South Korea North Korea - International University of Japan

1st quarter 1997

The Economist Intelligence Unit15 Regent Street, London SW1Y 4LRUnited Kingdom

COUNTRY REPORT

South Korea

North Korea

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Contents

3 Summary

5 Inter-Korean relations

South Korea9 Political structure

10 Economic structure11 Outlook for 1997-9817 Review17 The political scene21 Economic policy24 Production and demand27 Money, prices and wages28 Finance31 Foreign trade and payments35 Business news

North Korea38 Political structure39 Economic structure40 Outlook for 1997-9841 Review41 The political scene46 The economy, trade and investment

50 Quarterly indicators and trade data

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EIU Country Report 1st quarter 1997 © The Economist Intelligence Unit Limited 1997

List of tables14 South Korea: forecast summary16 South Korea: expenditure on gross domestic product25 South Korea: expenditure on gross domestic product26 South Korea: seasonally adjusted manufacturing production26 South Korea: construction indicators28 South Korea: wages in manufacturing industry28 South Korea: consumer and producer prices29 South Korea: money supply trends30 South Korea: stock prices, 199632 South Korea: exports of selected commodities33 South Korea: imports of selected commodities34 South Korea: current- and capital-account balances50 South Korea: quarterly indicators of economic activity51 South Korea: foreign trade52 North Korea: foreign trade53 North Korea: main trading partners53 North Korea: direction of trade

List of figures17 South Korea: gross domestic product 17 South Korea: won real exchange rate 24 South Korea: quarterly gross domestic product 27 South Korea: employment30 South Korea: stock market index and won:dollar rate31 South Korea: growth in semiconductor exports, 1996

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January 22, 1997 Summary

1st quarter 1997

Inter-Korean relations: North Korea has apologised for the submarine inci-dent, and agreed to meet with the USA and South Korea; so things are lookingup. The four-way (the two Koreas, China and the USA) talks may now takeplace. North-south nuclear cooperation in particular is set to resume and toexpand markedly. It remains to be seen whether Seoul will allow southernbusiness a free rein to go north. A northern family of 16 have gone south (viaChina), raising fears of a mass exodus; the south is building a camp, to preparefor that eventuality.

South Korea Outlook for 1997-98: Ongoing strikes may peter out, or be stamped on. TheNKP still looks likely to win December’s presidential election, and Lee Hoi-chang to be its candidate. GDP growth will fall again in 1997 but shouldrecover in 1998. Inflation will edge down, as will the large current-accountdeficit. The won will begin to recover against the dollar in the second half of1997 and the stock market should enjoy a better period than that in 1996which was dreadful.

The political scene: The turn of the year brought labour unrest (as wepredicted) in reaction to the ramming through of one-sided reforms. Ministershave been going down like ninepins, mostly under clouds, but Kim Young-samstill had a reshuffle in December which included sacking the trade minister.Chun Doo-hwan and Roh Tae-woo have had their sentences reduced. MPsfrom Kangwon province have switched allegiance to the ruling party.

Economic policy: There is to be a presidential commission on financialreform. The new trade minister says that the government should stop dictatingto companies, in the main. South Korea has formally joined the OECD. TheFair Trade Commission has proposed further deregulation. Taegu has wonpermission for an industrial complex which might pollute Pusan. The FKI(spokesman for the chaebol) is curiously nervous about mergers and acquisi-tions.

Production and demand: GDP growth in the first three quarters of 1996was 7% year on year. Manufacturing production has held up surprisingly welland probably rose by about 8% in 1996. As with exports, the heavy industrialand high-tech sectors are performing best. Construction indicators point tocontinued growth in the value of orders in 1997.

Money, prices and wages: Wage gains continue to be high, although it isimportant to note that South Korean labour productivity is the highest in Asiaoutside Japan. Inflation at the consumer price level hovers around 5%. Producerand import prices began to pick up in late 1996, in response to a weaker won.

Finance: Money supply growth was inflated by central bank injections in1996. Interest rates remain very high, but are set to fall. The stock market hasperformed dreadfully, despite a rally in early 1997. The domestic bond market

3


has been partially liberalised. Banks are considering mergers. The Bank of Koreais intervening to support the won.

Foreign trade and payments: The merchandise trade and current-accountdeficits hit record highs in 1996. Exports of heavy industrial merchandise arecontinuing to out-perform the low value-added light industrial sectors, whichare either in terminal decline or have moved offshore. Imports of machineryhave slowed, but the value of fuel imports has been driven up by higher crudeoil prices. Both inwards portfolio investment and direct investment have risen.

Business news: France has prevented Daewoo from buying Thomson, andSamsung has proved unable to snap up Fokker. Hyundai may pip Samsung astop exporter, as cars last year held up better than computer chips. Thecountry’s two airlines are trying to shoot each other down, so to speak. Thereare almost 3 million businesses in South Korea and 12 million pagers.

North Korea Outlook for 1997-98: The outgoing CIA chief says that within three yearsNorth Korea must either make peace, make war, or implode. Happily, peaceseems the more immediate prospect, as talks are due with the South and theUSA. Kim Jong-il may at last be crowned, or perhaps not.

The political scene: Kim Jong-il was a little more active last year, mostlyvisiting soldiers. There have still been no overt reshuffles since Kim Il-sungdied, except lately among farm officials. North Korea has been reclassifying allits citizens. Foreign ties centre on China, an old ally, and the USA, a very newacquaintance. Talks with Japan may resume, as diplomatic relations couldbring a useful ¥1trn ($8.5bn) or so in compensation for colonialism.

The economy, trade and investment: There are even fewer figures thanusual, and seemingly no plan. Seoul has been estimating the north’s foodshortage, and says that North Koreans are eating straw. Cargill has permissionfrom Washington to barter half a million tons of grain. Pyongyang says thatmost flood damage has been mended, but otherwise there is little new build-ing. Northern skies are not yet opening, but aircraft are said to be crashingwhile trucks run on charcoal and waste material. An investment agreement hasbeen signed with Russia.

Editors:All queries:

Howard Smith; Georgina WildeTel: (44.171) 830 1007 Fax: (44.171) 830 1023

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Inter-Korean relations

Pyongyang apologises— Inter-Korean relations, always subject to sudden changes of climate, seem as ofearly January to be one season ahead. Whereas the autumn was wintry due tosouthern anger over last September’s submarine incursion (4th quarter 1996,pages 5-6), winter proper has brought an early hint of spring. On December 29Pyongyang said that it was sorry about the submarine incident. The next day,Seoul promptly returned the ashes of the 24 dead crew via Panmunjom. (It iskeeping the submarine, plus the one crewman captured alive who has in effectdefected. One other survivor was never caught.)

This is, of course, good news. At the very least, north-south relations are nowback where they were before the submarine incident. In particular, the threatto the Korean Peninsula Energy Development Organisation (KEDO) and thewhole Geneva nuclear accord has receded. (Seoul had stopped its engineersfrom doing any further work at the proposed light-water reactor site at Sinpo;whereupon Pyongyang suggested to the US technicians who have been assist-ing with the storage of spent fuel rods at Yongbyon that they might like to gohome for Thanksgiving—and then refused to let them return.)

–sort of However, it is too soon to toast the outbreak of peace in our time. For onething, the north’s “apology” is minimalist in every sense, running to just twosentences and 73 words in English. It expresses “deep regret” for the “sub-marine incident”, says that the country “will make efforts to ensure that suchan incident will not recur”, and commits Pyongyang to “work with others fordurable peace and stability on the Korean Peninsula”. The statement was issuedon behalf of the northern foreign ministry, and carried in Korean byPyongyang radio beamed at South Korea and in English by Korea Central NewsAgency (KCNA), the official mouthpiece of the government. There was noindication that any North Korean media for internal consumption had men-tioned it.

Stiff sentences To construct these two sentences took three weeks of negotiation: not betweenthe two Koreas, to Seoul’s chagrin, but between North Korea and the USA. RiHyong-chol, who directs the Americas desk in Pyongyang’s foreign ministry,arrived in New York on December 9, and stayed over Christmas before thewording was agreed. His main interlocutor was Mark Minton, of the StateDepartment’s Korea desk. Evidently it took much toing and froing of draftsacross the Pacific before the magic words to satisfy all concerned were found.South Korea’s foreign minister, Yoo Chong-ha, granted that the apology had“shortcomings”, including its brevity and use of “indirect expressions”. None-theless, Seoul deemed it acceptable as including “a clear admission, a sense ofapology, and a promise to prevent ... recurrence”. (A generous interpretation,some might say.) Mr Yoo added two further points: that the apology was from abranch of the North Korean government (as opposed to a shady entity such asthe Asia-Pacific Peace Committee) and that it “was made in Korean to ourpeople”.

Inter-Korean relations 5


Both sides backed off The subtext in all this is that, after three months of a freeze in ties chilly evenby the peninsula’s normal standards, both Koreas had had enough and wereready to revert at least to the status quo ante. Each had also come underpressure to back down. It was an open secret that Washington was worried bySeoul’s hardline stance, and the pressure will have increased once Bill Clintonwas safely re-elected as president. Kim Young-sam got the message in both earsat the Asia-Pacific Economic Cooperation (APEC) meetings in the Philippinesin November. Not only had he to concede to Mr Clinton that the four-waytalks offer to the north (see below) was unconditional, and hence could not bepredicated on a northern apology; but he was also admonished by the Chinesepresident, Jiang Zemin, no less, not to “be too particular about gains and lossesconcerning a single act or in a short period of time”.

Four-way talks, or at leastthree way

Another reopened possibility is that the four-way talks between the two Koreas,China and the USA proposed by Mr Clinton and Kim Young-sam in April 1996could at last materialise. But not so fast. KCNA said only that “the DemocraticPeople’s Republic of Korea side expressed its willingness ... to listen to a ’jointexplanation’ of the proposed four-way talks”. This is the preliminary clarifica-tory talk about talks which Pyongyang has been seeking, and for which bysome accounts the USA has offered inducements if the north attends. It will beheld in February in New York, and will be the first time since 1994 that NorthKorea has deigned to sit officially around a table with South Korea on a govern-mental basis. (Ominously, however, there have already been two false startsover the date.) The USA will also be present. (China, which had itself been lessthan fulsome about the four-way talks idea until late last year, is content to sitthis one out.) While it does not automatically follow that this meeting will leadon to the full four-way talks, even three-way talks constitute progress.

First southern official toreside in the north

On one front, detailed inter-Korean cooperation is already being mapped out.How the nuclear issue went from being the peninsula’s worst risk to its besthope has always seemed a minor miracle and a precious precedent; such thatputting it at risk in the last quarter of 1996 was foolhardy indeed. Still, Seoulhas wasted no time in dusting off and reactivating its plans. On January 4 theSeoul daily Hanguk Ilbo reported that Lee Hyon-chu, first director for economiccooperation in the foreign ministry, has been chosen as the first South Koreanofficial since 1945 to reside in the north. Mr Lee will live not in Pyongyang butat the light-water reactor site at Sinpo, where he will look after consular affairsinvolving South Korean technicians as part of the KEDO office. He could be insitu as early as March.

Before that, KEDO is scheduled to ship 15 tons of drilling and other equipmentfrom Pusan directly to Sinpo on January 20. This will be followed in earlyFebruary by the biggest batch yet of South Koreans to go north: a 60-strongland inspection and works consultation group, most of whom will stay atSinpo for up to five months doing geological and other surveys. Actual con-struction could begin in March, whereupon the number of southerners atSinpo will rise into hundreds and eventually thousands. (For more on KEDO,see North Korea: Outlook).



If KEDO, why not otherforms of cooperation?

If the submarine apology does lead to a wider thaw, an urgent priority will beto tackle North Korea’s food crisis, which if nothing is done could reach famineproportions. If bilateral south-north aid on the scale necessary is unacceptableto one side or both, then the consortium model which has worked so well withthe nuclear issue might be considered. Pyongyang seems to find it easier to dealde facto with Seoul within such a context. It is also good for Seoul, Washingtonand Tokyo to work together as a team; and it makes it difficult for the north totry to play the allies off against each other. (The food situation is discussedfurther below; see North Korea: Review).

Let business bloom Another possibility is that a thaw may at long last give South Korean businessthe chance to go north on a scale large enough to make a difference. Afterdecades of hostility and non-contact, south-north economic relations began inthe late 1980s: about the same time as those between China and Taiwan. Yetwhereas Taiwan’s trade and investment in China are both multi-billion dollarundertakings now, inter-Korean business has barely left the starting block.Trade reached almost $300m in 1995, but will have fallen in 1996. Investmenthas hardly started, even though Hyundai’s founder, Chung Ju-yung, blazed atrail north (where he was born) as long ago as January 1989. It should havetaken off in 1992, when Kim Dal-hyon, the then northern external economyminister, spent a highly successful week in the south as the guest of thechaebols (South Korea’s largest corporate groups). But then the nuclear issue putthe brakes on for two years, and even after that was settled Seoul has kept itscompanies on a tight leash.

As a result, only Daewoo as yet has its own factory on the ground at Nampo,built to export bags, garments and the like to the tune of $35m per year. Thishad hardly got going before the submarine incident intervened. The hope nowmust be that the Daewoo factory will be the first of many. Even a little invest-ment from a few southerners could go a long way in the north. ChungJu-yung’s estimated personal fortune of $6bn is equivalent to one-third ofNorth Korea’s entire GNP, while Hyundai’s turnover is five times as big as theentire northern economy. With the northern government seemingly happy toinvite the chaebol in, it seems perverse that the south should be the one re-straining them.

Après eux, le deluge? Steadily increasing business ties would support the gradualist strategy main-tained (or hoped for) by many in Seoul, albeit perhaps with less confidencethan at the start of the decade. But other outcomes are also possible. OnDecember 9 the largest ever single group of North Korean defectors, a 16-strongthree-generation family, arrived in Seoul from Hong Kong, where they hadsought asylum after spending a month illicitly crossing China. The ramific-ations of this case may be a potent augury of the shape of things to come. Forthe family head, 61-year-old Kim Kyong-ho, it was a homecoming. A native ofSeoul, he was taken north during the Korean war; there was a tearful reunion atKimpo with his older brother. His wife Choi Hyun-shil, 57, has links to a fourthgeneration among the Korean diaspora: her mother lives in Yanbian, theKorean autonomous prefecture in China; while her father is in Flushing, NewYork. It was apparently his money that got them out, covering the costs of

Inter-Korean relations 7


travel and bribes. (The party included a border guard whom they had bribed toget across the frozen Tuman river, in itself no great obstacle.)

A camp, or campus While few North Koreans may have the luck of such connections, the pressuresof hunger plus the lure of a fairly porous border will surely induce many moreto take the risk as conditions deteriorate. Seoul fears as much, and has broughtforward a plan to build its first refugee camp (or campus, as the South Koreansprefer to call it) this year, which would house some 400 defectors. Thus farthere have been remarkably few such escapees. The yearly total used to be insingle figures, but jumped to 47 in 1994 and 58 last year. There are also anestimated 2,000 who have made it to China, Russia, or another country of theCommonwealth of Independent States (CIS); but who lack the means to go onto Seoul (in which South Korean embassies have been less than encouraging),and live in fear of being caught and sent home to a dismal fate.

Pyongyang’s reported response, not unexpectedly, has been to tighten securityalong the Chinese border. It has to be said that there are still astonishingly fewNorth Korean defectors, and that this cannot be wholly attributed to the heightof the prison walls (so to say). There is no denying that Kim Il-sung constructeda remarkably tough and resilient social order, which even in extreme adversitymay hold firm for a while longer yet. But if the pressure goes on remorselesslybuilding up, sooner or later the dam must break and the floodgates open.



South Korea

Political structure

Official name Republic of Korea

Form of state Presidential system; president and National Assembly directly elected, both on afirst-past-the-post system

The executive The president (elected for a single term of five years) appoints the State Council(cabinet) composed of the president, prime minister and between 15 and 30 ministers.The State Council is not entirely composed of members of the National Assembly; lastreshuffle December 1996

Head of state Elected president

Legislature Unicameral Kuk Hoe (National Assembly) of no fewer than 200 members (currently299) elected for four-year terms; currently 253 seats are filled by direct election; theremaining 46 are distributed between parties in proportion to their share of the vote

National elections December 1992 (presidential), April 1996 (National Assembly); next elections due byDecember 1997 (presidential) and April 2000 (National Assembly)

National government The ruling Democratic Liberal Party, itself formed by merger in 1990 of the then rulingDemocratic Justice Party with two opposition parties, changed its name to New KoreaParty (NKP) in December 1995. The NKP only gained 139 seats in the April 1996election, but has since won over independents and others, giving it 157 seats and anoverall majority of seven.

