flowing the other way. LG International imported12,000 tons of North Korean naphtha in August via a Hong Kong intermediary,Pearly Gold. Samsung plans to buy a similar quantity in October, worth$2.4m and processed at the Sungri refinery (evidently up and running again) in

52 North Korea


Rajin-Sonbong from Chinese and Russian oil. Particularly intriguing are reportsfrom The Korea Economic Weekly that Samsung “plans to join hands with theNorth on a long-term basis to secure stable supply of naphtha”. Samsung doesnot have its own oil refinery.

Small is small Smaller South Korean companies are getting involved in processing-on-com-mission (POC) with the north. On September 21 a Cambodian-flagged vesselcarried electronic components from seven small southern firms the short dis-tance from Inchon near Seoul in the south to Nampo in the north. They will beassembled in Pyongyang before being shipped back to the south for sale. Whilesmaller southern companies have much to gain from the north’s cheap work-force in labour-intensive manufacturing, the total value of this order as re-ported was a paltry $15,000. Overall north-south POC trade was worth $21.6min the second quarter of this year, and rose to $11.1m in July alone.

Does POC pay? Having things made in North Korea is not necessarily economic for SouthKorean firms. The Seoul daily, Joong-Angilbo, on July 30 reported research on thisissue published in the LG Economic Weekly. Manufacturing costs in the north arecertainly lower: by 80% in clothing, 70% in metal processing, 60% in shoes,50% in home appliance assembly and 45% in electric wiring. But there is also alarge downside: transport costs for both raw materials and finished products,customs fees, storage costs, and “institutional deficiencies between North andSouth Korea”. The last includes the near-impossibility of sending southern tech-nicians to inspect the goods, so that final quality control only takes place backin the south with no comeback. Having it done in the north would save anestimated 12-24%. Likewise, the lack of scheduled shipping services betweenInchon and Nampo means that container charges on this route are four timeshigher than from Inchon to Tianjin. Factoring in all this changes the equations.Clothing and shoe production remain economic, with total costs—dependingon location—at 67-77% and 85-96% respectively of manufacture in SouthKorea. But wiring is marginal (93-103%), while home appliances and metalprocessing come in at 105-120% and 112-133% respectively—ie they cost morein the north. If South Korean firms nonetheless persist with POC, this may be asa loss-leader to gain market entry and favours from Pyongyang, or because theyexpect that in due course regular shipping services and the ability to sendtechnicians will mean profits further down the road.

Investment pactwith Egypt

Just days before he defected to the USA, North Korea’s ambassador in Cairosigned an investment promotion and protection pact with Egypt on August 19.No details were published, but this friendship dates back to the heyday of theNon-Aligned Movement in the 1970s, and has survived Egypt’s shift to a morepro-Western stance. Past cooperation has included arms, with North Koreahaving got its first ever Scud not from the Soviet Union but from Egypt (whichgave it to Pyongyang in order to get it reverse-engineered and improved).

New flight to Vladivostok The less than lengthy list of places linked by air to Pyongyang has just becomelonger. On August 5 KCNA announced a new service (presumably by Air Koryo,the North Korean carrier) to Vladivostok. Demand appears to be less thancrushing: there is just one flight per week, on Sunday, leaving Pyongyang’sSunan airport at 10.50 local time and returning at 17.30 the same day.

North Korea 53


Quarterly indicators and trade data

South Korea: quarterly indicators of economic activity

1995 1996 1997

2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Industrial production Monthly av

General, seasonally adj 1990=100 149 152 153 159 160 164 169 169 175 176a

Construction

Permits issuedb ’000 sq metres 12,351 7,616 10,630 7,885 10,287 9,721 10,047 7,618 10,659 n/a

Employment

Employed ’000 20,582 20,722 20,618 19,971 20,932 21,093 21,060 20,466 21,319 n/a

Unemployed “ 405 399 386 455 413 391 439 645 550 n/a

Wages & prices

Monthly earnings 1990=100 181.5 201.5 206.5 198.2 200.5 225.7 230.1 217.9 219.2 n/a

