Introduction

The fact that Korea was plunged into abyss of economic crisis since late 1997 drew great attention from international community, The major reasons for that are simple: First, Korea, as a third largest economy in Asia and eleventh largest economy in the world, takes an important part in international economy. Therefore, Korea’s economic crisis would exert serious negative effects on Asian and global economy. Second, Korean Peninsula is a highly sensitive and versatile region. Any incident is likely to lead to tensions and conflicts between South and North Korea, and endanger Asia’s stability and security. Therefore, it is natural for the world community to focus attention on the situation of Korea’s crisis and its impacts on the situation of Korean peninsula.

Under this circumstance, the paper aims to discuss two related questions: what does the future hold for Korean economy? What are the Korean financial crisis’ impacts on inter-Korean relations? The article begins with a review of outbreak of Korea’s financial crisis, and continues to make an analysis of the causes of and prospects for Korean financial crisis. Finally, the paper discusses the impacts of Korean economic crisis on inter-Korean relations.

Outbreak of Financial Crisis in Korea

Korean financial crisis can be traced back to the disintegration of Hanbo Steel. Leading South Korean steelmaker Hanbo Steel Corp. defaulted on loans, first of a string of major corporate failures on January 23, 1997. Seoul stock market index declined 2.8 percent to 658.18 on Hanbo news next day. Subsequently, Sammi Steel Co., a unit of Korea's 26th largest conglomerate Sammi Group, collapsed in March, and Jinro, South Korea's largest distillery, collapsed under mountain of debt and was placed under bail-out program by its creditor banks in April. Some people began to be worried about Korean economy.

It was the failure of Kia Group in July that really triggered a confidence crisis among foreign banks and investors. Shortly after Kia Group, Korea's eighth largest conglomerate with an international reputation, declared bankruptcy, the crisis spread fast. The indecisiveness shown by Korean government in dealing with Kia case worsened the situation. Won hit record low of 901 to the dollar on August 1997. In October, Foreign banks began to call in loans and stop rolling them over. As a result, Korea faced a situation in which its banks and companies could not secure new funds at any price. As foreign banks and investors pulled out of Korea, the pressure on the Korean won became greater. A foreign currency crisis approached. On October 28, Won ended at 953 despite central bank intervention. To support the won in foreign exchange markets. Korean government spent close to $15.1 billion in two months from October and November. But things got worse. Won closed at 999.00 to the dollar on November 10, approaching the psychologically important 1,000 barrier. As riot police lined up outside the banks, anxiety was turning to outright panic. South Korea's financial markets were melting.¹

On November 17, Korean central bank announced it would no longer defend 986 level to dollar and Won immediately fell its daily limit down to 1008.60. Won plunged to its new limit-down level of 1139 on November 20. Korea was in the risk of going bankrupt. According to President Kim Dae-jung later, Korea’s total foreign debt was more than US$150 billion and the debt that was due right away totaled US$23 billion. At that time, however, Korea had a mere US$3.8 billion in foreign currency reserves.

On November 21, the Korean government formally called on IMF for standby loans. On December 3, IMF managing director Michel Camdessus arrived in Seoul to sign $57 billion bailout deal with South Korea. Under the agreement, IMF would provide $21 billion standby credit, World Bank would give $10 billion, the Asian Development Bank $4 billion, and seven nations including the U.S, Japan, the U.K, Germany, France, Canada, and Australia a total of $22 billion. The rescue package contained extremely stringent conditions. In essence, the IMF demanded structural reforms from the ground up with possible consequences of chaebol breakups and the closing of many financial institutions. Under the program, South Korea was obligated to raise the foreign ownership limit in local socks to 50% in 1997 from the present ceiling of 26%, and 55% in 1998, which would enable hostile takeover of Korean firms by foreigners. The IMF also forced Seoul to hasten the opening of the lucrative short-term bond market and the permission for foreigners to take over local financial institutions. Under the agreement, South Korea was to pursue fiscal retrenchment with a budget cut and tax hikes. The economic growth target for 1998 was set at 2.5% to 3% of gross domestic product (GDP), inflation at less than 5%, and the current account deficit restrained at less than one percent of GDP or about $5 billion in 1998 and 1999. From then on, Korea entered an "IMF era" and went on a long and protracted journey of economic recovery.

