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The Outlook for Economic Cooperation
between North Korea and Japan
Suh Dong-man
Professor, IFANS
The diplomatic normalization between North Korea and Japan will be followed by an enormous amount of compensation. Accordingly, the current relations, which depend mostly on small scale trade and investment, will be changed into a developmental-aid type of economic cooperation. The means of linking economic cooperation between North Korea and Japan through economic cooperation of South-North Korea have been expanded upon since South-North Korean summit.
From this point of view, it is necessary to find a way to share the experience of the post-1965 economic cooperation between South Korea and Japan among South Korea, North Korea and Japan. To further those goals, it is recommended to establish a system of cooperation among the research institutes of South and North Korea and Japan, and thereby share materials, information and experience. Cooperation between South Korea and Japan in international organizations such as the ADB, IMF, and IBRD to support North Korea is also indispensable. Finally, it is incumbent on Japan to participate in the Kyongeui Line restoration project, considering the historical background of that railway.
I. Diplomatic Normalization and Economic Cooperation
between North Korea and Japan
Prospects for the Diplomatic Normalization Negotiations
The South-North summit last June fundamentally changed the political situation on the Korean peninsula. Since then, Japan has been trying to solve the problem of diplomatic normalization negotiations with North Korea by arranging a summit with the North Korean leader.
In light of the fact that North Korea has already engaged in summit talks with both China and Russia and that U.S.-North Korean relations appear to have entered a new phase, Japan may seem to be isolated in resolving its Korean peninsula issues. After the visit to the U.S. of North Korean Vice Marshal Jo Myong-Rok, the two parties issued a joint communiqu?and agreed to hold a summit between their respective leaders. This raises the possibility of resolving the missile problems and removing North Korea from the U.S. list of terrorist states. After issuing the joint communiqu? it was envisioned that relations should improve to such a degree that the two sides might open liaison offices.
Since relations between North Korea and the U.S. have changed so significantly, it has become imperative for Japan to normalize its relation with North Korea. This situation is similar to that in 1972, when the U.S.-China reconciliation occurred. There is now a likelihood that a tacit agreement will be made among the U.S., Japan and North Korea, through which the latter is compensated in exchange for resolving the missile threat and establishing diplomatic relations. As there is presently a fair possibility that the differences with respect to apology and compensation (which were chief obstacles in prior diplomatic normalization talks) will be narrowed, the issue of North Korea’s alleged abduction of Japanese citizens will remain on the condition that the missile problem be resolved.
However, the Bush administration’s policy toward North Korea is still fluid. If North Korea and the U.S. reach an agreement, there is the possibility of reaching an agreement on the normalization of diplomatic relations between North Korea and Japan, as the result of partial recognition and a political resolution of suspected kidnappings of Japanese citizens.
Means of Apology and Compensation
At the 9th and 10th rounds of diplomatic negotiations held in Pyongyang and Tokyo (in April and August 2000, respectively) North Korea called for compensation for past Japanese colonial rule of Korea in a broad sense, rather than demand reparations for Japanese colonization or war reparations as a belligerent party. At the end of the 9th round meeting (just as it did in 1991 and 1992), North Korea proposed to restore diplomatic relations on the premise that Japan apologize for past conduct prior to discussing pending issues, including an apology and compensation. The position of Japan was that former Prime Minister Murayama’s statement in 1995 was sufficient for an apology. Compensation should be made in line with the 1965 Treaty on Basic Relations between the Republic of Korea and Japan, and be handled in a manner consistent with property claims. Japan also insisted that the joint declaration of the Republic of Korea and Japan in October 1998 had been in accordance with the Murayama statement. Thus, it seemed that Japan intended to apply the joint declaration to its relations with North Korea.
Since there was no formal apology associated with the 1965 Treaty on Basic Relations, the compensation that is directly linked with an apology shall not be made in the same way. Under the circumstances that it has no choice but to make an apology on the same level as the October 1998 Murayama statement, Japan would consider it unreasonable to handle the compensation as a property claim, and is therefore expected to handle it as economic cooperation. The nature of the economic cooperation would be such that it may be thought of in two ways, depending on the point of view: either as compensation for past crimes, or as economic cooperation by Japan.