Main political organisations Government: New Korea Party (NKP); opposition: National Congress for New Politics(NCNP); United Liberal Democrats (ULD); Democratic Party (DP)

Main members of StateCouncil

President Kim Young-samPrime minister Lee Soo-sungDeputy prime minister & minister of economy & finance Han Seung-sooDeputy prime minister & minister or national unification Kwon O-kie

Key ministers Agency for national security planning Kwon Yong-haeConstruction & transportation Choo Kyung-sukDefence Kim Dong-jinEducation Ahn Byoung-youngEnvironment Kang Hyon-wookForeign affairs Yoo Chong-haGovernment administration Kim Han-KyuHealth & welfare Sohn Hak-KyuHome affairs Kim Woo-sukInformation & communications Kang Bong-kyunJustice Ahn Woo-mahnLabour affairs Jin NyumPolitical affairs Shin Kyung-shikScience & technology Kim Yong-jinTrade, industry & energy Ahn Kwang-koo

Central bank governor Lee Kyung-shik

South Korea 9


Economic structure

Latest available figures

Economic indicators 1992 1993 1994 1995 1996

GDP at market prices W ’000 bn 240.4 267.1 306.0 351.3 393.6a

Real GDP growth % 5.1 5.8 8.6 9.0 6.8a

Consumer price inflation % 6.2 4.8 6.3 4.5 5.0

Population m 43.7 44.1 44.5 44.9 45.3

Exports fob $ bn 75.2 81.0 93.7 123.2 127.9a

Imports fob $ bn 77.3 79.1 96.8 127.9 142.3a

Current account $ bn –3.9 1.0 –3.9 –8.3 –21.3a

Reserves excl gold $ bn (Dec) 17.1 20.2 25.6 32.7 32.4a

Total external debt $ bn (Dec) 44.2 47.2 54.5 74.6a 93.7a

Exchange rate (av) W:$ 780.7 802.7 803.5 771.3 801.7

January 20, 1997 W849:$1

Origins of gross domestic product 1995 % of total Components of gross domestic product 1995 % of total

Agriculture, forestry & fishing 6.5 Private consumption 52.9

Mining & quarrying 0.3 Government consumption 10.4

Manufacturing 29.9 Fixed capital formation 36.6

Electricity, gas & water 2.4 Change in stocks 0.5

Construction 11.4 Exports of goods & services 33.2

Trade, restaurants & hotels 12.5 Imports of goods & services –34.2

Transport, storage & communications 7.9 Statistical discrepancy 0.6

Financial & business services 17.2 GDP at market prices 100.0

Government services 5.8

GDP at market prices incl others 100.0

Principal exports 1995 $ m Principal imports 1995 $ m

Transistors, semiconductors etc 19,373 Machinery & transport equipment 49,437

Textiles & fabrics 10,065 Mineral fuels & lubricants 19,013

Passenger cars 7,242 Chemicals 13,156

Ships & floating structures 5,533 Raw materials 11,713

Clothing & accessories 4,958 Food & live animals 5,926

Total incl others 125,058 Total incl others 135,119

Main destinations of exports 1995 % of total Main origins of imports 1995 % of total

USA 19.3 Japan 24.1

Japan 13.6 USA 22.5

Hong Kong 8.5 China 5.7

China 7.6 Germany 4.9

Germany 4.8 Saudi Arabia 4.0

a EIU estimate.

10 South Korea


Outlook for 1997-98

Labour pains As of mid-January, it was still unclear how the furore over the new labour laws,which were railroaded through the National Assembly in December, wouldend. (The details so far are discussed below, see Review.) Looking ahead, it ishard to see good coming from this sorry episode. The government is hoist onits own petard. If it makes significant concessions to union protests, this willweaken its authority in Kim Young-sam’s final year in office and may encour-age further union demands. It is also possible that the new supplementary lawswhich are already being talked about, to mitigate the effects or even the likeli-hood of employers’ exercising their new flexibility, will cancel out the pur-ported benefits of the reform.

But given Kim Young-sam’s recent tendency to take a tough line towards allcomers—whether radical students, his corrupt predecessors, North Korea, orindeed past labour unrest—the fear must be that he will continue to crackdown and suppress the strikes. Even if this succeeds in the short term, it willonly reinforce the legacy of bitterness which pervades industrial relations inSouth Korea, and so store up trouble for the future. Already the unrest isproving a public relations disaster for Seoul’s new membership of the OECD,whose own trade union advisers have reportedly been threatened with expul-sion, having gone to South Korea to observe the situation. If only the govern-ment had stuck to its original even-handed bill, which gave more freedom toworkers to organise as well as for firms to employ and dismiss, its positionwould have been more tenable and the unrest might have been avoided.

The NKP is still on trackto win in December—

Much as Kim Young-sam may seek to prevent or postpone discussion about hissuccessor (for fear of becoming a lame duck in his final year of office), thepresidential election due in December 1997 is bound to be the focus of increas-ing attention. The EIU’s view remains that the ruling New Korea Party (NKP) isbest placed to win, and that its likely candidate will be Lee Hoi-chang. The NKPis in effect the only truly national party, drawing support across the country,and also benefiting from the large populations in its two main regional strong-holds: greater Seoul, where 40% of South Koreans now live; and Pusan, thecountry’s second city, with its surrounding South Kyongsang province. Bycontrast, the main opposition National Congress for New Politics (NCNP) at-tracts few votes outside its southwestern stronghold in the Cholla provinces;while the minor United Liberal Democrats (ULD) have an even smaller regionalbase, in the conservative Chungchong provinces in the centre of the country.

—as the opposition looksunconvincing

The NKP thus has a basic demographic advantage, which would probably holdeven in the highly unlikely event that the current tactical alliance between theNCNP and ULD were to last until December. Even if either Kim Dae-jung(the leader of the NCNP) or Kim Jong-pil (the leader of the ULD) were some-how to surrender their long-cherished presidential dreams in favour of theother, this strange hybrid would hardly convince the electorate. It is as hard toimagine Kim Dae-jung’s supporters voting for the founder of the KoreanCentral Intelligence Agency, as it is to envisage Kim Jong-pils’s right-wingfollowers casting their ballots for the long-time dissident whom many still

South Korea 11


regard (quite erroneously) as pink, if not downright red. Moreover, both menare past 70 already, and widely seen more as figures from the past than of thefuture. Their alliance has already prompted some ULD MPs to defect to theruling camp, as discussed below.

By demographic default rather than positive popularity, and barring someunforeseen political upheaval or realignment, the NKP thus seems on track tofulfil the ambition inherent in its original name, when formed as a coalition byRoh Tae-woo in 1990. Like its Japanese model, the Democratic Liberal Party(DLP) was designed as a machine for holding on to power. Unlike its Japanesesemi-namesake, the LDP, the DLP has thus far not been dislodged. It may beeventually, but probably not in 1997.

No dragons or cronies,please

Hence attention focuses principally on who will be the NKP’s presidentialcandidate. There is no shortage of contenders, and the battle for nominationmay be bruising. Both the party’s conservative wing, associated with the ChunDoo-hwan era in the 1980s, and its reform wing, associated with Roh Tae-wooalso in the 1980s, and with Kim Young-sam since 1993, have their hopefuls.But they probably hope in vain. The jailing of Mr Chun and Mr Roh in 1996,to wide public applause, makes it inconceivable that the party would pick anold-guard figure associated with the era of the generals, such as KimYoon-hwan or Lee Han-dong; both of whom were recently described as “hold-over dragons” by the Korea Herald. The same may well apply to anyone tooclosely associated with Kim Young-sam, such as Choi Hyung-woo or KimDeog-ryong. The latter in December gave up a cabinet post (see below), pre-sumably to pursue presidential ambitions. In view of Kim Young-sam’s waningpopularity, the nation might rebuff someone seen as his crony.

From three Kims to threeLees

As the aim is above all to hold on to power, this creates a dilemma not unlikethat which the DLP faced in 1992. Then, Kim Young-sam was the party par-venu, and anathema to the old guard, but he was also the man most likely towin them the election. So he got the nomination, and duly won. Similarly in1997, the public are more likely to favour someone seen as untainted by “oldpolitics”. Hence, as the era of the three Kims draws to a close, the spotlight isshifting to three Lees (and a Park).

The favourite is the former prime minister, Lee Hoi-chang, who has a strongimage as a campaigner against corruption (a crusade which still has some wayto run in South Korea). The other similarly placed contender is Park Chan-jong,a former independent popular with the young and in Seoul. But Mr Park maybe too much of a maverick to get the nomination. (If denied it, he couldconceivably leave the NKP and run once more as an independent.) But if LeeHoi-chang’s lack of an intra-party base—like Mr Park, he only joined the NKPless than a year ago—proves a handicap, this may open up the way for LeeHong-koo. He is currently the party chairman, as well as an ex-premier and aformer unification minister under both Roh Tae-woo and Kim Young-sam,who thus has ties to both wings of the ruling party. A recent dark horse is thecurrent prime minister, Lee Soo-sung, a former university president whoseopen manner has made him popular, but who denies any intention to “enterpolitics”. (Being prime minister does not count as being in politics, it seems.)

12 South Korea


“Unseasoned” versus“perverts”

With the present occupant of the Blue House (the presidential mansion) stillvetoing overt campaigning, the race so far is covert, but it is on. In lateNovember Lee Hoi-chang attacked (unnamed) elderly politicians as “politicalperverts”. This drew rebukes from the camps of not only Kim Dae-jung but alsoof Choi Hyung-woo, calling Mr Lee “an unseasoned politician”. The name-calling and jockeying will both heat up as the year wears on. Whether this willhelp or hinder efforts to tackle South Korea’s real problems is another question.Thus Lee Hong-koo’s efforts to meet striking trade union leaders were no doubta genuine attempt to defuse the crisis, but they also conveniently put him inthe public eye.

Hand-picked? It is possible that the candidate may not be chosen until August or September.Ominously, remarks by Kim Young-sam at his new year press conference seemto suggest that he is contemplating hand-picking the candidate personally.While intra-party democracy has rarely been any more in evidence in the newSouth Korea than the old, so high-handed a move would surely provoke abacklash both within and beyond the NKP, and would do the chosen candidateno favours.

Go east—or south? Among the foreign affairs challenges for Kim Young-sam (and his successor) isto find a way of improving relations with Japan before the two countriesco-host the football World Cup in 2002. More immediately, their rival claimsto the Tokdo/Takeshima islet could also sour ties. Kim Young-sam was due tomeet the Japanese prime minister, Ryutaro Hashimoto, at Beppu for an infor-mal working visit on January 25-26—to the consternation of the sports min-istry, which reminded him that on January 25 he was already booked to openthe winter Universiade, the country’s first big international sports meetingsince the 1988 Seoul Olympics. Red faces at the Blue House admitted that thedouble booking was their fault. Japan won and the games opening has beenbrought forward by one day.

The economy is stillslowing—

GDP growth figures for the first three quarters of 1996 indicate a steady slow-down in the economy, driven by weaker expansion in private consumptionand fixed-capital formation. But the external sector has proved to be less of aconcern than the dramatic worsening of the current-account deficit wouldsuggest. Export and import growth have slowed more or less in tandem, indi-cating that the current-account problems are largely terms-of-trade rather thanvolume-related. The 7% year-on-year growth in GDP over the first three quar-ters of 1996 is hardly suggestive of an economy about to plunge into recession,although by South Korean standards this represents an unacceptable weaken-ing of performance.

—but will not crash— We estimate full-year growth at 6.8% in 1996, implying a further deceleration inthe fourth quarter. It is unlikely that the first half of 1997 will mark the begin-nings of stronger growth. The wave of strikes in protest at the government’s newlabour laws have already cost the economy over $3bn in lost output, and thecount is rising. We assume, however, that a resolution to the labour dispute willbe thrashed out during the first quarter and that the economy can get back ontoan even keel by April. Trends in the yen:dollar exchange rate are worrying for

South Korea 13


South Korea’s export sector. Although the won is continuing to slip against thedollar, the cumulative appreciation it has recorded against the yen over the past18 months is denting competitiveness in those third markets where SouthKorean and Japanese goods compete head on (household electrical goods, tele-communications equipment and cars in the USA and Europe, for example).Growth in South Korean export volumes is still slowing, while Japanese exportsare beginning to rebound strongly. Export volume growth will be lower in 1997than it was in 1996, although the weakness of the domestic demand compo-nents means that imports are unlikely to grow by more than 1.5 percentagepoints above exports, and the drag from the external sector will not be huge.Overall, we expect GDP to expand by 6.5% in 1997.

—and will recover in 1998 Business conditions will improve in 1998 as export growth is boosted by a lesscompetitive yen and by a profits-induced recovery in fixed-capital formation.Corporate earnings will be lifted by rising export prices and by the effects thata weak won has on boosting the domestic value of dollar export receipts.Private consumption growth will remain muted, however, held down byfalling real wage gains and by the beginnings of a shake-out in the manufac-turing sector, which is likely to suppress employment growth. GDP growth isforecast to exceed 7% after a two-year hiatus, but there will be no return to thevery rapid expansion recorded in 1995. In conjunction with a stronger won(see below), faster economic growth means that South Korean GDP per headwill move above $13,000 in 1998, ensuring a gradual convergence with theOECD average.

South Korea: forecast summary(% change year on year unless otherwise indicated)

1995a 1996b 1997c 1998c

Real GDP 9.0 6.8 6.5 7.3

Industrial production 11.9 8.0 6.8 8.5

Consumer prices 4.5 5.0 4.4 4.0

Merchandise exports fob ($ bn) 123.2 127.9 139.7 161.7

Merchandise imports fob ($ bn) 127.9 142.3 150.2 170.6

Trade balance ($ bn) –4.7 –14.4 –10.5 –8.9

Current-account balance ($ bn) –8.3 –21.3 –17.0 –14.5

Average exchange rate (W:$) 771.3 801.7a 830.0 810.0

a Actual. b EIU estimates. c EIU forecasts.

The worst is over for theexternal sector

The deterioration in the current-account deficit, to a record of more than$21bn in 1996, was a shock to both government and most economic forecast-ers alike. After the USA, South Korea recorded the second highest current-account deficit in the world last year. Slowing export volumes and plungingexport prices for semiconductors, steel and chemicals capped the growth indollar-denominated export earnings in 1996 to less than 4%. This followed arise of around 30% in 1995. Import growth slowed, too, but there was still adouble-digit increase in the dollar value of imports. We believe that the worstis now over for the external sector. Although the current account will notreturn to surplus for at least another five years, there is the prospect of thedeficit contracting slightly over the next two.

14 South Korea


The improvement will be mainly attributable to a slight rise in the terms oftrade, which will boost growth in the dollar value of export earnings; exportand import volume trends will mirror each other closely, with growth just 1 or2 percentage points apart. A recovery in semiconductor prices is already appar-ent and import prices in dollar terms will be kept down by the yen’s weakness(Japan is the most important supplier of imports), although in won termsimport prices will be driven up by the domestic currency’s weakness against thedollar. We forecast that the current-account deficit will contract to $17bn in1997 and $14.5bn in 1998. Most of the improvement will be the result ofsmaller merchandise trade deficits. Services trade will remain in the red but thedeficit should begin to look more manageable as inwards tourism, transportand financial services all grow strongly over the next two years. However, thedeficit on income, profit and dividends will widen as South Korea’s large stockof net overseas liabilities grows even larger.

Inflation will stay undercontrol

Despite the slowdown in real growth, inflation turned in a disappointing per-formance in 1996, as rapid money supply growth, strong gains in nominalwages and rising won-denominated import prices towards the end of the yearkept consumer price inflation at 5%. This is well above the average for indus-trialised countries in the OECD. The government will want to squeeze infla-tionary pressures over the next two years in order to move towardsconvergence with its new OECD colleagues. There is unlikely to be a majorimprovement—we expect inflation to fall by just 1 percentage point over thenext two years, thanks mainly to weaker economic growth in 1997.

The external inflationary pressures will hinge largely on exchange rate develop-ments. We expect both the won and the yen to stop depreciating against thedollar before the end of 1997. This will help to contain imported inflation ondollar-denominated merchandise (the majority of South Korea’s imports) butcould also begin to add to some pressure if Japanese firms are forced to raisetheir export prices. Domestically, real wages gains are likely to be lower thanthey were in 1996, assuming that the government is able to thrash out acompromise with the unions to resolve the present labour dispute. Our fore-casts for growth in private consumption factor in this assumption. Overall, weexpect consumer price inflation to edge down to 4.4% in 1997 and 4% in 1998.