Major Causes of Financial Crisis

A number of external and internal factors contributed to Korean financial crisis such as poor government management, continuous trade deficit, Won appreciation, currency devaluation in neighboring countries, sudden withdrawal of foreign funds, short term loan structure, and inefficient business investment, etc. But it’s generally held that internal factors are more important than external ones. Here I’d like to focus on some major internal causes of Korea’s crisis.

From the most fundamental level, the government-business alliance should be responsible for Korea’s economic crisis. Korea pursued government-led and export-oriented economic development strategy in past over 30 years. The Miracle of Han River proved the success of the strategy. However, some problems accompanied the strategy. As time went by, these problems accumulated and turned into more and more serious structural problems until they triggered the crisis. Two of them are as follows:

The first is government-controlled banking system. Korean economic crisis broke out essentially in the form of banking crisis. Korean banking sector was particularly vulnerable. If the banks had been stronger, they may have been able to withstand the initial crisis without undermining their credit ratings in the international financial markets. Korean banks have long been loaded with significant amounts of non-performing loans even though there are no reliable data. Banks have also suffered from the slumps in the asset markets such as real estate and stocks that lowered the value of their assets. When the IMF bailout came, few banks were healthy enough to meet the BIS requirements for self-owned capital. 10 Korean banks are also notoriously inefficient with an excess number of workers and branches. They also lag behind in modern financial techniques. When banks provide loans, their decisions depend on the size of collateral, not on the merit of investment proposals.

Long period of undue government’s intervention and dominance resulted in the weak banking sector. For a long time, the government allocated credit to favored sectors through policy loans and administrative guidance. Credit control and allocation were the key instruments of the government's industrial policy. Since it was the government who decided where money went, the banks did not really have an incentive to develop capacity for project evaluation. Moreover, the risk for the banks was minimal. The government provided explicit guarantees for depositors while it bailed out the companies that they supported. The government acted as "an effective risk partner of private industry." The implicit co-insurance scheme among government, banks, and industry worked well for a long time, fueling the industrialization of the Korean economy. But it left the banking sector inefficient, backward, and dependent. The state-dependent banking sector was also a breeding ground for corruption. Since capital was in short supply and the government regulated interest rates, banks could and did allocate credit, under government direction, to those who can deliver favors to them, such as friends of powerful politicians or to the highest bidder of bribery. The Hanbo scandal was a vivid example.

The second is undisciplined expansion of business conglomerates (Chaebols). Korea’s business conglomerates grew up with special help from government. They constitute most of Korean economy. Nobody can deny the critical contribution chaebols have made to Korea’s economic takeoff. But chaebols are to blame for their undisciplined expansion.

Chaebols’ undisciplined expansion found itself in three ways: one is blind expansion of size. The concept of "too big to fail" was prevailing in Korea before the crisis. Chaebols were preoccupied with expansion and market share without considering profitability and risk of investment. In fact, profitability of Korean firms was increasingly declining, especially in foreign markets. Corporate profits have always been low in Korea, but they fell to the lowest level ever in 1996. In 1996, corporate profits, as measured by the ratio of ordinary income to sales, fell to 1 percent, the lowest since 1987. Korean exporters have also been losing market shares in key export markets, such as the United States. This trend began in the early 1990s. The another is expansion of business area. Chaebols expanded businesses outside of their core competencies. A typical group has an affiliate in almost every industry, and its organizational chart resembles an armada, with one or two flagship companies escorted by a whole range of member companies. Expansionary behavior is motivated in part by jealous competition for prestige and for a position in the pecking order, defined in terms of size. The third is large-scale investment abroad. With easing of capital controls, Korean chaebols expanded their operations abroad. According to one estimate, about $60 billion of total foreign debt outstanding as of November 1997 were used to finance the chaebol's direct investments abroad. Chaebols overextended under the government protection, and their monopoly power caused problems in the country's economy. Those problems include redundant allocation of limited resources, heavy debt-financed capital structure, cross-finance guarantee system and lack of transparency, and "money-talks" pollution with unfair income distribution. Korean businesses have a problem of resource allocation owing to flexible access to bank loans, debt-financed capital structure, and ownership dominance by one family in a business group. The chaebols have expanded recklessly without considering the domestic industrial structure, creating idle capacity in one industry and bottlenecks in the other. The overlapping investment with limited resources expedited a shortage of capital and introduced foreign currency problems. For example, Samsung Group entered the automobile industry in 1994 when South Korea had suffered from over-capacity in that industry. Hanbo Group, the fourteenth-largest chaebol, collapsed by leaving US$5.8 billion in bad loans in building a steel plant. Hyundai Group was planning to enter the steel business while Dongbu Group announced plans to enter the semi-conductor business, though they shelved the plans after the financial crisis. These increase the adjustment costs for industrial restructure in the future. Family-run stile of chaebols is increasingly criticized for undermining their competitiveness It’s argued that chaebols are highly centralized in terms of the system; owner-managers with shares far fewer than 50 percent control every one of the member companies. This skewed governance structure has raised concerns about fairness and the concentration of economic power. More importantly, there is growing recognition that the corporate governance structure of the chaebols has. Decisions by owner-managers go unchallenged and no effective internal and external monitoring mechanism for investment decisions exists. Critics argue that owner-managers of Samsung and Ssangyong put their groups at risk by entering the automobile industry as their pet projects. The chaebols have also suffered from their own structural and organization limitations. Their organization