II. Prior Experience in Economic Cooperation and Diplomatic Normalization between the Republic of Korea and Japan (1965)
Diplomatic Normalization & Property Claims Fund
In the process of the normalization of relations between Korea and Japan in 1965, there was neither an apology nor subsequent compensation for colonial rule; thus, the compensation problem was addressed as a settlement of property claims. The amount of property claims reached a total of USD 800 million, including USD 300 million in grants, USD 200 million in public loans (provided for 10 years at an interest rate of 3.5% per annum, and payable in 20 years following a 7-year grace period), and USD 300 million in commercial loans. Criteria for the assessment of this amount are not clear, but they were supposed to be based on negotiations between Korea and Japan, and take into account the amount demanded by the Korean government and the solvency of the Japanese government.
At the end of 1964, the foreign exchange holdings of Japan stood at USD 2.53 billion, exports were USD 7.036 billion, and imports USD 6.5 billion. At that time, Japan was the 6th largest exporting country in the world, and the 4th largest industrial goods exporting country. Since Japanese exports were rapidly increasing, and the economic cooperation fund was spread out over 10 years, the settlement was not viewed as a burden on the Japanese economy. Indeed, the Japanese trade surplus was USD 1.223 billion in 1968 and 2.3 billion in 1969. Considering that the foreign exchange holdings in Korea in 1965 stood at USD 138 million with total exports at approximately 300 million, the property claims fund was relatively large, and represented an important financial resource for the development of the Korean economy.
Uses of the Economic Cooperation Fund
The economic cooperation fund functioned by supplying Japanese products and services in lieu of cash. Upon launching the fund, Japan utilized it as a method of reducing surplus equipment and goods and increasing exports.
The Japanese general trading companies granted mostly commercial loans; these also contributed to the promoting the export of Japanese goods and materials. The grants and public loans of the fund were generally apportioned to the development of agriculture, fisheries, mining, manufacturing and social overhead costs (SOC). USD 67 million (13.3%) was spent on agricultural and fishery projects, such as the development of water for agricultural use, farm mechanization and the construction of fishing boats; USD 280 million (56.1%) was invested in mining and manufacturing industries, including the construction of the POSCO plant (USD 119.48 million), the promotion of small and medium size enterprises, and importing equipment and materials; USD 170 million (21.4%) was spent on the SOC, including the construction of Soyang-River multipurpose dam and the improvement of railroads; the remaining funds were spent on open account and bank charges.
Since the grants and public loans (but not the commercial loans) were provided on a per-project basis, their uses were designated through negotiations with Japan. The conditions and uses of the fund were generally deemed tolerable for Korea. However, in the establishment of POSCO, Korea met with strong opposition from Japan and the negotiations proceeded with difficulty; but the Japanese steel industry, which was in the midst of restructuring, cooperated towards establishing POSCO.
Expansion of Korean-Japanese Economic Cooperation
Even though the amount of the fund for property claims was agreed to through tough negotiations at the time of diplomatic normalization, far more commercial loans were subsequently granted. From the moment of normalization until 1971 (a period when economic cooperation was very active), USD 182.5 million in grants, USD 119.4 million in public loans and USD 59.4 million in commercial loans were dispensed for property claims; additional commercial loans in the amount of USD 600 million were also provided. Subsequent to the normalization of relations with Japan, the Korean government and industries sought not only funds for property claims but also commercial loans. From 1965 to the end of 1992, the loans granted to Korea by Japan reached USD 8.5 billion, which is more than ten times of the amount agreed to for property claims. That amount represents 21.5% of USD 39.85 billion, which is the total amount of loans during the same period; 32.6 % of the loans were public loans and the remainder were commercial loans. It was felt that the public and commercial loans from Japan respected the country’s will in regards to development and allowed more freedom in use than loans from international financial institutions, which are granted according to bilateral contracts and often impose harsh conditions.
Evaluation of Korea-Japan Economic Cooperation
The economic cooperation between Korea and Japan was a stepping-stone for the development of the Korean economy. The fund for property claims played an important role in the government of Park Chung-Hee as it carried out the 2nd 5-year economic development plan, and formed the foundation for Korea’s economic growth. On the other hand, since 1965, the degree of Korean economic dependence upon Japan has been growing. Except for 1998 (when an unusual trade situation arose due to the financial crisis), Korea recorded USD 10~15 billion of yearly trade deficits with Japan throughout the 1990’s
From 1965 to 1997, the deficit accumulated through trade with Japan has reached USD 138.6 billion. This is more than twice the remaining total trade deficit with all other countries. In the late 1960s, the trade deficit with Japan was about 50% of the total trade deficit; in the 1970s it was about 80%; since the 1980s it has exceeded the remaining trade deficit, and in 1990s it increased to 150%~180% of that. The degree of trade dependence on Japan has dropped from 22% in the 1980s to 15% in 1997, but 20~25% of total imports are from Japan. Since Korea depends so much on Japan for technology and capital, and exports capital goods and parts that are imported from Japan after processing, the more Korean exports increase the more Korean imports from Japan also increase.