Consumer prices: “ 134.9 136.1 136.6 139.2 141.8 143.2 143.2 145.7 147.2 148.2c

change year on year % 4.8 4.0 4.4 4.9 5.1 5.2 4.8 4.7 3.8 n/a

Producer prices 1990=100 117.2 117.8 117.1 118.7 119.3 120.5 121.2 123.1 123.8 123.6c

Share prices ” 119.3 126.3 125.1 115.5 121.8 108.0 99.9 90.3 96.9 n/a

Retail sales: value “ 137 133 151 151 150 145 162 156 158 n/a

Money End-Qtr

M1, seasonally adj: W bn 32,206 30,999 36,161 35,040 35,115 37,537 36,852 36,039 36,799 n/a

change year on year % 11.2 8.2 20.1 10.8 9.0 21.1 1.9 2.9 4.8 n/a

Foreign trade Qtrly totals

Exports fob $ m 32,050 32,072 34,744 31,496 33,175 29,576 35,468 29,721 35,602 11,805a

Imports cif “ 34,742 34,441 35,414 35,665 37,080 37,092 40,503 37,052 37,307 12,632a

Exchange holdings End-Qtr

Goldd $ m 94.8 94.3 94.5 98.2 95.7 99.2 92.3 86.1 84.1 79.5e

Foreign exchange:

Bank of Korea “ 27,614 32,072 31,928 32,634 35,748 32,038 33,237 29,146 33,316 33,673e

other banks ” 24,649 25,831 27,806 29,537 30,080 31,029 33,136 32,882 33,793 n/a

Exchange rate

Market rate W:$ 758.1 768.4 774.7 782.7 810.6 821.2 844.2 897.1 888.1 902.0e

Note. Annual figures of most of the series shown above will be found in the Country Profile.a July only. b 32 cities and 90 towns. c Average for July-August. d End-quarter holdings at quarter’s average of London daily price less 25%. e End-August.

Sources: Bank of Korea, Monthly Statistical Bulletin; IMF, International Financial Statistics.



South Korea: foreign trade($ m)

Total USA Japan China Germany

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

Imports cif 1995 1996 1995 1996 1995 1996 1995 1996 1995 1996

Food 5,928 7,265 2,472 2,883 114 120 424 624 82 117

of which:

cereals & preparations 1,949 2,654 1,564 1,862 2 2 32 69 58 89

Hides & skins, raw 1,189 1,175 830 802 9 7 0 0 4 4

Rubber, crude 729 703 33 52 97 92 5 1 10 10

Wood, unmanufactured 1,694 1,695 300 291 2 3 82 93 2 3

Pulp 1,858 1,473 837 675 11 17 9 1 3 1

Textile fibres & waste 1,551 1,367 483 378 117 94 125 137 13 9

Metal ores & scrap 3,238 2,981 882 699 133 218 63 32 65 39

Coal 2,081 2,337 218 216 12 15 353 411 1 1

Petroleum & products 14,760 19,049 558 688 623 522 507 762 24 28

Chemicals 13,156 13,257 3,116 3,252 4,244 4,047 616 611 939 989

Textile yarn, cloth & mnfrs 3,959 3,878 198 232 627 576 1,345 1,150 64 56

Iron & steel 6,539 6,549 345 265 2,398 2,379 1,243 1,134 173 178

Non-ferrous metals 4,617 4,126 408 354 630 473 234 224 118 92

Metal manufactures 1,555 1,744 359 451 539 552 95 128 178 197

Machinery & transport eqpt 49,436 54,701 14,706 16,516 17,932 17,522 782 1,316 4,086 4,597

of which:

power-generating eqpt 3,891 3,666 1,515 1,429 931 772 83 118 471 403

office machinery 3,570 3,998 1,271 1,445 1,015 885 108 201 28 47

telecommunications eqpt 3,057 3,505 1,122 1,522 951 783 249 362 44 59

transistors, valves etc 9,838 11,460 3,185 3,681 3,740 3,864 58 124 211 223

road vehicles 1,910 2,068 449 484 778 641 14 22 362 491

aircraft 2,479 2,766 2,185 2,360 1 68 0 0 1 3

ships 1,556 1,934 8 12 233 250 1 19 3 5

Scientific instruments etc 6,370 6,706 1,601 1,916 3,179 2,981 73 107 447 507

Total incl others 135,113 150,334 30,419 33,320 32,604 31,448 7,401 8,538 6,584 7,292

