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

[Editor's Note]

The conception of the New Economic Map for the Korean Peninsula, aimed at realizing a peaceful community on the peninsula, emphasizes the development of North Korea's underdeveloped socio-economic infrastructure. Infrastructure development begins with seeking effective funding 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 through multilateral development banks but also at the regional level in Northeast Asia for North Korea's infrastructure development. He adds that finding a breakthrough for North Korea's infrastructure development is possible when ROK-DPRK relations, ROK-Japan reconciliation, and progress in East Asian regionalism are understood and addressed as interconnected issues, not separate ones.

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Challenges of North Korean Infrastructure Development and the New Economic Map for the Korean Peninsula

Although the prerequisite of building a peace regime on the Korean Peninsula centered on North Korea's denuclearization presents a significant barrier, discussions on inter-Korean cooperation and international cooperation targeting North Korea's economic development appear more urgent than ever. Under what institutional framework should South Korea approach the development of North Korea's infrastructure, which will serve as a catalyst for its economic growth? South Korea's strategy for North Korea's infrastructure development is established as the 'New Economic Map for the Korean Peninsula.' The New Economic Map for the Korean Peninsula, centered on the 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. It encompasses inter-Korean cooperation in all economic sectors, aiming to build the foundation for economic unification and realize a peaceful community on the peninsula by pursuing a single market cooperation between the two Koreas. 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 employment creation in North Korea. 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 the nature of a public good, requires public capital investment. The problem is that, given North Korea's low capital accumulation, it is impossible for the North Korean government and public institutions to secure the funds needed for the infrastructure investments necessary 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 occurrence in the early stages of development for emerging countries, and North Korea will be no exception. How should the funds required for the construction of North Korea's socio-economic infrastructure be raised?

Financing Issues 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 Construction & Economy Research Institute in 2019, initial infrastructure development in North Korea requires an investment of 306 trillion won over 10 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's 'Core Development Projects for the Korean Peninsula,' which served as the basis for South Korea's New Economic Map for the Korean Peninsula, share commonalities in focusing on infrastructure development along the West and East coasts. When overlapping projects from both plans are excluded, the estimated cost for North Korea's infrastructure development is 306 trillion won.

The primary responsibility for financing the 306 trillion won required for North Korean infrastructure development over 10 years lies with the North Korean government and its public financial institutions. However, given North Korea's current state capacity, it is difficult to expect the North Korean authorities to undertake this financing role independently. 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 the international financial market and its unfamiliarity with international financial norms, it is difficult for it to move directly towards such public-private financing. When North Korea embarks on reform and opening, initial infrastructure investment financing will inevitably be based on public funds, governed by norms of political stability rather than profitability.

The most likely source of funding 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 serves as 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 be a stage for economic profits. 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 within South Korea's government funds that could 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 Korean 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 could be used for North Korean infrastructure investment after legal revisions, the annual scale of government development assistance (approximately 3 trillion won) and Economic Development Cooperation Fund (approximately 1.5 trillion won) shows a significant gap compared to the required scale of funding for North Korean infrastructure investment. In other words, while ODA and EDF can help secure the necessary funds for North Korean infrastructure investment, they are unlikely to become the core funding source.

Exploring Institutional Frameworks for International Cooperation in North Korean Infrastructure Development

In addition to the Inter-Korean Cooperation Fund and ODA/EDF, it is also necessary to create separate sources of public funding from South Korea for North Korean infrastructure investment. However, the demand for North Korean infrastructure investment is difficult to meet with South Korean funds alone. Moreover, North Korean infrastructure investment can play a role in strengthening global connectivity with North Korea in the future vision of peace on the Korean Peninsula. When public funds from neighboring countries and international financial 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 international 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 positive engagement from 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 utilized as a source of funding for North Korean infrastructure investment, it is a long-term process that requires North Korea to demonstrate and be recognized as a stable member within the multilateral development finance regime. Since joining international financial institutions to receive concessional funding is not easy for North Korea, establishing a Multi-Donor Trust Fund, where relevant countries including South Korea contribute funds, has been discussed as the most realistic form of international cooperation for North Korean infrastructure investment prior to joining international financial institutions. Currently, in the transition from international cooperation for humanitarian aid to North Korea to international cooperation for 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 Need for Regional Multilateral Cooperation in 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 multilateral development bank specialized for the Northeast Asian region with implications for North Korean infrastructure investment, have been ongoing since the 1990s. Amidst the post-Cold War regionalism boom, the need for additional international finance for development demands in Northeast Asia has been mentioned. The connection of the Northeast Asia Development Bank with North Korean infrastructure investment stems from discussions that re-activated the concept of a Northeast Asia Development Bank in South Korea in the 2000s and proposed using it for financing North Korea's development. However, although discussed as a regional cooperative financial institution for North Korean development cooperation, the concept of a Northeast Asia Development Bank struggles to differentiate itself and play a leading role in supporting North Korea compared to other multilateral development banks. While exploring regional institutional frameworks beyond the multilateral framework for international cooperation in North Korean infrastructure investment is significant in terms of diversifying cooperation, it is difficult to see how high levels of institutionalization and organization, operating under the strong norms of the international financial regime, would benefit development cooperation with North Korea. From the perspective of 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 the surrounding countries in the Northeast Asian space, and their associated development funding policies, can be meaningfully discussed in the initial stages of North Korean infrastructure investment. South Korea, China, Russia, and Japan all have regional development initiatives. These initiatives have emerged from efforts to enhance their international standing and strengthen their influence within the region through development cooperation that extends beyond their 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, the development of North Korea is somewhat essential geographically. While Japan's regional initiatives are unfolding as the Indo-Pacific concept centered on maritime axes, the unresolved issue 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 regional development initiatives of various countries with North Korean development will likely advance. The countries surrounding the Korean Peninsula have clear interests in North Korea's infrastructure development. China has significant interest in both the West and East Coast axes of North Korean development. The West Coast axis directly connects to Northeast China via the Gyeongui Line railway. Furthermore, the East Coast axis, connecting to Jilin Province, serves as a means to enhance maritime access for Northeast China. Russia has a strong interest in building transportation and energy infrastructure through the East Coast axis, extending through North Korea to South Korea. Japan, in terms of enhancing connectivity in the East Sea rim region, shows high interest in North Korea's East Coast axis. Moreover, the prospect of substantial Japanese funding for North Korea, anticipated 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 current 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 conflict issues between the two countries, centered on historical perception, are creating a situation that makes cooperation on all matters difficult. Even if North Korean infrastructure development were an issue that could be immediately implemented, the space for cooperation between the ROK and Japan in the global and regional dimensions of financing North Korean infrastructure development has become extremely narrow. Rather, if North Korea's reform and opening become a reality, the two countries may find themselves in a competitive relationship regarding the development of North Korea's socio-economic infrastructure. From South Korea's perspective, if it intends 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 respond to inter-Korean relations improvement, ROK-Japan reconciliation, and the advancement of East Asian regionalism as interconnected issues, not separate 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-hwanProfessor of Political Science at Seoul National University. He received his Ph.D. in Political Science from the University of California, Berkeley. His main research areas are Japanese politics and economics, and Japanese foreign policy. His major works include <Decentralization Reform and Public-Private Cooperation in Contemporary Japan> (2016), "The De-localizing Nature of Japan's Regional Revitalization Policy" (2017), and "The Transformation of the Abe Administration's Historical Policy: The Abe Statement and Internationalism" (2019).

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