Domestic Coalition of South Korea’s Engagement Policy
Sung Chull Kim
Associate Professor, Hiroshima Peace InstitutePrepared for Workshop on“Prospects for East Asian Nuclear Disarmament”
Hiroshima Peace Institute
Hiroshima, Japan
March 11-12, 2004

1. Introduction

The purpose of this chapter (article) is to demonstrate how a domestic coalition between thegovernment and the business for South Korea’s engagement policy to the North emerged in thelate 1990s, and how coalition partners have interacted with each other since then. The chapter
illustrates interconnectedness between political economy and security issues, by exploring thecoalition that shares a policy orientation of internationalization.

Up to today, in understanding of inter-Korean problem, security factors -- either domesticallyoriginated or internationally induced -- have been treated as sole independent variables. Bothdecision-makers and scholars focused on the ways in which the international security
environment in East Asia and North and South Korean regimes would decide the inter-Korean
relationship. They also investigated the effect of the security situation in the Korean peninsula on
economic consequences of two Koreas. Such way of understanding of the Korean problem
extended to a deterministic explanation positing that the security relation between the North andthe South has determined the economic relations between them.

Such logic, to a certain extent, has a factual ground. The national division, the Korean War, theCold War, and a half-century confrontation not only separated families and relatives but limited
potentials of economic prosperity both in the North and the South. Before the end of 1980s,
oppressive regimes in the two Koreas prohibited themselves from moving toward tension
alleviation and from having a genuine dialogue. Furthermore, under the tense situation, it was
impossible for them to have an economic exchange through which South Korean businessmen

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2might take an advantage of chief skilled labor and natural resources of the North. In this regard,
the unstable security situation constrained the development of inter-Korean relation andparticularly economic assistance and cooperation.

There are, however, evidences to refute the logic that tense security situation has simply
contained economic relations between two Koreas. In other words, the Korean problem should
not be interpreted by the eyes of the security factor alone. Let us look at the aftermath of theSouth Korea’s engagement policy and the inter-Korean summit in June 2000. The historic event
paved a way for advance of South Korean enterprises headed by the Hyundai Asan Corporation
into the North. Two naval skirmishes on the Northern Limit Line (NLL) that occurred in 1999
and 2002 respectively could not stop the South’s engagement policy that favors the economic
cooperation between two Koreas and humanitarian assistance to Pyongyang. Such situation in the
Korean peninsula is best depicted by the statement: the cruise ship floats for tourism of Mt.
Keumgang in the East Sea even when gun smoke soars up in the West Sea. Furthermore, under
the perilous situation of North Korea’s nuclear development, the trade volume and humanexchanges between the North and the South has gradually increased.

This situation shows that despite the lingering danger of conflict in Korean peninsula, South
Korean government’s policy of engagement with the North and the business strategy for thesurvival have been in harmony with each other. This harmony represents a domestic coalition
between the government and the business for internationalization.1 This coalition clearly takes acommon goal of engagement with the North, in particular, and of internationalization both ineconomic and security affairs, in general.

The coalition forces not only combine the issues of security and economy together but graduallytransform the configuration of relations between two Koreas. Making the issues inseparable, thecoalition neither allows one issue to prevail the other, in general, nor permits a security problem
to obstruct inter-Korean economic exchanges, in particular.

1

For the concept of domestic coalition of internationalization, see Etel Solingen, Regional Orders at
Century's Dawn: Global and Domestic Influences on Grand Strategy (Princeton: Princeton University
Press 1998) and Etel Solingen, “Internationalization, Coalitions, and Regional Conflict and Cooperation,”in Edward D. Mansfield and Brian M. Pollins, eds., Economic Interdependence and International Conflict:
New Perspectives on an Enduring Debate (Ann Arbor: University of Michagan Press, 2003), pp. 60-59.

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3This chapter examines particularly the engagement policy, led by the coalition ofinternationalization centered on Kim Dae-jung administration, as a background of South Korea’s
attempt to push the six-party talks for the solution of North Korea’s nuclear crisis. For thispurpose, it will identify the conception of the domestic coalition for internationalization in South
Korea. Then it will move to the exemplary case of collusive coalition, i.e., the Hyundai’s
remittance scandal. Finally, it will conclude with institutionalization of the coalition and its effecton the emergence of the six-party talks.

2. Coalition for Internationalization: Issues and Actors

In the study of international relations, two different traditions have attracted the attention ofrelated audiences. One tradition is an examination of the interplay between politics and theinternational economic order. Under the umbrella terminology of international political economy,
proponents of this approach have mainly discussed economic policies but not the security andpeace issue. The other tradition concerns the link between domestic and international factors,
standing in opposition to the realist viewpoint that the state is a unitary actor. Those scholars who
are affiliated to this tradition have investigated pluralistic dispersion of power in domestic politics
and its effect on foreign policy and international relations. The scholars’ interests relate either tointernational security or to international economic cooperation, but not to both of them. Here, it isnotable that in the study of international relations, a clear distinction has been made between
political economy and international security.

