SURVEY: THE KOREAS

Yesterday’s war, tomorrow’s peace

Jul 8th 1999
From The Economist print edition

Despite South Korea’s ambitious reforms, the country remains ill-prepared for the crisis that will, sooner or later, engulf it from the North, writes Edward Carr

ON THE border with North Korea you can find what, to its patrons, feels like one of China’s most agreeable eating places. It is modest. The floor is bare, the walls are peeling, and the windows are insulated with plastic sheeting. The smeared glasses and plates hint at bellyache, or worse. But it is warm, and the food is good: pork, steamed horseradish and the pungent pickled cabbage the Koreans call kimchi. The company is good too: two Koreans and a Chinese, all three of them dissidents defying the local government by taking in North Korean fugitives. Just a few yards away, across the Tumen river, you can see the frontier with North Korea. There is little warmth on that bank because so many of the trees have been cut down for firewood. There is no talking to dissidents, because in a country crawling with spies nobody would be so foolish. And there are virtually no restaurants, because in North Korea there is virtually no food.

Nobody can say whether the workers’ paradise in the North will last two years, or twenty; only that the regime of Kim Jong Il is doomed, and that South Korea will be left to pick up the pieces. Yet what should be a moment of triumph could turn into disaster. South Koreans, still absorbed by the aftermath of the Asian economic crisis in 1997, think they can put off the preparations and the sacrifices of reunification until much later, perhaps decades into the future. That is a mistake. The timing of unification, and the way it happens, will be determined by events in the North, not by when it suits the South. Unification will be the biggest thing South Korea has experienced since the Korean war in the early 1950s. The country must start to get ready now, because the preparations for it will be long and arduous.

The immediate cause of unification might be brief and bloody. American intelligence chiefs have repeatedly given warning of the risk of war in the Korean peninsula in the next five years, possibly at very short notice. Even as North and South Korea agreed recently to hold talks in Beijing, their patrol boats were shooting at each other in the Yellow Sea.

If a desperate and disintegrating North were to attack, there would be carnage. Two-thirds of the huge North Korean army and 80% of its firepower are dug in within 100km (62 miles) of the demilitarised zone (DMZ), the misnomer of a frontier, which President Clinton on a visit in 1993 called “the scariest place on earth”. The Americans estimated in 1994 that in a war some 50,000 of their troops and ten times as many South Korean servicemen would die, to say nothing of the civilian toll. Seoul, South Korea’s capital, is only two minutes’ flying time from the North’s airfields, and within range of its heavy artillery. Analysts believe the North can fire shells tipped with chemical weapons, and might even have a few nuclear warheads.

Fortunately, North Korea is more likely to collapse than to explode. Yet, in its own way, an army of starving northern migrants could also devastate the South. With 46m people to the North’s 23m, South Korea is neither big nor wealthy enough to support the North in the way West Germany supported East Germany after its collapse ten years ago. Compared with North Koreans, East Germans were rich, sophisticated and well-informed about life in a democratic market economy, not least from watching western television. North Korea, by contrast, for the past few centuries has known nothing but feudalism and imperialism, and latterly a bizarre form of communism. Its people are, literally, starving; they know nothing of the outside world; crime and corruption are rife. The South Korean economists who study the prospects for unification throw up their hands in despair.

If there is chaos in the North, the South will surely be drawn into the maelstrom. South Koreans are being suitably level-headed about it, but the national dream of a single Korea is as potent as ever—on both sides of the DMZ. For many separated Korean families that dream is made up of real flesh and blood. In the Korean war in 1950-53, brother was separated from sister, mother from son as northern troops first advanced to the southern port of Pusan and then were driven back almost to the Chinese border, only to advance again to today’s frontier. South Koreans’ relatives in the North may be lost for the time being, but they have not been forgotten.

Reunification would represent the ultimate victory of South over North. That would be especially sweet because for many years after the war South Korea had something of an inferiority complex, which for the first decade or two was justified by the North’s better performance. Whereas the North has kept foreigners at bay, the South is peppered with American army bases, incuding one slap bang in the middle of Seoul. The North was built by anti-Japanese freedom fighters; the South by Japanese-trained army officers. Unification would be not only the fulfilment of a South Korean dream, but the moment when southern politicians finally won complete control of their foreign and defence policy from America. No South Korean president could turn his back on such a prize.

After all, the unfinished civil war has been the defining influence on South Korea. Three generals-turned-president zealously and ruthlessly set about building the nation, in fear of a North that after the ceasefire in 1953 seemed to reconstruct and rearm itself with redoubled intensity.

