By Mark Tokola, Phil Eskeland, Troy Stangarone, Jenna Gibson, Kyle Ferrier, and Juni Kim

The Korean peninsula was dominated by unexpected events in 2016. North Korea began the year with a nuclear test that merely foreshadowed a year of significant advancements in its nuclear program rather than its traditional pattern of using tests to provoke a cycle of crisis and negotiations. In response, the Park Geun-hye administration closed the Kaesong Industrial Complex in what would become the first of a series of significant moves to tighten sanctions on North Korea bilaterally by a series of nations and through the United Nations.

On the political front, 2016 saw the surprise election of Donald Trump as president of the United States on a platform that may remake parts of U.S.-Korea relations while redefining the role of the United States in East Asia. Closer to home in Seoul, South Korea was rocked by a political crisis that led to the impeachment of Park Geun-hye.

As 2017 begins the consequences of those events and others from 2016 will begin to play out on the Korean peninsula and Kim Jong-un has again begun the year with a shock announcing that North Korea is close to testing an intercontinental ballistic missile (ICBM). With that in mind, here are 10 issues to follow that will have an impact on the Korean peninsula in the year to come:

Political Dynamics and the Presidential Election in South Korea

Perhaps no issue will have more impact on the Korean peninsula this year and in the years to come than the resolution of the current political crisis in South Korea. Depending on when and how the Constitutional Court rules on the impeachment of Park Geun-hye, South Korea could have a new president as early as this spring or enter into a period of extended political uncertainty with President Park remaining in power until February 25 of 2018.

These political dynamics have implications for South Korea and the peninsula beyond whether Park Geun-hye leaves office early or serves the remainder of her term. The political uncertainty around the impeachment means that needed economic reforms will likely be delayed and that policies enacted by the interim administration or late in the Park administration could be subject to quick reversal after the question of impeachment is resolved. The current environment could also lead to a move towards constitutional reform, an issue that had already been gaining steam prior to the move towards impeachment.

If President Park’s impeachment is upheld a snap 60 day campaign could change the dynamics of the election and favor a candidate who might not ordinarily have performed as well under an ordinary campaign. It may also aid a move towards more populist positions, as is becoming an increasing trend around the world, but in the case of South Korea may come from left rather than the right as we have seen in Europe and the United States.

The election also holds the potential to see a significant shift in policy related to North Korea and Japan, among other issues to watch in 2017.

The Trump Administration’s Foreign and Security Policy in East Asia

For the first time since the end of the Korean War, there is significant uncertainty on how U.S. foreign and security policy will develop in East Asia. After decades of bipartisan understanding of both the benefits of the region to the United States and the basic policies that should be put in place to promote U.S. interests, the Trump administration will come into office having campaigned for significant change in U.S. policy and with an air of uncertainty in the region on the shape of U.S. policy to come.

In the campaign, President-elect Trump seemed to place a greater emphasis on international economic issues and question the utility of U.S. alliances and whether countries such as South Korea were contributing enough financially to the deployment of U.S. troops. He also suggested a willingness to withdraw U.S. troops and allow South Korea and Japan to defend themselves with nuclear weapons.

Since the election, we have seen President-elect Trump reaffirm the United States commitment to defend South Korea, but also a willingness to change the nature of the U.S. relationship with Taiwan, potentially increasing tensions with China. For the Korean peninsula, the priorities the administration sets in the region, including whether China or North Korea will be a priority, as well as whether it chooses to purse those policies through negotiation or confrontation will have significant impact on events on the Korean peninsula, including how willing China is to cooperate in pressuring North Korea to denuclearize.

As the Trump administration sets out its new policies, we should expect there to be significant changes that could unsettle the region early in the administration. However, as events and structural challenges in the region necessitate, there will likely be a shift towards a more traditional U.S. foreign policy in the region.

Trump Administration Asia Economic Policy

During the campaign, President-elect Donald Trump castigated U.S. trade policy, including the Korea-U.S. Free Trade Agreement (KORUS FTA).  While the KORUS FTA was cited as an example of a “disastrous” trade deal, candidate Trump did not threatened to withdraw or renegotiate the agreement, as he did with other FTAs.  His first 100 days agenda only reiterated his pledge to withdraw from the Trans Pacific Partnership (TPP).

