The two Koreas : prospects for economic cooperation and integration

Publication Date: January 2000

Publisher: East-West Center

Author(s): Marcus Noland

Research Area: Economics

Type: Report

Coverage: Korea (North) Korea (South)

Abstract:

After nearly a half century of strident adherence to the principles of socialism and self-reliance, North Korea may be on the verge of opening itself to outside aid and advice. Motivators include a decade of economic trouble punctuated by declining output and famine as well as underdeveloped infrastructures and reduction in foreign trade and material support. The limits of national self-sufficiency may finally have become admissible in North Korea, as evidenced by recent diplomatic negotiations and cooperative commercial projects with capitalist nations. South Korea, meanwhile, is struggling to regain ground lost in the financial crisis and to correct faults in its own political and economic systems. Among these is a history of military dictatorships and extensive government involvement in economic planning. Free elections supplanted the dictatorships in 1987, and South Koreans subsequently have had the benefit of an increasingly open political forum. As for government involvement in the economy, there has been a slow but steady disengagement over the last two decades in favor of market-driven controls, although the trend may have abated recently due to the uncertainties accompanying progress toward reconciliation. Hindrances to further progress include North Korea's reliance on military exports for revenue and its reluctance to accept "capitalist" aid. Free exchange of information and reliable indications of intent are still the exception to the rule in North Korea. Ideological volatility in both nations presents another obstacle. Each involved nation has a vital interest in peaceful, expanded relations, but competing ideologies and old animosities must be overcome in the interest of mutual advancement. Surprisingly, current prospects for reconciliation, and perhaps reunification of the two Koreas, seem better than ever. This can be attributed in part to new leadership in both nations. South Korean President Kim Dae-jung has called for peaceful coexistence. He also has supported the provision of aid and establishment of diverse bilateral economic projects. North Korean President Kim Jong-il seems to have been accepted by party leaders, the military, and the citizenry. In this more stable environment, denunciations of non-socialist nations have lessened, both from Kim and the North Korean media. Kim has also overseen the normalization of relations with other nations, while North Korea's foreign minister has said his nation could consider a "one country, two systems" model similar to Hong Kong and China. In this light, South Korea's investment strategy should emphasize tax incentives rather than state-directed investment in the North to assure that efficiency guides decision-making. Further progress will be best served if North Korea allows expansion and diversification of cooperative projects, now few and tightly controlled; the ideal would be free investment throughout the North by South Korean firms. About the Author Marcus Noland is a senior fellow at the Institute for International Economics and an associate of the International Food Policy Research Institute. He was a senior economist at the Council of Economic Advisers in the Executive Office of the President of the United States, and has held research, teaching, or fellowship positions at the Johns Hopkins University, the University of Southern California, Tokyo University, Saitama University, the University of Ghana, the Korea Development Institute, and the East-West Center (where he was a POSCO fellow). His previous works include three published by the Institute for International Economics: Avoiding The Apocalypse: The Future of the Two Koreas (2000), Economic Integration of the Korean Peninsula, ed. (1998), and Global Effects of the Asian Currency Devaluations, with Liu et al. (1998).