The won and the stockmarket will recover

The won’s plunge to record lows of around W850:$1 in recent weeks has twocauses: the ballooning of the current-account deficit and the depreciation of theyen against the dollar, which continues to alarm the monetary authorities (con-cerned about loss of export competitiveness vis-à-vis Japan). The Bank of Korea(the central bank) has been prodding the won on its downwards course for mostof the past year. At current exchange rates, however, the monetary authoritiesappear to have ruled that enough is enough. Were the won to continue todepreciate, it would conflict with inflation-fighting objectives; won importprices were beginning to rise sharply at the end of 1996. In the past two weeksthe central bank has been intervening to support the domestic currency againstthe dollar, a clear reversal of its policy until the end of 1996. The Bank of Koreamay not have to worry for much longer. Now at ¥120:$1, we expect the yen todepreciate no further against the dollar during the next few months and tobegin climbing towards the end of 1997 and during 1998. This will take some

South Korea 15


pressure off the won. Meanwhile, the improvement in South Korea’s externaldeficits (see above) and an acceleration of inwards portfolio flows, in the wakeof OECD entry, will also help. Accordingly, we forecast average exchange ratesof W830:$1 and W810:$1 in 1997 and 1998 respectively.

South Korean equity markets had a dreadful year in 1996. The weighted indexof prices on the Seoul stock exchange lost nearly 40% of its value in US dollarterms. Despite a rally in early January, the weakness of the economy andcontinuing uncertainty over the labour dispute will preclude a sustained up-turn in stock prices during early 1997. But the price/earnings ratio is nowbeginning to look attractively low by regional and historical standards. This,together with improving corporate earnings and rising inflows of foreign port-folio investment, should trigger a more prolonged rally in the second half of1997 and in 1998.

South Korea: expenditure on gross domestic product(W bn at constant 1990 prices; % change, year on year in brackets)

1995a 1996b 1997c 1998c

Private consumption 138,015 147,400 157,275 167,970 (7.9) (6.8) (6.7) (6.8)

Public consumption 23,433 24,721 25,908 27,203 (2.8) (5.5) (4.8) (5.0)

Gross fixed capital formation 98,374 104,080 110,429 118,711 (12.4) (5.8) (6.1) (7.5)

Final domestic demand 259,821 276,201 293,612 313,884 (9.1) (6.3) (6.3) (7.5)

Change in stocks 164 200 1,300 1,800 (–0.4)d (0.0)d (0.4)d (0.2)d

Total domestic demand 259,985 276,401 294,912 315,684 (8.6) (6.3) (6.7) (7.0)

Exports of goods & non-factor services 106,768 120,328 133,805 151,868

(24.1) (12.7) (11.2) (13.5)

Imports of goods & non-factor services 108,164 120,603 135,317 152,908

(22.1) (11.5) (12.2) (13.5)

Net exports –1,396 –275 –1,512 –1,040 (0.5)d (0.4)d (–0.4)d (0.2)d

Statistical discrepancy –1,053 –1,100 –600 –500

GDP 257,536 275,025 292,800 314,145 (9.0) (6.8) (6.5) (7.3)

Net factor payments abroad –2,802 –3,100 –3,250 –3,500

GNP 254,734 271,925 289,550 310,645 (8.7) (6.7) (6.5) (7.3)

a Actual. b EIU estimates. c EIU forecasts. d Change as a percentage of GDP in previous year.

16 South Korea


Review

The political scene

Winter of discontent— The warnings in our last report of trouble ahead in industrial relations(4th quarter 1996, pages 11-12 and pages 25-26) came true with a vengeance atthe turn of the year. Having failed to win the backing of either employers orunions for its belated efforts to revise the country’s labour laws, which datefrom 1953, the government decided in December to draw up its own bill. Asoriginally conceived, this was even-handed: giving employers the flexibility toemploy and dismiss which their competitors (in the West and Asia alike) takefor granted, but also ending restrictions on workers’ rights to organise.

Each side of industry predictably protested at the other’s new freedoms, but thestate listened to only one of them. The bill that eventually came before theNational Assembly still contained the employers’ agenda—including easierlay-offs, flexible hours and the right to replace (and not pay) strikers, all witheffect from next March—while postponing almost all the concessions to theunions. Thus the smaller but more militant Korean Confederation of TradeUnions (KCTU), whose lack of legal recognition has been an absurd and muchcriticised anomaly, will remain an outlaw until 2000; while the right to havemore than one union in a workplace is postponed to 2002.

—as a biased bill isrammed through—

Insult was then added to injury by the way the bill was rammed through. theassembly. Faced with an opposition blockade on the speaker, which preventednormal proceedings, the ruling party secretly assembled its MPs at 6 am onDecember 26 and passed the bill in minutes without debate. While they wereabout it, they also rubber-stamped a no less contentious law restoring powersto the Agency of National Security Planning (the Korean Central IntelligenceAgency’s successor) to investigate domestic “subversion”: powers of which theagency had been stripped soon after Kim Young-sam became president. TheNew Korea Party (NKP) was able to act thus by virtue of its absolute majority,but needless to say a furious opposition resolved to challenge this manoeuvre

5

6

7

8

9

10

1994 95 96(a) 97(b) 98(b)

South Korea

Asia excl Japan

South Korea: gross domestic product % change, year on year

(a) EIU estimates. (b) EIU forecasts. (c) Nominal exchange ratesadjusted for changes in relative consumer prices.Sources: EIU; IMF, International Financial Statistics.

80

90

100

110

1990 91 92 93 94 95 96(a) 97(b) 98(b)

South Korea: won real exchange rate (c)1990=100

W:$W:$W:$W:$W:$W:$W:$W:$W:$W:$W:$W:$W:$W:$W:$W:$W:$W:$W:$

W:¥

W:$

W:¥W:¥

W:DMW:DMW:DM

W:$

W:¥

W:$

W:¥W:¥

W:DMW:DMW:DM

W:$

W:¥

W:$

W:¥

W:$

W:¥

W:$

W:¥

W:$

W:¥

W:$

W:¥

W:$

W:¥

W:$

W:¥

W:$

W:¥

W:$

W:¥

W:DM

South Korea 17


as unconstitutional. (Actually, opposition parties have since conspicuouslyfailed to join the demonstrations on the streets.)

—provoking the largestever strikes

Railroading through a one-sided law was bound to produce a fierce reaction.Both the KCTU and the more moderate, officially recognised and largerFederation of Korean Trade Unions (FKTU) called immediate partial strikes,which, after a break for the holiday, continued in the new year. As of lateJanuary, lost production was estimated at around $3.3bn, mainly in such famil-iar strongholds of militancy as car factories and shipyards. Hyundai Motorannounced a shutdown from January 13, in a bid to force moderate workers topress their militant colleagues to halt the stoppage.

The political temperature also rose with the government’s decision first tosummon KCTU leaders for questioning, and then to seek arrest warrants whenthey refused to appear. Attempts to enforce the warrants provoked the familiarscenes of tear gas versus stone throwing, which as ever were telecast around theworld. With a delegation from the International Confederation of Free TradeUnions flying in to show solidarity with the KCTU, the result, over and abovethe domestic political strains, was yet more bad publicity for South Koreainternationally as an apparent scene of continual confrontations. As of mid-month, patchy support for the FKTU’s two-day strike called for January 14 and15 suggested that things may start to die down.

Yet more ministersskittled

Earlier, it had not been a good spell for either cabinet continuity or KimYoung-sam’s drive against corruption. Within less than a month, the defence,foreign and health ministers all resigned under various clouds. First to go wasLee Yang-ho, who was replaced as defence minister on October 17 by KimDong-jin, chairman of the joint chiefs-of-staff. Mr Lee’s head might have rolledanyway in the wake of September’s submarine incursion by North Koreancommandos, which revealed gaps (to say the least) in the country’s vigilanceagainst intruders. It soon became clear, however, that Mr Lee was also implic-ated in an arms procurement kickback scandal, and he was later sentenced tofour years in jail. He had been expected to go in any case in the end-of-yearreshuffle; partly because, as the first defence minister without an army back-ground (he had been an air force general), he was judged to lack authority overthe military as a whole.

For whom the Gong tolls Barely a fortnight later, on November 4, the foreign minister tendered his resig-nation. Gong Ro-myung cited health reasons (he suffers from cataracts and highblood pressure); but what really precipitated the former career diplomat’s depar-ture seems to have been a magazine article which accused him of having servedin the North Korean army while Seoul was briefly occupied during the KoreanWar. While not a few Koreans of Mr Gong’s generation have such skeletons intheir cupboards, the post-submarine atmosphere of near-McCarthyism made hisposition untenable. He was succeeded by Yoo Chong-ha, the presidential for-eign affairs and national security adviser. Mr Yoo has a reputation as a hawk onNorth Korea, although in his former post he drafted the four-way talks proposalto Pyongyang.

18 South Korea


Short-sighted Just a week later, the health minister made it three. Lee Sung-ho was sacked onNovember 13, amid charges that his wife had received some $200,000 from anopticians’ association which was lobbying for the exclusive right to sell spectacleframes. Mr Lee’s replacement is Sohn Hak-kyu, whom the EIU has tipped in thepast as a man to watch. Mr Sohn is an ex-dissident turned politics professor andMP, who has both the ambition and talent to be a presidential contender in 2002.

He is also Kim Young-sam’s seventh health minister in fewer than four years.So much turnover in the cabinet, coming on top of August’s mini-reshuffle(4th quarter 1996, page 21), might have counselled continuity as a priority forKim Young-sam’s final year in office. Even the Korea Herald was moved toprotest in his editorials at the seemingly unending musical chairs in govern-ment, militating as this does against any minister staying in his post longenough to master his brief, let alone launch policy initiatives. It also doesnothing to balance the president’s already overweening power as comparedwith all other branches of government, his own cabinet included.

And still another reshuffle Evidently Kim Young-sam sees it differently, however, as what has now be-come the customary end-of-year reshuffle went ahead as usual. Nine ministerswere replaced on December 21. The most important head to roll was that ofPark Jae-yoon as trade minister, who took the rap for the swelling trade andcurrent-account deficits much as Rha Woong-bae did in August for the eco-nomy’s under-performance more generally. He is replaced by his deputy, AhnKwang-koo, a career technocrat widely credited as the chief originator of indus-trial policy during the 1980s, the period that saw the first moves away fromheavily interventionist state-led development. No particular policy changes areexpected (but see Economic Policy).

Ex-science minister forOECD

The pretext for the reshuffle was the appointment of Koo Bohn-young, thescience and technology minister, to be Seoul’s first ambassador to the OECD,which South Korea formally joined earlier in the same month. Mr Koo is ahigh-flyer not yet aged 50, and the appointment of a minister (as opposed to avice-minister) to the OECD is seen as an indication of South Korean intentionsto play an active part in the organisation. The new science minister is KimYong-jin, who had been chief policy coordinator at the prime minister’s office,but has no particular background in science or technology.

Most of the other changes were driven by politics rather than policy. Althoughcabinet office in Seoul is often non-party political, with ministers drawn fromthe civil service or universities rather than government, in this instance four ofthe nine appointees are present or former ruling party MPs. Moreover, in areflection of the continued salience of regionalism in politics, all come fromareas where the NKP is relatively weak.

Reaching out to theregions

• The new agriculture and environment ministers are both from Cholla in thesouth-west, the heartland of the main opposition party. Jeong Shi-chae (agri-culture and forestry) is a former mayor of Kwangju and vice-governor of SouthCholla; while Kang Hyon-wook (environment), himself an ex-agriculture min-ister, has also served as governor of North Cholla, and won the NKP’s onlyCholla seat at the last elections.

South Korea 19


• Kim Han-kyu (government administration) has had a versatile career, in-cluding a decade in the USA and heading an adoption agency. But his keyvirtue now is ascriptive: he is from Taegu, and popular there. The home terri-tory of the ex-presidents Chun Doo-hwan and Roh Tae-woo, which, as such,was in effect the centre of power throughout the 1980s, has shunned the rulingparty since Kim Young-sam took to prosecuting, or in local eyes, persecuting,his predecessors.

• Shin Kyung-shik (first minister for political affairs), a long-time MP and aideto Kim Young-sam, comes from North Chungchong, the stronghold of KimJong-pil’s United Liberal Democrats (ULD), the second opposition party. Hereplaces an even closer presidential crony, Kim Deog-ryong, who has not beensacked so much as released to pursue his ambitions (which are greater than hischances) of becoming the NKP’s presidential candidate.

Mr Chun and Mr Roh: notappealing

On December 16 Chun Doo-hwan’s death sentence for mutiny and corruptionwas commuted on appeal to life imprisonment. Roh Tae-woo, Chun’s co-conspirator in the 1979-80 coup and successor as president from 1988 to 1993,also had his sentence reduced from 22 to 17 years in prison. Most of theirco-defendants, too, had their jail terms slightly reduced. The appeal court alsosuspended the prison sentences imposed on (among others) the Daewoo groupchairman, Kim Woo-choong, and Choi Won-suk of Dong Ah Construction,neither of whom had in fact been held in custody.

A week later both Mr Chun and Mr Roh abandoned their appeals to theSupreme Court, with Mr Chun’s lawyer explaining that his client did not wantto “drag on his case ... and burden the state and the people in a difficultsituation”. This is unlikely to be the end of the matter, however. Come thepresidential election in December, the ruling party will need votes from thenow disaffected Taegu-Kyongsang region which is the home base of Mr Chunand Mr Roh. A judiciously timed presidential pardon can by no means be ruledout, in what has all along been a heavily politicised judicial process. Havingachieved his aim of breaking the power of the old guard in the ruling party,Kim Young-sam can afford, and will need, to appear magnanimous. Partlybecause of the transparency of this political manoeuvring, public interest inthese proceedings has declined considerably. It was not much rekindled by aclaim by Mr Chun’s wife that it was her husband, rather than the incomingMr Roh, whose idea it had been to concede in 1987 the democracy they hadboth trampled on in their 1979-80 coup.

Kangwon switches sides— In all South Korea’s regionally based political alignments, Kangwon provincein the north-east rarely gets a mention: mainly because, being mountainousand sparsely populated, it pulls little weight. Usually loyal to the ruling party,Kangwon had lately been supportive of the conservative opposition party, theULD. On December 24, however, the provincial governor, a city mayor, andthree MPs crossed the floor and joined the ruling NKP, which thus now com-mands 157 of the National Assembly’s 299 seats—a fact which came in usefulfor passing the new labour bill just two days later (see above).

20 South Korea


—bringing the end for theULD?

The ruling party may soon see its majority boosted further, from two sources.The tiny rump that remains of the Democratic Party (DP), once the largestopposition force, may come to rest in the bosom of the NKP (power is power,after all; and they were once allies of Kim Young-sam’s). And there may well befurther defections from the ULD, whose long-term position looks increasinglybleak. Its current alliance of convenience with the main opposition party, KimDae-jung’s National Congress for New Politics (NCNP), has lasted longer thanmany expected; yet it is already causing strains. Among the reasons given bythe Kangwon defectors was unease at having to oppose the government billstrengthening the Agency for National Security Planning, the successor to theKorean Central Intelligence Agency (KCIA). It would appear that the ULD’s leader,Kim Jong-pil, must feel similarly uneasy, as it was he who founded the KCIA.

Economic policy

Presidential commission? At his new year press conference on January 7, Kim Young-sam confirmedreports that a presidential commission on financial reform is to be established.According to the president, this will “conduct consumer-centred reform withinthe financial industry and financial customs so that our enterprises can com-pete in the world market, and so that the financial industry can survive open-ing up and infinite competition. The commission will be composed of civiliansand consumers, such as entrepreneurs”.

While formal details are still awaited, this apparently sufficed to produce sev-eral straight days of gains on the Seoul stock exchange, which after a dire yearwas plumbing new depths (because of the labour unrest). The new commissiondoes at least and at last reflect a tacit admission that labour costs and rigiditiesare by no means the only structural problems in the economy. It is widelyagreed that something must be done to make credit both cheaper and morewidely available, as well as to get the banking system into better shape—notleast, in order to face the challenge of market opening. What is less clear is howto accomplish these worthy goals, particularly at a time of relative economicdownturn. It seems certain, however, that one way or another the governmentwill compel a number of banks to merge this year, with the aim of havingfewer, but better and more efficient, financial institutions.

The new trade ministerspeaks

The Korea Herald on January 8 published an interview with the new trademinister, Ahn Kwang-koo, which was revealing about how the policy environ-ment is changing. As the youngest person ever to pass the higher civil serviceentrance examination in 1964, Mr Ahn has made his entire career within theMinistry of Trade, Industry and Energy (MOTIE), which in its day exercised thepower of life and death over the fates of South Korean companies by giving orwithholding credit allocations and subsidies. Things are different nowadays, asderegulation has deprived MOTIE of most of its former tools to implement indus-trial policy. Hence the ministry is “fast shrinking”, according to the Herald.