While the KORUS agreement may be out of the limelight, there are indicators to watch for to see the future of U.S. trade policy.  First, his senior appointees for various posts will determine the extent of Trump’s economic nationalism.  He has nominated Wilbur Ross, a private equity billionaire who specializes in restructuring failed companies, particularly several in “Rust Belt” industries, as Secretary of Commerce, and noted “fair” trade attorney Robert Lightizer, to serve as the U.S. Trade Representative.  In addition, Trump has appointed two individuals to fill newly created positions within the White House – noted trade skeptic and economist, Peter Navarro, as the Director of the National Trade Council, and Jason Greenblatt, who currently is Executive Vice President of the Trump Organization, as the Special Representative for International Negotiations.  It is unclear how all these four individuals, along with free trade advocate Rex Tillerson, who was nominated by Trump to serve as his Secretary of State, will interact to shape a unified trade policy, and how much real power and authority each one of these individuals will possess.

Second, in early February, the annual trade statistics will be released by the U.S. government.  The Year to Date (YTD) trade deficit between the U.S. and the ROK in goods is slightly outpacing last year’s level ($24.07 billion for 2016 vs. $23.997 billion for 2015).  If this trend continues, there could be a renewed attention on KORUS.

Third, even if there is not a direct confrontation of KORUS in the near-term, the Trump plan to focus most of their attention on fixing agreements with Mexico and enforcing trade laws before negotiating any new bilateral deals could have ancillary spillover effects on Korea.  China is Korea’s top trading partner and Mexico is Korea’s ninth largest export market.  Mexico is also becoming a major destination for Korean foreign direct investment.  Thus, while KORUS maybe out of the cross-hairs, actions by the Trump Administration affecting other trading partners could have negative effects for the Korean economy.

North Korean Behavior in Response to a New Political Environment

With a new administration in the United States and the prospects for a new administration in South Korea this year, there is an expectation that North Korea may test the alliance and Kim Jong-un has already suggested that he will conduct an ICBM test.  Observers have tried for years to explain the timing of North Korean nuclear tests, missile tests, and other provocative acts on the basis of North Korean political anniversaries, foreign elections, and other external events such as international summits or Olympic Games. The historic correlations are weak.  It may simply be that North Koreans test their weaponry when it is time to do so on an engineering schedule.  When they are ready to test, they test.  They might wait a matter of days or weeks if tests would interfere with a major political event such as a bilateral meeting, as we would do, but that would nudge the schedule, not drive it.

The tempo of testing has picked up since Kim Jong-un came to power.  Nuclear and missile test are happening much more often than they did during the time of Kim Jong-il.  This might be occurring because Kim Jong-un is still trying to cement his power and has tied his personal prestige to weapons testing.  It may be because North Korea wants to get as far as it can, as fast as it can, before the U.S., South Korea, Japan, and China take stronger steps to try to put an end to its quest for a nuclear arsenal.  It might also reflect Kim Jong-un’s personal impatience.

Will North Korea be a Trump Administration Priority?

U.S. Administrations have limited ability to set foreign policy priorities.  It is a useful exercise to try to set priorities on the grounds that unless you know where you want to go, you are unlikely to get there.  But, foreign policy is unavoidably reactive because decisions by foreign leaders and non-state actors, natural disasters, accidents, and miscalculations require responses.  British Prime Minister Harold Macmillan was quoted as answering a journalist’s question of what Prime Ministers fear most by saying, “Events, dear boy, events.”

Discounting events, North Korea should be a high foreign policy priority for the Trump Administration.  North Korea has threatened military action against the United States, South Korea and Japan and is getting closer to having a nuclear weapon that could strike the U.S. west coast.  That in itself should not be considered a watershed moment, North Korea can already threaten South Korea, Japan, and hundreds of thousands of Americans, military and civilian, living within the range of North Korean military strikes.  North Korea’s belligerency, possible instability, and grotesque human rights abuses should be of great concern to countries in the region, the U.S., and the international community.  A concerted, coordinated policy towards North Korea is necessary.

Are Sanctions Working?

The sanctions enacted this year on North Korea constitute the toughest and most comprehensive framework to date. New information in 2017 will help to gauge whether these measures are working as intended and how they can be strengthened, with China’s enforcement of new sanctions playing a key role. The effectiveness of improvements made to UN sanctions in resolution 2321 and U.S. secondary sanctions targeting financial institutions facilitating Kim Jong-un’s pursuit of hard currency greatly depends on Beijing’s willingness to cooperate with Washington. However, President-elect Donald Trump’s initial approach towards China suggests heightened tensions in the relationship over other issues may pose significant challenges for cooperation on sanctions in 2017.

Nevertheless, the continued use of sanctions as a tool on North Korea may be in question. Several candidates in South Korea’s presidential elections next year favor economic engagement with North Korea. South Korea’s return to engagement would greatly undermine the cohesion of UN sanctions, likely precipitating Russia and China—the most reluctant supporters of sanctions and North Korea’s most influential economic partners—to abandon their support. Even if these candidates are unsuccessful in their presidential bids, should the new sanctions have a limited impact in the first half of 2017 transitioning leaders in the U.S. and South Korea may consider other policy alternatives.