Some hold the opinion that the East Asian economic crisis occurred because the economies of the affected countries contained a ‘bubble’ due to the mass injection of Japanese capital. Japan has since withdrawn loans from these countries, due to the financial crisis. The impact of Japanese capital is tremendous on those countries’ economy in crisis, as well as in their recovery. After the financial crisis in Asia, the voices of those in Korea who admit the positive role of Japan regarding the AMF plan and the internationalization of the yen are getting strong.
III. Figures on Economic Cooperation between North Korea & Japan
Type of Economic Cooperation between North Korea and Japan
Under a program of economic cooperation between North Korea and Japan, any compensation which followed the normalization of diplomatic relations would become a basic financial resource. Besides compensation, Japanese commercial loans would play an important part in any North Korea-Japan economic cooperation. Admittedly, it will take some time to furnish legal and political measures which will secure profitability and reduce risk. Even so, within a short period of time investment from Japan could be made in the special economic zones such as Kaesung industrial park, depending on the progress of economic cooperation between South and North Korea.
Financial support from international organizations such as the ADB (in which Japan is influential) will play an important role. In the long term, assistance from a ‘Northeast Asia Development Bank’ would also be significant, if such a structure is established. The Northeast Asia Development Bank can be established only if regional economic cooperation in the Northeast Asian countries is fully realized.
Amount of Compensation (Economic Cooperation Fund)
There is an unconfirmed report that North Korea demanded that Japan provide USD 10 billion for 10 years at the negotiations for normalization. An investigation by the U.S. Congress concluded that the expected amount of compensation may range from USD 3.4~20 billion, but the grounds for such claims are not presented. Komaki Deruo of the Asian Economy Institute of Japan insisted that the present value of USD 800 million (provided as the property claims in 1965) is no more than USD 3.1 billion at current price levels. However, considering that an apology shall be made at this time, and that the volume of the Japanese economy has grown, and that South Korea is looking favorably upon the negotiations, an additional increment is expected. Marcus Norland, a U.S. expert on the North Korean economy, concluded that the amount of compensation could reach USD 20 billion.
As it is difficult to set negotiable criteria for calculating the amount, the fund provided by the Korea-Japan economic cooperation would inevitably become a benchmark. On the other hand, if one considers that the criteria in 1965 were not clear either, that amount may not be so readily acceptable. Considering that Japan has become a major economic power, that compensation has been delayed and an apology is to be made, and taking into account the opportunity costs of the benefits that earlier compensation could have provided, a significant increase would be inevitable, even after conversion to present values.
At the end of 1999, the foreign exchange holdings of Japan were USD 293.154 billion; in August 2000, they were USD 344.86 billion.
Uses of the Fund
As in past Korea-Japan economic cooperation, and in general overseas development aid (ODA), when North Korea submits a project, Japan considers its justification and negotiates for adjustments, after which the use of the fund might be decided. Japan has typically respected a recipient country’s proposals after ensuring its own economic interests.
As North Korea is suffering from a low rate of operation in basic industries, priority shall be give to the normalization of operations of major factories in those industries. There is a report that North Korea is planning to reconstruct the factories of basic industries along the Kyongeui and Kyongwon railway lines. Metal, coal, energy and industries that are directly linked with export would be among the first objectives. The North Korean government has also ordered that blueprints for the construction of the petrochemical Kombinat to a Japanese engineering company in an investment briefing for the Najin-Sunbong special economic zone.
Another imminent problem for North Korea is to improve its agricultural foundation. A great deal of money will be invested in this sector. Cooperation between Korea and Japan in this field was agreed to at the summit talks between President Kim Dae-Jung and Prime Minister Mori.
Furthermore, significant funds will be allocated for SOC such as roads and railways; these are the biggest obstacles to the recovery of the North Korean economy. Future road construction, or the restoration of Kyongeui Line (which will be started as a South-North Korean economic cooperation project), would be key projects, just as the construction of the Kyongbu Expressway was in the past.
Conditions of Economic Cooperation
The fund for economic cooperation between North Korea and Japan might be provided basically as ODA through which Japan supports developing countries. Support for socialist states such as China and Vietnam have been made through the ODA. Since 1991, Japan has been the world’s leader in the amount of ODA. In 1998, the annual amount of ODA from by Japan totaled USD 10.776 billion; bilateral aid comprised USD 8.651 billion (80%), while aid via international organizations amounted to USD 2.125 billion. With regards to the bilateral aid, 41% (USD 3.544 billion) was directed to East Asian countries. Mongolia, with a population of 2.4 million, has received annual aid of approximately USD 100 million (10.3 billion yen) since 1991.