Another important reason for the economic crisis involved the size and structure of Korea’s foreign debt. If Korean banks and firms had not borrowed so much from abroad, a series of bankruptcies in 1997 would not have triggered a currency crisis. Korea has always been dependent on foreign debt to finance its investment. As a result, Korea’s total external debt reached $109.8 billion, accounting for 22.6 percent of GDP by the end of 1996. At the time of IMF bailout, Korea's external debt arrived at $116.1 billion, about 23% of 1996 GDP. What’s worse, the structure of the debt was very inappropriate. Short-term debt (loans with maturity of less than 1 year) held too big share, accounting for 58.8 % while long-term debt represented 41.2 %of the total. This type of the loan composition was unusual by historical standards. Korea faced serious problem of foreign debt in early 1980s. At that time, short-term debt reached less than 30 %.

Labor sector is one of the major reasons for economic crisis, too. The last decade witnessed obvious improvement of Korean workers’ warfare. Korean workers’ wages have risen at an average rate of (7.8%) in real terms during the 1987-1996 period, which exceeded productivity gains of the same period. Labor unions became powerful politically after the democratic reforms of 1987. Meanwhile, labor law was passed with a ban on layoffs by the Parliament. Workers could force employers to comply with the continuous demands for wage increases. Regrettably, the labor sector had failed to achieve the level of Productivity worth a five-fold wage increase in the past 12 years. The high labor cost made businesses prefer investment in foreign countries to seek lower wages, which expedited capital outflow and shortage of foreign exchange reserves.

The Role of the U.S. and China

Korea is a country of strategic significance to both the U.S. and China. The U.S. and China, as a Korea’s major economic and security partner and an important economic partner respectively, kept close watch on what’s going on in Korea, and responded positively.

The U.S. has worked to support Korea’s efforts with bilateral assistance and through the IMF and the multilateral development banks. To aid trade and investment, America’s Export- Import Bank has offered $4 billion in credit, which over the next 2 years will support $8 billion in exports. The Overseas Private Investment Corporation has reopened its operations in Korea to help the return of private investment. The U.S. agreed to expand agricultural export credits during President Clinton’s visit of Korea in November 1998.

China, as a developing country, is incapable of providing large-scale economic assistance to Korea. But China still did what it could to help Korea. China’s pledge to stabilize its currency RMB is obviously a critical support to Korea’s recovery. President Kim Dae-jung spoke highly of China in this regard during his visit of China in late 1998. China also helped Korea through IMF and multinational development banks. What’s more, to support Korea’s tourism, Chinese government listed Korea as a country which Chinese travelers can enter freely.

Looking into the future, for the U.S, the only superpower in the world, a lot of things can be done to help Korea. For example, the U.S can increase imports from Korea as much as possible, which is critical for Korea’s economic recovery, although the U.S has no much room for increasing imports. The U.S should reduce trade frictions with Korea in time of Korea’s crisis. The U.S can be more helpful in restoring international confidence in Korea’s economy. For China, future stabilization of its currency is China’s biggest help for Korea.

