[Cankor] Report #258

[cankor at cankor.ca]

Dear readers,

The piece of fiction in the 6th anniversary edition of the CanKor Report 
was a great hit, it seems, with several readers calling it "brilliant".

"Just brilliant! You have hit the nail on the head!" David Morton, 
former United Nations Coordinator in Pyongyang, Country Director of the 
UN World Food Programme.

"Brilliant piece of hermeneutics. Bravo. Wholly believable." Aidan 
Foster-Carter, Honorary Senior Research Fellow, Sociology & Modern 
Korea, Leeds University.

"That story about Pak Kim Li is brilliant." Ruediger Frank, Professor of 
East Asian Political Economy, University of Vienna.

"Your piece of not so fictional fiction is brilliant!" Nigel Cowie, 
General Manager of Daedong Credit Bank, Pyongyang.

"I do think that you have really captured the inner life of that 
fictional 'patriot' very well. It is really a brilliant piece." Charles 
Burton, Associate Professor of Political Science, Brock University, Canada.

Since it is still time for extended summer reading, we have a 
longer-than-usual issue this week. But before we get to that, we want to 
alert readers who have just come back from a long vacation away from 
their e-mail (do such people still exist?) that the good ship CanKor has 
been set adrift by its former benefactor and now relies completely on 
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Our CANKOR FUNDRAISING CAMPAIGN target is $30,000. We are moved by the 
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*************************************************
CANADA-KOREA ELECTRONIC INFORMATION SERVICE

CanKor # 258

Friday, 11 August 2006
*************************************************

The University of North Korean Studies at Kyungnam University and the 
Export-Import Bank of Korea co-organized the 2nd international symposium 
on "North Korean Development and International Cooperation," in Seoul, 
Republic of Korea, on 6-7 July 2006. This issue of CanKor presents 
abridged versions of two papers presented at the symposium by Ruediger 
Frank, Professor, Korea University and University of Vienna, and by 
Erich Weingartner, Editor of CanKor. Abstracts of other papers are 
appended. Full texts may be requested from the Center for International 
Cooperation for North Korean Development (ICNK), University of North 
Korean Studies at http://nk.ac.kr/eng/default.asp.

Frank's paper, "The Impact of Economic Sanctions on North Korea's 
Transformation and Alternative Approaches," examines the relative merits 
of sanctions vs. development assistance in promoting transformation in 
the DPRK. Weingartner's paper, "Equipping Potential Reformers -- 
Knowledge Sharing and Capacity Building as Interim Steps toward DPR 
Korean Development," argues that DPRK development must ultimately be 
implemented by North Koreans themselves, rather than imposed from the 
outside. What outsiders can do to further the process of reform is to 
provide education and knowledge transfer.

Abstracts of other papers presented at the symposium deal with the 
prerequisites for the DPRK's membership in the Asian Development Bank 
and the World Bank, lessons of Chinese special economic zones for the 
DPRK, the Kaesong Industrial Complex, including issues affecting the 
Korea-US Free Trade Agreement, and the role of foreign investment and 
financial markets.
*************************************************

Contents:
FOCUS: DPRK Development and International Cooperation

1.   ECONOMIC SANCTIONS VERSUS DEVELOPMENT ASSISTANCE
     by Ruediger Frank, written for ICNK symposium

2.   EQUIPPING POTENTIAL REFORMERS
     by Erich Weingartner, written for ICNK symposium

3.   ENTERING INTO THE ASIAN COMMUNITY
     by Yuzo Akatsuka and Tsuneaki Yoshida, written for ICNK symposium

4.   ISSUES AND CHALLENGES OF WORLD BANK ASSISTANCE
     by Daniel Morrow, written for ICNK symposium

5.   LESSONS FROM SPECIAL ECONOMIC ZONES IN CHINA
     by Hongyi Lai, written for ICNK symposium

6.   LEAPFROGGING STYLE OF ECONOMIC REFORM
     by Keun Lee, written for ICNK symposium

7.   FINANCIAL MARKETS AND MID- TO LONG-TERM PERSPECTIVES
     by Jong Ryel Bae, written for ICNK symposium

8.   THE KAESONG INDUSTRIAL COMPLEX: PENDING ISSUES AND TASKS
     by Eul-chul Lim, written for ICNK symposium

9.   KAESONG AND THE KOREA-US FREE TRADE AGREEMENT
     by Wook Yoo, written for ICNK symposium
*************************************************

FOCUS: DPRK Development and International Cooperation

*************************************************

1.   ECONOMIC SANCTIONS VERSUS DEVELOPMENT ASSISTANCE
     by Ruediger Frank, Seoul, 6 July 2006

GOALS MAKE THE DIFFERENCE
A number of basic goals of both approaches -- sanctions or assistance -- 
are the same: To improve the human rights situation in North Korea, to 
ensure peace on the peninsula, to prevent the proliferation of nuclear 
material and weapons, to prepare for a smooth unification process in the 
future. In addition, the United States are concerned with the global 
"War on Terrorism", the emergence of a new economic and security order 
in East Asia, and its relationship with key partners such as China, 
Japan and South Korea.

 From Seoul's perspective, the fact that the North is part of Korea 
plays an important role, both because of national feelings and 
interests, but also because of the obvious fact that a military conflict 
or any other disastrous situation would have direct impacts on the 
South. Among these many objectives, there is a natural order of 
priorities that determines the actual approach and explains the 
sometimes differing policies of both sides, despite many similarities in 
their foundations.

