Euphoria fading fast in South Korea

SEOUL — No wonder economics is known as the dismal science. While everyone else is celebrating the love-in at Pyongyang between the two Kims, economists here in Seoul have been sitting down with their pencils and calculators. They just called in to say that their estimate of the discounted future benefits of the likely outcome of the faltering steps toward unification are likely to be smaller than the opportunity cost of the South Korean funding that would be required. They have a point.

The United States may have decided to drop the word “rogue” when referring the regime in Pyongyang, and the military in South Korea will no longer refer to it as the “northern puppet regime,” but a few glasses of champagne shared before world television viewers (but not starving North Koreans who may wonder were the money for the champagne came from) have not changed economic fundamentals.

North Korea is a bankrupt country with a discredited hardline communist regime that cannot feed, clothe or house its people adequately. Millions of North Koreans are being kept alive by (or more cynically, in order to conveniently dispose of) the agricultural surpluses generated by interventionist U.S. farm policies.

The five articles in the agreement reached in Pyongyang between the two Kims added nothing to the 1992 Basic Agreement in terms of proposed economic cooperation. Both called for the balanced growth of the two economies, although the 1992 agreement spelled out in much greater detail how that balance was to be achieved. Nothing much was achieved by the 1992 agreement, other than two loss-making investments by Hyundai and Daewoo.

In the euphoria surrounding the “historic landmark summit” as we must call it, no doubt many South Korean companies will propose ambitious plans for projects in the North. Hyundai has already come up with a grand plan for a multibillion dollar “Silicon Valley-like” research and development complex in the North and another to develop a special economic zone to stimulate tourism and light industry around scenic Mount Kumgang.

A closer look at these proposals suggests that they are the same ones that have been gathering dust on the shelves for some time, put there soon after the 1992 agreement.

The only difference is a promise from National Defense Commission Chairman Kim Jong Il (which is how the South Korean Defense Ministry has announced it will now describe the Stalinist dictator) to “positively consider” the sites Hyundai are insisting on rather than North Korea’s preferred politically more correct but economically disastrous border with China. This area is already the site of the UNDP-sponsored white elephant development zone at Tumen.

North Korea remains a bankrupt economy and will remain an uneconomic location for any modern industry for many years to come. The basic requirements for the successful establishment of modern industry are simply not there.

Basic infrastructure (power, water and communications) is poor or nonexistent; labor can sing the “Red Flag” but is unproductive, uneducated and untrained. The essential “soft” commercial infrastructure (the whole panoply of commercial support activities required by industry, from accountants to freight forwarders, from insurers to commercial bankers) is inadequate — mostly nonexistent. And finally, high transport costs between the two Koreas and within North Korea will ensure that that the proposals being made in the post-summit party will suffer the same fate as most resolutions made at champagne-fueled parties — they will evaporate in the morning sun.

Some may go ahead; especially those sponsored by entrepreneurs who escaped from the North, often with illegally removed assets that provided the foundations for successful businesses in the South. They will almost certainly continue to make losses for many years to come, the funds being used to cover the losses justified in personal terms by the guilt complexes of those who left their families behind. (Funny how now megarich escapees are regarded as patriots by the North while the poorer millions who also moved south during the Korean War are still called “traitors.”)

In addition to the negative economic fundamentals, there is also the problem of the North Korean bureaucracy and politicians other than “Dear Leader” Kim Jong Il himself. With mind-sets forged in over 50 years of Stalinism, they are not going to find it terribly easy to deal with market-driven South Korean and other foreign entrepreneurs. As good communists they may not even understand why they should, just because their leader seems to drunk a bit too much champagne.

We have seen how this total lack of understanding and even aggressive hostility toward capitalism can prevent, or seriously slow down, efficient liberalization and modernization before.

The euphoria that greeted the introduction of Doi Moi in Vietnam has turned into frustration among foreign investors who have seen the plans thwarted by bureaucrats and fundamentalist party cadres. Those investments that went ahead are mostly showing losses and the flow of foreign direct investment into Vietnam is dropping off rapidly. Expect the same in North Korea.

We have already seen the problem in the first post-summit negotiations, those over the arrangements for family reunion set for Aug. 15. The Northerners wanted to included as part of the deal spies from the North who were captured but now want to return to the North, while the South wanted to include remaining prisoners of war in the North and the hundreds of people who were abducted and taken to the North over the years.

The South agreed to include the spies while the North simply repeated what they have always said: There are no POWs or abductees. The negotiators from the North threatened to walk out of the meeting if the other side persisted in their claims. Faced with a democratic and vocal public and a free press in the South, the Southern negotiators backed off.

As the champagne bubbles begin to fade, South Koreans are coming to appreciate that balanced growth between the two Koreas means taking wealth out of the South and putting it in the North. They are beginning to indicate that they will be reluctant to stump up the extra taxes that will required to keep the regime in the North sweet. When they realize that the Holy Grail of unification is no nearer, their reluctance may turn nasty and the political climate may shift to the right.

Americans and Japanese might be willing to pour in resources in the hope that Kim Jong Il will stop threatening them with missiles, but the South Koreans have to live with the world’s largest, brainwashed, standing army just a few minutes tank drive away. Sorry to pop the balloon.