A green light forcompanies—

Despite (or perhaps because of) having helped to run the old system as a juniorbut rapidly rising bureaucrat under Park Chung-hee’s presidency in the 1960sand 1970s, Mr Ahn is seemingly no defender of state intervention. Already in

South Korea 21


the 1980s, under Chun Doo-hwan, he was credited with the implementation ofthe first easing of the government’s grip on the economy, and now he comesacross as an enthusiast for deregulation. Indeed, listening to him might suggestthat horse and cart have completely changed places in the government-business relationship. Mr Ahn called “on all MOTIE officials to serve as ind-ustry’s tool”, adding that “Any MOTIE man who cannot understand thisshould think twice about his position as a civil servant”. Or again: “Unlikeprevious years, this time the government is ready to accept almost withoutreservation demands from business”, in view of the need to tackle the current-account deficit.

—or maybe amber— Yet Mr Ahn is no unalloyed free marketeer, either. Despite averring that “The timehas passed when the government can direct the private sector to do this or that”,he went on to defend the state’s right to control companies’ entry into particularsectors, apparently even if this is against the law: “From a purely legalistic perspec-tive, the government may not be authorised to allow or disallow the privatesector’s market entry. But there is definitely a need for the government to make itsposition clear in projects requiring massive financing and involving grave envi-ronmental concerns. What is the government for, otherwise?”

One answer to Mr Ahn’s rhetorical question is that what government is for isboth to make and abide by the law. Particularly in a newish democracy, this isno mere formality. It remains a complaint of foreign business that the law isnot always either transparent or paramount in Seoul, but rather that govern-ment pursues its substantive agenda first and bends the law to fit where necess-ary. If the state has environmental concerns, as well it may, then it should passlaws which embody those concerns. Any other way of proceeding confusesbusiness and weakens democracy.

—but red again forHyundai steel

While the state has undoubtedly retreated by comparison with the past, itremains hard to know in what contexts it will still feel moved to interfere. Noone knows this better than Hyundai, whose ambitions to build a steel mill havebeen first opposed and then apparently accepted by the government(3rd quarter 1996, page 35). In December, however, a second official volte-faceonce again saw the administration thwarting Hyundai’s hopes, albeit indirectlyvia pressure on trade associations. If Ahn Kwang-koo is serious in saying that“No one can deny the fact that the government’s regulations should be easeddrastically”, then ending such frustratingly mixed signals as these is a priority.

Short on detail (but awhiff of nationalism)

As well as a degree of inconsistency on general principles, Mr Ahn was elusiveon policy details in his Korea Herald interview. He mentioned technology de-velopment, support to companies for plant and equipment renovations, andretraining, as well as encouraging “rational spending practices”. This last was inthe context that “many consumers still have a blind preference for thingsforeign”, a remark that will not encourage those selling to South Korea, who areweary of such officially sanctioned moralising against foreign “luxury” imports(which in reality play only a minor role in the widening trade deficit). InJanuary the German ambassador wrote to the press complaining about thisso-called frugality campaign, which has had a tangible effect in reducing salesof German cars from their already meagre levels.

22 South Korea


In at last On December 12 South Korea officially became the 29th member state of theOECD. So ends a lengthy process, during which Seoul learned that this de-served symbol of its transition from third- to first-world status also carried aprice tag in terms of further and faster market opening. Nor will the scrutinycease now that membership has been secured. On the contrary, concerns vari-ously about the freedom or lack thereof of both capital and labour will contin-ue to be voiced. It is thus apt that South Korea has chosen someone ofministerial rank (and a high-flyer to boot) as its first ambassador to OECD(see The political scene).

FTC proffers deregulationpackage

The cabinet-level Fair Trade Commission (FTC) is the sole South Koreangovernment body whose commitment to deregulation is unequivocal. InDecember it put forward a package of 26 liberalising measures to an inter-ministry task force. These include the following.

• A new entrant to end Korea Telecom (KT)’s monopoly of inter-city phoneservices. The FTC also proposes that telecoms companies—other than thosethat dominate the market, such as KT—should be free to set their own chargeswithout state approval.

• Free entry by private companies into power generation. (Currently a licencecan only be offered if the state-owned Korea Electric Power Corporation,KEPCO, cannot do the job.)

• An end to the current arrangements for selling liquefied natural gas (LNG),where at present a single company monopolises the market within a series ofzones set by government.

The FTC’s cartel-busting enthusiasm is not always echoed by other governmentagencies, so whether all these steps are adopted remains to be seen. Meanwhile,the task force on deregulation agreed to relax or scrap 48 rules across the board:in finance, taxation, land use, distribution, factory permits, environment andindustrial safety. The last two may not be universally welcomed, given SouthKorea’s mixed record on pollution and poor rating for industrial accidents.

Switch on Wichon: a taleof two cities

It was reported in December that the government has agreed to designate aspecial industrial complex in the Wichon area of Taegu. This will either end orintensify a longrunning dispute with economic, political and ecological over-tones. Taegu’s wish for the new zone to boost its economy was opposed down-stream in Pusan, where there are fears that it may further pollute the Naktongriver, their main source of drinking water. The political dimension is thatTaegu and North Kyongsang province are the power base of the ex-presidents,Roh Tae-woo and Chun Doo-hwan, and their so-called TK faction, while Pusanand South Kyongsang are Kim Young-sam’s home turf.

In an election year, with Taegu already disaffected by the jailing of its localscions, winning back this region’s support is a priority, whereas Mr Kim mayreckon that Pusan’s votes are in the bag come what may. Certainly the pres-ident seemed to be courting Taegu on December 19, when he broke the groundfor the city’s second subway line (which will cost more than $2bn) whileemphasising other infrastructural work in the area, such as expanding the localairport and the high-speed railway.

South Korea 23


FKI fights shy of M&A— The enthusiasm of the Federation of Korean Industry (FKI, the chaebol, orconglomerates’, club) for economic deregulation can be oddly selective. Fromnext March, existing restrictions on buying blocks of shares are due to be eased,which should make mergers and acquisitions, hitherto rare and frowned uponin South Korea, more feasible. This prospect does not please the FKI, whichcalled on the government in December to take steps to prevent “unproductive”takeover bids, including raising the limit up to which companies may buy theirown stock from 10% to 15% or 20%.

—and stokes up fear offoreigners

What has triggered this concern was a rare bid by a minnow to catch a whale.A small financial company, Woopoong, has managed to build up a 40% stakein Hanwha Merchant Bank and is trying to take control. This is the first timethat one of the top ten conglomerates has faced such a challenge, and it isdepressing to see the FKI respond by running to the state for protection. Theyalso played the xenophobic card, noting (as reported by the Korea Herald) that“foreign M&A experts would rush to Korea” after financial liberalisation in1997. To beat off the foreigners, the FKI called for exemptions on cross-shareholding and owners’ equity ceilings “if there is an urgent need to protectmanagerial rights”.

But as the Woopoong-Hanwha case shows, foreigners are not the point. If it istrue to its ostensibly pro-liberalisation stance, the government will resist theFKI and remind itself that to be pro-business does not mean always beingpro-chaebol. Challenging the conglomerates is to be encouraged: it will shakethem up and keep them on their toes. South Korean capitalism can only gainfrom such an infusion of competitive behaviour.

Production and demand

A recession with Koreancharacteristics—

The slowdown in GDP growth recorded over the first three quarters of 1996would still represent a healthy expansion in almost any economy other thanSouth Korea. Real GDP stood some 7% higher between January and Septemberthan it had in the corresponding year-earlier period. The 6.4% year-on-yeargrowth recorded in the third quarter was virtually a recession by South Koreanstandards: it was as recently as 1995 that the economy was expanding at ratesclose to double-digits in year-on-year terms. The EIU expects fourth-quartergrowth to be 6.4% again, implying a 6.8% increase in GDP for 1996 as a whole.

The expenditure components of GDP reveal a slowdown virtually across theboard. The main engines of domestic demand, private consumption and fixed-capital formation, were both growing less quickly during the first nine monthsof 1996 than in the same period of 1995, although growth in governmentconsumption accelerated. The slowdown in investment was particularlymarked, from year-on-year growth of 12.4% in the first nine months of 1995 to6% in the corresponding period of 1996. The main reason for the decelerationis weakening business sentiment, which in turn stems from poor corporateearnings, especially for the large, export-sensitive chaebol (conglomerates)firms. The external sector of the national accounts paints an interesting pic-ture, at odds with the steep increase in the current-account deficit. Whileexport growth has slowed, so too has import growth, with the result that the

6

7

8

9

10

1995 . . . 96 . .

South Korea: quarterly grossdomestic product% change, year on year

Source: Bank of Korea, Monthly Statistical Bulletin.

24 South Korea


external sector made a positive contribution to GDP growth between Januaryand September of last year. This was also true in 1995 and underscores the factthat the worsening external accounts have been driven by terms-of-trade devel-opments rather than underlying volume trends.

South Korea: expenditure on gross domestic product(W bn; at constant 1990 prices)

Jan-Sep1994 1995 % change 1995 1996 % change

Private consumption 127,865 138,015 7.9 101,734 108,709 6.9

Government consumption 22,788 23,433 2.8 16,529 17,410 5.3

Gross fixed capital formation 87,484 98,374 12.4 71,297 75,606 6.0

Change in stocks 1,190 164 –0.4a –2,416 –2,084 0.2a

Exports of goods & non-factor services 86,040 106,768 24.1 77,267 88,316 14.3

Imports of goods & non-factor services 88,579 108,164 22.1 79,192 89,602 13.1

Net exports –2,539 –1,396 0.5a –1,925 –1,286 0.4a

Statistical discrepancy –413 –1,053 –0.3a –639 –846 –0.1a

GDP 236,375 257,536 9.0 184,580 197,509 7.0

Net factor income from abroad –2,042 –2,802 n/a –2,139 –2,581 n/a

GNP 234,333 254,734 8.7 182,441 194,929 6.8

a Change as a percentage of GDP in the previous year/year-earlier period.


—but industry seems tohave weathered the

slowdown well

The data on manufacturing production confirm that what is by South Koreanstandards a sharp slowdown is in fact an economy still humming along quitesatisfactorily by the standards of virtually any other economy in the world.Growth in manufacturing output has been steady rather than spectacular, butthe data are hardly suggestive of an economy that is about to grind to a halt.The table below presents indices up to and including the third quarter, therewill have been some slowdown in the fourth quarter because of the first out-break of strikes after the passage of the government’s controversial labourlegislation on December 26. But the impact will probably be minimal: weestimate that industrial production (mining, manufacturing and utilities) ex-panded by 8% in 1996, down from around 12% in 1995 but at least three timesas fast as growth in a typical OECD industrialised country. The ongoing labourdispute will have a negative effect on manufacturing output and exports in thefirst quarter of 1997. Current estimates of the value of lost production arerunning at over $3bn (or 0.6% of GDP), so it is imperative that an earlyresolution is found if GDP growth is to exceed 6% again this year.

Heavy and high-techindustries are still the star

performers

The sectoral indices on industrial production point to an economy in whichthe newer, higher valued-added industries are still storming ahead, while theless competitive, lighter industrial sectors are in terminal decline. This trend isalso evident in the export data (see below). Office, accounting and computingmachinery is still the brightest star of all: output was up by 27.4% in the thirdquarter of 1996 compared with the year-earlier period. The success of thevehicle industry is also evident: output of motor vehicles is now 2.5 times the1990 level, while that of other transport equipment is more than double.

South Korea 25


Radio, television and communications equipment is another sector performingbetter than most: year-on-year output growth of 16% in the third quarter wasrecorded. The key subsector here is communications equipment, as more andmore South Koreans enjoy the delights of mobile telephones, pagers andmodems for their computers. The weakest two sectors in the table below arethose of textiles and clothing, both of which peaked in the 1980s and havebeen in steady decline since. Capacity is either being closed permanently orbeing moved overseas in search of lower labour costs.

South Korea: seasonally adjusted manufacturing production(1990=100)

1995 19962 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Food & beverages 125.1 119.6 122.4 125.2 123.8 121.6

Textiles 84.7 83.6 80.2 77.0 78.2 74.9

Clothing 77.6 76.1 82.8 83.4 82.4 71.7

Chemicals & products 175.9 176.5 179.6 188.6 185.1 195.2

Rubber & plastic products 136.6 137.2 133.7 137.4 140.5 142.0

Basic metals 153.1 155.6 156.9 161.9 162.7 165.4

Fabricated metal products 136.6 134.3 131.8 133.0 140.6 143.0

Non-electrical machinery 157.5 158.7 159.4 162.0 156.7 161.5

Radio, TV & communications equipment 207.6 223.3 239.1 247.5 253.4 259.0

Office, accounting & computing machinery 248.5 270.7 296.1 335.7 318.7 344.8

Electrical machinery 164.8 163.6 158.5 158.8 162.3 177.0

Motor vehicles & trailers 212.6 219.8 219.9 237.7 239.0 255.2

Other transport equipment 168.0 174.5 169.2 196.3 203.4 205.5

Manufacturing 149.1 152.5 153.8 159.1 160.0 164.5Source: Bank of Korea, Monthly Statistical Bulletin.

Construction: a tale ofvalue and volume

Recent data on construction permits and the value of domestic constructionorders break a trend that had been evident for some time, a steadily growingvalue of orders on a contracting floor area authorised by permits. We hadassumed that the value per sq metre of construction work was rising dramati-cally; construction has traditionally been a high inflation sector and the tech-nology associated with building “intelligent offices” is growing more complexall the time. However, in the third quarter of 1996, the floor area associatedwith the permits for building construction was above the year-earlier level forthe first time since 1995. Again, the value of construction orders received wasalso up in year-on-year terms. As permits issued are something of a leadingindicator for future construction starts, it seems safe to assume that the value ofconstruction work will continue to rise sharply throughout 1997.

South Korea: construction indicators1995 1996

1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Permits for building construction (m sq metres) 25.53 37.05 22.85 31.89 23.66 30.86 29.16

Domestic construction orders received (W trn) 67.27 116.03 108.38 185.59 99.15 131.20 128.24Source: Bank of Korea, Principal Economic Indicators.

26 South Korea


Money, prices and wages

Wage inflation is stillhigh—

The pace at which nominal wages increased during the first three quarters of1996 perhaps makes it easier to understand why the government has workeditself into such a lather about international competitiveness, and why it was sokeen to rush through its controversial labour legislation in December. BetweenJanuary and September of 1996, wages in manufacturing stood 12.6% higherthan in the corresponding period of 1995 (detailed data on monthly wagelevels are available in the table below for the first eight months of last year).

—but needs to be put intocontext

Given inflation of around 5%, this nominal rise meant that real wages in-creased by more than 7% during the first nine months of 1996. Althoughseemingly very high, such an increase needs to be put into context: during thesame period, the year-on-year increase in manufacturing production was morethan 7%, while the number of people employed in manufacturing fell. As aresult, labour productivity must also have risen by more than 7% and unitlabour costs must have fallen. In a nutshell, South Korea can tolerate rapidgains in real wages so long as they are being matched or outstripped by growthin labour productivity. The government is probably right to assume that rapidproductivity growth cannot go on for ever; there must eventually be diminish-ing returns to scale, as there are in all large, industrialised economies. Labourreform to make employment markets more flexible is, therefore, long overdue,but the concern over the loss of international competitiveness can sometimesbe exaggerated.

Also of interest is the composition of earnings in South Korean industry. Agovernment report in September indicated that the basic fixed salary ac-counted for just over two-thirds, or 68%, while almost one-quarter (23.5%) was“extra pay” (bonuses, for example), with overtime making up the rest. And thetrend seems to be upwards. While the 12.2% year-on-year increase in overallearnings was marginally higher than the 11.6% recorded a year earlier, the“extra pay” component soared by 16.2%, as opposed to 13.6% from 1994 to1995. While somewhat mystifying against a background of a weakening eco-nomy last year, such a large discretionary and overtime element in an em-ployee’s compensation can be a useful tool for a corporation facing pressures totrim its wage bill. Rather than lay off staff, an employer can cut costs simply bylowering the discretionary element of pay; such flexibility probably helps toexplain why unemployment is so low in countries such as South Korea andJapan, although in the past it has also been a direct cause of labour unrest.

Inflationary pressures arestill evident—

Prices at the consumer level have been rising by around 5% year on year for thelast 12 months, a rate deemed too high both by the government and by SouthKorea’s new commentators and advisors at the OECD. Although the inflationrate eased slightly in the fourth quarter, from 5.1% in October to 4.5% inDecember, squeezing inflation further is an imperative for the monetaryauthorities. Rapid money-supply growth (see below) and a weakening of thewon were probably the two main reasons for the disappointing inflation per-formance in 1996. Service charges rose by 6.2% last year, down from 8.5% in1995, but held up by some sharp increases in public service charges for transportfares and school fees. The government aims to cap inflation at 4.5% in 1997,

0

4

8

12

16

20

1992 93 94 95 Sep 96

ManufacturingServices

South Korea: employment million


South Korea 27


which in light of the slowing economy and the prospect of falling commodityprices on international markets—especially crude oil prices—is a target the EIUviews as realistic.

