&#91OUTLOOK&#93A long way from paper to reality

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[OUTLOOK]A long way from paper to reality

Seoul and Pyeongyang finally put four economic cooperation agreements into effect. It has been three years since they were first discussed at the second ministerial meeting in August 2000, and two-and-a-half years since they were signed at the fourth ministerial talk in December 2000. If we go back to the July 7 Special Declaration in 1988, which reopened the inter-Korean economic exchange that had been suspended since the partition of the peninsula, it took over 15 years to prepare the systematic grounds of inter-Korean economic cooperation.
We should welcome the change. The agreements offer a systematic framework for the two Koreas to pursue economic cooperation, and companies are expected to benefit in the new environment. As the investment guarantee agreement comes into effect, South Korean assets invested in the North will be protected and firms will be eligible for appropriate compensation in case of expropriation. The double taxation agreement will alleviate the tax burden on businesses and increase investment profits.
South Korean companies have been assuming a unilateral responsibility for their North Korean partners’ nonfulfillment of contract terms, late delivery or substandard products, but the agreement on dispute resolution will facilitate fair, effective and prompt resolution of corporate disputes. The agreement on financial settlements will provide convenient payment methods, and companies will be able to save on currency exchange and transmission fees that occur when using a bank in a third country. The four agreements will contribute to the expansion of inter-Korean economic exchanges.
However, too-high expectations and hopes can be harmful as well. The four agreements came into effect only days ago, and will not immediately bring a sudden boom in inter-Korean exchanges. That is the same logic that relinking the Gyeongui line won’t directly lead to the “iron silk road.” Even if the railroad is indeed linked again, there are no products, resources or people to transport, and being connected to the railway across the Eurasian continent will require the modernization of North Korean rails, which is expected to cost over 1 trillion won ($850 billion) and take abut 10 years.
In fact, a system is only a tool to support substance. More important than a system are the will to make it work and the opportunities for profit that make the system meaningful.
Remember how happy we were when the Inter-Korean Basic Agreement was signed over 10 years ago? Now, the “agreement” remains a paper pact only, and the promised “systems” have faded from our memories. When there is no actual investment, economic agreements cannot have substantial meaning.
Despite the 15-year history of the inter-Korean economic exchanges, there are only a few South Korean investment projects in the North, not because there hasn’t been systematic support but because companies saw no profitability. No matter how insufficient a system is, companies will move into a field when they see profitability. For example, there were over 300 South Korean investment projects in China before the Korea-China Investment Protection Agreement was signed in 1992. Companies were attracted to China because of the Chinese government’s active efforts to invite foreign investment, continued rapid annual growth rate of over 10 percent, open and reform-minded policies, enormous market potential and cheap labor. They did not decide to go into China because of investment protections or dispute resolution.
After all, the future of inter-Korean economic exchange depends on the North Korean authority’s will to make policy and economic changes. North Korea had agreed with the Korean Peninsula Energy Development Organization to provide labor for a $100 monthly wage, with a 2.5 percent annual raise, for the light-water reactor construction project. Then Pyeongyang suddenly asked for $600, and when the organization rejected the demand, Pyeongyang pulled out its work force. Unless the agreements are bolstered by North Korean authority’s will to respect them, the four economic cooperation agreements will be just more scraps of paper.
Improvement in profitability through economic reform is another prerequisite for more active exchanges. During the 1992 tour of southern China, which jump-started China’s economic growth and made the communist state an investment magnet, Deng Xiaoping famously said, “We should not walk like a woman with bound feet. We need to boldly experiment and drastically push for what we saw in the world. There is nothing but death if we don’t develop our economy with reform and market opening and improve the people’s living.” Without such an aggressive drive for economic reform, we cannot expect inter-Korean investment to boom.
What we really want is not the agreements themselves, but substantial development in economic cooperation. That is why we are more anxious than hopeful, more uneasy than excited, when we see the agreements coming into effect. Let’s hope our worries are groundless. I hope to be criticized someday soon that my apprehension proved unfounded. Let’s pray for a soft landing for the agreements and for booming inter-Korean exchanges.

* The writer is a senior fellow and head of the North Korean Economy Division at the Korea Development Institute. Translation by the JoongAng Daily staff.


by Jo Dong-ho
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