To simplify, we could argue that South Korea is more concerned with a 
complex set of interrelated micro-issues and operates from a national, 
at best regional perspective, whereas the United States look at a 
limited number of larger "hard" issues from a regional and global angle, 
without being significantly influenced by "soft" considerations. Other 
nations find themselves on either side, or somewhere in between. Some 
have so far decided not to make a clear choice at all.

Accordingly, answers to the question "surgery or medicine?" vary 
strongly. In fact, this is why even well-intentioned discussion is 
unlikely to be able to bridge the gap between the proponents of 
engagement and the supporters of a hard-line approach. The difference is 
mainly in the goals, not in the process.

SANCTIONS AND ANTI-SANCTIONS: A DIALECTIC QUESTION
Developmental assistance is a form of anti-sanction. A sanction denies 
North Korea something that the country would otherwise be able to get; 
assistance provides North Korea with something it would otherwise not 
get. In principle, development assistance and sanctions are similar 
because they both artificially change the operating environment for 
North Korea.

The international community is, naturally, most of all concerned with 
North Korea's behavior in the nuclear question. The principal similarity 
between sanctions and assistance leads to the important conclusion that 
if sanctions indeed have an influence on Pyongyang, assistance also has 
(and vice versa, of course). If we assume that North Korea is faced with 
basically two behavioral options in the nuclear issue, then assistance 
would encourage ending the program, while sanctions try to discourage a 
continuation. This makes both -- sanctions and assistance -- two equally 
valid policies from a theoretical point of view. The key question is, 
then, which of both is the most efficient in practice.

SANCTIONS
Economic sanctions against North Korea are not new and include a great 
variety of options. Among the more recent examples are the Japanese 
regulations on pollution insurance for ships calling at Japanese ports, 
which effectively constitute a sanction against North Korean vessels 
(100 of which had made more than 1200 calls at Japanese ports in 
2002),[1] the Japanese restrictions on ferry services and on cash 
remittances by pro-North Korean residents to Pyeongyang, the U.S. ban on 
the import of double-use technology into the Gaeseong Zone. The most 
prominent among the recent sanctions was the threat by the United States 
to restrict business with U.S. lenders if a bank (such as Banco Delta 
Asia of Macao) is found guilty of being involved in North Korea's 
financial transactions, which are per se regarded as potentially 
illegal. The reasons for these sanctions and their justification are not 
an issue here; what we shall look at are the results.

As far as we can tell, the Japanese sanctions at the beginning really 
hit a nerve because transfers from pro-North Korean residents in Japan 
constituted a major source of hard currency revenue. Meanwhile, other 
ways have been found. But while North Korea's overall trade grows, trade 
with Japan last year declined by 20 percent. This will not hurt the 
Japanese economy; however, it certainly limits the Japanese access to 
information about North Korea as well as Japan's leverage over a country 
that directly and indirectly determines Japan's future. In terms of 
bargaining power, Japan shot itself in the foot.

In October 2005, the manager of a South Korean enterprise in Kaesong 
complained in a private conversation at this site that to make a phone 
call to Seoul, he had to have it re-routed via China at the final cost 
of US$3.60 per minute because the United States blocked the installation 
of a direct connection due to concerns over dual-use technologies. The 
consequences were fewer calls, no Internet connection, and more 
isolation. One month later, the United States finally agreed to Korea 
Telecom's construction of a direct phone connection between the Kaesong 
zone and South Korea. The sanctions did not affect the North Koreans; 
they hit the South Koreans and made it easier for the North to control 
the flow of information in and out of the zone. Eventually, they had to 
be lifted anyway. All that's left is a bitter taste in the mouth of 
South Korean investors who wonder who is the biggest obstacle for market 
economy exchanges with the Communist North.

The recent ban on financial transactions with North Korea has certainly 
hurt, as American officials stated more or less surprised by their own 
success. However, this sanction, too, might turn out to be both 
ineffective in the long run and a double-edged sword. North Korea has in 
the past shown that it will be able to bypass a sanction; it is not a 
matter of if, but when and how it will establish new financial networks. 
This time, however, they might be less transparent and more difficult to 
intercept. There is a good reason why in most Western metropolises, the 
police finally accepted the existence of a drug scene, usually in parks 
or around the Main Station. You can batter it, but it will inevitably 
reemerge somewhere else. Those who opened a bottle of Champaign over the 
unexpected success of the sanctions on North Korea's financial 
transactions might one day realize that they have wasted one of the few 
available "incentives" more or less aimlessly. Or, as Leon Sigal argues, 
"leverage without negotiations makes no sense."[2] Will the limited gain 
in the short run outweigh the big loss in the long run?

As many foreign businesspeople complained,[3] the sanctions were 
hindering their legal businesses. But North Korea needs hard currency. 
If sanctions limit the options for earning hard currency by legal means, 
this will change the cost-benefit balance of illegal transactions. In 
other words, it will become more feasible for North Korea to engage in 
trade with narcotics, weapons, and counterfeit money. Let us not forget 
that the fight against this kind of activities usually is the official 
justification of sanctions.

However, one does not have to be a Nobel laureate to understand that 
they will in all likeliness have the opposite effect. North Korea is a 
system based on ideology and typically claims moral superiority. The 
leaders in such a system do care about reputation. They do not conduct 
illegal activities simply because they like being called evil, but 
because they see few other options. A hungry person will continue to 
steal food no matter how often he is punished; giving him a job might be 
the better solution.