South Korea: wages in manufacturing industry(Won per month; yearly averages)

% changeyear on year

1993 885,398 10.9

1994 1,022,496 15.5

1995 1,123,895 9.9

1996Jan 1,120,604 0.0Feb 1,296,134 35.3Mar 1,095,798 14.4Apr 1,164,103 12.8May 1,017,943 9.0Jun 1,371,773 9.7Jul 1,322,122 14.1Aug 1,271,978 6.0Source: Bank of Korea, Monthly Statistical Bulletin.

—and are perhapsbuilding again

In the short term, however, inflationary pressure may be building again. Thefall in consumer price inflation towards the end of the year was not matchedby corresponding declines in import price inflation or producer price inflation.Import prices in won terms fell sharply during the first six months of 1996, butthen turned upwards when the effects of the currency’s steady depreciationagainst the dollar began to feed through. Producer prices have also been indica-tive of building inflationary pressure—after averaging 2% in the second andthird quarters, producer prices rose by an average of 3.5% year on year in thefinal quarter of last year.

South Korea: consumer and producer prices(% change, year on year)

1995 1996 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Oct Nov Dec

Consumer prices 4.0 4.5 4.9 5.1 5.2 5.1 4.8 4.5

Producer prices 5.2 3.6 3.1 1.8 2.3 3.3 3.8 3.5

Export prices (won terms) 0.2 –0.9 –1.3 –1.9 1.8 3.0 3.6 n/a

Import prices (won terms) 2.9 –0.1 –2.4 –3.9 1.5 4.5 5.1 n/aSources: Bank of Korea, Principal Economic Indicators; press reports.

Finance

M2 growth is above target The broad M2 measure of money supply has been growing more quickly thanthe official target ceiling of 15.5% for approximately the last nine months.Provisional data put M2 in December 17.8% above its year-earlier level. Lastyear’s target range for money supply growth turned out to be little more thana hollow promise: in fact, against a background of slowing economic growthand a desire to lower interest rates, the Bank of Korea (the central bank) wasquite content to see its target range breached. The monetary authorities pointto the expiry of trust accounts in 1996 and the flow of funds from these into

28 South Korea


savings accounts, which are part of the M2 measure, as the reason for theunusually rapid expansion of money supply. Without this factor, according tothe central bank, M2 would have expanded by 13.5-14% in 1996, right in themiddle of the 11.5-15.5% target range.

But there were also regular injections of money through the banking system bythe Bank of Korea, designed to help firms accommodate a need for workingcapital. As inventories rose and interest rates began to move upwards in mid-1996, the liquidity injections became larger—at the end of the third quarter,for example, the narrow M1 measure of money supply was 21.3% higher thanit had been a year earlier, after a year-on-year rise of less than 10% at the end ofthe second quarter. The central bank intends to maintain an accommodatingmonetary stance in 1997: its target range for M2 growth is 14-19% and it planscuts in reserve requirements (see below).

South Korea: money supply trends(Won trn; end-period)

1995 1996 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Oct

M1 309.21 316.26 313.71 388.73 342.70 345.88 380.63 359.50 % change, year on year 17.2 11.6 8.9 19.6 10.8 9.4 21.3 7.2

M2 1,317.80 1,362.86 1,397.68 1,539.45 1,516.91 1,597.54 1,697.60 1,683.09 % change, year on year 17.4 15.6 13.9 15.6 15.1 17.2 21.5 18.3Source: Bank of Korea, Monthly Statistical Bulletin.

Interest rates remain wellabove OECD norms

At all points along the yield curve, which in South Korea is really only liquidup to three years, interest rates remain well above OECD norms. Despite a fallduring the last quarter of the year, as money supply growth was boosted byofficial liquidity injections (see above), the yield on the benchmark 3-yearcorporate bond stood at 12.60% at the end of December and that on 3-monthcertificates of deposit (CDs) at 13.35%. This latter figure means that short-termrates are around 800 basis points (8 percentage points) higher than in the USAand Taiwan and 1,250 basis points higher than in Japan. Despite higher infla-tion than in competitor countries, real interest rates, at some 7-8%, are alsomuch higher than is typical in an OECD country. The interest rate structure isa legacy of South Korea’s long-repressed financial system, with its directedlending and controls on interest rates, as well as an inflation performance thatuntil recently was consistently bad.

The Bank of Korea plans to cut commercial bank reserve requirements by2 percentage points during the first half of 1997, bringing them to an averageof 3.5%. This follows a similar cut on November 8, when the average reserverequirement was lowered from 7.4% to 5.5%. The new requirement should,according to the Bank of Korea, release about W2.5trn ($3bn) of liquidity intothe banking system and lead to immediate cuts in lending rates. The centralbank governor, Lee Kyung-shik, hopes that interest rates will fall by 1 percent-age point per year for the next five years, which would dramatically narrow thegap between domestic and typical OECD rates.

South Korea 29


South Korea: stock prices, 1996(end-period)

Mar Apr May Jun Jul Aug Sep Oct Nov Dec

KOPSI index 866.8 980.9 903.1 817.4 821.7 781.5 789.7 757.6 726.5 651.2Source: Bloomberg.

The stock market has adismal year

The weighted index on the Seoul stock exchange fell by almost 40% in dollarterms in 1996, as the slowing economy and plunging semiconductor prices hitcorporate profits. The high point for the year was set in mid-May, when theindex reached 987 points, but it was virtually all downhill after that. The rashof strikes that broke out at the end of the year pushed the index down to a lowof 606 points in early January, before it recovered on waves of foreign buyingand on hopes that the labour stoppages would be shortlived. In mid-Decemberthe government unveiled a package of measures designed to boost the stockmarket, which included liberalisation of interest rates on customer depositsheld at stockbrokers and of the loans that brokerage firms extend to clients formargin trading. The package was apparently something of a panic measure,because it came just a few days after the government had unloaded W260bn($310m) of Korea Telecom shares, in a market that had already been asked toabsorb W9trn ($10.8bn) in initial public offerings and rights issues in 1996.These minor reform measures are unlikely to have a lasting impact on senti-ment: it will take a firm-rooted recovery in corporate fortunes before a sus-tained rally is triggered. The outlook for corporate Korea will probably notbrighten until the second half of 1997.

A chink in the bondmarket

From January 3, foreign investors have been able to purchase non-guaranteed,won-denominated bonds issued by small and medium-sized firms. However,the value of bonds sold to foreign investors is not allowed to exceed a com-pany’s capital, and the Securities and Exchange Commission has to approveeach sale. This chink in the bond market is unlikely to be of much interest toforeign investors; it is a small and illiquid portion of the market, and mostinstitutional investors will want to wait for further liberalisation before com-mitting funds. Straight, won-denominated bonds offered by the blue-chipchaebol firms will remain off limits to foreign investors until 1999, and there isno schedule for the opening of the market for government bonds. The mone-tary authorities are keen to see long-term yields fall closer to internationalnorms before they liberalise the more lucrative sectors, for fear of unleashing aflood of capital inflows. (Foreigners have been enthusiastic buyers of the con-vertible paper issued by chaebol companies in Euro-markets or in the form ofYankee or Samurai bonds (dollar- and yen-denominated, respectively.)

Weak banks will be hardhit by deregulation and

the new labour law

If the government is able to make its new labour reforms stick, then banking islikely to be one of the first sectors to suffer the consequences of more powerfulrights for employers to sack staff. South Korean banks employ more than100,000 people, but the asset quality of many is doubtful and margins onlending are thin; the combined profits of the country’s 25 commercial banksfell by 2.4% in 1996. The Seoul office of SBC Warburg estimates that theaverage city bank spends more than four times its net earnings on employee-related costs, including severance reserves and fringe benefits. If labour costswere reduced by 20%, earnings could double. There will be a blast of new

850

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790

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650

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750

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850

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950

1,000

Jan . Mar . May . Jul . Sep . Nov .

South Korea: stock market indexand won:dollar rate

Source: Bloomberg.

Won:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scale

Stock marketindex—right scale

Won:$ rate (inverted)—left scale



Stock marketindex—right scaleStock marketindex—right scale























Won:$ rate (inverted)—left scaleWon:$ rate (inverted)—left scale

Stock marketindex—right scaleStock marketindex—right scaleStock marketindex—right scale

30 South Korea


competition from the end of 1998 onwards, when foreign banks are allowed toset up wholly owned subsidiaries, which will allow them to expand branchnetworks. The most likely course of events is that, before the deregulation takesplace, the leading South Korean commercial banks will merge with some of thecountry’s weaker regional and secondary banks, possibly even under govern-ment duress. There is also a strong possibility that some of the smaller and lesswell capitalised institutions will go under as has already happened in Japan,Taiwan and Thailand.

The won is propped up bythe Bank of Korea

With one eye on the depreciating yen, the Bank of Korea allowed the won toslip against the dollar for most of 1996. The currency was coming under pres-sure anyway from the deteriorating trade and current-account deficits andthere was a need to shore up export competitiveness. But in recent weeks therehave been reports of central bank intervention to support the won, whosedecline was threatening to conflict with domestic inflation-fighting objectives.Although the average exchange rate in 1996 was W801.7:$1, a depreciation ofjust 3.5% from the 1995 average, by mid-January 1997 the won had slipped toW850:$1, a record low. It was also beginning to depreciate against the yen,when for most of last year the won had been gaining on the plummetingJapanese currency. Although there may be a little further to fall, we do notexpect the won to lose much more ground from current levels—the Bank ofKorea has a large enough war chest in its foreign exchange reserves of $32bn toprovide concerted support; the yen is unlikely to shed any more value againstthe dollar; and the current-account deficit should begin to narrow by mid-1997. The EIU sees W855:$1 as being the floor for the exchange rate this yearand envisages it rising to W870:$1 by the end of 1997.

Foreign trade and payments

A record trade deficit in1996

Provisional figures released by the trade ministry on January 3 indicate a recordmerchandise trade deficit in 1996. On a customs-cleared basis, the deficit stoodat $20.38bn last year, up from $10.06bn in 1995. The growth in export receiptswas limited to a mere 3.8% (giving fob exports a value of $129.83bn), mainlybecause of sharp falls in the international price of the largest single exportcategory, semiconductors. At the end of 1996 the average price of a 16-megabitDynamic Random Access Memory (DRAM) chip was $9.25, a fall of 81.7% onthe $50.60 price prevailing a year earlier. Excluding semiconductors, exportsgrew by 8.1% in dollar value in 1996, considerably more respectable than thebroader performance, although still well down on the 25.6% growth recordedfor exports, excluding semiconductors, in 1995. As well as a large volumeslowdown, falling dollar prices for other key export categories such as steel andchemicals suppressed growth in export receipts last year.

The value of imports (cif) in 1996 is provisionally estimated by the governmentat $150.21bn, an increase of 11.2% on the 1995 total. The government oftenpoints to growth in “luxury consumer goods” imports as a cause behind adeteriorating external deficit: although imports of consumer goods did grow by20.6% last year, they remain a small proportion of the total import bill (less

-40

-20

0

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40

60

Jan . Mar . May . Jul . Sep .

South Korea: growth insemiconductor exports, 1996$ bn; % change, year on year


South Korea 31


than 20%). Sharp increases in crude oil prices offer a more satisfactory explan-ation (see further discussion and table below).

Heavy industryout-performs the rest—

A detailed breakdown of exports by category is available for the first tenmonths of 1996. The data confirm a pattern that has been evident for most ofthe 1990s: the success of heavy industry at the expense of lower value-addedlight industrial sectors. Amid the broad export slowdown, there were still starperformers last year: exports of passengers cars and ships are the two mainexamples. South Korea’s vehicle industry is investing heavily in new capacity,both at home and abroad, and is enjoying spectacular success in developedmarkets such as the USA and the UK as well as in the transition economies ofeastern Europe and the developing countries of Latin America. Kia’s involve-ment in the production of Indonesia’s new national car, the Timor, suggeststhat the South Koreans are now beginning to knock on the door of theJapanese in the hugely exciting vehicle markets of Asia.

Other sectors enjoying rapid increases in export receipts last year includedoffice machinery and refined oil products. The success of this latter industry ispartly attributable to expansion of capacity by oil refiners, but also to the risein crude oil prices on international markets, which is reflected in the importbill (see below). Office machinery exports consist mainly of computers andperipheral equipment, a sector that is still gaining ground in South Korea, aftera slow start (Taiwan remains ahead in many fields, particularly the productionof notebook computers).

South Korea: exports of selected commodities($ m)

Jan-Oct 1994 1995 % change 1995 1996 % change

Apparel & accessories 5,653 4,958 –12.3 4,189 3,553 –15.2

Passenger cars 4,470 7,242 62.0 5,819 7,095 21.9

Footwear 1,780 1,506 –15.4 1,265 1,027 –18.8

Textiles fabrics 7,838 8,735 11.4 7,359 7,330 –0.4

Transistors, chips etc 11,848 19,373 63.5 15,468 14,187 –8.3

Iron & steel 4,456 5,107 14.6 4,296 3,726 –13.3

Office machines 3,607 4,967 37.7 3,921 4,502 14.8

Telecommunications equipment 3,687 4,244 15.1 3,514 3,608 2.7

Refined petroleum products 1,608 2,291 42.5 1,894 2,883 52.2

Chemical elements & compounds 2,116 2,955 39.7 2,460 2,474 0.6

Television receivers 1,698 1,901 12.0 1,480 1,886 27.4

Sound equipment, VCRs etc 1,757 1,824 3.8 1,468 1,550 5.6

Radios 1,092 909 –16.8 785 455 –42.0

Ships & floating structures 4,945 5,533 11.9 4,301 5,800 34.9

Household electrical goods 1,485 1,685 13.5 1,414 1,602 13.3

Textiles yarn 1,055 1,331 26.2 1,106 1,194 8.0

Musical instruments & parts 1,199 1,385 15.5 1,135 1,218 7.3

Rubber tyres & tubes 1,233 1,330 7.9 1,105 1,278 15.7

Electric power machinery 1,105 1,322 19.6 1,068 1,312 22.8

Power-generating equipment 1,002 1,212 21.0 1,008 582 –42.3

Total incl others 96,013 125,058 30.3 101,932 106,476 4.6Source: Bank of Korea, Monthly Statistical Bulletin.

32 South Korea


—as the sunset sectorsfade away

The light industrial export sectors such as clothing and footwear have becomemarginal players in industry. Capacity is being slimmed down at home, eitherthrough permanent closure or translocation offshore. South Korea can simplyno longer compete in such highly labour-intensive sectors, where little value isadded to the raw materials. Interestingly, however, exports of textiles yarnout-performed the broader export total during the first ten months of last year,suggesting that South Korean firms are still supplying the inputs for clothingmanufacture in countries where labour costs are cheaper. Exports of radios,another low-tech item, provide further evidence of loss of competitiveness infields where the country was once a dominant player. The sharp fall in exportsof iron and steel goods in the first ten months of 1996 is more attributable toprice declines than to a loss of competitiveness. It is likely that exports fromthis sector will begin to pick up in 1997 as prices recover (they grew by 14.6%in 1995).

South Korea: imports of selected commodities($ m)

Jan-Oct 1994 1995 % change 1995 1996 % change

Machinery & transport equipment 37,408 49,437 32.2 40,950 44,645 9.0 of which: transistors, chips etc 6,983 9,838 40.9 8,063 9,295 15.3 power-generating machinery 2,768 3,891 40.6 3,098 2,933 –5.3 electric power machinery 1,737 2,181 25.6 1,821 1,894 4.0 telecommunications equipment 2,221 2,659 19.7 2,226 2,540 14.1 office machinery 2,615 3,570 36.5 2,904 3,315 14.2 metalworking machinery 1,788 2,341 30.9 1,961 2,720 38.7 textiles machinery 1,217 1,087 –10.7 929 615 –33.8 motor vehicle parts 1,118 1,304 16.7 1,091 1,042 –4.5 aircraft 2,208 2,479 12.3 2,153 1,959 –9.0

Measuring & controlling instruments 2,664 3,607 35.4 2,942 3,187 8.3

Chemicals etc 9,763 13,156 34.8 10,971 11,137 1.5

Mineral fuels, lubricants etc 15,415 19,013 23.3 15,335 18,921 23.4 of which: crude petroleum 8,878 10,809 21.8 8,063 11,181 38.7

Inedible raw materials 9,405 11,713 24.5 9,726 9,227 –5.1 of which: hides & skins 922 991 7.5 844 725 –16.4 iron ore & ferrous scrap 1,644 1,847 12.3 1,543 1,590 3.0 timber 1,012 1,047 3.5 868 814 –6.2 raw cotton 590 772 30.8 647 613 –5.3 iron & steel 3,734 5,504 47.4 4,473 3,985 –10.9

Food & live animals 4,761 5,926 24.5 4,928 6,002 21.8

Non-ferrous metals 3,066 4,617 50.6 3,900 3,498 –10.3

Total incl others 102,348 135,119 32.0 111,442 123,289 10.6Source: Bank of Korea, Monthly Statistical Bulletin.