In fact, political economy issue and international security issue are closely related each otherempirically. The relationship between them does not simply mean that a change in one issue
brings another change in the other. Rather, the relationship is an interactive one in the sense thatthey move together to a certain direction, avoiding the other direction. More importantly, theactors who are involved in the security and economic affairs are not segmented from one anotherbut either identical, or overlapped, or tightly coupled. Whether they are either governmental
officials or business leaders, the actors engage in both security and economic relations directly or
indirectly. In addition, whether they are physically located in a certain national boundary or not,the influence of actors’ behavior reaches to international issues as well as domestic issues.
Consequently, whatever their professional occupations may be, actors’ individual and groupinterests lead them to articulate wants and demands on cross-boundary issues to either domestic
partners or international partners.

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Therefore, regardless of the traditional disciplinary distinction between international security andpolitical economy, they are empirically interpenetrated by the actors who play across issuecleavages. Likewise, the inter-Korean relation cannot be explored by the political and military
factors alone. Economic factor also has played an important variable that affects inter-Korean
relationship in general and South Korea’s policy toward the North in particular.

Who are the actors involved in the security and political economy issues in the case of Korean
problem at the end of the 1990s? In examining this, it is useful, at first, to look into twodimensions through the 2×2 matrix. One is a dimension of political economy and security, andthe other is on domestic and international levels.

Figure 1. Two dimensions of Korean problem at the end of 1990s

Political Economy

Security

Domestic

Restructuring of
economic sector

Kim Dae-jung’s
engagement policy

International

Globalization,
IMF conditionality

Cold War structurein Korean peninsula

On the political economy, major actors were businessmen and Kim’s new administration, andthey were linked each other by the restructuring policy and the IMF conditionality. In times offinancial crisis in the late 1990s, the conglomerates, so-called Chaebols, and small corporations
were under mounting pressures of reforming their management pattern and financial structure.
The IMF’s stand-by package to save South Korea’s draining reserves included a harshconditionality that drove the business to search own survival strategy by themselves. Even under
the intensifying trend of globalization in the mid-1990s, the business was reluctant to change their
behavior pattern relying upon the government’s favor in securing domestic bank loans andforeign financial sources. On the eve of the financial crisis, their heavy dependence on short-term“Prospects for East Asian Nuclear Disarmament”

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5loans with high interest rate climaxed, which later strained their necks.2 However, under thepressure of conditionality given by IMF, Kim Dae-jung administration launched restructuring
policies in those sectors of the private, the public, the labor, and the banking. The policy
apparently oriented toward economic internationalization. In particular, the government forgedreforming of conglomerates to enhance their viability, on the one hand, and making attempts to
attract foreign investors for the creation of new jobs, on the other.3

It is certain that the policy of economic restructuring aimed at internationalization. On
conglomerates, the government pushed transparent management, and profit-orientedorganizational reshuffling, debt curtailing, and mergers and acquisitions. On the public sector, thegovernment implemented such measures as down-sizing of administrative organizations,privatization of major state-owned enterprises, and cutting of pension and retirement benefits. On
the labor sector, the Tripartite Commission, newly created for flexibility of the labor market, led asocial agreement for mass dismissal of employees. On the banking sector, the restructuring
program required commercial banks to increase the ratio of bank’s own capital of the Bank ofInternational Settlements (BIS) and to reduce outstanding debts so as to enhance the profitability
and safety.4 All these measures were in parallel with the general trend of globalization andeconomic liberalization.

On the security issue, there are three actors: Kim’s administration, as a prime mover; South
Korean business group and non-governmental humanitarian organizations, as participants; andNorth Korea, as a passive respondent. As soon as Kim Dae-jung was inaugurated as the president
in February 1998, his administration launched the engagement policy, called Sunshine Policy,
toward North Korea. This policy adopted the measure of “distinction between politics and2South Korean conglomerate’s mode of getting capital was different from that of Latin American
enterprises. The former has largely relied upon loans from domestic or foreign banks, whereas the latter has
equity-based financial structures. In addition, the former was distinctive in that the development-oriented
government even guaranteed for the conglomerate’s introduction of capital from foreign bankers. Therefore,
South Korean conglomerates had unique characteristics of having a huge amount of outstanding debt,
keeping ownership rights in the hands of the chief executive officers. Marcus Noland, Avoiding the
Apocalypse: The Future of the Two Koreas (Washington, DC: Institute for International Economics, 2000),
p. 215.
3This new policy orientation contrasted with the nationalist policy preferences right before the financial
crisis. On the nationalist policy preference in the mid-1990s, see Chung-in Moon and Dae-Won Ko,“Korea’s Perspective on Economic and Security Cooperation in Northeast Asia,” in Tsuneo Akaha, ed.,Politics and Economics in Northeast Asia: Nationalism and Regionalism in Contention (New York: St.
Martin’s Press, 1999), pp. 178-83.
4
Gyoung-won Kim and Soon-woo Kwon, eds., How Has the Korean Economy Changed in the Five Yearsof Financial Crisis? (Seoul: Samsung Economic Research Institute, 2003), in Korean, pp. 248-9.