Last but not least, the U.S and China should cooperate more constructively to maintain the peace and stability on Korean Peninsula. It’s also a big help for Korea.

Prospects for Korea’s Economic Recovery

Predictions of prospects for Korea’s economy differ greatly in Korea and abroad, between Korean government and private institutes. I am pretty optimistic about Korea’s economy in the medium and long term. The reasons for optimism are:

First, to faithfully observe the IMF agreement and revitalize its national economy, Korean government carried out a comprehensive economic reform. The extent and degree of the reform are unprecedented since the founding of ROK. Last year witnessed some progress of the reform. Let’s have a quick look at Korea’s reform.

Kim Dae-jung government’s economic reform focused on four major areas--banking, corporate management, labor and the public sector.

In banking, Korea has already resolutely closed insolvent banks. Financial market is open to foreign countries.

In corporate management, Corporate reform is being carried out. The government and five major business groups announced a restructuring agreement in November 1998. The agreement includes drastic liquidations and reform based on core industrial sectors, and was designed to expedite restructuring in redundantly invested areas such as petrochemicals. It also completely removes cross guarantees among subsidiaries by March 2000, projects earnings of W20 trillion in the sell off of non-core businesses, and promises completely transparent financial reporting starting the fiscal year 1999.

In labor sector, reform has progressed substantially, too. The labor, management and the government have agreed to allow flexibility in the labor market.

Restructuring in the government and the public sector is being implemented. The Government Reorganization Committee in February 1998 announced its plan to gradually phase out 17,612 of its officials, or 10.9% of the total 161,855 posts excluding teachers and the police by the year 2000. According to the plan 7,762 officials would be cut in 1998, 6,392 this year, and 3,458 next year. The government has announced immediate privatization of 5 state-owned enterprises and their 21 subsidiaries, and gradual privatization, by 2002, of 6 other state-owned enterprises.

As a result, some latest macro-economic indicators sent encouraging signals. According to Korea’s Ministry of Finance and Economy, foreign currency and price are stable, trade surplus in 1998 reached US$ 40 billion (decrease of imports as a major factor). Total foreign currency reserve was US$ 48.5 billion. Direct foreign investment increased by 50%, reaching US$ 8.85 billion. Another good news was Moody's Investors Service joined other ratings agencies in restoring South Korea to an investment grade early February in 1999. This paved ways for more foreign investment.²

Second, Korean economic foundation laid by past 30 years’ economic development was not basically destroyed by the financial crisis. Korea has achieved outstanding success in the past 30 years, well known in the world for its miracle of Han River. The economic miracle is close related to Korea’s high saving rate of 34%, good infrastructure facility, well-educated human resource and open trade system, etc. As ADB pointed out in its annual report of 1998, Asian economic crisis didn’t do fundamental harm to Asia’s human resource and base for social and economic development. Korea’s powerful economic base provides a strong support for its revitalization.

Third, Korea’s strong tradition of patriotism and spirit of unity in time of crisis greatly increased Korea’s capability to overcome economic crisis. To overcome the national crisis, a lot of ordinary Koreans who bore the brunt in the crisis voluntarily undertook a national campaign to collect gold and have managed to collect US$2 billion worth already until February 1998, leaving the world deep impression.

Fourth, the speeding up of economic globalization provides Korea a favorable environment for moving past the crisis. As an important trend of current international economy, globalization is characterized by economic connection and interdependence between countries. As a 11^th largest economy, Korea in crisis attracted deep concern from the world. International institutions and some countries economic have provided strong support for Korea’s economic recovery. This kind of support will continue.

Fifth, Korea accumulated some valuable experiences in the long practice of Market economy, which made Korea adapt to requirements of IMF more easily.

In short term, however, the situation of Korea’s economy is far from satisfactory.

One of the most serious problems will be unemployment. The jobless rate in 1998 was 7.3%. As the restructuring of conglomerates and government deepens, more jobs will be lost. That new university graduates join the workforce in 1999 will surely make things worse. The IMF has forecast that Korea’s unemployment rate for 1999 will peak at upwards of 8-10%. This could become a major destabilizing factor in the political arena and society as a whole, causing incalculable problems. However, it appears that government measures are somewhat inadequate to cope with the challenge.

