Citizens look on at a PYongyang statue of former leader Kim II Sung, whose economic policies have left N. Korea teetering on the edge of collapse.Renewed political tension is hampering Seoul's desire to boost business links with Pyongyang.
Ten Daewoo Corp engineers have been waiting in Seoul, bags packed, since September last year. They are ready to return to jobs at Daewoo Corp's joint-venture textile factory in North Korea. But, since crossing back into the South to renew their visas, they have been left stranded by a string of political incidents, which have exacerbated tension between the two Koreas.
Days after the engineers arrived back in Seoul, a North Korean submarine was discovered in South Korean waters. After Pyongyang apologised, the engineers looked forward to returning to their jobs. But as they prepared to set off again, the defection to the South - on 12 February - of Hwang Jang Yop, the highest-ranking communist official to seek asylum, sent diplomatic relations into another tailspin.
'Our team is still waiting,' Daewoo Corp's public relations deputy general manager, Moon Ki Hwan said at the end of February.
Daewoo Corp, the country's fourth largest chaebol, is the only South Korean company with a permanent presence in North Korea. Other companies from the South have shown interest in joining Daewoo Corp, but trade links have been repeatedly held up by the political animosity between the two sides.
North seen as good production base
The North has the potential to provide a good production base and a new market for South Korean firms. With a shared language and culture, the two countries would make natural trading partners, and Seoul is eager to see business links with the North grow. However, widespread famine and years of economic decline have left the North teetering on the edge of collapse. If, or when, the Stalinist state tumbles, Seoul is aware it would have to pick up the pieces.
The cost of reunification could send South Korea's already troubled economy into chaos. Some economists believe even a hint of impending collapse over the border could cause a Mexican-style currency crisis in the South. 'The collapse of the North Korean economy would be a disaster for South Korea,' says Lee Jaymin, an economic professor of Yongsei University in Seoul.
The question now, is how fast Seoul can put co-operation back on the agenda.
Economic exchanges between the two sides are relatively recent. Although reunification has been a stated goal of both sides since the 1950-53 Korean War ended in a ceasefire, the enmity has kept relations frosty. It was only in 1988 that South Korea took the first step to reconciliation by signing a unilateral agreement to expand co-operation with the North.
The North, whose juche ideology is based on economic self-reliance, shunned foreign investment until the 1990s, when trade with the former Soviet Union began to crumble. Last year, it established its first foreign trade zone at Rajin-Sonbong, near the Russian-Chinese border. Based on China's Special Economic Zones, it has attracted investor interest from Japan, the Netherlands, Hong Kong and China.
But its attitude to South Korean investment has been far from consistent. Although state firms have dealt with the South's private sector, Pyongyang have frequently been prepared to sacrifice economic investment for the sake of ideology. After arranging an investment forum in the Rajin-Sonbong zone last year, it refused to issue invitations or permits to a 53-strong delegation from the South.
But despite the diplomatic stand-off, South Korea's businesses are still pushing to strengthen links with the North.
A South Korean consortium has been awarded a project to build a nuclear power station in the North. Rising labour costs and high interest rates in the South have pushed many of its large conglomerates to seek production sites across the border.
Daewoo Corp has led the way. In August last year, production began at its joint-venture factory, which produces shirts, jackets and bags for export to Japan. The National Industry Corp is a 50:50 partnership with the North Korean state trading company Korea Samcholli General Corp, based near Pyongyang. Most of the 1,300 employees are from the North.
'Their skills are good,' Moon, of Daewoo Corp, says, of the local labour force. However, he admits the plant is unlikely to be profitable until the end of the century.
Other South Korean companies have been tentatively trading with the North through production-on-commission agreements, whereby the South sends designs and material for manufacture in the North.
All uniforms worn by workers at Daewoo Motors' Pyongyang plant, for example, are made under such an deal. LG Semiconductor has a similar agreement with a factory in the North for the production of televisions - a project which it is hoping to convert into a joint venture.
Several banks, including Hanil Bank, Korea Exchange Bank and Donghwa Bank, have shown interest in setting up offices in the North, to support growing trade. South Korea's Ministry of National Unification estimates trade with the North reached US$310 million in 1995, up from US$228 million in 1994. Interest is also growing among international investors.
Although little investment has materialised, the Rajin-Sonbong free trade zone has met its target in pledges. From last year's investment forum, it says as much as US$840 million has been promised in sectors such as tourism, light manufacturing and oil processing.
But many of the fledgling projects being negotiated by the South were put on ice as the political tension rose earlier this year. After the apology for the submarine incursion, seven South Korean firms were given the go-ahead to resume negotiations on projects in the North. But the defection of Hwang put the brakes on trade again.
'The situation does not allow us to conduct the existing programme smoothly,' says Cho Kun Shik , director general of the Intra-Korean Interchange and Co-operation Bureau at the Ministry of National Unification. 'But our basic position is to continue to pursue co-operation and exchange between the two Koreas.'
Frustrating lack of infrastructure
Practical problems are further frustrating those trading across the border. As the two countries are still technically at war, there are no direct telephone or fax lines. A four-kilometre-wide demilitarised zone separates the two sides and to communicate with partners in the North, firms in the South often have to work through a third party or in a third country.
The social and legal infrastructure for business is equally underdeveloped. There is little legal protection for companies trading in the North and a poor understanding of business practices of the developed world.
Cho says the South is ready to begin building the infrastructure, but is thwarted by a lack of co-operation from the North.
But co-operation may already be too late. With the state of the North's economy, the South now has to face the possibility of an economic crisis on the peninsula.
'We are considering various scenarios, but it is not possible to have perfect preparation. Nobody knows what will happen,' says Cho. 'If we develop and expand trade with North Korea we can minimise the problems after unification.'
The signs are not good, however. South Korea's trade deficit ballooned to more than US$22 billion last year and North Korea's economy is in decline.
The reunification of the East and West Germany, which is estimated to have cost US$500 billion since the Berlin Wall came down in 1990, happened when West
Germany had a trade surplus and the East was stable. The cost of reunification of the two Koreas is being estimated at between US$40 billion and US$2 trillion.
And as Yongsei's Lee suggests, just the hint of a collapse could be enough to plunge the South Korean economy into chaos. 'Everybody will expect South Korea to be seriously in debt and they will pull out capital. If North Korea collapses, there could be a foreign exchange crisis in the South, similar to what happened in Mexico.'
Others are less pessimistic. Many expect the South's economy to be cushioned from the impact by a gradual liberalisation of the North's.
Keunmo Lee, head of research at ING Barings Securities in Seoul, says the only way to save the South is to keep the border in place for the next decade. 'They will not simply free up the currency exchange. They will try to cultivate North Korea gradually, to confine the territory and gradually improve the situation over the next 10 years.'
Since 1995, the Ministry of National Unification has sent about 200 people every year to Germany, Vietnam and China to study options for the transition to reunification.
This year, the number is to be increased to 700 and re-unification teams will be set up in each government department.
Cho says both the reforms in China and Vietnam's doi moi could offer the North a route for modernisation. 'Whatever case they follow, I want them to activate something immediately.'