South and North Korea have found a breakthrough in their relations, which have been deadlocked for the last two years. On January 9, the two sides held high-level talks and agreed to discuss North Korea’s participation in the PyeongChang Winter Olympics to be held in South Korea next month and to hold their military talks. Now that the two Koreas have found rare momentum for normalizing bilateral ties on the occasion of the Winter Olympics, attention turns to its potential impact on the economy. Here is Dr. Cho Bong-hyun at the Industrial Bank of Korea Economic Research Institute to discuss whether the warm diplomatic breeze in the previously icy inter-Korean relations may also blow into the South Korean economy.
A thawing mood in inter-Korean relations is expected to influence the South Korean economy positively. An improvement in cross-border ties has eased geopolitical risks in the region to prompt foreign investors to see South Korea as another investment destination. The local stock market has already been enjoying the positive effect. According to the Korea Exchange, foreign investors bought a net 1.78 trillion won worth of shares as of January 9, the highest level since 2005. That means they purchased stocks worth 330 billion won per day on average. No doubt, the eased geopolitical risks are leading to active investment by foreigners from the beginning of the year. The upbeat atmosphere will have a positive influence not only on the stock market but on South Korea’s credit rating as well to benefit the nation’s economic growth.
The good news about inter-Korean relations was immediately reflected in the local bourse. Thanks to a thaw in South-North relations, foreign investors have gone on a buying streak. Foreigners net purchased shares for seven consecutive trading days dating to January 9, when the inter-Korean high-level talks were held. South Korea’s credit default swap or CDS premium, which indicates a nation’s default risk, has reached its lowest point in 10 months. In other words, the nation’s credit risk has been reduced, in line with the decreasing geopolitical tension, which is a major factor known as the “Korea Discount.” An improvement in South-North relations is also raising hopes for the reopening of the now-closed inter-Korean industrial complex in Gaeseong.
It is South Korean manufacturers at the Gaeseong industrial park that most welcome the latest inter-Korean talks. The 123 South Korean firms that had done business at the joint factory park in North Korea are in a very difficult situation because the industrial complex was shut down two years ago. The number of their partners or subcontractors in South Korea amounts to 5,000. The closure of the industrial park has also taken a toll on them, with some even going out of business. The companies hope that better inter-Korean relations will lead to the reopening of the industrial complex as quickly as possible so they can increase production again.
In February 2016, more than 120 South Korean firms had to withdraw from the Gaeseong industrial park, leaving everything behind, due to the Seoul government’s abrupt decision to close the complex. They are estimated to have suffered a loss of 1.5 trillion won so far. Some have relocated their factories overseas due to rising labor costs, while some have given up on their business altogether. But 93 percent of the South Korean manufacturers that once operated factories at the Gaeseong industrial complex are hoping that they will re-enter the park, if conditions are met. South Korean President Moon Jae-in hinted at the possibility of resuming operations at the inter-Korean joint industrial park during his New Year’s speech on January 10, and the companies are pinning their hopes on that possibility with caution. In addition to the industrial park business, it is possible that other stalled inter-Korean economic cooperation projects may pick up steam again.
An improvement in South-North relations will be seen in the sports sphere first. Over time, the two sides may resume joint economic projects as well, including the stalled Mt. Geumgang tour program. Some 300 companies that had engaged in inter-Korean economic projects will revitalize their business. It will not happen overnight, though. There should be some progress in the North Korean nuclear issue, and North Korea and the U.S. should seek dialogue. When the situation improves gradually, inter-Korean economic cooperation programs will gain traction again.
Economic cooperation between South and North Korea started in 1988, following the July 7 declaration that year. In 1998, the two Koreas launched the Mt. Geumgang tour program. Bilateral economic cooperation developed in earnest after the second inter-Korean summit in October 2007. However, the Mt. Geumgang tour business came to a halt in July 2008 after a South Korean tourist named Park Wang-ja was shot dead at the mountain resort in North Korea. In 2016, the Gaeseong industrial complex stopped operation, following North Korea’s fourth nuclear test. Inter-Korean economic cooperation has since been suspended. Fortunately, Seoul and Pyongyang have managed to restore their dialogue channel lately, holding their high-level talks. The recent positive development is expected to jumpstart bilateral economic cooperation as well. The resumption of inter-Korean economic cooperation may possibly realize the Moon government’s vision to build an inter-Korean economic community, known as “a new economic map for the Korean Peninsula.”
One of the Moon government’s key North Korea policies is a new economic map for the Korean Peninsula. Under this grand vision, economic cooperation between South and North Korea would expand to northern regions, such as China, Russia and Mongolia, so not only the two Koreas but the whole of Northeast Asia can achieve economic growth. During the recent inter-Korean talks, South Korean delegates actively explained this vision to their North Korean counterparts. In the economic map consisting of three axes, the two sides would build traffic networks along the eastern and western coastal areas on the Korean Peninsula as well as the Demilitarized Zone separating the two Koreas. The eastern belt covers Mt. Geumgang, Wonsan, Chongjin and Rason in North Korea and Busan in South Korea, while the western belt stretches from the Gaeseong industrial park, Pyongyang and Nampo to Sinuiju and China. If the nuclear crisis is resolved, and if North Korea is committed to economic cooperation with South Korea, both the South and the North will hopefully be able to develop their economies, based on the three envisioned economic belts. Furthermore, the vision seeks ways to enable Northeast Asia to prosper together.
The purpose of the new vision is to secure new growth engines by establishing three economic belts on the Korean Peninsula and to link them with northern economies. In brief, South and North Korea will form one, shared market by connecting the divided peninsula through the economy. The unified Korean economy means the economic integration of the two Koreas, and it would then expand to reach the Eurasian economy. But there is a lot of work to do in order to realize the ambitious plan.
The economic plan will not be executed simply because South and North Korea have agreed on that. It is necessary to enlist international understanding and cooperation. Under the U.N. Security Council’s sanctions on North Korea, it is difficult even to take the first step toward the new vision. Under the strong, comprehensive U.N. sanctions, there are only limited opportunities for South and North Korea to pursue their cooperation programs. Therefore, it is important for North Korea to show a change in its attitude toward the nuclear issue so the international community may consider easing sanctions on the North. North Korea should come up with some forward-looking measures that will win trust from the international community.
Inter-Korean economic cooperation has much to do with international sanctions on North Korea, so it is not a task that can be solved quickly. Most of all, it is hard to expect a positive change, unless North Korea takes specific measures aimed at denuclearization. Now, it’s more important to focus on the future. If North Korea actively cooperates for South Korea’s successful hosting of the PyeongChang Winter Games and makes efforts to restore trust, the rare inter-Korean dialogue momentum could lead to a new era of South-North economic cooperation.