President Moon Jae-in of South Korea has been proactively engaging North Korea’s leader Kim Jong Un in a way few saw coming last year.
In addition to three high-profile summits, he has extracted promises to permanently dismantle key missile and nuclear assets, ratified a military agreement between the two Koreas, engineered the first-ever meeting between a leader of North Korea and a sitting U.S. President, and, many believe, helped prevent a war.
But the prevailing assumptions about Moon’s motivations behind his outreach to Pyongyang often fail to appreciate how domestic challenges at home inform his attempts at peace on the peninsula.
South Korea is facing a well-documented demographic problem. The number of live births have been slowing for years, and now ranks 1.05, the lowest in the world. At the other end of the spectrum, Koreans are living longer, and the elderly population – defined as persons age 65 and above – now outnumbers children aged 0 to fourteen. Soon, elderly Koreans will account for greater than forty percent of the entire population.
The Moon government has attempted to increase the birth rate through a series of measures – mostly cash-transfers – with little indication of success. The efficacy of measures to raise the birth rate is beyond the scope of this piece, but among the key obstacles are that social and structural barriers to raising a family that are simply incompatible with rising gender equality.
The lack of babies means a dwindling labor pool and consequently a shrinking tax base. Indeed, the working age population declined last year for the first time. This comes exactly at a time when taxable inputs are most needed, as the older population draws on Korea’s generous social services.
The areas of North Korean development most in need are exactly the sectors of the South Korean economy that need the most help
A 2016 report by Statistics Korea, the primary big data collection wing of the Korean government, reveals that the average per-capita medical expenses for Korea’s aged population was $3,340 and growing. If we multiply this by 10 million – less than half the elderly population predicted by 2060 – that amounts to USD$33.4 billion, nearly the entire defense budget of South Korea last year.
Moreover, the country is still in the midst of a clunky navigation away from a manufacturing economy to a high-skilled services and IT economy. In 2017, manufacturing accounted for 27 percent of GDP – nearly double the OECD average. And unlike the consumption-driven United States, South Korea’s economic health is heavily dependent on exporting those manufactured goods, which constitute 42 percent of the economy.
As demand for these exports wax and wanes, so to do the fortunes of Seoul. Though it is true that South Korea pulled in record foreign direct investment (FDI) last year, much of that USD$22.94 billion was poured into IT and petrochemical sector, highly-efficient and process-intensive industries with less need for labor. The OECD Economic Survey 2018 points out that “Korea is vulnerable to shocks, given its dependence on construction and a few key industries, notably semiconductors.”
Indeed, semiconductors have been an absolute powerhouse for growth the past several years. But the nature of high-tech manufacturing – heavy automation and computerized processes – simply require less workers to achieve higher productivity. As the same OECD states: “the [semiconductor] export boom in this highly automated industry had a limited impact on employment, accounting for only 1% of job creation during the first half of 2017.”
Ship-building, steel production, heavy machinery, and construction have all been casualties of Korea’s shift towards services and tech, and this shift is reflected in the poor growth projections issued this month by the Bank of Korea. The on-going trade dispute between China and the U.S. – Korea’s first and third-largest export destinations, respectively – further underlines the precariousness of Korea’s growth model in a time of rising protectionism and distrust of global trade.
The shrinking consumer base, which as mentioned for reasons above is less important to Korea’s economy overall, will no less impact several industries, particularly construction and infrastructure.
Domestically, Moon has been wholly focused on wages and jobs
Not only is South Korea’s population shrinking, but it’s a heavily urbanized country. 77 percent of Koreans live in cities of over 500,000, and this number will only increase as the economy evolves and deaths outnumber births.
There is increasingly diminishing incentive for a young, well-educated Korean millennial to move outside of the capital city area unless they somehow find employment in one of Korea’s dwindling export industries.
The Moon administration, and several more after it, has to face these enormous structural challenges.
Domestically, Moon has been wholly focused on wages and jobs, attempting to spur ‘income-led growth’ through a series of reforms.
But South Korea’s economic issues also inform his foreign policy. Moon’s “New Southern Policy,” for example, is designed to expand South Korea’s export markets in Association of Southeast Asian States (ASEAN) states; he actively promotes construction and energy projects in the Middle East; Korea-Latin American relations have never been better; and there is a growing ‘strategic partnership’ between Seoul and the European Union.
And then of course, there’s North Korea. Despite Moon’s history as a Sunshine architect – and valid concerns he may try to resurrect the defunct policy – he has proven more pragmatic than bleeding heart.