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economy” that certainly intended to economically engage with the North, leaving behind
uncertain and unsolved security matters. The engagement policy encouraged the business group
to invest in the North with abundant skilled labor and geographical and cultural advantages.

The Sunshine Policy, at a glace, seems to have sought an independent national unity between the
two Koreas, whereas the policy, in reality, has fostered internationalization of North Korea
problem. At the Joint Declaration of the summit between Kim Dae-jung and Kim Jong-il in June
2000, independent solution of Korean issue was emphasized. A common effort to move towardreunification of Korea, following common elements of North and South Korean unification
models, was also included in the declaration. In this regard, some watchers observed that thedeclaration was a reflection of Pyongyang’s longtime insistence on the exclusion of foreign forces,
meaning the withdrawal of American military presence. Such interpretation does not comprehenda real implication of the summit, especially from Seoul’s perspective. Through the summit, South
Korea intended to lessen the tension on Korean peninsula, but neither to reject American militarypresence nor to weaken the security alliance. Only one month after the summit, South Koreanpresident Kim Dae-jung told that the American military forces based on the alliance between thetwo countries is and will be crucial, even after the Korean unification, for the peace in Korean
peninsula.5 That is, Kim and his administration’s endeavor for the summit in particular and theengagement policy in general aimed at peaceful coexistence with the North as a primary goal.
They believed that the summit could gear down the cost of confrontation between the two Korea,
particularly in times of economic restructuring.

In fact, the government made strenuous efforts to dismantle the deep-rooted Cold War culture ofanti-communism and confrontation in the South Korean society. Furthermore, South Korea
attempted to induce the North to the international community. With diplomatic supports fromSeoul, Pyongyang could open normalized relations with Western countries in the early 2000s.6

5

Donga Ilbo, July 10, 2000. Kim’s statement of the necessity of American forces even after unification
aimed at the alleviation of criticisms from the opposition party. However, this statement could not erase theopposition’s skepticism on Kim’s lenience toward Pyongyang on the issue of American military presence.
6
Taking the opportunity of Seoul’s engagement policy, North Korea opened normalized relations with thefollowing western countries: Italy (January 4, 2000), Australia (May 8, 2000), Philippine (July 12, 2000),
United Kingdom (December 12, 2000), Netherlands (January 15, 2001), Belgium (January 23, 2001),
Canada (February 6, 2001), Spain (February 7, 2001), Germany (March 1, 2001), Luxemburg (March 5,2001), Greece (March 8, 2001), Brazil (March 9, 2001), New Zealand (March 26, 2001), Kuwait (April 6,
2001), Bahrain ( May 23, 2001), Turkey (June 27, 2001), and European Union (May 14, 2001). Yonhap
News, North Korea Yearbook 2003 (Seoul: Yonhap News, 2002), in Korean, p. 424.

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Such a change enabled North Korea to secure continuous humanitarian aids from internationaland South Korean non-governmental organizations.

By the actors who were involved in political economy and security issues, both wereinterconnected with one another. The government and the business in South Korea, for different
reasons, followed the value of internationalization. This was an apparent domestic coalition in
sharing a policy orientation of tension reduction and co-existence in security terms as well as of
opening and liberalization in economic meanings. There is no question that the government was
the prime mover. Kim’s newly launched administration openly presented an idea that thesunshine would disarm the militant North Korea, and in turn, this would guarantee economic
well-being of North and South Koreas. Because of a widespread perception that any serious
military conflict in the Korean peninsula would have foreign investors withdraw their moneyfrom Seoul, not only the government but the business group more keenly acknowledged
importance of peaceful coexistence with North Korea than ever before. In this respect, they
commonly accepted the conception of “buying peace with economy” or “investment in thepeace.”

The coalition first appeared in a rudimentary fashion, a collusive coalition, under the Kim Daejung’s rule. The collusive coalition is represented by the scandal of Hyundai Asan Corporation’s
remittance to a bank account of a North Korean trading company. In general, however, thecoalition between the government and the business flourished under Kim’s rule. Furthermore, it
has been maintained in the new administration of Rho Mu-hyun as well.

Notably, the deepening of the South’s engagement with the North seems to be in conflict with
George W. Bush administration’s hard-line policy. In a sense, Rho administration’s tilting too far
to the North is attributable to the American hard-line posture to the North, as well as to Rho’s
ideological predisposition. However, this does not mean the weakening of domestic coalition forinternationalization. The coalition partners still share the common cause of tension decrease andeconomic prosperity on the Korean peninsula. A policy preference of this coalition is themaintenance of engagement with the North, playing an active role for avoiding a conflict between
the United States and North Korea. In this respect, South Korea supports China’s mediation andthe tripartite talks among US, China, and North Korea in April 2003, which later evolved to the
six-party talks.

