[Global NK Commentary] International Cooperation in North Korean Infrastructure Development and ROK-Japan Relations

[Editor's Note]

The Korean Peninsula New Economic Map initiative, which aims to realize a South-North peace community, emphasizes the development of North Korea's underdeveloped socio-economic infrastructure. Infrastructure development begins with exploring effective financing methods through international cooperation. The author, Professor Lee Jeong-hwan of Seoul National University, stresses the need for cooperation not only at the global level centered on Multilateral Development Banks (MDBs) but also at the regional level in Northeast Asia. He adds that the key to North Korea's infrastructure development can be found when inter-Korean relations, ROK-Japan reconciliation, and the advancement of East Asian regionalism are understood and addressed not as separate issues but as interconnected ones.

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Challenges in North Korean Infrastructure Development and the Korean Peninsula New Economic Map Initiative

Although the prerequisite of a high barrier, namely the establishment of a Korean Peninsula peace regime centered on North Korea's denuclearization, exists, discussions on inter-Korean cooperation and international cooperation targeting North Korea's economic development seem more urgent than ever. Within what institutional framework should South Korea approach North Korea's infrastructure development, which will serve as a catalyst for its economic development? South Korea's strategy for North Korea's infrastructure development is established as the 'Korean Peninsula New Economic Map Initiative.' The initiative, centered on three economic belts (the East Coast Economic Belt, the West Coast Economic Belt, and the Border Area Economic Belt), is not limited to North Korea's infrastructure development. Aiming to build the foundation for economic unification and realize a South-North peace community by pursuing a single market cooperation between South and North Korea, the Korean Peninsula New Economic Map Initiative encompasses inter-Korean cooperation in all economic sectors. However, the emphasis is placed on developing North Korea's underdeveloped socio-economic infrastructure rather than on private foreign direct investment, which will account for the largest share of future production and job creation in North Korea in the long term. The East Coast Economic Belt focuses on energy and resource development, while the West Coast Economic Belt is structured around investments in logistics and transportation infrastructure.

The most critical question in the challenges of North Korean infrastructure development is the method of effective financing. Socio-economic infrastructure, which has a strong public good character, requires the intervention of public capital investment. The problem is that, given North Korea's low capital accumulation, it is impossible for the North Korean government and public organizations to secure the funds needed for infrastructure investment for North Korea's future development. As seen in the development experiences of the 20th century, securing funds from abroad and investing them in socio-economic infrastructure construction is a common phenomenon in the early stages of development in emerging countries, and North Korea will be no exception. How will the funds required for the construction of North Korea's socio-economic infrastructure be financed?

Financing Challenges for North Korean Infrastructure Development

It is realistically impossible for South Korea to solely bear the cost of overseas capital required for the construction of North Korea's socio-economic infrastructure. According to calculations by the Korea Institute of Construction Industry in 2019, initial infrastructure development in North Korea requires an investment of 306 trillion KRW over ten years. The '10-Year Strategic Plan for National Economic Development' announced by North Korea in 2011 under the name of the Chosun Daephung International Investment Group, and the Korea Research Institute for Human Settlements' 'Core Development Projects for the Korean Peninsula,' which served as the basis for South Korea's Korean Peninsula New Economic Map Initiative, share commonalities in focusing on infrastructure development along the West Coast and East Coast axes. When the overlapping projects of both plans are excluded, the estimated cost for North Korea's infrastructure development is 306 trillion KRW.

The primary responsibility for financing the 306 trillion KRW required for North Korean infrastructure development over ten years lies with North Korea's government and public financial institutions. However, given North Korea's current state capacity, it is difficult to expect the North Korean authorities to independently undertake this financing role. In the long term, it will be necessary to develop development cooperation funding from multilateral development banks and private banks, as well as public-private partnerships, amidst North Korea's reform and opening and its increased connectivity with the global market and international finance. However, given North Korea's current lack of connectivity with international financial markets and unfamiliarity with international financial norms, it is difficult for North Korea to directly move towards such public-private financing. When North Korea embarks on reform and opening, initial infrastructure investment financing will inevitably be based on public funds, adhering to norms of political stability rather than profitability.