Special Measures Agreement/Burden Sharing 

Ever since 1991, the Republic of Korea (ROK) has provided some financial support to offset the cost of stationing U.S. troops on the peninsula.  During the presidential campaign, Donald Trump questioned on several occasions the alleged low reimbursement for stationing U.S. troops abroad.

Later this year, Korea and the United States will begin negotiations on renewing the Special Measures Agreement (SMA), which is set to expire in 2018, that lays out the terms of the burden sharing arrangement.  Last April, General Vincent Brooks testified before the U.S. Senate that Korea pays approximately 50 percent of the total non-personnel costs of the U.S. troop presence on the peninsula.  Under the current SMA, Korea’s annual payment (in won) increases by the rate of inflation.

Just as in all negotiations, one side offers its most parsimonious offer and the other side counters with its proposal to bolster its own self-interest.  Over time, the two sides come together to reach an agreement.  Marine Corps General James Mattis, Trump’s nominee for Secretary of Defense, earlier criticized President Barack Obama for “saying that our allies are freeloaders.”  Not only does the ROK already share half of the burden of the stationing costs of the U.S. military on the peninsula, but this staunch U.S. ally also has a military draft with 625,000 active duty military personnel confronting North Korea; spends 2.6 percent of its GDP on its own defense (highest among any major European or Asian ally of the U.S); and 80 percent of South Korea’s imports of military equipment over the past five years have come from the United States.  South Korea is leagues above European members of NATO in terms of alleviating the defense burden of the United States.

SMA negotiations will be tough with the Trump administration, as they have been at times in the past.  However, these talks will not undermine the alliance.  The U.S. national interest will continue to inform policymakers that no U.S. troops should be withdrawn from the ROK until the threat from North Korea is resolved.

Will RCEP Be Finalized in 2017?

The failure of TPP has turned attention to the remaining mega free trade agreement in Asia: the Regional Comprehensive Economic Partnership (RCEP). Negotiations were due to have finished by the end of 2015, but have been bogged down by disagreements over a range of issues. However, the breakdown of TPP may prove to be the necessary push to conclude negotiations in 2017. China, the largest member economy and key driver of the deal, has vowed to accelerate talks and is already looking ahead to lead the Free Trade Area of the Asia Pacific (FTAAP), the next progression in the regional architecture.

RCEP members and even non-signatories, such as the U.S., stand to benefit from an Asia with fewer barriers to trade. Still, the deal’s avoidance of non-tariff barriers, while making consensus easier among sixteen diverse economies including Korea, offers limited gains from liberalization. If RCEP is concluded it may provide the foundation for slower and less ambitious regional integration

With RCEP in place, an emboldened Beijing could seek to displace Washington from its leadership role in the region on economic issues. However, the longer RCEP talks continue to drag on, the greater the opportunity for the U.S. to bolster its standing in Asia through bilateral agreements preferred by President-elect Donald Trump.

Will the Korean Wave Continue?

Last year was nothing if not a roller coaster for Korean cultural exports. The bombshell soap opera “Descendants of the Sun” broke records at home and abroad, raking in billions in direct and indirect profits. However, the second half of the year was marred by reports of a Chinese ban on Korean entertainment content because of Korea’s decision to deploy THAAD.

While there have been some instances that could raise suspicion, other events have proceeded as planned, indicating that this is not a blanket ban. It’s far more likely that some local organizers, skittish about the Chinese government’s harsh language on THAAD, decided not to risk a controversy. With THAAD set to be deployed later this year, this will deserve further attention as the deployment takes place.

Yet, interest in everything Korea continues to grow, and shows no sign of stopping. Cosmetics giant Amore Pacific saw a 26.7% year-on-year jump in overseas sales in Q3. And Korea already broke tourism records as of mid-November, with more than 15 million people visiting the country by that point.

It’s worth remembering that the word “hallyu” itself was originally a derogatory term created in China in the 1990s to push back against the influx of Korean media content. People have been predicting the downfall of the Korean Wave since then, yet it is stronger than ever. Expect this to continue in 2017.

Relations Between South Korea and Japan

Relations between South Korea and Japan remain as complicated as ever and 2017 could see uncertainty in the relationship. Despite the implementation of the 2015 Seoul-Tokyo agreement regarding the compensation of comfort women earlier this year, controversy and protests in South Korea have continued to overshadow the deal. In light of President Park Geun-hye’s recent impeachment, leading members of the South Korean opposition parties have increased calls for the government to reconsider the agreement. Potential presidential candidates Moon Jae-in and Ahn Cheol-soo have criticized the deal and may try to restructure the deal or scrap it entirely if elected.

