South Korea’s Contradictory Approach to Economic Engagement With the North

All signs in recent weeks are pointing to an easing of inter-Korean tensions and a return to dialogue with North Korea: the inter-Korean foreign ministers’ meeting on the sidelines of the ARF in Bali, DPRK Vice Foreign Minister Kim Kye-gwan’s visit to New York for talks led by Special Representative Stephen Bosworth, the Medvedev-Kim Jong Il meeting in Siberia and renewed discussion of a pipeline connecting Russia and South Korea that would transit the North, Lee Myung-Bak’s selection of former Chief of Staff Yu Woo-ick as Unification Minister, replacing Hyun In-taek, who clearly rubbed the North Koreans the wrong way, and ROK presidential contender Park Geun-hye’s article in Foreign Affairs, which essentially signals that the overall South Korean public debate over policy toward the North will be focused more on how whether than when to engage the North, especially economically.

One troubling aspect of this shift is that North Korea has thus far provoked with impunity, and the Lee Myung-Bak administration’s efforts to impose accountability on North Korea have failed.

But another emerging contradiction in South Korea’s current approach pits recent developments at Mount Kumgang, where North Korea has taken harsh measures in response to the freeze on inter-Korean tourism that remains in place following the summer 2008 shooting at a beach near the resort of a South Korean housewife, for which North Korea has refused to take responsibility. For over two years, North Korea has employed many escalatory measures in an attempt to pressure Hyundai Asan and the South Korean government into resuming the project. Most recently, the North has invalidated its contracts with Hyundai Asan, seized Hyundai Asan assets at the tourist resort, and attempted to make a contract with a new company to revive tourism (and cash flows) to the resort. South Korea has argued that North Korea’s unilateral actions are a breach of contract and that this behavior underscores the dangers to foreign investors of doing business in North Korea.

At the same time, the Medvedev-Kim Jong Il summit meeting last week at a military base near Ulan-Ude arguably could not have happened without an understanding by Russia and South Korea regarding the desirability of pursuing a pipeline project through North Korea. In light of the Kumgang imbroglio, an oil or gas pipeline project through North Korean territory would seem to be overwhelmed by significant political risks and might provide North Korea with tremendous leverage through control over the flow of energy resources to the South, but it is a project that arguably must be incredibly appealing to Lee Myung-Bak, a former Hyundai executive who has taken creative foreign policy initiatives in the name of energy diplomacy. The problem is that the political risks and potential financial losses inherent in a pipeline project that would transit North Korea would be staggering in comparison to the losses South Korea faces as a result of the failure of the Mount Kumgang tourism project.

The pipeline dream held a special place in the heart of Kim Dae Jung, who sold his engagement policy a decade ago with constant references to the economic benefits of reconnecting pipelines and railways between South Korea and Europe through North Korea. It turns out that this dream also appeals to South Korean conservatives, including Lee Myung-Bak and Park Geun-hye. But are South Korean investors really prepared to double down on North Korea’s trustworthiness as a business partner by sealing a Russian pipeline deal at the same time they are getting shoved out of Mount Kumgang?