The slowing economy eatsinto imports of capital

goods

The most notable feature of the import breakdown for the first ten months oflast year is the slowing of demand for imported machinery and transportequipment—growth of just 9% in dollar terms, compared with 32.2% in 1995.The deceleration in domestic demand—particularly fixed-capital formation—islargely responsible for the weaker growth in imports. Within the machineryand transport equipment category, there are some exceptions to the broad

South Korea 33


slowdown, such as the continuing strong demand for metalworking machin-ery, but the overall trend is indicative of weaker economic growth. Whereas in1995 the sharp rise in the dollar value of imported fuels and lubricants was dueto a surging domestic economy, an even sharper rise in 1996 was largely attrib-utable to increasing oil prices on international markets. During the first tenmonths of last year, the imported value of crude oil was up by almost 40% yearon year. A particularly strong increase was also recorded in the food and liveanimals category, following on from rapid growth in 1995. Obviously SouthKoreans are developing a taste for foreign flavours.

South Korea: current- and capital-account balances($ m)

% Jan-Oct %1994 1995 change 1995 1996a change

Merchandise exports 93,676 123,203 31.5 100,336 105,386 5.0

Merchandise imports –96,822 –127,949 32.1 –105,465 –117,962 11.8

Trade balance –3,145 –4,747 51.0 –5,129 –12,576 145.2

Invisibles trade balance –1,989 –3,640 76.6 –2,843 –6,093 114.3

Net transfer payments 604 –561 – –439 –826 88.2

Current-account balanceb –4,531 –8,948 94.6 –8,441 –19,495 131.0

Long-term capital balance 5,862 7,827 34.8 6,143 8,939 45.5

Basic balance 1,331 –1,120 n/a –2,298 –10,557 359.4

Short-term capital balance 3,163 5,592 78.0 4,435 5,576 25.7

a Provisional. b There is a discrepancy between Bank of Korea and IMF figures. Bank of Korea figures are reported here because they are moretimely, but IMF figures are used as the basis for the projections in the Outlook and for the historical data on the Economic structure page.


A ballooningcurrent-account deficit—

The broader measure of South Korea’s trade with the rest of the world, shownin the current account, hardly makes encouraging reading for the government.Official estimates put the deficit at around $23bn in 1996, on the Bank ofKorea’s measure (we estimate a deficit of $21.3bn, using IMF methodology). Adetailed breakdown from the Bank of Korea for the first ten months of 1996shows increases of more than 100% year on year for both merchandise andinvisibles trade. The current-account deficit was 131% larger than in theJanuary-October period of 1995. Trade in services has been driven deeper intodeficit by the slowdown in merchandise exports (closely correlated to servicesexports) and by a tide of outwards tourism. Meanwhile, the growing stock ofoverseas liabilities, in the form of foreign currency debt and the holdings ofSouth Korean equity by foreign investors, is pushing trade in income, profitand dividends deeper into the red.

—drives up the appetitefor foreign capital

Trends in the capital account mirror those of the current account. Net inflowsof both long-term and short-term capital have risen compared with 1995—add-ing directly to the stock of overseas liabilities. Inflows of portfolio capital roseparticularly rapidly during the first ten months of last year, despite the dismalperformance of the Seoul stock market, and look set to exceed the record of$11bn recorded in 1993. The finance ministry estimates the value of foreigndirect investment (FDI) at $3.2bn in 1996, up from $1.9bn in 1995, although itis referring to approvals here rather than actual investment. Based on data forthe first ten months of last year available in the long-term capital account, it

34 South Korea


appears more likely that recorded inflows of FDI in 1996 amounted to $1.5bn,up from $1.2bn in 1995. The current-account deficit was financed last yearwithout much depletion of the central bank’s foreign exchange reserves: re-serves stood at $32.32bn at the end of November, down from a high of$36.56bn in June but only slightly lower than the end-1995 level of $32.71bn.

Business news

France rebuffs Daewoo Two of the four largest chaebol (conglomerates) have been rebuffed in theirefforts to take over major European companies. The more publicised case is theFrench government’s volte-face on its earlier agreement to sell ThomsonMultimedia to Daewoo Electronics, in a deal which would have made Daewoothe world’s biggest television manufacturer. Few doubted that this was acapitulation to local public opinion which, while resistant in general to therestructuring endeavours of the president, Jacques Chirac, reserved especialchauvinism for the thought of a state-owned jewel in the crown being sold toorientals, and all for a single franc. (Daewoo had pledged to invest billions, andnot only to protect existing jobs but create thousands more.)

Pot and kettle Daewoo is annoyed, and rightly so. Less appropriate, if predictable, were criesof outrage from the Seoul press, which, while mounting its high horse, choseto overlook the fact that the very concept of selling off a major state enterprisein its entirety to foreigners would be both legally and culturally out of thequestion in South Korea. It remains to be seen whether Daewoo will resurrectits bid for Thomson at a later stage. Some analysts had queried why they shouldwant it in the first place, and also how they could afford it. (Even more thanother chaebol, Daewoo gives the impression of investing massively all over theworld in every possible sector all at once.) To critics who say that makingtelevisions has become a low-end mature industry with little growth potential,Daewoo retorts that most of the human race does not yet own one. As withother chaebol and other sectors, the strategy is thus primarily a bet on develop-ing world growth over the coming decades.

Earlier, Daewoo had also been pipped at the post by Proton of Malaysia in itsquest to buy Lotus, the British sports car manufacturer. Both suitors covetedLotus’s 1,000-strong design and engineering team for their efforts to developnew and original car models, to replace the (respectively) Mitsubishi andGeneral Motors clones with which they had started out.

Samsung’s bid for Fokkerfails—

Less publicised, but no less interesting, have been the different travails thatSamsung has experienced in its bid to buy the bankrupt Dutch aircraft manu-facturer Fokker. This saga illustrates how “Korea Inc” is changing. The oldinstincts are apparent in the almost mystical conviction, shared by govern-ment and conglomerates alike, that just about everything should in principlebe made by them and in South Korea.

—as backing is lacking It was when a proposed venture with China collapsed that Samsung took aninterest in Fokker instead, assuming that Seoul would back it. Not so. Alreadystung by charges of favouritism when it had allowed Samsung to build cars in

South Korea 35


defiance of its alleged policy of chaebol specialisation, the government told thecompany to form a consortium as on the China project. But the potentialpartners, Daewoo, Hyundai and Korean Air, were now reluctant. With Chinastill going ahead and building its own plane with new partners in Europe andSingapore, they judged the marketplace too crowded and the chances of mak-ing money slim. They also feared that Samsung would run the show, althoughat the last minute it offered to dilute its 51% stake to an equal one-quarter eachof the equity. There was even opposition within the Samsung group, whereplummeting semiconductor prices had starved the cash cow whose profits hadbeen intended to finance the new venture, but which were also needed moreimmediately for Samsung’s $5bn foray into car making. (Buying Fokker andinvesting in new aircraft would cost at least $2bn.)

Why make it all? The uncertainty over official government approval translated into delays andpostponed deadlines. The crunch came in late November, when Short Brothersin Northern Ireland decided that it could no longer supply wings to Fokkergiven the uncertainty; which in turn prompted the Dutch receiver to break offtalks with Samsung. December saw a flurry of last-ditch efforts, but by the turnof the year it was announced that the deal was off. In theory, Korean interestcould be rekindled were Fokker to be repackaged on more attractive terms. Yetat a time of both relative economic under-performance and growing awarenessof the need for restructuring in South Korea, perhaps government and com-panies alike have learned a salutary lesson: that South Koreans do not, after all,have to make everything.

Top dog Competition between South Korea’s large companies continues to be fierce.Samsung and Hyundai have long been rivals for the top spot: measured, char-acteristically, in terms of sales or exports rather than profitability. Last year wasbetter for Hyundai, whose cars have sold well while Samsung has suffered fromplunging semiconductor prices. (These two products each account for around30% of the respective group’s export volumes.) Both behemoths have had tocut back their original export goals. Samsung lowered its from $20bn to$16.5bn, but may not attain even that. Hyundai dropped its target from $18bnto $15bn, but expects to exceed this. The contest will be close.

War in the air Another case of no love lost is in the skies. Korean Air has always begrudgedlosing its status as the sole national airline eight years ago, when Asiana startedoperations. Both companies, plus their respective parent groups (Hanjin andKumho), are at daggers drawn. Asiana complained bitterly early last year whenKorean Air lowered domestic fares by 5%, even though these routes were al-ready loss-making. It has also threatened to sue over disqualification of its bidto run refuelling services at the new Inchon international airport. The contractwent to Hanjin, which already holds the rights at Kimpo, and allegedly makeslife hard for Asiana. The younger airline has now struck back, however, bystressing its youth. A current advertising campaign, which resonates withsafety issues being debated around the world in the wake of recent accidents,emphasises that the average age of Asiana’s planes is just over four years.Korean Air’s fleet is considerably older.

36 South Korea


Millions of businesses There are almost 3 million businesses in South Korea. According to figurespublished in December by the National Statistical Office, the total at the end of1995 stood at 2.77 million, up by 8% on a year earlier. Almost 225,000 werecorporations, but over 90% were sole proprietorships or unincorporated. Bybusiness area, more than a million (36.5%) are shops (retail, wholesale, orrepair), while a further 500,000 comprise restaurants, inns and hotels. Manu-facturers number just over 300,000, service operations just below that figureand transport, warehousing and communications a further 200,000. Two-fifthsof all businesses are in greater Seoul, with almost a further 10% in the secondcity, Pusan. It remains to be seen whether the economic gloom of 1996 willhave caused any dampening of South Korean entrepreneurial spirit.

The fax of life The upside of high wages in South Korea is a buoyant home market of45 million people with a per head income of over $10,000. South Koreanworkers can thus afford to buy the goods they make. In home electronics, thebiggest item is now personal computers. Sales last year were forecast to reachW2.56trn, or over $3bn, with household purchases overtaking those by busi-ness for the first time. The total is 2.7 times more than the next biggest seller,televisions, at just under W1trn. Next come stereos and refrigerators, the mar-ket for each of which is worth some $850m. South Koreans also boast morethan 12 million pagers, an average of almost one per household. Currentadvertising for fax machines is targeted at single young women, in the hopethat a fax will become a de rigueur dowry item such as fridges and washingmachines.

South Korea 37


North Korea

Political structure

Official name Democratic People’s Republic of Korea

Form of government One-party rule, based on the ideology of juche (self-reliance)

The executive The Central People’s Committee (CPC) is elected by the Supreme People’s Assembly(SPA). It directs the work of the Administration Council (the cabinet) and is theexecutive and administrative arm of the SPA

Head of state Indirectly elected president

National legislature Unicameral 687-member SPA directly elected for five-year terms; elects the presidentand members of the CPC on the advice of the president. The SPA also elects a StandingCommittee which performs the functions of the assembly when it is not in session

Regional legislatures Each province, city, county or district elects people’s assemblies or committees. Thesecommittees elect local officials to carry out centrally decided policies

National elections April 22, 1990; next election was due April 1995, but did not take place

National government The Korean Workers’ Party, through the Democratic Front for the Reunification of theFatherland, controls all the arms of the state

Main political parties Government: Democratic Front for the Reunification of the Fatherland is a coalitionfront comprising the Korean Workers’ Party (KWP), the Social Democratic Party (SDP)and the Chondoist Chongu Party

Key holders of state & partypositions

President vacantVice-presidents Pak Song-chol; Li Jong-ok; Kim Yong-ju;

Kim Byong-sikPrime minister Kang Song-sanVice-premiers Kim Yong-nam; Choe Yong-nim; Kim Bok-sin;

Kang Hui-won; Kim Yun-hyok;Kim Hwan; Kim Chang-chu; Chang Chol; Hong Song-nam; Kong Chin-tae

Key politburo members Kye Ung-tae; Choe Gwang; Chon Byong-ho

Key ministers Chemicals industry Kim HwanDefence Choe GwangElectronics & automation industry vacantFinance Yun Ki-chongForeign affairs Kim Yong-namForeign trade Li Song-daeMachine industry Kwak Bom-giMetal industry Choe Yong-nimPublic security Paek Hak-nimRailways Pak Yong-sok

Chairman of the StatePlanning Commission

Hong Sok-hyong

38 North Korea


Economic structure

Latest available figures

Economic indicators 1992 1993 1994a 1995a 1996a

Real GNP growtha % –5.0 –3.5 –2.0 –4.2 n/a

Rice productionb ’000 tons n/a 1,330 n/a n/a 1,340

Population m 22.2 22.6 23.0 23.4 23.7

Exportsc $ bn 1,020 1,020 840 590 n/a

Importsc $ bn 1,640 1,620 1,270 1,470 n/a

Trade balance $ m –620 –600 –430 –880 n/a

External debtd $ bn n/a n/a 9.8 n/a n/a

Exchange ratee (av) Won:$ 2.16 2.17 2.17 2.15 2.15

January 15, 1997 Won2.15:$1f

Origins of gross domestic product 1994c % of total

Agriculture, forestry & fishing 29.5

Mining 7.8

Manufacturing 23.6

Electricity, gas & water 4.8

Construction 6.3

Services 27.9

Total 100.0

Main destinations of exports 1995g % of total Main origins of imports 1995g % of total

Japan 27.9 China 32.6

South Korea 20.8 Japan 17.2

China 5.2 Russia 4.7

Germany 4.0 South Korea 4.3

Russia 1.2 Germany 2.9

a EIU estimates. b UN Food and Agriculture Organisation (FAO) figures. c Bank of Korea estimates. d Including rouble-zone debt, at pre-1990values. e Official rate until 1991; market rate thereafter. f Market rate. g Cited in a book by Marcus Noland: The North Korean Economy, Institutefor International Economics, Washington DC, 1995

North Korea 39


Outlook for 1997-98

Three years, three choices The medium-term outlook for North Korea was succinctly summarised inDecember by someone who is surely in a better position than anyone elseoutside the peninsula to judge, at least in terms of access to intelligence. JohnDeutch, the outgoing head of the USA’s Central Intelligence Agency, told aSenate committee that within the next two or three years Pyongyang will haveto do one of three things: implode, make war or make peace.

Both the timescale and the narrow range of choice seem correct. Granted,North Korea has proved astonishingly resilient in adversity and has not as yetfollowed the former Soviet Union and eastern Europe into political collapse ofthe old system, any more than it has followed China and Vietnam down theroad of economic reform. Yet its survival thus far does not gainsay the fact thatits system is in a cul-de-sac and that the pressures for change continue tomount remorselessly. The food situation alone, as discussed below, cannot getmuch worse without widespread malnutrition verging into famine. The ques-tion then becomes whether ordinary citizens will do as Pyongyang’s mediaconstantly urges them to and lay down their lives for the not noticeably under-fed Kim Jong-il. One may beg leave to doubt whether even in North Korealoyalty can be pushed quite that far.

Three-way explanation Meanwhile, immediate prospects on several fronts look brighter at the start of1997 than they have for some months. Part of the deal with Pyongyang’sapology for sending a botched submarine mission to South Korea in September1996 (4th quarter 1996, page 5) is that the north has at last agreed to attend athree-way briefing meeting with the USA and South Korea about proposedfour-way talks (between the two Koreas, the USA and China) which were firstmooted in April 1996. The likely attendees will be the US deputy assistantsecretary of state, Charles Kartman; South Korea’s deputy foreign minister, SongYong-sik; and one of North Korea’s many vice foreign ministers, Kim Kye-kwan(rather than Kang Sok-ju, who handled the nuclear negotiations). This meetingis scheduled for February in New York. Provided that North Korea abstains fromits usual habits of stalling and playing for time, then perhaps the four-way talksmight take place after all, if only a year after they were first proposed.

Two-way talks withWashington

Also set to resume, perhaps within the context of the three-way meeting butthereafter separately, is the bilateral dialogue with the USA which Pyongyangprefers (see below). This has already amassed a substantial ongoing agenda. USconcerns include missile proliferation, searching for missing-in-action (MIA)remains and the much-delayed exchange of liaison offices. For its part, NorthKorea wants more US economic sanctions against it to be lifted. It was reportedin early January that Hwang Jang-yop, the party secretary in charge of inter-national affairs and one of Pyongyang’s most powerful figures, has been in-vited to the USA in March by a university. Should he also talk with thegovernment in Washington, this could betoken significant developments. (Seealso below, The political scene.)

40 North Korea


KEDO girds up for action As discussed above (see Inter-Korean Relations), Pyongyang’s apology forSeptember’s submarine incursion has also unblocked nuclear co-operationwith the Korean Peninsula Energy Development Organisation (KEDO). OnJanuary 8 the two sides signed the last two protocols, on sites and services, forthe light-water reactor project at Sinpo. The first three, dealing with consularaffairs, communications and transport, had been agreed as long ago as July.The final two had been held up originally by disputes over wage levels, butlatterly by Seoul’s post-submarine freezing of all cooperation with the north.