Despite controversy over the comfort women agreement, South Korea and Japan have continued to strengthen their defense ties. Both countries participated in regular joint military exercises with the U.S. this year and started implementation of an intelligence sharing deal earlier this month. The deal allows for intelligence sharing between the two countries regarding North Korea’s nuclear and weapons programs. Controversy over historical issues between the two countries is unlikely to subside in the near future, but the shared North Korean threat provides avenues for greater security cooperation for South Korea and Japan. Needless to say, the next South Korean president will play an instrumental role in determining the future of the relationship.

Mark Tokola is the Vice President of the Korea Economic Institute of America, Phil Eskeland is the Executive Director of Operations and Policy,  Troy Stangarone is the Senior Director for Congressional Affairs and Trade, Jenna Gibson is the Director of Communications, Kyle Ferrier is the Director of Academic Affairs and Research, and Juni Kim is the Program Manager and Executive Assistant. The views expressed here are the authors’ alone.

Image designed by Jenna Gibson of the Korea Economic Institute of America with photos from the photostreams of Gage Skidmore, Stefan Krasowski, Herman Van Rompuy, Byoung Wook, and Korea.net on flickr Creative Commons.

By Troy Stangarone

In the Chinese zodiac, 2016 is the year of the Fire Monkey. Fire Monkeys are said to be ambitious and adventurous, as well as irritable. Despite Donald Trump’s not having been born in the year of the Monkey, looking back, his victory in the U.S. presidential election that year may yet seem fitting. However, rather than being a year reflective of the characteristics of the Fire Monkey, 2016 might be better known as the year of unexpected events around the world and on the Korean peninsula. Whether it was the British vote to leave the European Union in June or the impeachment of the South Korean President Park Geun-hye in December, 2016 will be remembered for a series of unexpected events and the questions they have raised about how they may shape the future.

As we take our annual look back at the events that helped to shape the Korean peninsula during the past year, it is also an opportunity to review the events we highlighted on The Peninsula in our annual 10 Issues to Watch For on The Korean Peninsula in 2016 blog. For a year that was dominated by such a large number of unexpected events, our annual look ahead to the events of the coming year holds up surpassingly well. However, while our look ahead was correct on the importance of many events in 2016, those same events also often played out in surprising ways that will have significance beyond what we expected earlier this year. One example of this is the U.S. presidential elections. While U.S. elections always hold significance for the Korean peninsula, few foresaw the election of Donald Trump and the implications his presidency could have for the peninsula early in 2016.

With that said, here’s a brief look back at the 10 issues we highlighted and what happened:

1. No Significant Progress with North Korea – After North Korea began 2016 with a nuclear test, the international community moved towards placing greater pressure on Pyongyang. This included sanctions at the UN, which would later be strengthened, to cut off North Korea’s trade in minerals such as coal, and bilateral sanctions by the United States to cut North Korea off from the global financial system. As was expected at the time little progress was made with North Korea on resolving the nuclear issue, but the one surprising element was that rather than try to find a way to engage North Korea after a new round of sanctions, South Korea went all in on pressuring the North with the closure of the Kaesong Industrial Complex and lobbying countries to cut their ties with Pyongyang. While we were right on the broader element of there being little progress with North Korea and how structural issues such as the U.S. elections and sanctions would inhibit progress, the strength of South Korea’s stance was one of the unexpected turns of 2016.
2. If There Will Be Another Round of Family Reunions – If there was going to be progress in relations between North and South Korea it was going to require both countries to separate the nuclear issue from other issues in their relationship. Neither side was able to do so in 2016, which is regrettable for both the humanitarian burden that it places on the divided families and for the reality that family bonds will be one of the important ingredients for unification if it takes place at some point in the future. The longer that families remain divided the further apart the two Koreas are likely to drift.
3. Could a China-North Korea Summit Still Happen? – This is one issue that was fairly straight forward. While there had been suggestions in late 2015 that Chinese President Xi Jinping might finally meet Kim Jong-un thanks to improving relations, the nuclear test in January ended what little chance there may have been for a China-North Korea summit.
4. Korea-Japan Relations – When looking at Korea-Japan relations heading into 2016, clearly there had been prior progress. At the same time, it seemed unlikely that there would be the type of progress that the U.S. might have liked and the prospect for backsliding existed. While Japan did approve money for the comfort women fund, the agreement itself remains controversial in South Korea and may face pressure under the next administration. As for the comfort woman statue near the Japanese Embassy, it remains an issue for the local government of Seoul. While progress was made in relations, unsurprisingly, much work remains.
5. How the U.S. Elections Could Impact Policy – Here we were right about how the political parties viewed the situation in Korea, but wrong about the overall impact of the elections. While we foresaw the critiques of the Obama administration’s policy and the push back on issues such as the Trans-Pacific Partnership (TPP), the degree to which then candidate Donald Trump would shift the debate with his repeated push on the question of South Korea’s contributions to U.S. troops on the peninsula, and suggestions that the U.S. might withdraw those troops and allow South Korea to develop its own nuclear weapons, and that a candidate with these views would win the presidency, were clearly unforeseen. The ultimate result of the election is potentially much more significant for the peninsula than anyone might have imagined at the beginning of the year.
6. South Korean National Assembly Elections – Here we saw the fairly divided electorate give the opposition Minjoo Party a slim majority and a display of surprising strength by Ahn Cheol-soo’s new People’s Party. However, the impeachment of Park Geun-hye likely means that any signals the National Assembly elections may have had for the presidential election in 2017 no longer matter.
7. Cooperation Between Korea and China in the G20 – At the G20 in China, South Korea worked with China as expected to help advance the agenda, but IMF quota reform and global safety nets played less of a role than expected during 2016.
8. K-Pop’s Next U.S. Breakthrough – While K-Pop and Hallyu more generally remained popular in much of the world, especially with the release of Descendants of the Sun, K-Pop continued to have difficulty breaking into the U.S. market. The English language debut of CL, Lifted, was expected to give K-Pop its first breakout in the U.S. since Psy, but the album has yet to produce a chart single in the United States.
9. South Korea’s Trade Policy – Events on the trade front have played out largely as expected. While TPP, should it be revived, will be an issue for the next Korean administration, there has been significant progress on the Regional Comprehensive Economic Partnership (RCEP) talks that include the ASEAN, China, India, Australia, New Zealand, Japan, and South Korea.
10. Has Samsung Turned the Corner? – After two difficult years Samsung had turned the corner in 2016 with the successful launch of the Galaxy 7 and the new Edge. However, all of Samsung’s progress melted down with the battery issues of the Galaxy Note 7. As a result, next year will again be a key year for Samsung as it once more looks to turn another corner and rebuild consumer confidence after the issues with the Note 7.

Beyond the events that we expected, here is a look at some of the unexpected events that helped to shape 2016:

1. Multiple Nuclear Tests and the Advancement of North Korea’s Nuclear Program – Before we even published our look ahead to 2016, North Korea had conducted its first nuclear test of the year. It would go on to break with its pattern of only conducting a single test in a year by conducting a second nuclear test in September. While much attention has focused on the significant increase in North Korean missile launches and tests in 2016, the most significant step may have been in the advances the program took in developing a second strike capability. Though initial tests of a submarine launched ballistic missile failed, North Korea had made progress before the year’s end.
2. The Closure of the Kaesong Industrial Complex – South Korea took the unexpected step of closing the Kaesong Industrial Complex in response to North Korea’s first nuclear test in 2016. The closure was significant for several reasons. Not that long beforehand South Korea had been pushing to internationalize the complex to avoid the prospect of the complex being shut down after North Korea had withdrawn its workers in 2013 for political purposes. Kaesong also held symbolic importance as the last remaining connection between North and South Korea, as well as the last vestige of the prior sunshine policy. While closing Kaesong was a significant step it may have played a role in encouraging the international community to take stronger steps against North Korea.
3. International Sanctions on North Korea – While there is nothing necessarily surprising about the international community sanctioning North Korea over its nuclear test, what is significant about the current round of sanctions are the steps that they take to try and limit North Korea’s ability to continue its nuclear program. There are now requirements to inspect North Korean cargo, even that of North Korean diplomats, and caps have been placed on North Korean exports of coal while bans have been placed on other mineral exports. The United States has moved to cut North Korea off from the international financial system and has set in place steps to use secondary sanctions to go after those who enable North Korea. While sanctions are unlikely to resolve the North Korean nuclear issue on their own, they were significantly strengthened in 2016.
4. The Political Crisis in South Korea – The corruption and influence peddling scandal surround Choi Soon-sil, a longtime confidant of President Park Geun-hye, engulfed South Korea is a political scandal that has seen millions of South Koreans protest in the streets and the impeachment of Park Geun-hye by the National Assembly. As a result of the scandal, South Korea faces an uncertain political future in 2017. Even before the new year begins, there has already been a split within the conservative Saenuri Party with 29 members leaving to form the New Conservative Party for Reform.
5. THAAD and Dispute with China – Beyond sanctions, one of the steps being taken by the United States and South Korea to deter aggression by North Korea is the deployment of the Thermal High Altitude Arial Defense, or THAAD. This is a step that has been strongly opposed by China which sees it as undermining Beijing’s own interests in the region. While the evidence seems thin to date that China has actually done anything more than complain, there have been concerns that China will retaliate economically against South Korea by restricting its exports of Hallyu to the China and Chinese tourism in South Korea.  Taking such steps would harm Chinese as well as South Korean interests.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from Gage Skidmore’s photostream on flickr Creative Commons.