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3. “Collusive” Coalition between Government and Hyundai

In August 2003, the scandal of remittance to North Korea by Hyundai Asan (hereafter remittancescandal) was revealed to the public by the independent counsel’s investigation team, which wascomposed to probe an alleged collusion between Kim Dae-jung administration and the Hyundai
in arranging the summit talk with Kim Jong-il in June 2000 by paying money. According to theinvestigation result, $450 million in cash and $50 million in goods and services, with the name of
economic cooperation funds, were sent to North Korea by the Hyundai right before the historicinter-Korean summit.7 The independent counsel concluded that the cash remittance was closely
linked to the summit talk. In addition, the independent counsel found that the government
arranged for the Hyundai to get illegal loans from the state-run Korean Development Bank andtook measures to help the Hyundai to covertly remit the cash to a North Korean bank account.8

This remittance scandal exemplified the collusive coalition for internationalization between thegovernment and the business in South Korea. It was a collusion in that the business paid akickback to North Korea as well as South Korean political figures in order to obtain monopoly
rights in businesses in the North, such projects as Mt. Kumgang tourism and the Kaesong special
industrial zone. Under the given tense situation between two Koreas, the Hyundai considered thesummit talk an effective means to open the path to its entrepreneurial advance to the North. It was
similar to the old collusion between politics and business in South Korea under authoritarian rulein the development stage on the ground that the government provided business conglomerates inneed of mobilizing capital with favoritism on bank loans. Remarkably, the conglomerates
expanded their working capital not through the stock market but by the commercial banks andforeign banks, either contributing the national economy or giving kickbacks to politicians. South
Korean developmental government was a facilitator of the loans for the conglomerates. The
remittance scandal was a new version of collusion, which occurred in the midst of governmental
initiation to develop the relationship with Pyongyang.

Meanwhile, the remittance scandal was a coalition for internationalization, formed between thegovernment and the business. Let us look at the government side at first. Kim Dae-jung
7

The former chairman of Hyundai Asan, Chung Mong-Hun, who killed himself by a psychological burdenof the scandal, was quoted as telling the independent counsel that South and North Koreas agreed that theHyundai would pay $400 million to North Korea and the government pay $100 in May 2000 when Seoul
and Pyongyang negotiated the first inter-Korean summit. However, the Hyundai took all burdens including
the amount that was supposed to be paid by the government.
8
Korea Times, August 4, 2003.

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Domestic Coalition of South Korea’s Engagement Policy

administration initiated an actual engagement policy toward Pyongyang for the first time since theend of the Korean War, reflecting his life-long philosophy and theory of national unification. The
engagement policy, called Sunshine policy, was different from previous policy that had been
based on the Cold War policy orientation. The policy has pursued peaceful coexistence with theNorth, even though there was resistance from conservative forces in domestic political arena.

In the study of international studies, one of the frequently quoted indicators that reflect the peaceprone policy is a trend of military expenditure. Figure 1 shows a comparison between the periodof Kim Dae-jung administration between 1998 and2002 and that of previous Kim Young-sam
administration between 1993 and1997. South Korean case shows a fluctuating trend with a sink at
the end of the 1990s, which contrasts with a stable increasing trend of Japanese case and a rapid
soaring Chinese case.

Table 1. Military expenditures in East Asian countries, 1993-2002(million US dollars)
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
S.K.*
10,998 11,310 11,897 12,539 12,842 12,398 12,061 12,801 13,079 13,533
Japan
43,753 43,958 44,398 45,293 45,510 45,394 45,479 45,793 46,259 46,727
China 14,200 13,500 13,900 15,300 15,500 17,800 20,700 23,000 26,300 31,100*The South Korean case does not include expenditures on military pensions, arms imports, orparamilitary forces.
Source: Stockholm International Institute of Peace Research, SIPRI Yearbook 2003 (Oxford:
Oxford University Press, 2003), pp. 348-9.

A benchmarking measure of South Korea’s engagement policy was the “differentiation between
politics and economy” in dealing with North Korea affairs. With this measure, Seoul government
allowed South Korean businessmen to make adventurous advancement toward the North,including expansion in the processing trade of manufacturing products and exploration of direct
investment and trade. Given this situation, the Hyundai, i.e., the most adventurous conglomeratein South Korea, which could have not expanded its business under the previous administration
because of a political repression, became a coalition partner of the new government’s engagement
policy toward North Korea.

It is remarkable that the South Korean government’s Sunshine Policy was in accordance with aninternationalizing economic policy that pursues opening to foreign investment and enhancing
transparency of the economic system. That is, there is a clear link for internationalization between
the security policy, particularly the North Korea policy, and the economic policy. Compared to“Prospects for East Asian Nuclear Disarmament”

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the engagement policy initiated by the administration, the origin of neo-liberal economic policy
was attributable to the financial crisis in 1997.9 When it received IMF package loans in order toovercome the crisis, South Korea could not but accept conditionality of the restructuring of four
sectors: banking, labor, private, and public sectors. In a sense, the forced restructuring actuallyempowered the government’s drive to eradicate old dreadful practices in Korean economy -- suchas bank’s favoritism in loans to the big conglomerates; loss of competitiveness owing to the highlabor cost; family management and excessive expansion of the conglomerates; and wastes andexaggerations in the management of the state-owned enterprises. The government launched therestructuring under the slogan of the simultaneous development of “democracy and market
economy.”10 This slogan represents the neo-liberal approach whereby the state neither play aleading role of protecting enterprises, nor of providing a “from-cradle-to-heaven” welfare system,
nor of assuring job security of public servants.

