Under the Loving Care of the Fatherly Leader: North Korea and the Kim Dynasty (127 page)

Up to that point, interest in North Korea as a business destination had been confined largely to South Koreans who had been born in the northern part of the peninsula—including Hyundai Group founder Chung Ju-yung. But the American Chamber of Commerce in South Korea was attempting to schedule a trip north by Seoul-based representatives of such major U.S. companies as Goldman Sachs, General Electric, Coca-Cola and Procter & Gamble, all of-which had big investments and operations in the South. Optimists pointed to evidence that North Korea’s decade-long economic decline had bottomed out in 1998. According to a report by the South Korean central bank, the North’s economy had grown by 6.2 percent in 1999. Grain production was up by 8.5 percent, to 4.22 million tons—still at famine level, but an improvement. By the end of 1999, production had resumed at the giant Kim Chaek steel complex and thousands of other factories that had been idled earlier as a result of energy shortages and a general logistical breakdown.
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The south’s Unification Ministry which supervised North-South relations, predicted that North Korea would try to join multilateral organizations such as the International Monetary Fund by 2001. The country already had resumed diplomatic relations with Italy and Australia and was about to do the same with the Philippines. It had arranged a low-interest loan from the Organization of Petroleum Exporting Countries. The help was badly needed. Foreign lenders, like foreign investors, had shunned North Korea since the 1980s, when it defaulted on its debts to the West and Japan. With
the interest compounding, Pyongyang’s hard-currency debt had mushroomed to around $14 billion. The general unwillingness of Westerners and Japanese to extend credit, coupled with the collapse of communism in the Soviet Union and Eastern Europe, blocked major improvement in Pyongyang’s trade figures. Those had been factors, along with mismanagement and natural disasters, in causing the drastic economic decline—the near-collapse—of the 1990s.

In 1994 North Korea had been growing weaker by the day. My own research like that of others had suggested a real danger that it might choose the last-ditch means of war to avert the extinction of its regime and system. It had made sense then for the United States, South Korea and Japan to agree to a deal in which Pyongyang would receive $4.5 billion worth of light-water reactors to boost its energy output, in exchange for freezing its nuclear weapons development program. The unspoken assumption in Washington had been that any war threat eventually would peter out as the regime continued to decline—indeed, that the regime would collapse before the donors had to make good on all their promises.

As the 1990s ended, North Korea was publicly wielding long-range missiles, in place of 1994’s nuclear weapons, as it attempted extortion against old enemies. And while the gap with South Korea continued to grow, the North again was growing stronger in absolute terms. The food crisis had abated somewhat—in large part thanks to aid from its enemies. Kim Jong-il clearly had consolidated his domestic position. He had kept the allegiance of the military, partly by extracting lucrative concessions from old enemy countries and doling out large shares of the proceeds to those in uniform. At a time when the country could think about starting to rebuild its economy, it had already begun beefing up its conventional warfare capability. Donor countries had to ponder whether aiding a strengthening adversary could ever be a wise policy.

There seemed little problem with the process Clinton had started of easing some economic sanctions against North Korea, pending further negotiation of a possible freeze of Pyongyang’s missile development program. Most analysts agreed that following through on the gesture would not result in a major immediate windfall to Pyongyang. While Americans would become legally free to invest in the country, other reasons besides sanctions restrained them from looking upon North Korea as a high-priority investment target. Poor infrastructure was one. Another was that trust of a country that had repeatedly failed to pay its foreign debts was close to non-existent. The bigger, political-military question was where former U.S. defense secretary William Perry’s “comprehensive” approach might lead—-with regard, for example, to Japan.

Kim Jong-il naturally saw the missiles program as his other card, besides nuclear weapons. He would not relinquish it cheaply. North Korean representatives would demand large sums of cold cash. In talks with Washington they were reported to have said the price for suspending missile exports would be $1 billion a year. Pyongyang had little production of any sort left to export, other than missiles. Thus the regime schemed to find new ways of earning foreign exchange. It needed hard currency at the most basic level, to buy weapons that it could not make at home and to maintain the standard of living of the ruling class and military. Restoring the devastated manufacturing and agricultural sectors to the levels of the 1980s—not to mention achieving a real takeoff into third-generation Asian tigerdom—-was no more than a dream, barring a huge influx of foreign exchange.