By Thomas Lee

In the wake of the 20^th legislative elections on April 13^th, the Minjoo Party edged out the conservative Saenuri Party to win the slimmest possible majority of one. This has been hailed as a revolution as this was the first instance in South Korean history of a ruling party with a sitting president in power losing the majority in the National Assembly. Add to the mix the liberal split and President Park Geun Hye’s reputation as the “election queen,” and this loss is even more stunning for the Saenuri Party.

The Saenuri Party lost its strongholds of Seoul, Daegu, Busan, and Ulsan. Seoul in particular was lost to the Minjoo while the others were split between Minjoo, independent, and former Saenuri representatives. The People’s Party in turn swept the Minjoo out of Honam (Gwangju and the Jeolla Provinces). Discontent with the ruling party, especially with young voters, who surged to the ballot box, denied the Saenuri the predicted gain in seats. At the same time, with the Minjoo spending most of its time attempting to win the capital and the southeast, discontent likewise evicted the Minjoo from its own former regional stronghold. Although the Minjoo Party gained in the National Assembly, people voted for it not because they suddenly favored the Minjoo, but because they were voting against the Saenuri Party. This was a painful setback for both the conservative and opposition parties.

The idea of a third party that operates beyond the traditional framework of the entrenched two-party system resounds within South Korea’s electorate. Nearly doubling its number of seats to 38, the People’s Party has gained considerable power and has set the Party up as a potential kingmaker, as the number of seats between the two traditional parties are almost neatly split.

That is not to say that the People’s Party won. Yes, this was a major victory and the Party became an undeniable force, but looking at the spread of seats that it holds, the People’s Party cannot claim to be a centrist party as Ahn Cheol-soo desired, but a Homan faction. Ahn’s plans called for a wave of support from citizens at the ballot booth who identified with equality, justice, and a fresh start. This would have translated into support from people all over the nation who were tired of traditional regionalism. This simply did not materialize.

This shows that although the South Korean electorate would like to see the values that Ahn himself personally came to represent materialize on the political stage, they believe that he would have been unable to bring about this change and that his party is not the  vehicle to do so. His party’s success has stemmed more from disapproval of the Minjoo party than zeal for his party’s values.

While the 20^th National Assembly is beginning afresh, Ahn Cheol-soo found himself wedged between a plummeting Party approval rating and allegations of corruption involving some of Ahn’s closest aides. From an internal struggle on whether to merge with the Minjoo Party or not, to remarks about allying with the Saenuri Party to deny the opposition party the speakership, to controversial statements made by Ahn himself, the People’s Party was struggling to gain a foothold and now the resignations of Ahn Cheol-soo and party co-founder Chun Jung-bae put its future in doubt. The party’s difficulties should have been expected, taking into account that the southwest region has detested conservative factions since the 1960s, and that a number of lawmakers in the National Assembly harbor a shady past.

With the Minjoo Party regaining ground in the Honam region and President Park’s  approval rating rising  due to her achievements in international relations and diplomacy any third party would have an uphill battle ahead of it.  In the meantime, whether and how United Nation’s Secretary-General Ban Ki-moon enters the race for the Presidency is the biggest question in Korean politics.

Thomas Lee is a former intern at the Korea Economic Institute of America and a graduate of American University. The views expressed here are the author’s alone.

Photo from daumdna’s photostream on flickr Creative Commons.

KEI Communications Director Jenna Gibson, host of Korean Kontext, recently interviewed Valerie Dabady Liverani, manager of the Resource Mobilization and External Finance Department at the African Development Bank. After President Park Geun Hye made the first visit by a Korean president to the African Union this spring, South Korea is increasing its efforts to connect with the continent. With this in mind, Gibson and Dabady Liverani discussed Korea’s development aid to Africa, trends in the aid sphere, and what more Korea can do to collaborate with Africa in the future. The following is a partial transcript of that conversation. The rest of the conversation can be found at http://keia.podbean.com.

Jenna Gibson: To get us started off, South Korea joined the African Development Bank in 1980, and since then they have contributed millions of dollars to a variety of efforts, including knowledge sharing, education, infrastructure projects and more. Could you give our listeners maybe a brief background of Korea’s cooperation with the Bank since it joined?