Although Japan’s capability to deploy funding has significantly improved since 1965, the conditions of dispensing aid have become subject to additional international restrictions. In 1992, the following four principles were prescribed in the general guidelines for ODA by Japan:
(1) Harmonize the environment and development.
(2) Avoid aid with a military purpose, or which may cause international conflicts.
(3) Link aid with military expenditure and arms sales.
(4) Secure democratization, switch over to a market economy, and protect fundamental human rights.
The Japanese government has been enduring vast financial deficits; therefore, there is a limit on expansion of ODA, and support for North Korea might cause a reduction in support for other countries.
Japan has considerable experience in ODA, including aid for China, (which had not yet started its reformation) in 1973, to aid for Russia, Eastern Europe and Mongolia, all of which were shifting to a market economy after renouncing socialism. Even though Japan desires a certain degree of reformation by North Korea (which is required to adjust itself to the capitalist market) Japan would not demand that North Korea drastically reform its market at this stage of negotiations providing that the benefits to Japan can be secured. Instead, initial financial support would focus on solving immediate problems such as improving agriculture, resolving the energy problem, constructing railways and roads, and providing technical support. Being as North Korea has already declared its intention to reform (after Kim Jong-il’s visit to China), support from Japan could easily be made.
IV. Relevance of South-North Korean Economic Cooperation, Korea-Japan FTA and North East Asian Regional Cooperation
Relation to Economic Cooperation between South and North Korea
Some people have expressed concern that the progress of economic cooperation between North Korea and Japan after normalization would result in a conflict of interests between South Korea and Japan. They reason that North Korea may choose Japan as a partner for economic cooperation rather than South Korea, because the former poses less of a threat to the security of its political system; therefore, South-North Korea economic cooperation, which is at an early stage, might become deadlocked.
Indeed, if Japan does play a key role in the recovery of the North Korean economy, a restructured North Korean economy could possibly center on Japan. Furthermore, such a situation would have a negative impact on the ‘National Economic Community’ as it would escalate the degree of the Community’s dependence on Japan by adding North Korea’s new dependence onto South Korea’s existing dependence.
Notwithstanding such an objection, South Korea is positively seeking ways to induce Japan into playing a role in the economic cooperation between South and North Korea, on the grounds that the resources required for the establishment of an economic infrastructure in North Korea are beyond South Korea’s economic capabilities. In addition, as any compensation depends on the result of bilateral negotiations between North Korea and Japan, there is no room for South Korea to play a role. Finally, the injection of mass capital into North Korea will have a positive impact on South Korea since it will contribute to cutting down the future cost of unification.
Taking into account the close ties between South Korea and Japan in economic cooperation and the economic aspect of division of works, the economic cooperation between North Korea and Japan could promote economic cooperation between South and North Korea. At the summit between President Kim Dae-Jung and Prime Minister Mori in September of this year, cooperation in economic support for North Korea was discussed.
When compared to the situation in 1965, the current structure of the Japanese economy has reached a higher level and a great deal manufacturing facilities have been moved to Southeast Asian countries and China. Japanese industrial capitalists are not interested in making investment in North Korea.
To encourage Japanese capital to enter into North Korea, cooperation with countries whose economic level is lower than that of Japan is needed. Even if Japan utilizes overseas subsidiaries, it is inevitable to cooperate with such countries as South Korea. In the past, Japan has made use of a subsidiary in Thailand to make risky investment in Vietnam, another socialist country.
Relation to the FTA between Korea and Japan
Japan adopted a positive attitude regarding the FTA with South Korea and joint research was carried out by Korean and Japanese institutions for a feasibility study. At the South Korea-Japan summit talks in September, it was agreed to enter into an investment agreement and set up an economic forum for the private sector to go on with the discussions.
Japan insists that the FTA will do nothing but benefit South Korea; South Korea, while recognizing that it can realize gains through some part of the FTA, maintains a cautious attitude due to the unfavorable balance of trade and increased dependence on Japan.
Recently, Japan asserted that the FTA between South Korea and Japan would play a role in inducing private capital toward the economic cooperation efforts between South and North Korea. According to the results of the discussions on the FTA, Japan may make a decision as to whether to cooperate with South Korea in the economic cooperation between South and North Korea. South Korea maintains the position that it will cope carefully with the situation, considering the effect of the FTA on economic relations with Japan and on relations with China and North Korea.