The most likely source of financing for North Korean infrastructure investment outside of North Korea is, naturally, South Korea. Given the unique relationship between South and North Korea, infrastructure construction in North Korea, which forms the foundation for its sustainable development, should be considered domestic investment in the long term. In the short term, as South Korean companies are highly likely to be closely involved in the process of infrastructure construction projects, it will serve as a stage for economic returns. However, it is realistically impossible for South Korea's government funds to fully or largely cover the demand for North Korean infrastructure construction. Potential sources of South Korean government funds that can be used for North Korean infrastructure investment include the Inter-Korean Cooperation Fund and Official Development Assistance/Economic Development Cooperation Fund. However, even if the political obstacles to the use of the Inter-Korean Cooperation Fund were removed, the scale of the fund itself is very small compared to the scale of North Korea's infrastructure construction demand. Meanwhile, legal revisions are necessary to use Official Development Assistance and Economic Development Cooperation Fund, which are targeted at foreign countries, for North Korean infrastructure investment. Furthermore, even if these funds can be used for North Korean infrastructure investment after legal revisions, the annual scale of government development assistance (approximately 3 trillion KRW) and Economic Development Cooperation Fund (approximately 1.5 trillion KRW) shows a significant gap from the required scale of financing for North Korean infrastructure investment. In other words, while Official Development Assistance and Economic Development Cooperation Fund can contribute to financing the required funds for North Korean infrastructure investment, they are unlikely to become the core sources of funding.

Exploring Institutional Frameworks for International Cooperation in North Korean Infrastructure Development

In addition to the Inter-Korean Cooperation Fund and Government Development Assistance/Economic Development Cooperation Fund, it is also necessary to create separate sources of public funding for North Korean investment from South Korea. However, the demand for North Korean infrastructure investment is difficult to meet with South Korean funds alone. Furthermore, North Korean infrastructure investment can play a role in strengthening connectivity between the world and North Korea in future peace initiatives on the Korean Peninsula. When public funds from neighboring countries and international capital are invested in North Korea, it will provide North Korea with an opportunity to adapt to international financial markets and serve as a basis for the international community's support for North Korea's successful reform and opening. In terms of the quantity of financing, international cooperation in North Korean infrastructure investment is essential, and such cooperation can enhance the positive engagement of the international community in the stable development of the Korean Peninsula's future.

The involvement of Multilateral Development Banks (MDBs) is essential for international cooperation in North Korea's infrastructure development. However, for MDBs to be used as a source of financing for North Korean infrastructure investment, it is a long-term possibility that can only occur through a process where North Korea demonstrates and is recognized as a stable member of the multilateral development finance regime. Since joining member states to receive concessional funding from international financial institutions is not easy for North Korea, establishing a Multi-Donor Trust Fund with contributions from relevant countries, including South Korea, has been discussed as the most realistic form of international cooperation for North Korean infrastructure investment. Currently, in the transition from international cooperation in humanitarian aid to North Korea to international cooperation in infrastructure investment, a trust fund operated by the UN Development Group could be launched first, and then a trust fund operated by the World Bank could play a role as North Korea integrates into the international community's rules and norms.

The Necessity of Regional Multilateral Cooperation for North Korean Infrastructure Development

International cooperation in North Korean infrastructure development requires not only global-level institutions centered on multilateral development banks but also the establishment of cooperative institutions at the regional level in Northeast Asia.

Discussions on establishing a Northeast Asia Development Bank, a specialized MDB for the Northeast Asian region with implications for North Korean infrastructure investment, have been ongoing since the 1990s. Amidst the regionalism boom in the post-Cold War era, the need for additional international finance for development demands in Northeast Asia has been mentioned. The connection of the Northeast Asia Development Bank to North Korean infrastructure investment arose in the 2000s when discussions in South Korea revived the concept of a Northeast Asia Development Bank and proposed using it for financing North Korean development. However, although discussed as a regional cooperative financial institution for North Korean development cooperation, the concept of a Northeast Asia Development Bank faces difficulties in differentiating itself and playing a leading role compared to other MDBs in supporting North Korea. While exploring regional institutional frameworks beyond the multilateral framework for international cooperation in North Korean infrastructure investment has significance in terms of diversifying cooperation, it is difficult to see how a high level of institutionalization and organization, operating within the strong norms of the international financial regime, would benefit development cooperation with North Korea. Viewing North Korean development as a long-term process, regional cooperation is unlikely to be realized immediately through formal institutionalization.