Valerie Dabady Liverani: Sure. By way of background, Jenna, Korea joined the Africa bank in 1980 and so they’ve been a longstanding partner of the institution. The most recent contribution that they made was to the African development fund back in 2013, where they made a pledge of about $81 million dollars. We would say that Korea is a big friend to the African Development Bank; they are one of the few bilateral donors to have a cooperation framework something called the KOAFEC, Korea Africa Economic Cooperation Framework, which was created back in 2006. It provides if you will for a context for aid to Africa and also for collaboration with the African development bank. The first meeting was a ministerial level meeting held in 2006 and it has been held biannually in Seoul since then, with the exception of 2014 when the Ebola crisis made planning for the event a bit difficult. We’re quite excited in fact planning out the next KOAFEC meeting which will be held October 2016 in Seoul, and preparations are in high gear.

Korea has one of the most important trust funds with the institution, [as well as] a co-financing framework. The difference is that co-financing provides support to projects, and the trust funds provide grants in 6 priority areas: infrastructure, green growth, knowledge sharing, human resource development, ICT, and agricultural and rural development. Also in terms of collaboration I think what doesn’t get talked about perhaps as much as financing, but which is equally important, is exchange of staff. Currently we have about 12 Korean staff working at the bank. Recently someone from KEXIM, the export bank of Korea joined us – about two or so months ago. We’re quite happy in terms of the collaboration, and we feel there is a lot we can learn from a country like Korea in terms of its own growth trajectory; Korea was once a recipient of aid and is now a provider of aid.

Jenna Gibson: You mentioned a lot of these really important key areas including infrastructure, ICT, green growth…so within those, are there any programs or projects that Korea tends to gravitate towards? What, on the ground, do these projects look like?

Valerie Dabady Liverani: So in infrastructure for example, Korea has financed both the hard and the soft parts of infrastructure In terms of the soft parts they have, for example through the trust fund, improved the private sector regulatory and business climate in East Africa. On the infrastructure side they have financed some roads also in East Africa. On the knowledge side, which I think is also one of the more important components of the collaboration, there is a strong link between our econ department and certain Korea institutes such as the Korea International Economics Policy Institute – that’s a mouthful! – and essentially what that really tries to do is to learn from the lessons of Korea’s own economic development and essentially try to see what lessons we can learn from that. Finally, Korea has generously offered scholarships at the Korea Development Institute to Africa Development Bank Staff.

Jenna Gibson: That’s great to hear – a way of investing in the human resources and creating long-term growth…

Valerie Dabady Liverani: Exactly. Which I think one needs to really have if you want to talk about development. I think ultimately development is a very big word, and a very vague word. I think that in that, one must also focus on the hard and the soft and honestly one needs to be able to treat one’s neighbors, one needs to provide internet services and reliable energy and everything else. You also need to have a scope in your workforce in order to handle development from manual labor to things that require a bit more specialization. All those things count very much.

Jenna Gibson: Right, absolutely. Do you also see any particular openings for future cooperation and future projects where Korea could be helpful?

Valerie Dabady Liverani: I do indeed. You’ve mentioned the first visit by the Korean president recently, and I think you know we have a fairly new President, Akinwumi Adesina, who came in last year in September. I think he was able to make a trip out to Korea back in March. I think it was one of the first trips he made and I think it’s important in that it shows the value that he has for that particular relationship. During that trip back in March he was able to set out what we call the “high fives”, which is essentially the areas in which the bank is going to focus on. Those areas are energy, to light up and power Africa; agriculture, which is to feed Africa; to industrialize, which is to lead to better trade for Africa; it’s to innervate Africa; and finally it’s to improve the lives of Africans. These are what we call the “high-fives” and for us we see an opportunity for Korea to support each one of these pillars. But if I had to pick maybe two in which we see Korea being strongest, it would be industrialize Africa in terms of trade and lighten up Africa in terms of energy. I think industrialization is one of the areas where Korea has the most lessons to teach Africa, since its own growth was based on industrialization.

Jenna Gibson: One project that caught my attention, it’s not through the AfDB but is quite interesting – it’s called Korea Aid.  It’s basically a mobile clinic that promotes maternal health services, helps educate people on hygiene and nutrition, and more. Its pilot program at the moment that they started in Kenya and eventually hope to expand. The interesting element to me is that it also includes a cultural component. In these mobile clinics there is a K-meal truck to provide Korean-inspired dishes, and it also includes a K-culture vehicle that will introduce elements of Korean pop culture including music and TV programs. So, I’m very curious from the perspective of someone working on development, how do you see this intersection between aid and cultural promotion? How do you think these things will work together?