Saudi Arabia Australia Indonesia Italy Malaysia

Imports from other Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

suppliers 1995 1996 1995 1996 1995 1996 1995 1996 1995 1996

Total 5,432 6,667 4,897 6,272 3,325 4,013 2,425 3,070 2,515 3,007

continued

Quarterly indicators and trade data 55


Total USA Japan China Hong Kong

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

Exports fob 1995 1996 1995 1996 1995 1996 1995 1996 1995 1996

Food 2,656 2,724 155 153 1,680 1,680 90 91 157 150

of which:

fish & products 1,551 1,494 88 76 1,143 1,111 63 67 15 6

Crude materials, inedible 1,790 1,608 154 142 322 259 526 532 183 170

of which:

textile fibres & waste 1,061 927 119 100 9 10 457 458 106 92

Mineral fuels 2,472 3,866 115 96 930 1,728 480 822 280 328

Chemicals 8,944 9,149 430 517 910 866 2,181 2,221 1,141 953

Rubber manufactures 1,513 1,754 256 247 63 49 16 13 44 51

Paper & manufactures 1,170 1,228 82 64 49 54 268 345 388 399

Textile yarn, cloth & mnfrs 12,313 12,718 653 734 629 574 1,359 1,819 2,845 2,696

Non-metallic mineral mnfrs 676 633 59 50 251 209 23 38 36 30

Iron & steel 5,411 5,229 599 603 1,792 1,451 576 765 373 386

Metal manufactures 3,721 2,629 626 584 517 475 234 197 68 59

Machinery & transport eqpt 65,646 67,584 16,891 15,030 5,600 4,714 2,064 2,854 3,327 3,299

of which:

power-generating eqpt 1,212 693 473 169 121 136 36 72 30 30

office machinery 4,967 5,673 2,016 2,259 350 260 84 173 132 151

radio & television receivers 2,810 2,736 328 192 329 238 66 92 58 127

sound & video recorders 1,824 1,747 555 342 144 132 97 61 218 294

other telecommunications eqpt 4,244 4,404 908 720 380 331 190 260 250 296

transistors, valves etc 19,373 17,305 6,596 5,526 2,956 2,268 151 217 1,667 1,651

road vehicles 10,122 12,351 2,240 2,403 153 133 229 177 138 105

ships 5,533 7,127 259 42 21 44 2 18 273 91

Clothing 4,957 4,221 1,825 1,526 1,849 1,398 61 88 57 51

Footwear 1,506 1,235 474 328 370 336 92 152 63 46

Scientific instruments etc 1,708 1,677 476 388 268 266 58 80 101 105

Total incl others 125,056 129,715 24,344 21,926 17,049 15,767 9,144 11,377 10,682 11,131

Singapore Germany Malaysia Taiwan UK

Exports to other Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

main markets 1995 1996 1995 1996 1995 1996 1995 1996 1995 1996

Total 6,689 6,439 5,965 4,705 2,951 4,333 3,882 4,005 2,874 3,222

Source: UN, External Trade Statistics, series D.



South Korea: foreign trade($ m)

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-DecImports cif 1992 1993 1994 1995 1996

Wheat, unmilled 544 674 783 467 724Maize 847 702 696 1,265 1,572Hides & skins, raw 903 881 922 991 891Rubber, crude 466 447 552 729 703Wood, unmanufactured 919 1,183 1,012 1,047 963Pulp 740 628 828 1,453 1,192Cotton, raw 634 535 590 772 714Iron ore 880 888 797 851 918Coal 1,616 1,733 1,777 2,081 2,337Crude petroleum 9,548 9,151 8,878 10,809 14,432Chemicals 7,668 8,235 9,763 13,157 13,231Textile yarn & fabrics 2,212 2,249 2,927 3,455 3,307Iron & steel 2,778 2,488 3,734 5,504 4,647Non-ferrous metals 2,025 2,226 3,066 4,617 4,126Machinery & transport equipment 28,966 28,417 37,408 49,437 54,675 of which: power-generating equipment 2,782 2,493 2,768 3,891 3,666 metalworking machinery 1,582 1,184 1,788 2,341 3,192 office machinery 1,735 2,001 2,615 3,570 3,992 telecommunications equipment 1,377 1,645 2,221 2,659 3,069 electronic components etc 6,012 5,650 6,983 9,838 11,448 aircraft 1,965 1,846 2,208 2,479 2,766 ships 840 719 1,468 1,556 1,934Scientific instruments etc 1,977 2,284 2,918 3,881 4,164Total incl others 81,775 83,800 102,348 135,119 150,339