ASSISTANCE
There is also a quite extensive experience with assistance. This 
experience is not always positive either. As a matter of fact, 
successful assistance makes itself obsolete. Although assistance is 
rarely given without concrete intentions, it usually involves one-way 
transfers (unilateral costs) and often only weak control over its 
utilization. This is illustrated by one example that I have discussed 
with American colleagues last year:[4] even if we make sure that a 
particular kilogram of food aid reaches "deserving" people, this food 
can -- and will -- serve as a mere substitute for food from other 
sources that can now be distributed to anybody, including 
"non-deserving" groups, a term that itself is highly controversial (Is 
it ok if an 18 year old conscript starves to death?).

But all emotions and ethics aside, what have we got from almost a decade 
of assistance to North Korea? As it seems, the food situation is still 
tense, but there was no new famine. From a humanitarian point of view, 
that is a success that many aid workers in Africa have been awaiting for 
decades. Domestic destabilization -- something that always comes at the 
expense of the weak -- could be prevented. As Hazel Smith emphasizes,[5] 
we now do have a substantial amount of empirical and qualitative 
knowledge about North Korea, although we are of course not satisfied. 
She notes that there has been "an explosion of . . . usable quantitative 
and qualitative data" on North Korea since what I call the "second wave" 
of assistance around the mid-1990s.[6] The WFP alone was able to visit 
about 160 counties out of a total of 203 regularly. A number of 400 to 
500 visits per month looks quite impressive indeed if contrasted with 
the remarks by the former head of the CIA in South Korea and later 
Ambassador to Seoul Donald Gregg who repeatedly described North Korea as 
the "largest intelligence failure in the history of American 
espionage."[7] He did so mainly because of the CIA's inability to 
recruit North Koreans, i.e., to have sources on the ground.

Maybe it is a mere twist of faith, but the adjustments/changes/reforms/ 
transformation -- however we would decide to call them -- coincide with 
the beginning of the international assistance. The invisible impact of 
individual encounters with the outside world on North Koreans, again 
mostly in the context of assistance, is hard to measure but maybe of 
higher and deeper long-term significance than any of the visible 
changes. The costs of this success story are ridiculously low if 
compared to other options, somewhere in the range of hundreds of 
millions of U.S. dollars -- and let's not forget that the aid shipments 
have helped to preserve jobs and demand levels in the donor's economies, 
which further reduces the net costs. Hazel Smith (op. cit.) points at 
the fact that 90 percent of the food aid to North Korea consisted of 
grain surplus from developed countries that is of little alternative 
utility.

Assistance is a tricky issue, but is it risky? The experience of the 
assistance of East Germany and other socialist countries to North Korea 
in the 1950s and 1960s clearly demonstrates that many mistakes can be 
made that will leave the donor unhappy. However, this assistance has not 
harmed anybody. In fact, the friendly attitude that the North Koreans 
usually show vis-a-vis Europeans will of course be mainly motivated by 
strategic considerations, but to a certain degree also by the positive 
experience of post-Korean War reconstruction.

CONCLUSION: SANCTIONS OR ASSISTANCE?
The concrete experience of the last years suggests that sanctions are in 
most respects inferior to assistance. Sanctions are a non-friendly, 
aggressive policy and should therefore, if at all, be applied with care 
and only as part of a well-defined strategy. They limit the target's 
options and invite a reaction. In the short run, sanctions can be very 
effective and can therefore be used successfully to support concrete 
measures in the fields of diplomacy or military intervention. In the 
long run, however, they loose their impact and become a liability. The 
longer a sanction lasts, the smaller its effect, and the bigger the 
chance for a successful bypass. In the end, the new situation might be 
even less satisfactory than before the sanction.

If the pressure through economic, political or military means is 
increased to a level that is high enough to trigger a qualitative change 
such as a regime collapse, we might end up with a successful surgery, 
but a dead patient. Both sanctions and assistance naturally involve a 
great deal of uncertainty and risk. But while we can still change the 
engagement therapy after the failure of one type of medicine, the 
failure of a hard-line approach will leave us with irreversible damage. 
Based on the same logic, many societies reject the death sentence; it 
cannot be reversed and limits our options. At least from a theoretical 
point of view, the choice should be clear.

NOTES:
[1] Mark Manyin, "Japan-North Korea Relations: Selected Issues," CRS 
Report for Congress Congressional Research Service, Washington, DC: The 
Library of Congress (2003).
[2] Leon Sigal, "An Instinct for the Capillaries," a speech delivered at 
the Seoul-Washington Forum in Washington, May 1, 2006, see www.nautilus.org.
[3] See, for example, Nigel Cowie, "US Financial Allegations?What They 
Mean," keynote address from an information meeting hosted by the 
European Business Association, Pyongyang (2006), online at 
www.eba-pyongyang.org.
[4] See "Food Aid to North Korea or How to Ride a Trojan Horse to 
Death," in: Nautilus Institute Policy Forum Online 05-75 A, 13.09.2005, 
www.nautilus.org/fora/security/0575Frank.html; Discussion by Haggard & 
Noland and Response by Frank at 
www.nautilus.org/fora/security/0575ADiscussion.html.
[5] Hazel Smith, "Intelligence Failure and Famine in North Korea," in 
Jane's Intelligence Review, April 2004, pp. 40-43, 51.
[6] The first wave would have been the 1950s post-War reconstruction by 
the Socialist Camp, see Frank 1996.
[7] R. Nolan, "Global Q&A: Engaging North Korea?A Conversation with Amb. 
Donald Gregg," in Foreign Policy Association Resource Library (2002), 
available at www.fpa.org.
*************************************************

2.   EQUIPPING POTENTIAL REFORMERS
     by Erich Weingartner, Seoul, 6 July 2006

What do we mean when we speak about North Korean development? Why are we 
trying to formulate prescriptions for the economic development of the 
DPRK? Who gets to define the desired results? How we arrive at answers 
to these questions may be at least as important -- if not more important 
-- than the answers themselves.

