Beijing outpaces Seoul with North Korean influence

AP , KAESONG, NORTH KOREA
Saturday, Mar 18, 2006, Page 9

Thousands communist laborers toil under the supervision of capitalist managers in this fenced-in special zone, South Korea's economic beachhead in North Korea just beyond the border.

The Kaesong Industrial Complex is a key part of Seoul's strategy to engage the impoverished yet militarily potent North, reduce their economic gap and prepare for the day -- South Koreans hope -- they unite as one.

But at the same time, China is carving out a bigger role in North Korea's economic life, raising concerns in South Korea that greater Chinese involvement could hinder that vision of a unified Korean Peninsula.

Chinese and entrepreneurs are investing in North Korean ventures including glassmaking, bicycle manufacturing and a department store, and are developing mineral and fisheries resources and even prospecting for oil.

Over the last five years, China has become North Korea's largest trading partner, providing at least 80 percent of the North's consumer goods, ranging from electronics to shoes, according to South Korean central bank economist Lee Young-hoon.

China been an off-and-on ally of North Korea for decades. Now it wants "gradually to normalize the North's economy, with the long-term goal of a reformed, pro-Beijing state," the Brussels-based International Crisis Group wrote in an analysis.

Beijing's aim, according to the conflict prevention think tank, is ensuring stability in an impoverished, unpredictable country on its border that may have nuclear weapons.

South Koreans are worried that "China's going to be economically dominant in the North," said Peter Beck, director of the group's Northeast Asia Project in Seoul.

Chinese-North Korean trade totaled US$1.6 billion last year, outpacing exchange between the two Koreas, which reached a record US$1.1 billion boosted by activity at Kaesong.

Trade China increased an average of 30 percent annually from 2000-2004 and accounted for 40 percent of the North's total in 2004, says the Bank of Korea's Lee.

"North Korea's economy would collapse" if it weren't for China, he says.

Lee the expansion in trade to China's rapid growth -- 9.9 percent last year -- and government tax breaks from Beijing for Chinese businesses operating in border areas, which have encouraged them to venture into even high-risk North Korea.

Kaesong South Korea's only project. Hyundai Asan Corp, the Seoul-based company spearheading business in the North, also operates tours from the South to scenic Diamond Mountain. More than a million people have visited since 1998.

Separately, Pyeonghwa Motors Corp, with ties to the Unification Church, opened North Korea's first car-assembly plant in 2002. As of the end of last year, Pyeonghwa said it had sold about 1,000 cars, mostly to government officials.

Desperately and a geopolitical wild card with its nuclear programs, the North can offer China and South Korea an abundance of cheap labor and natural resources, while playing them off against each other.

China working to extract iron ore. South Korea's state-run Korea Resources Corp says it will begin producing graphite this month, the first-ever inter-Korean joint mining development project.

North Korea and China signed an agreement in late December to jointly develop offshore oil reserves, their state-run news agencies reported, without offering details.

"The position that Pyongyang wants to be in is having two suitors," Beck said. "But if they have a choice they're going to favor Beijing because it'll be much easier to contain the contamination."

North Korea's economy is showing signs of emerging from the horrors of the 1990s, when a famine caused by bad weather and compounded by mismanagement resulted in the deaths of an estimated 2 million people.

The North's economy expanded an estimated 2.2 percent in 2004, the sixth straight year of growth, according to the Bank of Korea, which has issued an annual estimate since 1991. The North has released no official data since the 1960s.

Modest reforms since 2002 have encouraged some private enterprise, allowing the emergence of an entrepreneurial class with money to spend on imported goods.

Divided the 1950-53 Korean War ended in a truce, North and South have recently engaged in a limited detente, including their first summit in 2000 in Pyongyang.

North Korean strongman Kim Jong-il, however, has declined to carry out a reciprocal visit and balked at overtures from current South Korean President Roh Moo-hyun to visit Pyongyang again.

On the contrary, summits with China have become almost a regular event.

Chinese Hu Jintao (胡錦濤) visited Pyongyang in October, reportedly offering a trade and investment package worth up to US$3 billion and nudging Kim to remain involved in international talks on ending the North's nuclear programs.

In January, Kim made a secretive nine-day journey to China's booming southern regions, his third trip to the country since 2001, causing speculation he may be considering further Chinese-style economic reforms.

Still, things can change quickly with North Korea.

Just years ago Japan was by far the North's largest trading partner. Now, amid political tensions over the North's abductions of Japanese citizens, it's fallen to No. 3, with exchange last year totaling about US$200 million far below the roughly US$1.3 billion in 2001.