continued



Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-DecExports fob 1992 1993 1994 1995 1996

Food 2,119 2,060 2,295 2,656 2,724 of which: fish 1,039 964 1,025 1,144 1,067Crude materials, inedible 1,073 1,160 1,430 1,790 1,608Mineral fuels 1,742 1,852 1,746 2,472 3,866Chemicals 4,455 4,922 6,339 8,944 9,148Rubber tyres 1,053 1,132 1,233 1,330 1,549Paper & manufactures 511 567 829 1,170 1,228Textile yarn & thread 1,042 944 1,055 1,331 1,470Cotton fabrics 373 382 459 510 543Other textile fabrics 5,362 6,062 7,380 8,225 8,160Iron & steel 4,399 4,744 4,456 5,107 4,549Non-ferrous metals 484 476 751 1,100 1,010Machinery & transport equipment 32,547 36,950 47,068 65,646 67,584 of which: power-generating equipment 784 845 1,002 1,212 693 office machinery 3,091 3,474 3,607 4,967 5,673 radio & television receivers 2,721 2,589 2,791 2,810 2,737 sound & video recorders 1,479 1,582 1,757 1,824 1,747 telecommunications equipment 2,337 2,922 3,687 4,244 4,404 electronic components etc 7,763 8,078 11,848 19,373 17,305 cars 2,534 3,884 4,470 7,242 9,089 ships 4,113 4,061 4,945 5,533 7,127Clothing 6,770 6,166 5,653 4,958 4,221Footwear 3,184 2,309 1,780 1,506 1,236Total incl others 76,632 82,236 96,013 125,058 129,715Source: Bank of Korea, Monthly Statistical Bulletin.

South Korea: direction of trade($ m)

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-DecExports fob 1993 1994 1995 1996 Imports cif 1993 1994 1995 1996

USA 18,138 20,553 24,132 21,671 USA 17,928 21,579 30,404 33,305Japan 11,564 13,523 17,049 15,767 Japan 20,016 25,390 32,606 31,449Hong Kong 6,431 8,015 10,682 11,131 China 3,929 5,463 7,752 n/aChina 5,151 6,203 9,518 n/a Germany 3,955 5,159 6,584 7,239Singapore 3,110 4,152 6,689 6,439 Saudi Arabia 3,735 3,807 5,416 6,667Germany 3,593 4,314 5,965 4,705 Australia 3,347 3,783 4,897 6,272Malaysia 1,430 1,652 2,951 4,333 Indonesia 2,588 2,843 3,325 4,013Taiwan 2,296 2,732 3,882 4,005 Italy 1,398 1,954 2,425 3,070UK 1,661 1,783 2,874 3,222 Malaysia 1,947 1,876 2,515 3,007Indonesia 2,095 2,540 2,958 3,198 UK 1,401 1,662 2,387 2,994Thailand 1,761 1,835 2,428 2,664 Taiwan 1,407 1,800 2,564 2,725Total incl others 82,236 96,013 125,058 129,715 Total incl others 83,800 102,348 135,119 150,339Source: Bank of Korea, Monthly Statistical Bulletin.



North Korea: direction of trade(%)

Jan-Dec Jan-DecExports 1995 Imports 1995

Japan 27.9 China 32.6South Korea 20.8 Japan 17.2China 5.2 Russia 4.7Germany 4.0 South Korea 4.3Russia 1.2 Germany 2.9Source: Institute for International Economics, Washington DC, The North Korean Economy.



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