Meanwhile, individual regional development initiatives by countries surrounding the Korean Peninsula in the Northeast Asian space, and the development financing policies of these countries linked to those initiatives, can be meaningfully discussed in the initial stages of North Korean infrastructure development. South Korea, China, Russia, and Japan all have regional development initiatives. These initiatives have emerged from efforts by each country to enhance its international standing and strengthen its influence within the region through development cooperation that extends beyond its borders and increases connectivity with surrounding areas. Examples include China's Belt and Road Initiative, Russia's New Eastern Policy, and South Korea's New Southern and New Northern Policies. For these countries' regional development initiatives to be pursued with completeness, North Korea's development is somewhat essential geographically. While Japan's regional initiatives are unfolding as the Indo-Pacific concept centered on maritime axes, the remaining task of normalizing diplomatic relations between Japan and North Korea demonstrates the potential strength of Japan's involvement in North Korean development.

If North Korea's denuclearization proceeds and North Korea returns to the international community, discussions linking the regional development initiatives of various countries to North Korean development will likely advance. The countries surrounding the Korean Peninsula show clear interests in North Korea's infrastructure development. China has significant interest in both the West Coast and East Coast axes of North Korean development. The West Coast axis directly connects to China's northeastern region via the Gyeongui Line railway. Furthermore, the East Coast axis, connecting to Jilin Province, serves as a means to strengthen maritime access for China's northeastern region. Russia has a strong interest in developing transportation and energy infrastructure that passes through North Korea to South Korea via the East Coast axis. Japan has a high interest in North Korea's East Coast axis in terms of enhancing connectivity in the Pan-Yellow Sea region. Moreover, the prospect of substantial Japanese funding for North Korea, expected from the normalization of diplomatic relations between Japan and North Korea, suggests that Japan's involvement in North Korea's infrastructure development will not be limited to the East Coast axis.

North Korean Infrastructure Development and Japan

The currently deteriorated ROK-Japan relations are a factor hindering ROK-Japan cooperation in both regional and global dimensions of North Korean infrastructure development. Fundamentally, the policy orientations of the ROK and Japanese governments regarding their relations with North Korea do not align. However, beyond differing stances on North Korea, the conflicts between the two countries, centered on historical perception issues, are creating a situation that impedes ROK-Japan cooperation on all matters. Even if North Korean infrastructure development were an issue that could be immediately addressed, the space for cooperation between South Korea and Japan in the global and regional dimensions of financing for North Korean infrastructure development has become very narrow. Rather, if North Korea's reform and opening become a reality, the two countries might find themselves in competition regarding the development of North Korea's socio-economic infrastructure. From South Korea's perspective, if it aims to maintain its leadership in the context of international cooperation for North Korea's reform and opening, efforts to enhance the complementarity of neighboring countries' involvement in North Korea, including Japan, with South Korea's plans are necessary.

The Kim Dae-jung administration sought to understand and address inter-Korean relations, ROK-Japan relations, and the advancement of East Asian regionalism not as separate issues but as interconnected ones. The implication of the Kim Dae-jung administration's foreign policy strategy is that the management of ROK-Japan relations is essential for the future vision of peace and prosperity on the Korean Peninsula. 

■Lee Jeong-hwan_Professor of Political Science and International Relations at Seoul National University. He holds a Ph.D. in Political Science from the University of California at Berkeley. His main research areas are Japanese political economy and Japanese foreign policy. His major publications include <Decentralization Reform and Public-Private Cooperation in Contemporary Japan> (2016), "The De-centralizing Nature of Japan's Regional Revitalization Policy" (2017), and "The Transformation of Abe Administration's Historical Policy: Abe's Statements and Internationalism" (2019).

• Managed and Edited by : Min Ji-yun Head of External Affairs, EAI
  
  Contact: 02 2277 1683 (ext. 203) | jymin@eai.or.kr