Anyone who has raised funds for development projects will be familiar 
with the acronym RBM, which stands for "results-based management." The 
idea of RBM is to define the results you wish to achieve, then work 
backward through a list of performance indicators, to the activities you 
need to undertake to achieve these predefined results. The part about 
RBM that bothers me most is the assumption that those on the outside 
actually know best what course of action those on the inside should follow.

We cannot make appropriate economic decisions without understanding the 
human dimension. When we outsiders discuss the economic future of the 
DPRK, we have to take into account at least two human dimensions: ours 
and theirs.

What are our own assumptions? What do WE believe should happen in North 
Korea? The international community is actually in quite broad agreement 
about the direction in which North Korea should move. For example:
-    ending isolation and opening up
-    respecting human rights
-    building confidence (trust) and making peace
-    increasing inter-Korean cooperation
-    taking concrete steps toward reunification
-    implementing economic reforms.

Why are we so concerned to bring about economic (not to speak of 
political) reforms in the DPRK? The most common answer is that political 
and economic reforms are necessary for the survival and wellbeing of the 
people living there.

After living in North Korea for almost three years, I am also convinced 
that the DPRK needs some very basic and thorough reforms. In fact, I get 
very annoyed that North Koreans don't see it the same way. When I ask 
North Korean colleagues why they are so allergic to the term "reform", 
they tell me that it is a treasonous concept, because it questions the 
entire foundation of their political system.

When I tell them that it is not political reform I am talking about, but 
economic reform, and point to their own July 2002 reforms, they respond 
that these were not reforms, but economic adjustment measures. The very 
enthusiasm with which we engage in this quest for reform arouses their 
suspicion.

A North Korean colleague once asked me, "You don't expect us to believe, 
that our enemies try to reform us because of their great concern for our 
wellbeing, do you?"

I answered, "Not all of us in the world outside are your enemies. Even 
your friends, the Chinese, are encouraging you to implement economic 
reforms."

But political, economic or strategic alliances don't really translate 
into feelings of friendship in the DPRK. My North Korean colleagues 
never had good things to say about China, and they resented any 
suggestion that they should follow the Chinese model.

"We don't need Chinese-style reforms," said my colleague. "The Chinese 
have always felt superior to us. But we know Chinese intentions from 
thousands of years of history."

"What about your South Korean compatriots?" I pressed on. This made my 
colleague quite angry.

"How can we trust the intentions of South Koreans?" he asked. "Their 
prosperity is built up on the bribes they received from the Americans 
who needed a flunky at the front line of the Cold War. If we adopt their 
reforms, they would feel vindicated for having sold their Korean soul."

On the other hand, he told me they are quite willing -- even eager -- to 
trade with capitalist countries and to learn how to do business with the 
world outside. But at the same time, they must be ever vigilant, because 
the profit motive is a disease that makes a nation vulnerable to 
exploitation and rot from within.

Whatever we might think of my colleague's opinions, he does raise some 
rather fundamental issues about the international community's 
intentions, and specifically about the implied ideological content of 
our own definitions of reform and development.

When we prescribe economic development for the DPRK, are we thinking of 
a process that is non-committal in terms of the political system that we 
advocate, or is there always the implication that the end result will 
have to be the construction of a liberal democracy, complete with a free 
market, full immersion into the globalized economy, and guaranteed civil 
and political rights for the individual? Are we convinced, in other 
words, that there is only one model of development, only one end to 
Korea's history? Do we believe that it is simply a matter of 
transforming THEM into US?

And if we remember the regional security context of all these concerns 
(and how could we forget after yesterday's dramatic missile launches?) 
then the urgency of our conception of North Korean reform becomes quite 
apparent. We are all very intimately involved. We cannot really have an 
impassionate, academically neutral discussion of these issues.

For the past four years (some would say for the past 60 years) we have 
relied on so-called "coercive diplomacy" to try to impose changes in the 
DPRK. But is it possible, or even desirable to impose reform from the 
outside? The imposition of reform in the DPRK can only be achieved with 
regime change, and because of reasons most of us here understand, that 
is currently not an option.

Instead, we should support reform from within. This presupposes that we 
learn to understand the mind of potential North Korean reformers. I am 
not talking here of defectors. I am talking about reform-minded 
individuals who cannot actually be identified at this point in history. 
We could, however, develop a profile of potential North Korean 
reformers, based on the large number of intimate encounters that many of 
us have had with North Koreans during the last decade. I am of the 
opinion that we need to involve more behavioral scientists, 
psychologists, sociologists and psychiatrists, in addition to the many 
political scientists and security analysts that currently populate North 
Korea research and studies.

My hunch is that potential reformers are most likely well-educated and 
intelligent members of the elite in responsible positions. They are not 
defectors or refugees. They are not what we used to call dissidents in 
Eastern Europe. In order to survive, they would have to have proven 
their loyalty to the regime. They would more likely to be of the 
post-Korean War generation, which means they would be more thoroughly 
indoctrinated, but would not share the emotional baggage of the older 
generation. Exposure to outside ideas may have led them to develop their 
own perspectives on Korea's future, while maintaining a sense of 
national pride and faith in the essential correctness of the Juche idea.