There was a logic of political economy here. That is, without keeping the development drive,
Kim’s administration could not maintain a relatively stable political support. Right after thefinancial crisis in 1997, massive jobless people poured out into the street because of thebankruptcy of big conglomerates and small enterprises that could not survive a high interest rate
enforced by the IMF conditionality. According to data of Korea National Statistical Office, theunemployment rate skyrocketed right after the financial crisis. The relatively low rate of 2.0% in
1996 and 2.6% in 1997 rapidly rose to 7.0% in 1998 and 6.3% in 1999.11 For this reason, theeconomic recovery that might guarantee the creation of new jobs became an important agenda of
the newly launching administration. Given this situation, the administration stressed thesignificance of the security and peace, in general, and tension reduction in Korean peninsula, inparticular. Without a development of the relationship with Pyongyang, Seoul may not revitalize
the economy. The country’s credit-rating would depend upon political stability as well as
economic conditions. The rate would be seriously damaged in case of any minor conflict between
the two Koreas, and then the government could not restore a momentum of economic growth thathas continued for almost four decades. In other words, the government’s internationalization

9

Kim Dae-jung’s ideology was originally a populist one. In his book, Mass Participatory Economy in 1971,
Kim showed a critical view on conglomerates, proposing an idea how to restrict the concentration of wealthin their hands. His alternative approach was mass ownership and mass participation in the management.
10
Donga Ilbo, December 20, 1997.
11
The highest unemployment rate in the past decade recorded 8.5% at the first quarter in 1999. It seems
that effects of impact of the financial crisis and the launch of restructuring policy appeared one year later.
See www.nso.go.kr/cgi-bin/sws_888.cgi. February 26, 2004.

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economic approach, whether it is either adaptive or forced one, was interconnected to theengagement policy toward North Korea.

A question follows here. Why the Hyundai, not other conglomerate, became the main partner tothe government for the collusive coalition, particularly in the engagement with the North? This
question is legitimate, since all conglomerates had experienced the collusion with previous
administrations and faced similar pressure of a forced adaptation under the IMF conditionality. A
key to this question lies in that the collusive coalition aimed at searching chances of virginmarkets in North Korea specifically.

At the individual level, personal motivation and regional origin of the founder of Hyundai was
important. The late Honorary Chairman, Chung Ju-young, was born in Tongchon of Kwangwon
Province, located in the just northern side of border, in November 1915. When he visited
hometown in 1989 for the first time, this adventurous entrepreneur surveyed business
opportunities as well as reunion with his separated relatives. He presented to North Koreanauthorities a blueprint of the development of Mt. Kumgang tourism, which was the first andambitious offer to Pyongyang made by South Korean businessman. Chung’s business adventure
was realized as Kim Dae-jung took the presidential office in February 1998 and implemented theengagement policy that was in parallel with the restructuring of economic sectors oriented toward
internationalization of the economic system.

At the corporate level, the Hyundai had a relatively less severe debt burden than otherconglomerates. Under the harsh pressure of restructuring, most businesses attempted to down-size
departments and teams so as to lessen management and labor costs. An important criterion for the
down-sizing was profitability. After the Daewoo conglomerate opened a business tie with theNorth in the first half of the 1990s,12 many other conglomerates and small corporations graduallydipped their feet in the North in order to secure markets and industrial bases in the unforeseeable
future rather than to have a tangible results in a short term. Facing with the financial crisis in

12

The first inter-Korean economic tie embarked with the chance that Kim Woo-jung, Chairman of Daewoo
Corporation, visited North Korean leader Kim Il Sung in 1992. The Daewoo and North Korea’s Samchonri
finally established a joint venture company named Minjok Sanyeop in Nampo, the gateway harbor of
Pyongyang, in 1996. Between 1992 and 1996, the Daewoo has dominated the inter-Korean economic
relations, both in transactions and information. The other South Korean conglomerates gathered
information leaked from Daewoo’s North Korea channel. See, Jhong-keun Lee, “A study on the Structure
and Prospects of the Inter-Korea Processing Trade” (M.A. Thesis of the Graduate School of North KoreanStudies, Kyungnam University, in December 2002), in Korean, pp. 29-32.

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general and the debt problem in particular, however, most of them had to minimize the size of theteams for inter-Korean businesses because of low profitability, maintaining the minimal function,
like information collection, and the operation of the existing processing trade.13 In the midst ofcritical situation, the Hyundai, with relatively free from debt pressure, took a different path for anadventurous expansion in North Korea, particularly realization of the tourism project at Mt.
Kumgang that the company had dreamed for a decade.