Another big problem is insufficient domestic demand. The government hasn’t prescribed an efficient remedy for it, which will delay the recovery.

Political instability is another great concern. As the foreign currency crisis was overcome, the problems of the parliamentary cabinet system, partisanship and growing regionalism could have a negative effect on recovery. A major clash between the ruling and opposition parties following the New Year’s eve break-in at an office in the National Assembly Building masterminded by the opposition Grand National Party (GNP) cast loud over the recovery. Reform will be impossible without political stabilization in any country. Korea is no exception.

Based on above analysis, my prediction is that Korea’s economy can be returned to the level prior to crisis on the condition that no big unfavorable changes occurred in international economic situation. Korea’s economy reached the bottom in 1998, and will resume recovery from 1999. It will take about five years for Korea to achieve full recovery. One more thing is that even if Korea gets out of the crisis, the days of high growth rate are gone.

Korea’s Financial Crisis’ Impacts on Inter-Korea Relations

Korea’s economic crisis hasn’t ended yet. Many things are uncertain. Therefore, it’s impossible for us to know exactly how much the economic crisis will influence inter-Korean relations. But some influences have loomed up. What’s worthy of noting is that the paper discusses the crisis’ implications for inter-Korean relations under the assumption that the major surrounding powers favor stability and peace on the Korean peninsula and will continue their present foreign policies toward Korean peninsula.

Immediate Korean Unification becomes almost impossible.

The conclusion is drawn from following two factors:

First, the financial crisis greatly weakened Korea’s economic strength and its capacity of absorbing North Korea.

When it comes to Korean unification, there are two forms of unification in terms of speed of unification. One is immediate or sudden unification, the other is gradual and peaceful unification.

Considering the two sides’ completely different political systems, 50 years’ antagonism and deep mutual distrust, people tend to think Korean unification is a long mission for the two sides. The possibility of gradual and peaceful unification is by far bigger than that of immediate Unification. However, Korean unification became a hot topic in Korea and abroad after cold war ended. What happened?

Drastic changes have taken place in the Security environment around the Korean peninsula since 1990’s, such as the breakdown of the Berlin Wall and the ensuing German unification, the collapse of the former Soviet Union and the East Block, the Success of South Korea’s nordpolitik (the normalization of foreign relation with Russia and China----the two most significant partners of North Korea), the North Korea’s sharp decrease of foreign trade with Russia and China, serious food crisis in North Korea, etc.

At the same time, the economic gap between the North and the South turned out to be bigger and bigger. In 1997, South Korea’s GNP per capita was about eleven times higher than that of North Korea, and the South’s GNP was more than twenty time higher.³

Obviously, the security environment around the Korean peninsula and the race of comprehensive national strength between North and South was greatly in favor of the South since the early 1990s.

It was under such circumstance that a lot of analysts and experts within Korea and abroad predicted that North Korea would collapsed and be absorbed by strong South. South Korean government once expected much of it.⁴ It appeared that Korean unification would come immediately.

How much possibility on earth is there for the immediate unification? To answer this question, we have to consider the North and South. For the North, whether can Kim jeong-il government survive the economic crisis? For the South, whether does the South have enough ability to absorb the North?

Unfavorable international environment to Korea in the past Cold War era, mistakes in domestic policy and natural disaster led to North Korea’s unprecedented Crisis. The whole country was near collapse. In 1998 North Korea was short of 150 million tons of food.⁵ At present, 2 million to 5 million people face starvation in North Korea.⁶ However, the current situation will be unlikely to endanger the survival of North Korean government.

The reasons include:

Historically, no socialist country has collapsed under the pressure of economic difficulty.

In the early years of Soviet Union, the economic situation was extremely difficult, but Soviet Union managed to survive. China survived the ten year "Cultural Revolution", which pushed China to the brink of economic bankruptcy. Cuba, a socialist country under the nose of the U.S., hasn’t collapsed although it experienced long time economic hardships. Those examples showed economic difficulty does not necessarily cause collapse of a government in socialist countries. To some extent, most dangerous time for socialist country is not when it is in a difficult economic situation but when it is in time of transition and reform.