Rather than searching for a method for implementing some predefined 
results of development, we need to discover a methodology to encourage 
the process of development, to accompany the process as it develops, to 
nurture it during infancy, to share knowledge derived from experience as 
it grows, and to build its capacity so that it may reach a mature level 
of autonomy and independence.

This means using engagement not as a reward or a "carrot", but as an 
indispensable tool to encourage internal reforms. We need to help move 
the DPRK away from seeing military security as the only option and equip 
its people with tools to enable them to fashion their own self-reliant 
development options.

This can be accomplished -- and others in this symposium have already 
made the same point -- by radically increasing our efforts in the area 
of knowledge sharing and capacity building. By providing education and 
training for North Koreans, we can build a mutually agreed upon 
technical knowledge base. And when individuals are exposed to the 
experience of traveling abroad for training, they usually find that 
ideological differences diminish as barriers to human interaction. It 
opens the possibility for a mutual recognition of the other's humanity, 
the possibility of increased understanding at a psychological, even 
subliminal level.

Knowledge sharing can lead to changes in perception, which is a 
necessary prerequisite of problem solving, not only in terms of 
development, but also in terms of peace building. Ideally, we should 
cultivate a critical mass of North Koreans whose experience of the 
outside world enables them to imagine different, homegrown solutions to 
their country's dilemmas.
*************************************************

3.   ENTERING INTO THE ASIAN COMMUNITY
     by Yuzo Akatsuka and Tsuneaki Yoshida, Seoul, 6 July 2006

[This is an Abstract of a paper presented at the ICNK's 2nd 
international symposium on "North Korean Development and International 
Cooperation." Akatsuka is Professor at Toyo University. Yoshida is 
Professor at the University of Tokyo.]

In the past decades, most of the countries in Asia have successfully 
gained a growth momentum. Without any exception, these countries became 
members of Asian Community, through which they have exchanged their 
lessons and learned a lot from each other. Growth in Asia has been 
supported by intra-regional exchanges of resources. In other words, the 
Asian growth momentum has been established mainly by means of 
circulation of resources within the Asian region. It is worth 
considering whether surrounding countries should encourage North Korea 
(DPRK) to become a member of international development communities such 
as the Asian Development Bank (ADB).

However, it is not easy for the DPRK to become a member of international 
development communities, because they require so called "good 
governance" in development activities and management. Good governance 
requests the development stakeholders (government, executing agencies 
and people) to follow codes of conduct that include transparency, 
predictability, accountability, strategic focus, efficiency, 
effectiveness and participation. In addition, ADB membership of any 
country requires consensus of the existing member countries on the 
admission. In the case of DPRK, consent of the two largest shareholders, 
Japan and USA would be most critical. Currently the DPRK has yet to 
establish diplomatic relationship with these two countries, without 
which it will be extremely difficult for DPRK to obtain agreement on ADB 
membership.

There are many countries that have newly joined ADB from transitional 
economies like China, Mongolia and most of the Central Asian countries. 
The process of becoming a new ADB member and receiving its development 
assistance is very much diversified from one country to another. Certain 
founding member countries have unfortunately experienced suspension of 
Bank operations, mainly because of domestic conflicts, as in the cases 
of Afghanistan, Cambodia and Viet Nam. Bank operations resumed once 
operational obstacles had been removed.

Most important and difficult are the early stages of Bank operations for 
new member countries. In the case of China, which joined ADB in 1986, 
there were fewer difficulties, mainly because China had received 
substantial development assistance from the World Bank and Japan Bank 
for International Cooperation. More importantly, China has been well 
recognized by the international communities. In the case of Viet Nam and 
Cambodia, while both countries are the founding members since 1966, Bank 
operations were suspended for nearly two decades, even after a ceasefire 
in the Indochina Peninsula in 1985.

In this paper, a few cases of the Bank's experiences with transitional 
economies are introduced, since it may provide the readers with some 
useful insights in addressing the case of DPRK. Depending on the timing 
and process of DPRK' s joining ADB, and on the environments of 
international communities, the Bank's initial operations toward DPRK may 
be similar to one of the Bank's experiences with the transitional 
economies. It is considered advisable for the Asian Communities to 
initiate preparatory studies individually as well as jointly, learning 
from the ADB' s diversified experiences and lessons.
*************************************************

4.   ISSUES AND CHALLENGES OF WORLD BANK ASSISTANCE
     by Daniel Morrow, Seoul, 6 July 2006

[This is an Abstract of a paper presented at the ICNK's 2nd 
international symposium on "North Korean Development and International 
Cooperation." Daniel Morrow is Professor at George Washington University.]

What must happen before the DPRK can become a member of the World Bank? 
Once it becomes a member, what benefits might it be able to receive? 
Before it becomes a member, what relationship might it have with the 
World Bank?

Accepting a country as a new member cannot be decided by World Bank 
management based on technical criteria. It requires political support 
from almost all of the Bank's member governments. Membership of the DPRK 
in the World Bank would become possible only if there were a successful 
resolution of the Six-Party Talks. After that, it would likely take one 
to two years to complete the negotiations and procedures for membership.