The Hyundai’s comparatively low debt pressure at the moment of financial crisis may be
attributed to the political repression given by previous Kim Young-sam administration between
1993 and 1997. The political landscape at the beginning of the 1990s was seemingly a battle
between old politicians and empowered businessmen, even though the collusion still existed
behind the battle. One of the sources of empowerment was the conglomerates’ ownership over the
non-banking financial institutions in the 1980s – e.g., insurances, securities, and short term
finance companies. As they came to have their own financial sources, they were less relied upondomestic banks and the government’s assistance.14 The battle between politics and businessculminated when Hyundai’s involvement in politics in 1992. At the nationwide election of the
National Assembly in March, the new Hundai-sponsored party, the Unification National Party,
made a surprising political status, 17% of the votes and 10% seats.15 Furthermore, Hyundai’s
Honorary Chairman, Chung, ran but lost the presidential election in December, whereby Kim
Young-sam took power. With the aborted political journey, Chung as a businessman wasted thecampaign money. Also Hyundai as a conglomerate lost the chance of entrepreneurial expansion
under Kim’s presidential rule between 1993 and 1997.

Other conglomerates competing with the Hyundai gradually expanded from manufacturingindustry to unconventional industries such as financing and importing, by introducing not only
domestic loans but short-term foreign capitals in short-term bases with a high interest rate. In
contrast, the Hyundai just kept a calm status in the business circle, under cold eyes of Kim’s
administration. There was no new business expansion during the period, with a single exception

13

Interviews with Jhong-keun Lee (Senior manager of North Korea Team, LG International Co.) and Yeon
Chul Kim (Research Assistant Professor, Asiatic Research Center, Korea University) on February 2, 2004.
14
On the empowerment of the conglomerates, see Eun Mee Kim, Big Business, Strong State: Collusion andConflict in South Korean Development, 1960-1990 (Albany: State University of New York Press, 1997), pp.
194-200.
15
Stephan Haggard and Chung-in Moon, “The State, Politics, and Economic Development in Postwar
South Korea,” in Hagen Koo, ed., State and Society in Contemporary Korea (Ithaca: Cornell University
Press, 1993), p. 92.

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13of the establishment of an aerospace technology corporation. Even this was a separation from theHyundai Precision Machinery whose origin dated back to the 1970s.16 In this regard, for theHyundai, the end of Kim Young-sam’s rule was a chance of jumping into a new field, being
contrasted to competitors’ case.

Another related question regarding the Hyundai’s partnership in the internationalization coalition
follows. What did the Hyundai aim at, in detail, through arranging the inter-Korean summit in2000 by paying tremendous amount of cash? What was Hyundai’s stake for being a coalition
partner to the government? An important goal was to predominate over entrepreneurial chances in
the North before other competitors move forward. The Hyundai pursued the development ofindustrial bases in the North, particularly the long-term monopoly of land usage rights. The
Hyundai had concrete targets: Mt. Kumgang tourism project and Kaesong special industrial zone.
First, the tourism project started even before the 2000 summit. Taking advantage of the Honorary
Chairman Chung’s meeting with North Korean leader Kim Jong-il, the Hyundai could take adecisive step for the tourism project. The Hyundai and Pyongyang accorded, in October 1998, on
the “Agreement on Mt. Kumgang Tourism Industry,” based on which the Hyundai started theoperation of cruise ships on the East Sea in November. Second, the Kaesong industrial site project
had a momentum in August 2000, i.e., right after the inter-Koran summit. Chung Mong-hun,
Chairman of Hyundai Asan, met Kim Jong-il and announced Kaesong area a special economic
zone on which the company has a development right for 50 years. Since the Kaesong project
involves the development of various types of infrastructure -- including electricity,
telecommunication, water, road, housing, and leisure facilities, its scale reaches to 66 million
square meters that needs a huge amount of investment by both conglomerates and small
corporations in the long run.

It is noteworthy that Hyundai’s business engagement in the North was followed by thelegalization of the projects in the North and economic assistance in the South. In November 2002,
the Supreme People’s Assembly in Pyongyang passed two laws that specifically indicated two
regions, that is, Mt. Kumgang and Kaesong. Even though the legalization took place three years
after the first move of the Hyundai, it implied a significant meaning of legally guaranteeing
independent management by South Korean business alone. Before the adoption of two laws, there
had been general laws that noted foreigner’s direct investment and joint ventures. By the laws on
16

Dae-yong Jung, Entrepreneurship of Asan Chung Ju-young (Seoul: Samyoungsa, 2001), in Korean, pp.
216-7.

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Mt. Kumgang and Kaesong areas, however, Pyongyang for the first time came to acknowledge
the potential of South Korean company’s independent management, not joint venture but direct
investment, in legal terms.

Whereas the Mt. Kumgang project has been conducted by the Hyundai’s initiative, the Kaesong
project is being carried out by both Korea Land Corporation and Hyundai. Whatever the case may
be, the two projects are either partly subsidized by the government or consortiumed by the stateowned enterprise. In this respect, the internationalization coalition between the government andthe business becomes solid, if not same as a collusive coalition that appeared in 2000.

