[Outlook]Aid is not the same as investment

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[Outlook]Aid is not the same as investment

The first commandment in investment in North Korea is “don’t.” That was the conclusion of a study aimed at finding successful models for economic cooperation between South and North Korea.
The study was initiated because few companies have made money by doing business in North Korea. The goal of the study was to uncover profitable business projects. But the conclusion was to not invest if one wants to make money. How surprising.
However, that is the reality of economic cooperation between South and North Korea. Last year, the volume of economic exchange between the two Koreas hit a record high of $1.35 billion, but commercial trade made up 40 percent of that amount.
The statistics included aid for North Korea and heavy equipment for construction of the Kaesong Industrial Complex. More than half of the economic exchange had nothing to do with trade. That was not just last year’s story -- that has been the case for several years.
When you think about it, it is a natural result. For trade volume to increase, one must buy or sell goods. But even if we want to buy goods from North Korea, there are few decent products, while most are low-quality. Except for some agricultural products, fish or minerals that occur naturally, most of the North’s products are not competitive. On top of that, logistical costs are so high that importing North Korean products does not pay off.
It is more difficult to sell South Korean products in North Korea because there is simply no money there. Even if North Korea has some money, it imports cheap Chinese products. To North Koreans, quantity matters, not quality. Thus, only a limited number of South Korean companies do business with the North.
Investing in the North is even more difficult. There is little infrastructure but a great deal of risk. There is hardly any domestic market. It is so hard to get the materials needed for manufacturing that if one wants to manufacture clothes in North Korea, one needs to bring needles, thread, scissors and buttons. That means increased manufacturing costs, needless to say.
Labor costs are low, but companies cannot employ or fire workers as they want. North Korean workers in South Korean companies think of investment as assistance so they demand more money under the table or rewards for their work. South Korean businessmen cannot visit their factories in North Korea whenever they want. They cannot talk over the telephone and cannot use e-mail to communicate with people at the factories.
North Korea must change its policy regulating incoming investment. It must improve the environment for investing by opening its doors and reforming. Then more companies will do business in North Korea.
That is where South Korea’s government needs to step in. A company or two cannot induce North Korea to open its doors and reform its economy. The South Korean government’s North Korea policy must be formed with that goal in mind.
The approach to the matter must be changed. So far, even the South Korean government has clung to projects, just like companies do. It is nearly impossible to develop North Korea’s economy with projects, such as reconnecting the Gyeongui Line or the Donghae Line or providing materials for light industry. These projects can exercise very little influence on North Korea’s reforms or its opening its doors.
Even among the South Korean government’s projects, few have economic value. That is why its North Korea policy has been condemned as “shoveling aid to North Korea.” Projects have limited achievements.
Thus, we need to set up a program, a comprehensive package. If we are to provide energy to North Korea, equipment in the country’s factories must be repaired at the same time.
South Korean companies must also be allowed to use the factories. That way, the issues of employment, communication and logistics will be bundled together. Such a program is economically efficient.
We need to think about offering our blueprints to North Korea. South Korea’s comparative advantage is not capital or technology. If North Korea needs capital or technology, it can get them from China. Our comparative advantage is our experience of development. Now is the time to use the experience.
The inter-Korean summit meeting has been postponed. This is good because there was not enough time for preparation.
As we have more time to prepare for the meeting, we should stop looking for a project. Instead, we should design a program.
Then we can avoid taking the same step over again ― deciding to shovel aid to North Korea during the summit meeting that will again be held in Pyongyang.

*The writer is a professor of North Korean studies at Ewha Womans University. Translation by the JoongAng Daily staff.

by Jo Dong-ho

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