If it becomes a member of the World Bank, the DPRK -- based on its 
relatively low per capita income -- would likely be eligible for soft 
loans and grants from the Bank's International Development Association 
(IDA). Given IDA's system of Performance Based Allocation, the amount 
allocated to the DRPK would depend on how seriously it pursues a 
transition toward a more open and market-oriented economy. In any case, 
IDA financing would be small compared to DRPK needs and to the potential 
assistance from bilateral sources. As the basis for its financial 
support, the World Bank expects each IDA-eligible country to prepare its 
own Poverty Reduction Strategy (PRS), which is an overall economic 
development strategy with explicit targets for poverty reduction. If the 
DPRK could mobilize its capacities to do prepare a PRS, this would 
provide an opportunity both to improve its economic policy making and to 
better manage its relationship with the World Bank and other aid 
providers. Among the instruments for World Bank financial support to the 
DRPK, investment lending and technical assistance are likely to be more 
important than policy-based lending. Accepting the Bank's norms for 
investment lending would require important changes in the DRPK's 
practices of non-transparency.

The World Bank's policy advice and its potential role in coordinating 
and catalyzing other donor assistance would be more important than its 
financial support. The key to a successful economic transition is 
putting in place the right policies and institutions, not getting the 
largest possible amount of aid money. Advice and technical assistance 
from the World Bank could help the DPRK design better policies and 
institutions.

If there would be sufficient political support for DPRK membership in 
the World Bank, a trust fund could be established to begin funding 
policy dialogue, strategy development, project preparation, and training 
-- even before the procedures for formal membership could be completed. 
The prospects for quickly launching a constructive relationship between 
the DPRK and the World Bank following a successful conclusion to the 
Six-Party Talks would be greatly enhanced by advanced preparation on 
both sides.
*************************************************

5.   LESSONS FROM SPECIAL ECONOMIC ZONES IN CHINA
     by Hongyi Lai, 6 July 2006

[This is an Abstract of a paper presented at the ICNK's 2nd 
international symposium on "North Korean Development and International 
Cooperation." Hongyi Lai is Professor at the National University of 
Singapore.]

Deng Xiaoping initiated and pursued a persistent policy on SEZs in 
China, despite stern domestic political opposition. Having SEZs in the 
early stages of opening up produced many advantages for China. SEZs 
became experimental zones for attracting FDI, which provided useful 
lessons for efficiently utilizing foreign capital, technology, and know-how.

The important variables for the success of SEZs are location, 
leadership, policy, and institutional arrangements. China's first two 
SEZs, Guangdong and Fjina, were chosen based on calculated geographical 
and political advantages. First, many overseas Chinese came from these 
two areas, and these also had the advantage of geographical proximity to 
advanced economies such as Hong Kong, Macao, and Taiwan. Second, these 
two areas had a tradition of trade and entrepreneurship. Together these 
attracted greater foreign investment.

Looking at Guandong, its leaders were generally more liberal minded. 
They could conduct local liberalization autonomously from the rest of 
communist China, if a degree of freedom and privilege was allowed by the 
central government. In the case of Shenzen, it is evident that a 
significant degree of autonomy was allowed for the local leaders to 
initiate favorable institutional setups and make bold and sound local 
initiatives. The national party provided persistent support and tried to 
use the momentum to produce progressive opening up of the coastal region.

China's transition from the era of Mao to the era of Deng suggests that 
enlargement of economic freedom at home and peaceful external relations 
abroad are essential for a successful economic reform. In this regard, 
Chinese experience provides useful lessons to North Korea: 1) initial 
SEZ locations were selected based on political, economic, and social 
advantages; 2) national reformists headed by Deng staffed the provinces 
with committed liberals and experienced politicians; 3) exclusive rights 
were provided to the regions; 4) local initiatives were conducted; and 
5) China gained momentum for further economic liberalization from the SEZs.
*************************************************

6.   LEAPFROGGING STYLE OF ECONOMIC REFORM
     by Keun Lee, 6 July 2006

[This is an Abstract of a paper presented at the ICNK's 2nd 
international symposium on "North Korean Development and International 
Cooperation." Keun Lee is Professor at Seoul National University.]

This paper argues that it is possible for North Korea, a late-comer 
transition economy, to achieve a leapfrogging style economic catch-up if 
it promotes in a sustained manner economic opening focused on foreign 
trade and investment. An analogy has been made with the case of the 
Fujian province in China, which has accomplished a catch-up owing to 
investment by Taiwanese, although it used to be a backward province 
before the reform and open door policy. The DPRK, being like Fujian in 
the mid 1980s, can achieve a path-creating catch-up along the line of a 
"socialist open economy" model, as none of the other socialist economies 
can be a perfect model for the DPRK, and a big role is expected for 
South Korea in the catch-up. To realize its potential for catch-up, it 
is recommended that the DPRK allow FDI from the ROK as a "local 
treatment," i.e. regarding it as intra-Korean investment and thus 
allowing more flexibility than other foreign investors.

The paper also discusses diverse models of cooperation with foreign 
capital, which include: 1) BOT (Build, Operate and Transfer), BLT 
(Build, Lease and Transfer); 2) diverse modes of project financing; 3) 
processing using local labor without equity investment; 4) 
wholly-foreign owned investment; 5) joint ventures; 6) licensing of 
foreign technology based on fees; and 7) purchasing of foreign 
technology. The host country (DPRK) can decide or select among them 
depending upon or in consideration of its own capability (absorption or 
management capabilities), rivalry among possible foreign investors, 
implications for market structure (monopoly or more competition), nature 
of target technologies or facilities, opportunity for learning and 
transfer, etc.