Pyongyang knew that it would be all but impossible both politically and legally for the Clinton administration to pay cash to a blackmailing country. In the North’s calculations, this was where Tokyo came in. In the wake of the Clinton commitment on sanctions, Prime Minister Keizo Obuchi said Japan would consider lifting its own sanctions—including its freeze on diplomatic normalization talks—“in the event the North clearly shows a positive attitude” by suspending a planned missile launch. Any renewed Tokyo-Pyongyang normalization talks would, of course, quickly focus on money. Pyongyang had resumed demands for Japan to compensate the North for the colonization of Korea in the first half of the twentieth century, among other offenses. Japan had sent South Korea more than $500 million in grants and loans following their 1965 normalization of relations. Factor in generous amounts for inflation and interest on that sum and such compensation to Pyongyang could mount up to as much as $5 billion, by some South Korean and Japanese estimates. Pyongyang was demanding $10 billion, with the extra amount to represent compensation for damage caused by Japan’s backing of the United Nations side in the Korean War.

Compensation or aid in the billions of dollars could serve in part as a payoff for an end to North Korea’s missile threat to Japan. But Japan would not be an easy sell. When North Korea lobbed a rocket over the Japanese archipelago on August 31, 1998, the effect was not—as Pyongyang almost certainly expected—to soften up the Japanese people and frighten them into a submissive mood. Rather, the launch electrified many Japanese and got their backs up. With public opinion finally amenable, the government in Tokyo was able to push ahead with a defense buildup intended to make constitutionally pacifist Japan a more “normal” country. Among other things, Japan planned to launch its own spy satellites and it formally agreed to do joint research with the United States on a missile defense system. A law passed in May 1999 authorized the Japanese Self-Defense Forces, during a regional crisis, to give stronger support to the U.S. military than had been permitted formerly.

But there was considerable Japanese interest in resolving longstanding
problems with North Korea. And to make it easier for Tokyo to agree to a payoff, Pyongyang—in a show of newfound flexibility—embarked on a program to smooth off some of the hard edges of the image it presented to the Japanese. To a visiting group of Japanese parliamentarians in August 1999 North Korean authorities suggested that a joint Red Cross effort could be mounted to search for missing Japanese. Searchers would seek not only those who had been abandoned in northern Korea in the confusion following 1945’s surrender. They would look also for at least ten other Japanese who were suspected of having been abducted by North Korean agents in more recent years. Pyongyang’s refusal during earlier bilateral talks to discuss the abduction charges—-which so far it was denying—had led to the failure of those talks.

Should Tokyo take the bait and reach for its wallet? A clue to what Pyongyang might do with a windfall came in reports that the country had imported parts for assembly into MiG 29 and MiG 21 fighter planes. MiG 29s, ten of-which reportedly-were imported in knockdown form, were selling for $50 million each, used—suggesting a possible outlay of $500 million. The question facing Tokyo was similar to one that faced the South Korean government: Should Seoul permit the Hyundai group to continue sending tens of millions of dollars a year to Pyongyang as “fees” for Hyundai’s tours to Mount Kumgang? For weeks the South Korean press tried to pin down whether it was Hyundai’s money that paid for MiG imports. The question was a naive one. Foreign exchange income from any source—from Hyundai, from Japan, from wherever—would increase the total amount of foreign exchange available to the regime. If there were not strictly verified external controls, such income would facilitate big military purchases. And that was true regardless of precisely-which account the money might go into initially. But the case against what some Washington hardliners were calling “appeasement” was by no means open and shut. The theory behind Perry’s comprehensive report and behind South Korean President Kim Dae-jung’s sunshine policy was that, yes, North Korea would strengthen as a result of aid. However, it would strengthen not just militarily but also economically. In the process it would begin to join the global market economy. With its security guaranteed by no less a power than the United States, its interests would grow intertwined with those of its old enemies. It seemed at least conceivable that the attempt to engage Pyongyang could work that way although North Korea had an impressive history of refusing to change itself in any fundamental way As Perry himself emphasized, it would be necessary to maintain strong military deterrents; any aid given to Pyongyang should be tied to particular projects in the non-threatening civilian sector and supervised closely to thwart diversion to the military.