4. Institutionalizing of Coalition: Demands and Information Flow

Despite American hard-line policy toward Pyongyang, the power transition in South Korea, andanother nuclear crisis of North Korea, South Korea’s engagement policy and the domestic
coalition for this policy has been continued and, to some extent, institutionalized. In particular,
new president Roh Mu-hyun, who inaugurated in February 2002, proclaimed the launch of “Peaceand Prosperity Policy” whose basic principle followed that of the Sunshine Policy. New
administration’s engagement policy has seemingly pursued both goals of security and economic
prosperity and a distinct status of Korea in East Asia context.

In security and peace affairs, Roh, compared to the previous administration, has attempted to keepa distance to the American unilateralist approach on the issue of Korean peninsula, searching avariety in accounting the challenging problem of North Korea’s nuclear weapon development.
This is apparently distinctive from the traditional national strategy based on US-Korea military
alliance. Insofar as the American military presence in South Korea and military alliance between
the two countries remain in tact, American influence in the security affairs continues to be strong.
For this reason, Roh’s administration has consistently attempted to rule out any possibility of
military conflict, voicing the need of “peaceful solution” on North Korea’s nuclear crisis.

In the economic affairs, Roh’s administration has shown two different performances. He has
envisioned a hub role of South Korea in economic transactions in East Asia. Unlike thisenvisaging the economic future, the management style in dealing with economic affairs,
particularly labor disputes, was against the vision. The government frequently intervened in theprocess of adjustment of wages and working conditions. As a consequence, the labor, particularly“Prospects for East Asian Nuclear Disarmament”

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Domestic Coalition of South Korea’s Engagement Policyin the manufacturing and transportation sectors, restored their job security and wage increase to acertain extent, which were considered as a taboo in the previous administration under economic
restructuring. Meanwhile, there has been no collusive coalition partner, like Hyundai, for theincumbent administration. This is so not only because of Roh’s strong intention of reforming thecorruption and collusion between politicians and businessmen, but also because of a high politicalrisk of involving in collusion with the business in the issue of North Korea after the revelation ofHyundai’s remittance scandal.

In general, by the Peace and Prosperity Policy and the economic reform measure, the generaltrend of internationalization that embarked sincerely in Kim Dae-jung’s administration has been
continued. In particular, through the continuously open dialogue channels, the engagement policy
toward North Korea has been able to persistent even under the severely tense situation of nuclear
crisis. Furthermore, by these trends in security and economic affairs, the domestic coalition for
the engagement with the North has been strengthened to some extent.

Table 2. Trend of inter-Korean trade volume
1993
1994
1995
1996
1997
1998
187
195
287
252
308
222
Source: www.unikorea.go.kr. February 27, 2004.

1999
333

2000
425

(million US dollars)
2001
2002
2003
403
641
724

2000
7,986
7,280
706

2001
8,742
8,551
191

Table 3. Trend of inter-Korean visits
1993 1994 1995 1996 1997 1998
Total
24
12
536
146 1,015 3,317
S to N1812536
146 1,015 3,317
N to S6000
00
Source: www.unikorea.go.kr. February 27, 2004.

1999
5,661
5,599
62

2002
2003
13,877 16,303
12,825 15,280
1,052 1,023

As economic transactions gradually expand in volume, and visitors of both Koreas increase in
number (see Table 2 and 3), South Korean business group becomes more acquainted with thesituation in the North and gets more interested in the northern adventure than ever before.
Moreover, the development project of Kaesong special industrial zone has successfully induced
attraction from small corporations. According to a survey analysis conducted by the Federation of
Korean Industries in July 2003, 41.7% of 171 responding companies show their intention to open
business in North Korea, provided the environment of economic relations improves. In particular,
respondents from trade (75.0%), information technology (73.3%), and transportation (62.5%)“Prospects for East Asian Nuclear Disarmament”

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demonstrate relatively high interests in the business in North Korea.17 It is remarkable that theseinterests have been followed by business circle’s demands to the government for the betterbusiness opportunities.

What are major demands of the business group to the government? It is, above all, to secure
North Korea’s full pledge to permit their free entrepreneurial activities and to guarantee of theirrights on their assets invested in the North. It is well known that North Korea lacks infrastructurethat is an essential condition to attract foreign and South Korean investment. It is a problem thatneeds a long period of time in fulfilling the demands of the investors. This is why South Koreanbusiness has focused on the processing trade. The processing trade in labor-intensive
manufacturing industry is the only sector that may have economic relations with Pyongyang
without such infrastructure. South Korean processing corporations provide northern partners withall the necessities such as plants, samples, raw materials, and transportation. The North provides
the labor only. In order to extend the business in North Korea, therefore, the most urgent issue isinter-Korean agreements on market principles in the economic relations and North Korea’s
commitment to the agreements.

In addition, businessmen have concerned about more support from the South Korean government
for their capital mobilization. This is particularly important for the small corporations because
unlike to the big conglomerates with a capacity of capital mobilization, they need governmental
funds that are practically not available now, if not theoretically impossible, owing to the lingeringbusiness risks in the North.