Currently, speaking of ideology, Juche(self-reliance) thought is well received by North Korean people and functional in maintaining state power. Oneness of party, government and the military commands a strict control of the whole society political system. North Korea’s adherence to national guiding line of political independence, economic self- reliance and self- defense in national defense helps to unify the whole country.

Although ordinary people are very poor, they don’t complain much against government in terms of social orders. The reasons are: First, most of them believed the present economic hardship is caused by external factors; Second, equalitarianism in distribution and little difference between the cadres and ordinary people in living standards in North Korea cool off people’s discontent.

Kim Jeong-il was re-elected chairman of the National Defense Commission on September 5, 1998 at the first meeting of the Tenth-term Supreme People’s Assembly, opening new era of Kim Jeong-il. The new cabinet took on a new look. Majority of Cabinet members was appointed from new generation with expertise. Some indications showed Kim Jeong-il government seemed to be stable.

For South Korea, whether does the South have the ability of absorbing North Korea?

If this question was controversial in the past, the current financial crisis gave a clear answer. The crisis dealt such a heavy blow on Korean economy that Korea government had no other choice but to ask for foreign help. The ensuing $57 billion rescue program led by the International Monetary Fund (IMF), the largest ever, opened an "IMF era" in Korea. Korea’s GNP per capita plummeted from US$ 10000 to US$ 6500. Its GNP was equivalent to that of Argentina. It’s obvious that the financial crisis has weakened South Korea’s ability to absorb the North greatly.

In general, the gradual stabilization of North Korea and weakened economy of the South caused by financial crisis minimized the possibility of immediate unification of Koreas in the near future.

What is worthy of noting is that the Kim Dae-jung government has realized the situation and become more realistic. As an official statement read: "unification is unlikely to be realized in the near future since the two Koreas have kept a long history of confrontation and conflict for the past 50 years since its division. At this style it is rather appropriate to focus on realizing coexistence of North Koreas through settlement of peace in the Korean Peninsula than making efforts on immediate unification."

Second, Korea’s financial crisis diverted Korea’s national attention to economic recovery, leading to a decrease of significance of unification in Korea.

At present, the most urgent issue for Korea is to overcome the financial crisis, which is described by President Kim Dae-jung as " the greatest national crisis since the end of the Korean War". Korean people are not as enthusiastic with unification as before. In a poll conducted by the Chosun Ilbo and Gallup in February 1998, 80.5% of Koreans put dealing with the current economic crisis as the most important goal for the new government. In the political and diplomatic area, 71.5% said there was no need to hurry with arranging summit talks with North Korea, far exceeding those who felt a summit should begin soon (26.6%). No wonder Kim Dae-jung declared that " The biggest task facing the Government of the people is to overcome the economic crisis and make our economy take off once again,"⁷ and reiterated "Peace on the Korean Peninsula is our supreme task."⁸

Korea’s financial crisis exerted a negative influence on Inter-Korean economic relations by causing sharp decrease of Inter-Korean trade volume in 1998.

Table one shows that Inter-Korean trade started to drastically decline in 1998.

Table 1: The Trend of Inter-Korean Trade Volume

(Unit: US$1,000)

The total trade volume for the first seven months last year dropped by 26% compared to the volume for the same period 1997.⁹ Korean economic difficulty caused this drop directly. Decreasing domestic demand and depreciation of the South Korean Won resulted in a decrease in imports and a drop of incentive to continue presenting on commission trade.

A survey by Korea International Trade Association showed, 93% of the respondents answered that the economic recession is frustrating their North Korean Projects; 72% of the respondents said that they would suspend their trade with North Korea or cut down the size of imports from North Korea. As far as investment is concerned, 79% replied that they would postpone investment projects, and 13% replied that they would reduce the investment size.¹⁰  But as Korea’s economy picks up, the negative effect will disappear.

Korea’s crisis also provides an opportunity for reconciliation of the two Koreas.

The above analysis of Korea’s economic crisis’ negative impacts on the unification of the two Koreas doesn’t mean the crisis’ effects on inter-Korean relations are completely negative. In fact, Korea’s financial crisis provides an opportunity for the reconciliation of the two Koreas. The reason lies in the fact that the two sides have to make all-out efforts to address most urgent economic problems. Peace on Korean peninsula is I indispensable to two sides’ recovery. If the two sides take advantage of the opportunity to improve inter-Korean relations and increase mutual trust, it will surely be conducive to unification of two Koreas in the long run. It was in this context that some positive indications appeared in inter-Korean relations in 1998.