The economic front

The South’s success was quite unforeseen. The country where Park Chung Hee seized power in 1961 had a GDP per head equal to Algeria’s. Its third-largest export was wigs. The average life expectancy of its people was 55. But those people were well-educated, they worked hard and they saved what they could. The government did its best to promote development, supporting firms that succeeded in foreign markets. Thirty-six years later South Korea was the world’s 11th-largest economy, with an income per head on a par with Portugal, and had become a member of the OECD. Average life expectancy had jumped to 71. The country had also become home to the sort of industries that a strong military government would want plenty of, such as giant steel firms, car makers and shipbuilders.

But this miracle came at a price. Outside the regime’s charmed circle, no entrepreneur could thrive. Petty-minded officials banned such “extravagances” as neon lights (until the 1970s), red cars (until the mid-1980s) and holidays abroad (until 1987). Successive governments used the supposed threat of subversion by the North to justify oppression, purges, incarceration, rigged elections, propaganda and a harsh national-security law.

South Korea’s great achievement in the past decade has been to begin to shed this legacy, peacefully. The country’s current president, Kim Dae Jung, is a former dissident who was almost assassinated on the orders of one general, and sentenced to death on trumped-up charges on the orders of another. In 1997 he was elected without a murmur from the armed forces. And the economy has come a long way since the days when the planning commission siphoned scarce capital into strategic industries under the country’s five-year plan.

Yet in the past few years South Korea’s continued shortcomings have also been plain for all to see. Politicians and bureaucrats became the instruments of big business. During the 1990s, large wage rises and foolhardy diversification diminished Korean companies’ competitiveness. The government, desperate to avoid failures, instructed banks to prop up large firms. But this did not work for long: the Asian crisis knocked the country sideways. From peak to trough, the won fell by 54% to 1,962 to the dollar, the stockmarket plunged by 65% between June 1997 and June 1998, and some of the country’s best-known companies went bankrupt. Last year GDP shrank by 5.8%. Just when the South Koreans thought they had made it, their economic miracle seemed to be evaporating.

To its credit, the country has acknowledged its faults with remarkable candour. It has not tried to blame foreigners for its troubles, nor has it hid behind tariff barriers or currency controls. Instead, it has pledged to abandon the economic system that took it from poverty to prosperity in a generation.

Under its newish president, the South has embarked on a thoroughgoing programme of economic reform. The economy has opened up to short- and long-term capital from abroad. Jobs are less jealously protected than they were. Minority shareholders now have powers to question managers. Starting this year, companies will have to comply with international accounting standards. The supervision of the financial system has been overhauled to meet international norms.

To judge by the economic indicators, these measures have been unexpectedly successful. In the first quarter of this year GDP was 4.6% up on a year earlier. The won is back to 1,170 against the dollar, and the stockmarket is back to pre-crisis levels. Exports have begun to rise again. Stocks have been run down and industrial production has perked up.

Seoul-searching

Yet all is not well in Seoul. “President Kim gets an A+ for overcoming the currency crisis,” says Kim Young Hie, a columnist with JoongAng Ilbo, a daily. “But the general economic crisis is still there.” A lot of restructuring remains to be done. Companies still have too many divisions and too many staff, and are still losing money. There may be more bankruptcies, and workers are restive. Looking north from the top of the high-rise Lotte Hotel in Seoul, you can see only three cranes. A few years ago there would have been dozens.

Are the reforms too ambitious? By trying to set markets free, they not only threaten commercial and political interest groups, they also seek to change the way South Koreans do business with each other. Free-market ideas of relying on legal contracts, impartial regulations and transparency sit uncomfortably beside the network of personal loyalties and obligations that still directs Korean affairs. The decentralised nature of a market system seems alien in a place that grants huge moral power to the “king” presiding over a company, a bank or the country as a whole.

One big question that will face South Korea over the next few years is whether the country can embrace market reform at this deeper level. Its very prosperity is at stake. Capital and labour will increasingly have to shift to the small job-creating, service-oriented companies that are currently in short supply, at the expense of big business. That is the only way South Korea can hope to realise its dream of catching up with Japan.

Yet there is a more cogent reason for reform than trying to best a former imperial power. The crisis South Korea really needs to prepare for—and which will make the Asian troubles of the past two years look like a mere stumble—is the collapse of North Korea. In all probability, few will know that it is coming until a coup is under way, or troops are massing on the DMZ. But that state of ignorance must not stop the South from getting ready. Yesterday’s war built the modern South Korea from iron and steel; tomorrow’s peace requires democracy and an open economy.

This is not to help South Korea to become richer so it can better afford to pay for poor North Korea; indeed, the economic gulf between the two Koreas is already part of the problem. Rather, a more flexible South Korean economy is the only defence against the huge shock that unification is bound to bring, and a strong South Korean democracy is the best way to carry its people through difficult times. These things take years to establish, but it is not at all clear how many years will be available.

Economic reforms will be part of the preparations South Korea must make for its inevitable encounter with the North. But in the aftermath of probably its worst economic crisis since the Korean war, is it in any shape to cope?

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