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Two Koreas, One Economy?

Prepared by: Lee Hudson Teslik
August 13, 2007

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When officials from North and South Korea convene in Pyongyang for an August 28-30 summit, their discussions will mark a historic meeting of minds—only the second summit between the countries since 1953, when the Korean War’s frontline froze into a bitter cold border. This summer’s summit will focus broadly on efforts to establish a permanent peace (Korea Times) between the two Koreas, following decades of North Korean isolation examined in-depth in this CFR.org Crisis Guide. Preparatory discussions, intended to set the groundwork for the talks, seem to indicate the meetings will not ignore the nuclear issues that animate officials in Washington, but may focus more specifically on economics (Yonhap).

Ahead of the summit, details emerged of a plan to pump millions of dollars of South Korean capital into North Korea’s crumbling infrastructure. Officials in Seoul say they will unveil a plan for injecting “social overhead capital” (Korea Times), which means funds will target social infrastructure like schools and hospitals, rather than focusing on more direct aid like rice and fertilizer provisions. It remains unclear precisely what the scale of this investment will be, but a UPI news analysis goes so far as to call the summit a likely “bonanza” for Pyongyang.

The economic focus of the meetings highlights incremental shifts underway in a nation long known for maintaining rigid central command of its economy. This Backgrounder notes the North Korean government has gradually lightened its restrictions on “small-scale trade and barter” operations as a spiraling, decades-long economic crisis has made these activities increasingly common, despite government clampdown attempts. Now, slowly but unambiguously, foreign investment in the country is picking up. Newsweek International notes in a recent article that Pyongyang—“a country that stretches the very definition of emerging market”—has made news recently as a foreign investment target. An Egyptian construction group, for instance, recently bought up a $115 million stake in a North Korean cement plant (FT). In part, this sort of investment comes in response to Kim Jong-Il’s policy of opening large special economic zones (NYT) in which companies can operate with limited interference from Pyongyang.

These inklings of openness, taken alongside high hopes for this August’s summit, make for a promising spectacle. But the Economist warns against buying too firmly into the hype, saying the summit may represent “another false dawn” in a diplomatic history smattered with letdowns. In a separate article, the paper notes that Kim may have cynical, non-economic reasons for hosting the summit—namely to bolster South Korea’s President Roh Moo-hyun, a relatively gentle political counterpart Kim may be eager to keep in power; and also to sow seeds of discord among North Korea’s negotiating partners in the Six-Party Talks on nuclear disarmament. The Korea Times notes that Seoul and Washington are already bickering over the summit’s agenda. Furthermore, even if Pyongyang makes baby-steps toward economic liberalization, there’s a long road ahead—the Heritage Foundation’s Index of Economic Freedom still ranks North Korea 157th out of 157 countries analyzed.

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