The business group transmits the demands to the government through various channels. First ofall, the demands are transmitted to Ministry of Unification in the process of proposing businessplans, getting approvals of the plans, and reporting of the contacts with North Korean partners.
Officials of the ministry not only listen to the corporations’ experiences and progresses but alsoacquire information regarding obstacles and difficulties. They take into account the demands infuture negotiations with Pyongyang. Secondly, some private business associations and nongovernmental organizations often produce direct and organized demands to extend legal devices
for the investment in the North.18 Meetings and forums, sponsored or organized by Korea Trade17

Sun-bom Kwon, “Inter-Korean Economic Relations of Major Industries in 2003: Situation and Tasks”(CEO Report on Current Issue, Federation of Korean Industries, August 2003), in Korean, p. 6.
18
The most recent umbrella organization is the Council of Private Economic Cooperation between Southand North Korea, which was established in November 2003.

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Investment Promotion Agency (KOTRA) and Korea International Trade Association (KITA),
provide prospective corporations with a chance of airing their wants and demands to thegovernment.19

To put into effect of the “four economic agreements” between two Koreas in August 2003 reflects
the government’s accommodation of the demands, either directly or indirectly produced by thebusiness circles, to forge Pyongyang’s pledge and commitment. The four economic agreements
comprehend some general regulations that may apply to the countries with normalized economic
relations -- investment guarantee, elimination of double taxation, mediation of trade disputes, andnetting settlement. They constitute basic principles to protect investments in the North; however,they need detailed rules and regulations in order to be implemented.

Here it is noteworthy that the sources of pressing the government to achieve these agreements
were withinputs20 in the sense that the input derived from internal government officials’
understanding of the necessity of them since December 1991. The Basic Agreement between the
North and the South, accorded in the 1991, was a well-documented agreement but further needed
details on the matters of economic cooperation. For this reason, South Korean delegates in theprocess of the negotiation in 2003 pushed the four economic agreements that may lessen the fearof risk-taking and ease capital mobilization for the business advancement to the North. It is said
that the officials could not consult or release the regarding information to the business, so as to
avoid the backfire of the diverging domestic forces and of sensational media coverage.

Meanwhile, it is certain that the South Korean business, particularly small corporations, iscautiously watching progresses in the follow-up talks of the four economic agreements. Throughvarious channels, the small corporations have expressed their wants and knowledge. Theirbehavior constitutes dual meanings: one is to produce demands, and the other is to provide thegovernment with information. Whatever the way of expressing their interests may be, thecoalition between the government and the business is not a one-directional but interactive movein its characteristics.

5. Conclusion
19Interview with Myong-Han Dong (Senior Manager of Inter-Korean Economic Cooperation Team, Small
Business Corporation) on February 3, 2004.
20
On the concept of withinputs, see David Easton, A Framework for Political Analysis (Chicago:
University of Chicago Press, 1965), p. 114.

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In examining South Korea’s engagement policy toward the North since late 1990s, twointeractive relations have been accounted. One is an interaction crossing the issues of political
economy and security: restructuring economy and tension reduction in Korean peninsula. The
other interactive relation is between the international and the domestic: IMF’s harshconditionality of restructuring economy and domestic response to the pressure. Of many foreign
policies of South Korea, the engagement policy has been located in the core of the crisscrossing
interactive relations.

The engagement policy is an exemplary case of internationalization in the sense that it has
pursued a solution of the Korean problem by a peaceful means in the context of international
cooperation. For this reason, the engagement policy has been able to induce supports frominternational community, both in governmental and non-governmental levels. A visible
consequence was a series of normalizations between North Korea and western countries in theearly 2000s. Furthermore, the engagement policy has had a practical linkage with the neo-liberalapproach of economic restructuring and opening. In the process of implementing the policy, thegovernment not simply envisioned common prosperity of two Koreas but also proceeded with arealistic concern of reducing the business risk and of upgrading the credit-rating given byStandard & Poors and Moody’s. This is so because the inter-Korean relationship is one of thesignificant factors to be counted for the credit assessment and the likelihood of investment.

The engagement policy has been empowered by the coalition between the government and thebusiness, even though it was initiated by the new president Kim Dae-jung in the peculiar situationof an inescapable international economic pressure. The coalition first appeared in a rudimentary
fashion, as appeared in the Hyundai’s remittance scandal. As time passes, the coalition has been
sophisticated in terms of channeling demands and information. To the business side, the various
channels are employed for the articulation of their demands, both in straight and circuitous ways,
to the government. To the governmental side, the Ministry of Unification has been a nodal pointof the channeling: accommodating demands and converting them into agreements with the North
at the negotiation tables.

It is noteworthy that the coalition seems to be continuous for the time being, and that principles ofthe engagement policy, based on the coalition, would persist. As far as such trend is maintained,
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multilateralism in which China plays a significant role of mediating different interests, even if the
US-Korea military alliance remains as a cohesive bond in coping with potential threats from theNorth.

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