On the same day ten engineers from the US firm NAC, accompanied by adeputy desk officer from the State Department, flew into Pyongyang to resumecanning spent fuel rods at Yongbyon after a two-month suspension. If all nowgoes smoothly, this process could be finished by the end of June; at whichpoint the 8,000 rods are due to be exported to a third country for final disposal.

Consortium, notcompetition

Newspaper reports suggest that construction of the light-water reactors atSinpo will be carried out by a consortium of at least three South Korean com-panies: Hyundai, Dong Ah and Daewoo. Apart from the general principle ofSeoul not wanting South Korea’s largest corporate groups, the chaebol, to viewith one another for business in the north, each has particular merits. Hyundaihas the best pedigree in building nuclear power plants. Dong Ah has some suchexperience, and its involvement in the world’s largest civil engineering pro-ject—the ongoing “Great Man-Made River” scheme in Libya—has given itgeneral expertise. Daewoo is seen as having the greatest familiarity with doingbusiness in North Korea. The government also hopes to find a way for moresmaller construction companies to participate, at least in less difficult areassuch as accommodation and road-building.

Coronation, at last? Heavy hints were offered last year that the dear leader’s official appointment ashead of state and party general secretary may finally take place some time afterthe third anniversary of his father Kim Il-sung’s death on July 8. In some wayssuch timing may be unpropitious, in that the food shortage could be at itsworst before this year’s harvest is gathered in. On the other hand, if 1997 doessee a serious outbreak of peace, the next six months could bring a substantialinflow of food and other aid from the USA, South Korea and Japan. This wouldenable Kim Jong-il both to feed his people, and to put on a lavish coronation-cum-celebration for this brilliant success of his leadership. What the EIU has inthe past called the “militant mendicant” option might thus pay off after all;although it could be doubted whether all of the people would really be fooledall of the time about the true pattern of cause and effect in their weal and woe.

Review

The political scene

Kim Jong-il goeswalkabout

Naewoe Press, the veteran South Korean Pyongyang watchers with close linksto military intelligence, have been totting up Kim Jong-il’s “on-the-spotguidance” in 1996. They find that the dear leader is becoming more active.

North Korea 41


Whereas in 1995 he appeared in public on just 30 days, as of mid-Decemberlast year he had already chalked up more than 40. What is more: “Sometimeshe was involved in two or three activities in one day”. Such exertions havetheir price, however. For two whole months, May and August, he went toground completely; while in January he did not emerge until January 19,prompting speculation about his fate. Perhaps to pre-empt any such concernsin 1997, he saw in the new year this time, literally so, at midnight, with a vigilat his father’s bier in the Kumsusan memorial palace, which he is only recordedas having visited a seemingly unfilial once in 1996.

Still mainly military The overall pattern of Kim Jong-il’s visits is still mainly military, in contrast tohis father’s era. (Kim Il-sung visited production sites in the main, while his sonin those days indulged his taste for the arts.) The last quarter of the year saw adozen visits to army units, many in the front line and including a trip toPanmunjom on November 24. Even the exceptions tended to prove the rule,such as the odd trip to a building site—either power stations or tourist resortsseem to be preferred—where the builders are soldiers (and this aspect is dulyplayed up). This only reinforces the impression that the dear leader still hassomething to prove in gaining acceptance by the armed forces; and that they,rather than the party or government, are the key institution in post-KimIl-sung North Korea.

Party freezes Formally, it is curious that the 30 months since Kim Il-sung’s death haveapparently brought not a single change in the Pyongyang hierarchy, otherthan due to death (as when Choe Gwang replaced the late O Jin-u, eventually,as defence minister). The contrast with the seemingly endless comings andgoings of ministers in Seoul could hardly be more marked. And yet this seem-ing stability in Pyongyang suggests rather a state of limbo, as if politics were insuspended animation. Which indeed they are. The Supreme People’s Assemblyhas not assembled since Kim Il-sung died, and is anyway out of time (electionswere due in 1995); nor is it clear even whether the Central People’s Committeehas been meeting formally or regularly. And, of course, the state remains head-less, and the party without a general secretary.

In this curious situation, one method (as with Kim Jong-il) is to chart thepattern of appearances. Of the four vice-presidents, the ageing Li Jong-ok andPak Song-chol continue to perform fairly light ceremonial duties. By contrastalmost nothing is seen of Kim Yong-ju, Kim Il-sung’s younger brother and onceKim Jong-il’s rival for the succession, whose star must be assumed to havewaned after his brief comeback in his brother’s last years. Yet Kim Yong-ju isstill listed as both vice-president and a full politburo member: meaning he hasnot been purged and perhaps cannot be. The fourth vice-president, Kim Byong-sik, has merely symbolic significance as a returnee from Japan.

Army rises Of the other full politburo members, the prime minister, Kang Song-san, wasinvisible throughout 1996. He is said to be seriously ill. Kim Yong-nam, nomi-nally foreign minister, did little on that front but was quite active in party andceremonial matters (where he was sometimes tagged as deputy prime ministerand/or politburo member rather than as foreign minister). More in evidencewere three party secretaries who are also full politburo members: Kye Ung-tae,

42 North Korea


Chon Byong-ho and Han Song-ryong. One or more of this trio typically accom-pany Kim Jong-il on his guidance visits.

Soldiers are also usually in Kim Jong-il’s tour parties. Formally, the three mostsenior military personnel (after Choe Gwang) are Ri Ul-sol, the only other fullmarshal besides Mr Choe and Kim Jong-il, who heads the secret service, andtwo vice-marshals: Cho Myong-rok, chief of the Korean People’s Army politicalbureau, and Kim Yong-jun, the chief-of-staff. This trio are typically rankedabove associate politburo members on official listings. Mr Cho in particularaccompanies Kim Jong-il almost everywhere, and is clearly a man to watch. Asever, all too little is known about these men and their opinions, except thatthey are clearly a power in the land.

Farm officials culled In one area, however, there may have been purges. According to Seoul sourcesquoted in the Seoul daily Joong-Ang Ilbo on January 10, many officials respons-ible for agriculture have been purged of late. None were named, but they aresaid to include the former chairman of the rural economic committee in NorthHwanghae province, one of the main granary areas (and also one of the worsthit by floods). Also involved are South Hwanghae and South Pyongan in thesouth, and Chagang and North Hamgyong in the north of the country. Thepurges allegedly include officials in charge of collective farms, as well as inprovincial and local government, but not Pyongyang, significantly. While suchscapegoating is hardly surprising, on its own it will do nothing to remedy thestructural failings of North Korean agriculture.

The people are reclassified Intelligence sources in Seoul claim that Pyongyang late last year carried out amassive rescreening exercise, reissuing residence cards to one and all for thefirst time since 1983. One peculiarity of the North Korean system is that itclassifies every single citizen in a complex system of what are best described asestates, or perhaps even castes; the point being that such ascription entirelydetermines life-chances, yet there is virtually nothing that individuals can doto change their classification. There are up to 51 subclasses, but the basicdivision is threefold: loyal, wavering and hostile. “Good” backgrounds includethose of worker and peasant, plus the remote northern areas which were neveroccupied by the enemy during the Korean War (although Kim Il-sung oncecomplained that these produced country bumpkins). Conversely, any familyconnections to landlords, priests or South Korea are bad. Returnees from Japanfall in the middle.

Catch 22 The contradictions of a system such as North Korea’s are fairly obvious. Onecan see why a totalitarian regime would want this information; yet usingbackground to determine who succeeds and who fails risks becoming a self-fulfilling prophecy. Children from “bad” origins might be perfectly loyal, par-ticularly after being brainwashed from birth in nurseries to love their leaders;but it rankles when, for instance, they are debarred from even applying touniversity, while seeing their less able peers get in. Hence Kim Il-sung regularlyused to inveigh against too rigid an application of the rules, and insist thatthose who proved themselves loyal should be trusted whatever their back-ground might be.

North Korea 43


This new rescreening exercise seems to have been partly in preparation for KimJong-il’s possible assumption of formal power, but also a response to the risingnumber of defections, not a few of which have involved North Koreans withoutside family ties, whether in South Korea, Japan, China or even the USA. Yetfor Pyongyang this is a Catch 22. If it steps up surveillance of and discrimin-ation against such people, it risks antagonising them further and so temptingthem to flee; but if it does not, they may flee anyway.

Diplomacy: mainly toChina—

Naewoe have also been charting comings and goings between North Korea andthe outside world. Two patterns are apparent. By sheer numbers, contacts withChina predominate. At least 25 North Korean delegations of all kinds visitedChina in 1996, which is more than to the rest of Asia put together. Thisenthusiasm was perhaps less than fully reciprocated, in that only 14 Chinesedelegations came to North Korea. In neither case, however, and in contrast topast times, were top leaders involved: the most senior visitors in either direc-tion being mere vice-ministers. Not that Chinese presidents and premiers nolonger visit Korea (and vice versa); but nowadays they go south, not north. Infact the most significant Chinese visit to North Korea last year was a naval portcall to Nampo, the first such in many a year.

—and now, coming to theUSA

The other striking trend is the burgeoning trans-Pacific travel into the enemy’slair. Gone are the days when Kim Yong-nam could be kept cooling his heels atthe UN in New York for two weeks and still not be allowed to visit Washington.By contrast, in one two-week period alone in April-May last year, no fewer thanfive separate North Korean delegations landed in the USA, while a sixth wastalking about missiles with a US delegation in Berlin.

While quite that much coming and going was exceptional, the presence ofNorth Koreans on US soil is now normal. The UN mission has long been in situ,initially as observers before both Koreas joined the UN in 1991. But whereas itsstaff used to be severely restricted in their movement, they are now regularly incontact with the State Department’s Korea desk officers. Visitors fromPyongyang, often for extended periods, are also no rarity. Thus Ri Hyong-chol,who is in charge of US affairs at Pyongyang’s foreign ministry, spent fully threeweeks in New York in December (Christmas included) hammering out the textof the north’s submarine apology with Mark Minton, director for Korea at theState Department; while the north’s nuclear negotiators with the KoreanPeninsula Energy Development Organisation (KEDO) stay in New York formonths on end.

Richardsons bow in andout

The North Korea-USA traffic is two-way. At least eight US delegations visitedNorth Korea last year, three of which involved two different Richardsons.Spence Richardson, designated head of the much-delayed US liaison mission inPyongyang, accompanied congressman Tony Hall (Democrat, Ohio) in August,before retiring from the service later in the year. The other is Bill Richardson,then a congressman for New Mexico and unofficial US government trouble-shooter in various hotspots around the globe: a role which began by chance inDecember 1994, when he happened to be in Pyongyang when a US helicopterwas shot down after it strayed across the Demilitarised Zone, and brokered thesurviving pilot’s release. Mr Richardson visited Pyongyang twice last year: in

44 North Korea


May to negotiate on bilateral issues and again in November to bring out ayoung US citizen of half-Korean parentage, Carl Hunziker, who had been heldfor several months on spying charges after swimming in across the Yalu fromChina while drunk (he also claimed to be a missionary).

Sadly, Mr Hunziker took his own life soon after coming home. ForMr Richardson, there was a happier ending, in his appointment to succeedMadeleine Albright as the USA’s UN representative for Bill Clinton’s secondpresidential term. This must be the first time that a North Korea connectionhas proved a career advantage for a US politician. Pyongyang will be glad ofthis appointment, while Seoul conversely is wary. (But the south takes comfortfrom the rest of the team. Mrs Albright, now secretary of state, was tough onthe north’s nuclear transgressions when in her UN post; while the new CIAchief, Anthony Lake, has a longstanding friendship with South Korea’s newishforeign minister, Yoo Chong-ha. In their former jobs as presidential securityadvisers, they jointly drafted the four-way talks proposal.)

Russia: no longer brothersin arms

Moscow’s efforts earlier last year to mend fences with Pyongyang suffered asetback when the latest Russian tanks and other weapons started arriving inKorea—South Korea, that is. Russia is finally paying back the $1.47bn loan withwhich Roh Tae-woo rewarded Mikhail Gorbachev in 1990 for opening diplo-matic ties with Seoul. Despite furious threats from North Korea, the latter partof the year saw three substantial shipments. On November 1 a tank battalionequipped with Russian T-80Us was dedicated in South Cholla, a month after aninfantry unit based in Kwangju sporting BMP-3 armoured personnel carriers(APCs). Both of these are the very latest models, and as such more advancedthan anything the former Soviet Union ever supplied to North Korea. A furthershipment of 26 tanks and 13 APCs arrived at the turn of 1997, and there are stillmore to follow.

Japan: see if we care? North Korea’s attitude to Japan can seem perverse. On January 10 the north’sKorea Central News Agency (KCNA) published a foreign ministry statement“urging the Japanese authorities to come out to the talks for postwar settlementwithout delay”. Four sentences later, however, they add that “We have made itclear that we do not mind whether our relations with Japan are normalised ornot”. The statement goes on to accuse Japan of “trying to avoid atonement.This indicates that Japan is politically and morally vulgar and is willing torepeat the crime if time comes”. For good measure, they also dispute Japan’sfitness to become a permanent member of the UN Security Council, as Tokyowishes.

This seems an odd tone of voice in which to call for dialogue. Behind therhetorical posturing, however, lies a recognition in Pyongyang that among theissues newly unblocked by the submarine apology is rapprochement with Japan,which has been on hold for over four years. Eight rounds of talks between 1990and 1992 got nowhere, and North Korea eventually walked out, accusing Japanof bringing in such irrelevancies (in Pyongyang’s eyes) as the nuclear issue.

A yen for yen Despite its professed insouciance, the north has very good reason to be anxiousto normalise relations with Tokyo. The clue lies in the reference to “postwar

North Korea 45


settlement”. The principle is already agreed that eventual normalisation willinclude a substantial sum by way of “reparations” for Japan’s colonial rule overKorea before 1945, on the precedent of the aid given to South Korea whenrelations were established with Seoul (as recently as 1965). While an exactfigure has yet to be agreed, it would certainly be of the order of several billiondollars. That could come in useful for anything from buying food to modernis-ing industry and infrastructure.

So provided that the four-way talks, or some equivalent inter-Korean dialogue,go ahead—Tokyo, deferring as ever to its allies in Washington and Seoul, insistson this as a precondition—separate Pyongyang-Tokyo negotiations may wellresume within the next few months. They are unlikely to be smooth. Specifi-cally bilateral sticking points include Japanese concerns over the threat fromNorth Korean missiles to the human rights (or lack thereof) of several thousandJapanese wives of ethnic Korean returnees, not one of whom has ever beenallowed out to visit Japan in over 40 years. Last time, Pyongyang in effect toldJapan to mind its own business when it tried to raise such issues. This time,though, if North Korea wants the money it will have to make concessions.

The economy, trade and investment

What’s going on? Aggregate economic data for 1996 are not yet in. When they come, needless tosay, it will not be from Pyongyang. Even by its own former standards, NorthKorea has fallen into a deep silence on all matters economic—presumablybecause the truth is too awful to contemplate, let alone publicise.

Thus even the pretence that there is an economic plan has been all but aban-doned. In late 1993, when it was admitted for the first time that a seven-yearplan had failed, this was supposedly succeeded by a vague “adjustment period”of two to three years, in which priority would go to three sectors: light ind-ustry, farming and foreign trade. At the same time, media exhortations sug-gested that the old bias towards heavy industry would not, in practice, bereadily abandoned. The three years are now up; yet there is no word of any newoverall economic line. Perhaps the North Koreans are preparing to announce areform package; one lives in hope.

South estimates thenorthern harvest

With Pyongyang mute on matters economic, it is largely left to Seoul—hardlythe most neutral of sources, but persuaded these days that truth makes the bestpropaganda—to fill the gaps. On January 10 the south’s Ministry of NationalUnification (MNU) published its own estimates of last year’s harvest in NorthKorea. Highlights include the following.

• The total grain harvest in 1996 is estimated to have been 3.69m tons. This isup by 6.9% on the 1995 figure, but still 10% below what has become thenormal level in recent years. And it is far less than the 6.77m tons needed if fulldemand is to be met and normal rationing implemented.

• Charting the ups and downs (mostly downs) of this decade, the MNUreckons that North Korea harvested 4.82m tons in 1990, 4.43m tons in 1991,4.27m tons in 1992, and 3.88m tons in 1993. (Note that this steady slide—down by 20% and almost 1m tons over three years—occurred well before the

46 North Korea


floods of the past two years.) After a slight gain in 1994 (4.13m tons—thisdespite claims from Pyongyang that 1m tons of rice was lost to hailstorms), thefloods in 1995 caused another plunge, to 3.45m tons.