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Desperation had driven North Korea to tone down its boast of having created a communist paradise. During a January 2000 cabinet meeting, Kim Jong-il and industry leaders had pledged that this would be the year for mending the economy.

Hyundai had given Pyongyang a sample of just how much the North stood to gain. The Mount Kumgang project was bringing North Korea nearly $200 million a year in hard-currency tourist revenues. The giant conglomerate, by far North Korea’s largest outside investor, promised to pay the country $950 million spread out over the five-year period from 1998 through 2002 in exchange for a thirty-year monopoly on tours to the resort. In addition, Hyundai planned to invest as much as $1 billion more at Mount Kumgang for an airport, shopping malls, restaurants, dutyfree shops, golf links, condominiums, ski facilities and an amusement park. Hyundai officials were vague about when they expected to make money on the venture. For the time being they treated the project as a loss leader ?while they negotiated other deals, such as the development of an industrial complex on the west coast of North Korea. Expecting eventually profitable North-South relations, Hyundai officials were eager to get a head start on competitors.

Worker salaries of about $1,500 a month had priced South Korea out of the markets for many labor-intensive goods, such as shoes and apparel. Now South Korean companies wanted to get back into those markets by teaming their capital with the cheap labor of the North, where workers for foreign-invested joint ventures earned $100 to $400 a month. With cost savings like those, “we can even overcome the Chinese,” predicted Hong Yeon-dal, a Hyundai executive.

Before many non-Koreans could consider the North a viable investment, there would have to be improvements in energy services, railroads, high-ways and ports. North Korea’s infrastructure had deteriorated badly during the 1990s. Power shortages remained a constant problem, and logistical complications still out-weighed the labor cost advantage. North Korea looked to Japan for one solution to the infrastructure mess. After months of talks, many observers believed Tokyo and Pyongyang would agree to establish diplomatic relations by the end of 2000. At that point, Japan was thought likely to pledge billions of dollars for infrastructure projects. Big money from Japan and South Korea was “really the only thing that’s going to save them,” a diplomat in Seoul said of the North Koreans.

Many Japanese and Western lenders continued to believe that Pyongyang could meet its obligations if it would stop pouring money into its military. Now, in particular, outsiders were demanding that North Korea stop developing weapons of mass destruction. “What we all want them to cough up,” said a diplomat in Seoul, “is to reduce their threat.” Indeed, declaring a moratorium
on long-range missile tests had been the quid pro quo for Washington’s easing of sanctions.
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Historical guilt was not the motive for what the South was offering: a combination of public and private investment plus assurances that Seoul would not interfere in Pyongyang’s domestic affairs. Other South Korean companies were starting to follow Hyundai’s lead. Samsung Electronics Company and LG Company had begun assembling television sets in North Korean plants. A joint venture 30 percent owned by the Unification Church’s Tong-il Heavy Industries Company and 30 percent by North Korea was gearing up to assemble Fiat automobiles in the western port city of Nampo, using components shipped from Tong-il’s joint venture with Fiat in Vietnam. And a pharmaceuticals plant sponsored by the South’s Korea Welfare Foundation was under construction in the Rajin-Sonbong Free Economic and Trade Zone in northeastern North Korea. Still, Hyundai was by far the most visible corporate agent of the South’s policy up to that point.

Before the North-South border cut it off the Mount Kumgang region had been a popular getaway destination for residents of Seoul. But the old infrastructure was long gone. It had been necessary for Hyundai to start from scratch to build what was needed to handle its tours. Company officials admitted to having spent about $30 million on roads, port facilities, the spa, the stadium, food and souvenir stands and a customs and immigration building equipped “with computers and metal detection devices. Outsiders guessed that the cost was several times higher.