Finally, the paper discusses the reasons for such catch-up not happening 
in today's North Korea, and notes the two leadership problems (i.e. DPRK 
and USA), both of which are hesitant in taking bold initiatives.
*************************************************

7.   FINANCIAL MARKETS AND MID- TO LONG-TERM PERSPECTIVES
     by Jong Ryel Bae, 6 July 2006

[This is an Abstract of a paper presented at the ICNK's 2nd 
international symposium on "North Korean Development and International 
Cooperation." Jong Ryel Bae is Chief Research Fellow at the 
Export-Import Bank of Korea.]

As the DPRK and China reopened high-level diplomatic talks in 1999, the 
growth rate of the DPRKn economy went from negative to positive. In the 
midst of this growth, the DPRK economy took a decisive new turn through 
the watershed "July 1st measures" adopted in 2002. The measures allowed 
for price adjustments, the establishment of a general market, and the 
expansion of special economic zones for the first time in fifty years. 
It is hoped that continued marketization and internationalization will 
lead to reform and opening of the financial sector.

Before addressing its high country risk, accumulation of foreign debt, 
nonparticipation in the IMF, and financial sanctions imposed by the USA, 
all of which explain its limited access to international capital 
markets, the DPRK must first resolve its trade deficit and inflation, 
which have worsened since the adoption of the July 1st measures. These 
two factors, which impede the efficiency of a developing economic 
system, suggest the DPRKn economy's potential competitiveness from a mid 
to long-term perspective.

The DPRK's trade volume, excluding trade with China, has not surpassed 
$1.4-1.5 billion since 1994, and its trade and import-export deficit 
have rapidly increased since 1999. The quantitative growth of the DPR 
Korean economy is focused on the reconstruction of a planned economy 
based on increasing dependence on China's economy. This growth 
emphasizes aid and expansion of import capability rather than normal 
transactions and raising export capability.

As exemplified by the rise in rice prices since the adoption of the July 
1st measures, the cost of living has increased much more rapidly than in 
the early 1990s, when prices increased by five to ten times over a 
period of five years. The downward trend in market prices exhibited 
after the food crisis in 1995-1997 has reversed as prices are once again 
increasing rapidly. The main reason is increased currency circulation 
rather than a shortage of goods. This has been brought about by an 
increase in loans granted by the Chosun Central Bank and businesses' 
demand for capital in the absence of a bank credit-creation function.

The DPRK's "path of constructing a military-first economy" is not 
fundamentally different from its existing strategy for economic 
development in that both are import-led rather than export-driven. It is 
possible that the situation will worsen if reform of the real economy 
does not follow reform of the financial sector. The point is that 
reconstructing an import-led planned economy is no longer a viable 
option for the DPRK. Market issues can be solved only through market 
logic, not by currency exchange or similar shock therapies.

Although it may be advisable for the DPRK to resolve its trade deficit 
and inflation issues by focusing on exports and constructing a developed 
financial system, it will be difficult to revise its import-led "path of 
constructing a military-first economy" in the near future. DPRK's 
reduced budget due to economic hardship and decrease in legal exchanges 
due to US sanctions will also make it difficult to procure development 
assistance from Japan or international financial institutions. At 
present one possible solution is to conduct the economic experiments 
necessary to transform its economy to an export-driven, developed 
financial system over the mid to long term.

One characteristic of North Korean finance brought about by the July 1st 
measures is the "systematization of duplicate structures," namely a 
double price structure, two exchange rates, and a duplicate system of 
settling accounts. The different management systems for domestic and 
foreign transactions and special and regular zones reflect the DPRK 
government's stance on the economy. The DPRK has been forced to accept 
the market economy as a response to the crisis, while sticking to the 
reconstruction of a planned economy as the path to becoming a powerful 
nation. However, the reality is that the center of its economic 
operation is gradually shifting to exports and a market economy.

First, financial policy is moving in an international direction, as 
evidenced by special economic zones and the export sector. The 
introduction of a developed financial system, or structured finance 
policy, over the mid and long term is necessary, but the DPRK must first 
be able to offer financial services to import-export firms and foreign 
investors according to international standards. Although the DPRK and 
the USA have clashed over the issue of counterfeiting, the Chosun 
Development Investment Fund and the restriction on opening DPR Korean 
accounts in American banks, the more important issue is to recover the 
international credibility of nationally owned banks, such as the Chosun 
Trade Bank.

Secondly, a policy for the return flow of existing cash capital must be 
put in place. The capitalization of industry through existing cash 
capital and a policy to combat inflation must be worked out as growth 
continues based on Chinese economic assistance. The DPRK should 
seriously consider splitting the functions of the Chosun Central Bank 
and establishing a separate commercial finance institution to manage the 
civilian sector. The first step would be to establish a commercial bank 
in charge of retail banking for citizens and market dealers. It is 
important to create a system that maintains money deposited into a bank 
and to restore the confidence of North Koreans in the banking system. 
DPR Korean financial institutions must recover the trust not only of the 
international community but also of their own citizens.
*************************************************

8.   THE KAESONG INDUSTRIAL COMPLEX: PENDING ISSUES AND TASKS
     by Eul-chul Lim, 7 July 2006

[This is an Abstract of a paper presented at the ICNK's 2nd 
international symposium on "North Korean Development and International 
Cooperation." Eul-chul Lim is Research Professor at Kyungnam University, 
Seoul.]