• By crop, barely one-third (1.34m tons) of last year’s harvest consisted of rice,compared with just under 2m tons of maize. Other crops consisted of red beans(150,000 tons), soybeans (120,000 tons), and “miscellaneous cereals”(100,000 tons, presumably sorghum and barley.) These figures seem to be onlyfor grains, so they exclude potatoes and green vegetables as well as meat andanimal products, on which figures are also needed in order to assess the overallfood situation.

Straw becomes a foodstuff Nonetheless, there is no denying that North Korea is desperately short of food,and will be shorter than ever this year. (Even Kim Young-sam, in his new yearpress conference, declared that the north’s “food situation and other problemsare worse than people think”; which makes one wonder why his adminis-tration spent much of last year doing its best to play down the north’s plight.)The MNU reckons that up to 1m tons can be saved by cutbacks, and says thataverage daily adult rations have been more than halved from 700g to 300g(other reports have claimed 250g or even 200g). It added that “Noodles madefrom rice straw and corn stalk powder are supplied as substitute food, and adrive is under way to dig and eat grass roots”.

In terms of bare survival and assuming that no grain goes as animal feed or forindustrial uses (for example, alcohol or enriched foods for children), a dailyaverage of 500g of grain for each of North Korea’s 24 million men, women andchildren would require around 4.4m tons per year. Depending how muchPyongyang has in store for military or other purposes (still an unknownquantity), this suggests that North Korea may yet be able to struggle on; partic-ularly if improved relations with Seoul and others permit a resumption of tradeand aid.

Cargill to the rescue Tentative moves towards deeper aid and trade are already happening. InJanuary, Cargill, a major US grain trader, got the green light from Washingtonfor a barter deal with North Korea. Details are scarce, seemingly at the north’srequest. Although the company had applied for permission to supply up to2m tons, the actual total seems likely to be more like half a million, presumablyof maize. As to what Pyongyang will trade in return, possibilities include min-eral water, primary steel goods, bauxite and magnesite. The last is probably thebest bet: a rare mineral used to line blast furnaces, and found only in China andNorth Korea, it had already been exempted from US trade restrictions in thefirst round of easing after the October 1994 Geneva nuclear accord. In anyevent, half a million tons of grain will be a big help.

Help from UNDP International agencies, too, are continuing to assist North Korea. On January 10the Korea Central News Agency (KCNA) singled out the UN Development Pro-gramme (UNDP), which it said has established a trust fund to try to raise $38mto restore arable land damaged by the floods. It has already supplied $600,000worth of excavators, bulldozers and other machinery, which will be used “inreadjusting the flood-damaged land and restoring agricultural infrastructure”.

North Korea 47


Beefing up the dikes Clearing up after the floods is obviously a massive task, but it is just the sort ofthing that North Korea is good at. A day earlier, another KCNA dispatch de-tailed progress to date. Last autumn saw 61,000 km of roads improved (that is80% of the north’s entire claimed road network), plus “bank revetment andrepairing along 7,000-km sections” (presumably of rivers, canals and irrigationchannels), and tree planting (crucial for preventing erosion) over 25,600 ha. InSouth Hwanghae alone, the main rice-growing province, more than 12.5m cumetres of “rubble stones” were said to have been used for river bank improve-ment in 490 places along a length of 970 km to protect 40,000 ha of arableland; and all this in two months from mid-October, presumably after what thefloods had left of the harvest had been gathered in.

Perhaps harder to credit is the claim that “land, reservoirs and pumping equip-ment which were washed away, buried or devastated by last year’s flood, wereall (sic) restored to their original state”. Other detail given focused on the moremountainous north of the country. Ryanggang province had more than2 million trees planted in a little over two months, again no doubt to combaterosion; while North Pyongyan “smoothed a total of 20m sq metres of roadsurfaces”. All in all, KCNA even managed a little of the old Pyongyangpanache: “Soaring high is the zeal of all the working people to turn theirbeautiful country into a splendid paradise.”

Little new was built lastyear

The urgent need to rebuild after the floods of the last two years must be onecause (though not the only one) of an observed slowdown in the number ofnew building ventures. Naewoe Press in Seoul has listed a mere nine economicconstruction projects declared as having come on stream in the north last year.They are a mixed bag: a trolley bus line (to a “revolutionary battle site”); ashooting gallery in Pyongyang; a power station in Nampo; a reservoir; a salt-works; a joint venture with Japan (presumably Chongryun), nature unspeci-fied; a hotel in the Rajin-Sonbong free zone; the Mt Kumgang power station,discussed in our last issue (4th quarter 1996, page 49); and a refinery (sic) at theKim Chaek steelworks, North Korea’s largest. This cannot be a complete list:Naewoe seem to have forgotten their own earlier interim tally for the first halfof 1996, which included two new seams at coal mines, a base metals mine anda calcium carbonate factory.

Yet the general point stands. For a country that used to boast building evermore edifices (some more monumental than practical, to be sure), this is acomedown indeed. Had we a figure for new fixed investment in 1996, it wouldbe very small. One further project nearing completion is the 110-km railwayfrom Wonsan south to Mt Kumgang, which has been under way ever since1989 (hardly “Chollima speed”). For now this is presumably linked to tourism,but in the fullness of time it could connect to South Korea’s railway network atKangnung.

The skies are not open yet Despite optimistic predictions from international aviation bodies that NorthKorea would open its air space to civil air traffic (including to and from Seoul,and South Korean carriers) in December, as of mid-January no such change hadyet been implemented. The inter-Korean thaw may, however, permit aresumption of the liaison between air traffic controllers north and south of the

48 North Korea


Demilitarised Zone, which is a precondition of any such opening. Talks to thisend had begun in Bangkok last September, but the submarine incident frozethis along with everything else.

Transport: crashingplanes—

If and when foreign planes do start to overfly North Korea, one apparenthazard will be local aircraft falling out of the sky. Kim Young-sam claimed inhis new year press conference that three MiGs had crashed in the previousmonth due to fuel shortages (including not filling the tanks for fear the pilotsmay defect). Subsequent clarification from other sections of the Seoul govern-ment suggested that the crashes might have had other causes as well (mechani-cal failure, for example), while extending the analysis of the north’s energyshortage to its impact on ground transport as well.

—and innovative fuels The basic problem is that Pyongyang’s oil imports have fallen from a typical2.65m tons in 1989, in the good old days when it was piped in at “friendship”prices from both the former Soviet Union and China, to 1.36m tons in 1993and 1.1m tons in 1995. The results are apparent everywhere. Many factories areeffectively idle, operating at less than 30% of capacity. Flight training has beencut back, and is now done as much as possible on the ground using simulators,which may be another reason why planes crash. On the roads, vehicle oper-ation—never exactly brisk in North Korea, where counting the handful ofother cars seen even on a long journey is a favourite pastime of foreignvisitors—is said to have been reduced by 40%. KBS TV in Seoul, which airedthese figures on January 8, added that “Charcoal-powered automobiles haveappeared again in North Korea, and methane gas generated from excretedwaste material is being used as fuel for buses and trucks”.

Russia faces both ways An investment promotion and protection agreement was signed with Russia inMoscow on November 28. No details were given. Rather than flying in a min-ister specially from Pyongyang; the signatory for North Korea was its long-serving ambassador in Moscow, Son Song-pil, which adds to the impressionthat this is a matter of form rather than substance. Despite the talk of resumingwide-ranging cooperation back in April when the Russian deputy premier,Vitaliy Ignatenko, visited Pyongyang, nothing seems to have materialised. Andsince then, Moscow has incurred the wrath of the north by sending its latestmodel tanks and armoured personnel carriers to South Korea in payment ofdebts. Evidently unfazed by Pyongyang’s threats in September to “make it pay”for this “irresponsible and reckless act, fanning war”, Russia gave Seoul aChristmas present of a further consignment in late December.

North Korea 49


Quarterly indicators and trade data

South Korea: quarterly indicators of economic activity

1994 1995 1996

3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

Industrial production Monthly av

General, seasonally adj 1990=100 131 147 144 149 152 153 159 159 160 n/a

Construction

Permits issueda ’000 sq metres 10,241 12,111 8,511 12,351 7,616 10,630 7,885 10,287 9,721 n/a

Employment

Employed ’000 20,181 20,019 19,593 20,582 20,722 20,618 19,971 20,932 21,093 n/a

Unemployed “ 448 417 487 405 399 386 455 413 391 n/a

Wages & prices

Monthly earnings 1990=100 181.6 190.6 171.4 181.5 201.5 206.5 198.2 200.5 219.6b n/a

Consumer prices: “ 130.9 130.8 132.7 134.9 136.1 136.6 139.2 141.8 143.2 143.4c

change year on year % 6.9 5.8 3.6 4.8 4.0 4.4 4.9 5.1 5.2 n/a

Producer prices 1990=100 112.1 113.0 115.1 117.2 117.8 117.1 118.7 119. 120.5 121.1c

Retail sales: value “ 123 139 137 137 133 151 151 150 145 n/a

Money End-Qtr

M1, seasonally adj: W bn 29,228 30,047 31,746 32,338 31,784 35,993 35,220 35,366 35,318d n/a

change year on year % –5.8 12.6 17.5 11.5 8.7 19.8 10.9 9.4 n/a n/a

Foreign trade Qtrly totals

Exports fob $ m 23,513 28,787 26,192 32,050 32,072 34,744 31,585 33,289 29,740 11,892c

Imports cif “ 25,716 29,270 30,523 34,742 34,441 35,414 35,665 37,061 37,097 13,463c

Exchange holdings End-Qtr

Golde $ m 94.1 93.8 92.6 94.8 94.3 94.5 98.2 95.7 99.2 98.0f

Foreign exchange:

Bank of Korea “ 21,780 25,032 25,879 27,614 32,072 31,928 32,634 35,748 32,038 32,318f

other banks ” 18,912 20,938 21,918 24,649 25,831 27,806 29,537 30,080 30,945d n/a

Exchange rate

Market rate W:$ 798.9 788.7 771.5 758.1 768.4 774.7 782.7 810.6 821.2 828.7f

Note. Annual figures of most of the series shown above will be found in the Country Profile.a 32 cities and 90 towns. b Average for July-August. c October only. d End-August. e End-quarter holdings at quarter’s average of London dailyprice less 25%. f End-November.



South Korea: foreign trade($ m)

Total Japan USA China Germany

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

Imports cif 1994 1995 1994 1995 1994 1995 1994 1995 1994 1995

Food 4,763 5,928 97 114 1,190 2,472 916 424 18 82

of which:

cereals & preparations 1,552 1,949 1 2 471 1,564 518 32 1 58

Hides & skins, raw 1,092 1,189 12 9 722 830 0 0 1 4

Rubber, crude 552 729 83 97 22 33 7 5 10 10

Wood, unmanufactured 1,570 1,694 2 2 300 300 34 82 2 2

Pulp 1,044 1,858 5 11 534 837 3 9 1 3

Textile fibres & waste 1,278 1,551 103 117 380 483 152 125 13 13

Metal ores & scrap 2,586 3,238 131 133 656 882 52 63 110 65

Coal 1,777 2,081 12 12 169 218 278 353 1 1

Petroleum & products 12,076 14,760 366 623 617 558 468 507 5 24

Chemicals 9,780 13,156 3,221 4,244 2,312 3,116 415 616 797 939

Textile yarn, cloth & mnfrs 3,338 3,959 581 627 152 198 1,135 1,345 53 64

Iron & steel 4,486 6,539 1,754 2,398 104 345 297 1,243 166 173

Non-ferrous metals 3,066 4,617 457 630 242 408 159 234 102 118

Metal manufactures 1,374 1,555 490 539 286 359 54 95 148 178

Machinery & transport eqpt 37,408 49,436 14,343 17,932 10,372 14,706 445 782 3,050 4,086

of which:

power-generating eqpt 2,768 3,891 823 931 988 1,515 58 83 394 471

office machinery 2,615 3,570 787 1,015 923 1,271 49 108 19 28

telecommunications eqpt 2,221 3,057 786 951 952 1,122 56 249 28 44

transistors, valves etc 6,983 9,838 2,771 3,740 2,339 3,185 33 58 142 211

road vehicles 1,467 1,910 747 778 299 449 6 14 182 362

aircraft 2,207 2,479 1 1 1,503 2,185 0 0 1 1

ships 1,467 1,556 191 233 3 8 16 1 25 3

Scientific instruments etc 4,774 6,370 2,222 3,179 1,291 1,601 41 73 383 447

Total incl others 102,343 135,113 25,388 32,604 21,599 30,419 5,463 7,401 5,159 6,584

Saudi Arabia Australia Indonesia Canada Malaysia

Imports from other Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

suppliers 1994 1995 1994 1995 1994 1995 1994 1995 1994 1995

Total 3,816 5,432 3,781 4,897 2,843 3,325 2,004 2,603 1,876 2,515

continued

Quarterly indicators and trade data 51


Total USA Japan Hong Kong China

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

Exports fob 1994 1995 1994 1995 1994 1995 1994 1995 1994 1995

Food 2,295 2,656 154 155 1,539 1,680 109 157 31 90

of which:

fish & products 1,400 1,551 86 88 1,084 1,143 13 15 18 63

Crude materials, inedible 1,430 1,790 138 154 329 322 117 183 348 526

of which:

textile fibres & waste 778 1,061 96 119 5 9 67 106 320 457

Mineral fuels 1,746 2,472 138 115 480 930 165 280 289 480

Chemicals 6,339 8,944 364 430 778 910 751 1,141 1,181 2,181

Rubber manufactures 1,386 1,513 253 256 58 63 34 44 13 16

Paper & manufactures 829 1,170 71 82 30 49 319 388 190 268

Textile yarn, cloth & mnfrs 10,693 12,313 630 653 574 629 2,683 2,845 910 1,359

Non-metallic mineral mnfrs 651 676 67 59 258 251 36 36 10 23

Iron & steel 4,680 5,411 589 599 1,410 1,792 265 373 738 576

Metal manufactures 2,524 3,721 586 626 451 517 67 68 163 234

Machinery & transport eqpt 47,054 65,646 12,792 16,891 3,611 5,600 2,367 3,327 1,432 2,064

of which:

power-generating eqpt 1,002 1,212 477 473 99 121 11 30 32 36

office machinery 3,607 4,967 1,620 2,016 180 350 77 132 62 84

radio & television receivers 2,790 2,810 449 328 295 329 66 58 60 66

sound & video recorders 1,757 1,824 627 555 77 144 79 218 68 97

other telecommunications eqpt 3,687 4,244 816 908 356 380 241 250 81 190

transistors, valves etc 11,848 19,373 4,197 6,596 1,693 2,956 1,090 1,667 135 151

road vehicles 6,632 10,122 2,096 2,240 110 153 177 138 157 229

ships 4,945 5,533 26 259 25 21 156 273 60 2

Clothing 5,653 4,957 2,273 1,825 2,025 1,849 37 57 51 61

Footwear 1,780 1,506 647 474 362 370 80 63 53 92

Scientific instruments etc 1,370 1,708 450 476 194 268 92 101 35 58

Total incl others 96,008 125,056 20,703 24,344 13,523 17,049 8,015 10,682 6,203 9,144

Singapore Germany Taiwan Indonesia Malaysia

Exports to other Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

main markets 1994 1995 1994 1995 1994 1995 1994 1995 1994 1995

Total 4,152 6,689 4,313 5,965 2,732 3,882 2,540 2,958 1,652 2,951

North Korea: foreign tradea

($ m)

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Jun1991 1992 1993 1994 1995 1996

Merchandise exports 1,010 1,020 1,020 840 590 260

Merchandise imports 1,710 1,640 1,620 1,270 1,470 570

Trade balance –700 –620 –600 –430 –880 –310

a Excluding inter-Korean trade.



North Korea: main trading partners($ m)

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec 1988 1989 1990 1991a 1992a 1993a

CIS/Soviet UnionExports 887.3 890.7 1,047.4 563.0c 65.2c 100.0bc

Imports 1,921.7 1,641.1 1,667.9 858.0c 227.1c 500.0bc

ChinaExports 212.3 166.7 141.5 85.0 155.5 300.0 Imports 379.7 398.5 403.4 524.0 541.1 600.0

JapanExports 293.3 267.5 271.2 284.0 257.4 230.0 Imports 262.7 215.8 193.7 223.0 222.9 220.0

a Data from a different source, may not be consistent with earlier years. b Russia only. c Estimate.

North Korea: direction of tradea

(%)

Jan-Dec Jan-DecExports 1995 Imports 1995

Japan 27.9 China 32.6South Korea 20.8 Japan 17.2China 5.2 Russia 4.7Germany 4.0 South Korea 4.3Russia 1.2 Germany 2.9

a Source: Institute for International Economics, Washington DC, The North Korean Economy.

Quarterly indicators and trade data 53


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