He continues to support international sanctions and remains an active proponent of the U.S.-ROK Alliance, proactively engaging the White House at every step of détente with North Korea and leaving be strategic assets on the peninsula, such as the controversial THAAD missile battery which Moon himself spoke out against prior to his presidential nomination.
WHY THE CHAEBOL WENT TO PYONGYANG
Perhaps little else illustrates how South Korea’s economic precariousness informs Moon’s North Korea policy better than the inclusion of South Korean lords of business during his trip to Pyongyang this past September.
The leaders of three of the biggest conglomerates – Samsung heir-apparent and vice president Lee Jae-yong, SK Group Chairman Chey Tae-won, and LG Group chairman Koo Kwang-mo, all of whom hold near-absolute decision-making authority, joined Moon in Pyongyang.
The delegation also included Hyundai Motor Group Vice Chairman Kim Yong-hwan, POSCO Representative Director & CEO Choi Jeong-woo, as well as significant representation from state-owned transportation and power entities KORAIL and KEPCO, along with financiers from the Korea Development Bank.
Despite Moon’s history as a Sunshine architect – and valid concerns he may try to resurrect the defunct policy – he has proven more pragmatic than bleeding heart.
The areas of North Korean development most in need are exactly the sectors of the South Korean economy that need the most help (and which the chaebol are most significantly entrenched). Construction, heavy industry, telecommunications, and other basic building blocks of any country are all in short supply north of the DMZ.
The North-Korea-as-cheap-labor-and-commodities take is not a new one, but it may be worth re-articulating that Moon’s inclusion of South Korea business royalty, along with sanctions-skirting infrastructure project proposals, is influenced by a need to get South Koreans to work and pull in foreign cash (particularly as Korea’s stock markets nosedive in the wake of investor pull-out).
Importantly for any business understandably worried about getting burned by North Korea’s severe lack of institutional oversight, Seoul has demonstrated a commitment to assisting industry for the sake of inter-Korean cooperation.
This is the same formula through which China approaches business with Pyongyang, providing generous state backing of private sector investment in North Korea as it has grown to account for over 90 percent of North Korea’s trade.
Despite the risk, the backwardness and low levels of development in North Korea are well-documented. And it means that for South Korean firms, even modest levels of investment stand to return huge dividends in a country where most roads are not paved, electricity lines do not run in many parts of the country, and bicycles remain the primary method of transportation for many.
South Korea’s desire to find a destination for its exports suits well Kim Jong Un’s intent to grow the Northern economy – and endeavor he and has more or less succeeded in over his first half-decade of rule.
His signature “dual progress” byungjin policy, which many interpreted as a way to shift resources away from the military and into the civilian economy, generated tangible growth between one to four percent.
Declaring byungjin a success after the North’s sixth and largest-ever nuclear test, the North Korean people have been witness to a relentless onslaught of factory tours and propaganda extolling the virtues of domestic industriousness.
Moon’s inclusion of South Korea business royalty is influenced by a need to get South Koreans to work and pull in foreign cash
Kim has even drawn comparison to Deng Xiaoping and other strongmen in Asia that have leveraged their authoritarianism and absence of basic human rights into rapid economic growth.
However, a combination of sanctions, inefficient market mechanisms, and low-levels of baseline development put a cap on how far Pyongyang can go on its own. It will need substantial assistance from the international community to meet Kim Jong Un’s lofty expectations.
Moon Jae-in fully understands North Korea’s predicament and sees South Korea’s economic struggles as an opportunity for Pyongyang. The April 2018 summit declaration signed between the two Koreas included an agreement “to actively implement the projects previously agreed in the 2007 October 4 Declaration in order to promote balanced growth and co-prosperity of the nation.”
Such measures include special economic zones and the reestablishment of rail and road ties across the DMZ. Despite criticism over the cost of these and other proposed inter-Korean projects, economics literature suggests that governments should increase spending exactly when it is dealing with the kind of economic conditions South Korea is at the moment.
None of this is to say presently warm relations between Seoul and Pyongyang will generate immediate or tangible improvements in South Korea’s economy. Demographic changes, automation, and the economic shift away from the historical foundations of the Korean economy are generational issues that require long-term strategic planning. But Moon Jae-in’s approach to North Korea, like his broader foreign policy in general, reflects a pragmatic understanding of these long-term challenges.
Edited by Oliver Hotham
Featured image: Pyeongyang Press Corps
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