The South Korean government began to pursue engagement policy, so called "Sunshine" policy, when dealing with North Korea since Kim Dae-jung came to power. The three principles of Sunshine policy include: First, it will never tolerate armed provocation of any kind; second, it does not intend to absorb or attack the North; and third it will actively promote reconciliation and cooperation between the two Koreas.

Kim Dae-jung promised to reactivate the 1991 Agreement on Reconciliation, Non-aggression, Exchanges and Cooperation between the South and North to put the stalemated inter-Korean dialogue on the right track.

President Kim Dae-jung also made a proposal for an exchange of special envoys to reaffirm the intention and willingness of the highest authorities of the South and the North.

A major breakthrough in South Korea’s North Korea policy is separation of business from politics, which is believed to be helpful to South Korea’s recovery and be able to further help the North Korean leadership opt for more reform and open-door policy later. In an attempt to facilitate economic exchanges and contacts between South Korean businessmen and North Korea, the administration promised to simplify the legal procedures for inter-Korean interaction and take all other necessary measures. In March 1998, the government announced the lifting of ceilings on South Korean investment in the North.

The administration also made a commitment to continue to provide food aid to North Korea through international organizations and bilateral ways to help fellow Koreans suffering from a severe food shortage. It encouraged civilian organizations to provide aid to North Korea. At the same time, it promised to continuously abide by its commitment to the Geneva Agreed Framework and its auxiliary agreements that had been made by the Kim Young Sam government. It included a central role in the light-water reactor projects that are going on in North Korea.

President Kim Dae-jung’s efforts didn’t stop there. He expressed his support of U.S likely easing of economic sanctions against North Korea during his visit of U.S in last June. A committee between Korea and U.S was established to discuss the issue. He also welcomed Japan’s efforts to improve relations with North Korea.

North Korea, on the other hand, responded somewhat positively. On February 18, 1998, North Korea adopted a resolution at a conference of North Korean parties and organizations in Pyongyang.The resolution expressed that North Korea was willing to have dialogue and negotiation with anyone in South Korea, including political parties and private organizations. North Koreaa delivered 70 letters addressed to South Korean leaders urging them to promote co-existence, co-prosperity, common interests, cooperation and unity between fellow countrymen. Afterwards, North Korea opened an address information center for assisting the reunion of separated family members. On April 4, 1998 North Korea proposed a vice-ministerial level talk on fertilizer issue with the South, which was the first government talk between two Koreas since 1994. The fact that North Korean leader Kim Jeong-il met Hyundai group founder Chung Ju-yung at a guesthouse in Pyongyang on October 30, 1998 was considered a friendly gesture to South Korea.

The significance of the successful tourism program between the two Koreas in 1998 should not be neglected. On November 18,1998, the first Mt. Kumgang tour group departed Tonghae Port in South Korea for Changjon Port in North Korea. The Mt. Kumgang project is regarded as one of the most significant events in half-a-century old division of Korea and as the tangible result of Sun Shine Policy of the Kim Dae-jung Administration.

However, there were also some negative effects in inter-Korean relations. For example, the submarine incident, test of projectile and the suspicion over underground construction site in North Korea. But fortunately, these issues didn’t cause much tension on the Korean Peninsula.

Conclusion

Economic crisis dealt a heavy but not fatal blow on Korean economy. There is no reason for being pessimistic about the future of Korean economy. Korea has ability to get over the crisis. But it needs time. Korea has a long way to go to completely recover from the crisis. Korea has to learn to be patient.

Korea’s financial crisis exerted far-reaching influence on inter-Korean relations. It made the prospects of immediate unification of the two Koreas become bleak. But it also provided a chance for improving inter-Korean relations. The general situation of Korean peninsula is likely to be stable in the period of Korea’s crisis. Exchanges of trade and personnel will expand. This is conducive to peaceful and gradual unification of two Koreas. But what will happen in inter-Korean relations after Korea’s recovery is unclear now.

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