Relation to Regional Economic Cooperation Between Northeast Asian Countries
In early 1999, local governments along the East Sea (Sea of Japan) proposed the establishment of the ‘Sea of Japan Economic Bloc’ or the ‘Northeast Asian Economic Bloc.’ Accordingly, meetings between the concerned parties--South Korea, North Korea, China, Russia and Mongolia--have been held. The Duman River development plan (led by UNDP and UNIDO) actualized the proposal, but until now there has been no notable outcome. Although there were once positive attitudes toward the idea after the end of the Cold War, mistrust between the related countries, a passive attitude on the part of the Japanese government and tensions between South Korea and North Korea have prevented progress.
In regards to other economic cooperation, Japan has pursued bilateral relations and shrank away from those multilateral commitments that have burdened Japan with heavier duties. In the wake of the inter-Korean summit, South-North Korean economic cooperation has expanded and the diplomatic negotiations between North Korea and Japan have become active; consequently, the issue of the 'Economic Bloc' is being raised again. Regarding the gas pipeline construction project and the Kyongeui Line restoration, attention is being paid to how Japan will link those projects to economic cooperation with North Korea.
As a result of the Japan-Russia summit and the Mori-Putin plan, Japan adopted a policy to expand economic cooperation, including the development of Siberia. It remains to be seen whether or not Japan will combine the Siberian development plan and economic cooperation with North Korea. The former attitude of Japan has been that it is natural to expand Japan-Russia economic cooperation (including the Siberian development plan) into regional economic cooperation in Northeast Asia.
V. Considerations
Accordance with Diplomatic Normalization Between Korea and Japan
Japan insists that compensation for North Korea should be modeled after that of South Korea’s; South Korea must consider that position. South Korea must clearly recognize that the compensation for North Korea will be decided only by bilateral negotiations between North Korea and Japan. Public opinion polls in Korea after the South-North Korea summit have not shown a demand that North Korea must receive as much as South Korea received. On the contrary, there is a strong opinion that more compensation is better only if it is helpful for the recovery of the North Korean economy and economic cooperation between South and North Korea.
In the process of normalization between North Korea and Japan certain basic principles (including the amount of compensation) have to be set, but these should be applied flexibly so as not to become obstacles in negotiations.
Relation to South-North Korea Economic Cooperation
It is necessary to find a solution that moves economic cooperation between North Korea and Japan toward such a direction that it can be linked with, and complementary to, South-North Korean economic cooperation. It is also necessary to find a way to share the experience of economic cooperation between South Korea and Japan among South and North Korea and Japan. It is helpful to establish a cooperative system among the research institutes of South and North Korea and Japan with a view to share materials, information and experience.
It is recommended to find a way for international organizations (such as the ADB, IMF and IBRD) to secure cooperation between South Korea and Japan in supporting North Korea. Furthermore, it is advisable that Korean and Japanese companies, which have experience working with North Korea, form a consortium to support North Korea. Regarding the FTA, a decision shall be made after due deliberation of related issues such as the adverse trade balance with Japan, relations with China and matters concerned in forming a ‘South-North Korean Economic Community.’
Relation to Regional Economic Cooperation in Northeast Asia
It is desirable to encourage Japan to participate in the restoration of Kyongeui Line, which Japan built in colonial period to invade the continent. Japan is quickly moving to occupy the intermediate station on the Siberian railroad through diplomacy toward Eurasia and economic cooperation with Central Asian countries. This line should be re-activated to link the recovery of the North Korean economy through economic cooperation between North Korea and Japan, via an overall plan for Northeast Asian regional economic cooperation (such as the proposed ‘East Sea Economic Bloc’) that includes South Korea, China and Russia. Since the 1990s, South Korean and Japanese local governments on both sides of the East Sea have experience in regional economic cooperation with northeastern China and far eastern Russian. In the long run, while promoting the economic cooperation between South Korea, China and Japan, ways to encourage North Korea’s participation in such cooperation should be presented.
Measures to secure Japan’s participation in the establishment of the ‘Northeast Development Bank’ proposed in the ‘East Sea Economic Bloc’ plan is necessary. Japan prefers to utilize the existing ADB rather than establish a new bank, as it is influential on the ADB’s decision making. On the contrary, the South Korean government has positively considered the establishment of the Northeast Asia Development Bank as means of raising the funds necessary for the implementation of KEDO projects.
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