The international community, in particular the USA, has focused on the 
issue of human rights and the work environment for North Korean 
employees at the Kaesong Industrial Complex. In addition, the USA has 
increased pressure against the DPRK through the imposition of financial 
sanctions, citing the nuclear issue and the DPRK's alleged 
counterfeiting activities. The USA appears to perceive the smooth 
progress at Kaesong Industrial Complex as weakening the effectiveness of 
this pressure. It is also concerned about the possibility that 
individuals could smuggle cash or strategic materials out of the 
complex, which would conflict with international regulations and 
American interests. Furthermore, the USA has portrayed the indirect pay 
of North Korean workers as a human rights issue, seemingly using it as 
an opportunity to criticize the DPRK.

To what extent are the perceptions of the international community based 
on objective evidence? At the current stage, how realistic is it to 
demand the guarantee of labor conditions that meet international 
standards? The purpose of this thesis is to suggest objective and 
realistic answers to these and similar questions. The Kaesong Industrial 
Complex is becoming a matter of international interest, not just one 
confined to the Korean Peninsula. International cooperation is a vital 
and important task, since the project at Kaesong is unlikely to succeed 
without it. How should the international community approach this issue, 
given the DPRK's external and internal situation? What are some 
prospective tasks that can be cooperatively undertaken?

The point is simple: if its special economic zones (SEZ) are to succeed, 
the DPRK must continue to change its own policies, and there must be 
further improvement in the international environment. In order for the 
two Koreas to achieve their goal of making Kaesong a base for exports, 
the nuclear issue must be resolved, which in turn will lead to the 
lifting of economic sanctions. Furthermore, the complex must gain 
recognition as an SEZ to import technology-intensive equipment. Another 
major task is to have goods manufactured at Kaesong by South Korean 
companies acknowledged as "made in South Korea."

The USA and the international community should recognize the strategic 
importance of the Kaesong complex, taking into consideration the strong 
influence that it has had on the DPRK's changing policies, and offer its 
active cooperation. Both North and South Korea realize that the success 
of the Kaesong Industrial Complex relies not only on inter-Korean 
cooperation, but also on their ability to draw effective international 
cooperation. As such, they must endeavor to alleviate the concerns of 
the international community and attract foreign investment by removing 
uncertainty in the investment environment. Ultimately, the comprehensive 
and decisive introduction of a market-based economic system will greatly 
improve the chances for Kaesong's success. The DPRK must gradually 
prepare itself for a system of directly employed labor and negotiable 
wages. The international community must offer the opportunity for the 
North Korean leadership to see the benefit of introducing a 
market-inclined economic and legal system and fostering labor conditions 
that meet international standards.
*************************************************

9.   KAESONG AND THE KOREA-US FREE TRADE AGREEMENT
     by Wook Yoo, 7 July 2006

[This is an Abstract of a paper presented at the ICNK's 2nd 
international symposium on "North Korean Development and International 
Cooperation." Wook Yoo is an Attorney with the Bae, Kim & Lee Law Firm 
in Seoul.]

The Korea-US Free Trade Agreement (KORUS FTA) will tremendously 
influence the Kaesong Industrial Complex (KIC). The Republic of Korea 
insists that in order to keep the Korean peninsula's stability and 
prosperity and lead changes in The DPRK, the inclusion of the KIC in the 
KORUS FTA is definitely important. However, the USA insists that the FTA 
should cover only products made in South Korea, because otherwise the 
FTA could grant advantages to North Korean production while that country 
obstructs the Six-Party Talks on security issues and engages in abusive 
labor practices and counterfeiting of US currency. The real problem is 
that there is a fundamental difference in the two countries' views and 
strategies to promote change in the DPRK. This difference does not 
appear to be narrowing in the current KORUS FTA negotiation.

This situation raises several questions. First, does the US government 
have sufficient understanding of the KIC? Secondly, have there been 
close communications and discussions between the two governments 
regarding the status and role of the KIC?

Examining the KIC's overall features, the strict restrictions on the 
export of certain goods to the DPRK -- due to the export control 
regulations on strategic materials -- does appear limiting. Because of 
these strict restrictions, it is impossible for high-tech companies to 
enter the KIC. As a result, almost all of the tenant companies in the 
KIC are small and medium-size companies in labor-intensive industries. 
However, like the Shenzhen SEZ in China, the DPRK allows the KIC to have 
its own legal infrastructure, separate from the general DPRK legal 
system. And also, based on the failure of the Rajin-Sonbong SEZ, the 
DPRK delegated its administrative power and authority to the Kaesong 
Industrial District Management (KIDMC) organized by South Koreans. 
Through the KIDMC, advanced legal devices such as improved company and 
labor regulations have been adopted. These regulations will induce 
positive effects to improve North Korean life. And as the KIC is a 
special zone separated from politics, it is possible for the South and 
North to frequently communicate and access each other through the KIC.

The DPRK is one of the few countries to which the United States does not 
grant normal trade relations status. Accordingly, if the KORUS FTA 
excludes the KIC, it will be impossible to export products to the US 
market. In order to resolve this, concerns over labor issues will have 
to be solved relatively soon. However, the gap between the ROK and US 
positions on this issue is still quite wide.

Examination of several FTAs does reveal some precedents, and provides 
some ways to deal with the "rules of origin" issue in the context of the 
current KORUS FTA negotiation. The US government does not appear to have 
sufficient understanding of the KIC, and there have not been in-depth 
discussions between the two governments as to the strategic value of the 
KIC. The ROK government needs to examine closely the current situation 
and try to persuade the USA.
*************************************************

End CanKor # 258

*************************************************
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