Valerie Dabady Liverani: I think actually it’s a very good idea to combine the two things, because aid sometimes happens at levels where the ordinary person maybe doesn’t have exposure to it, at least to the human side. If you build a road for example that’s obviously a good thing, but you maybe may not know who is behind this particular road, who financed it, who worked on it. I think once you put together some sort of cultural exchange you put a face to a donor, and I think whenever you do that one of the benefits will be that you learn more about a particular culture. You know sort of what the people eat, what they appreciate on television. Obviously culture is something that is shared very quickly these days. I’m trying to remember the incredibly popular pop song that my 14 year old son was singing two years or so ago – Gangnam Style! – you know, one does get snippets of culture and things like that but I think what’s important in what you’re mentioning is that one gets to choose essentially what you put out. I see this may have an audience that may be younger than your traditional segment of society whether or not that’s people working at ministries or what have you, you may reach an audience that is younger and receives information in a different way.

Jenna Gibson: I think that’s a great way to end on a forward-looking note, but before we go is there anything that you think would be important for our listeners to know about Korea’s work with the AfDB and with the African continent?

Valerie Dabady Liverani: I think that I would probably want to add is that the continent had a history back when it was still the axis between America and Russia, the sort of two poles. And obviously we see that as the cold war fell away, much more interest developed in other development poles that are interested in the continent. Today, for example, the Indian president is visiting the Ivory Coast, the Exim Bank is opening an office in Cote d’Ivoire. You’ve got lots of other players – Korea, India, China are all there as well – and Turkey is a big player too. I think it’s important at this level that those that want to participate in the sphere of development on the continent also need to coordinate between themselves. I’m still somewhat biased but I still believe that the multilateral development bank context is the best context for aid to flow through. There will always be room and space for bilateral channels, I don’t think anyone is saying that UK and France and the like will close their embassies, but I’m simply saying in terms of wanting to have the best effect for development, it’s the multilateral development channel that one should go through.

Photo from the Republic of Korea’s photostream on flickr Creative Commons.

By Jenna Gibson

On June 16, Uganda officially kicked North Korea to the curb, asking approximately 60 DPRK troops and state security officials to leave the country. Uganda was playing host to the North Koreans as part of a military exchange program – the UN recently reported that the North Koreans were providing police training to their Ugandan counterparts, including lessons on the use of AK-47s and pistols.

Why kick them all out now? It may be yet another sign that South Korean President Park Geun-Hye’s so-called Summit Diplomacy is working.

According to 38 North, South Korea described President Park’s recent international trips as “part of diplomatic efforts to enlist the international community to the effort to bring about change in North Korea on all fronts.”

Uganda is a perfect example of the strategy’s success. Ugandan President Yoweri Museveni first promised to cut military ties with the DPRK after his summit meeting with President Park. During her visit to Uganda, which was the first visit by a South Korean president to the African nation since 1963, President Park also signed 10 agreements to cooperate on defense, health, rural development and communications technology.

While South Korea has long invested in development aid in sub-Saharan Africa, the timing of this visit and Uganda’s subsequent split with Pyongyang is noteworthy, in part because it is hardly the first country that has recently given preference to Seoul after a visit from the Korean president.

In fact, Park’s 2016 itinerary almost reads like the most recent UN General Assembly vote on North Korean human rights. Uganda – abstain. Ethiopia – abstain. Kenya – abstain. Iran – no. It seems clear that President Park’s administration is focusing on those who still support North Korea, whether actively or by staying silent.

Take Iran, for example. In one of the most high-profile diplomatic moves of her administration, Park recently travelled to Tehran for the first bilateral summit between South Korea and Iran since the two countries established diplomatic relations in 1962.

Iran has long been seen as a friend to North Korea, purchasing arms and backing the Kim regime in the international sphere. In 2002, U.S. President George W. Bush famously linked the two as part of the “axis of evil,” along with Iraq. To see Iranian President Hassan Rouhani stand next to a South Korean President and declare his opposition to nuclear development on the Korean peninsula is no less than a sea change.

 In a recent KEI podcast that examined the historic trip, Iran expert Alex Vatanka clearly saw an opportunity for South Korea to make inroads with Iran.

“Much of what Iran has done in recent years in terms of outreach to certain countries around the world was driven by an almost ideological desire to as they would put it, challenge the global system,” Vatanka said. “Rouhani is very different. This Iranian president’s view, and why he was elected in 2013, is those countries are great, but they actually have nothing to offer us. They can’t contribute to the most important thing we are trying to fix, which is the Iranian economy.”

South Korea, in contrast, has much to offer Iran economically. In fact, Park Geun-hye left Tehran with promises to triple trade between the two countries from $6 billion to $18 billion annually. Using this leverage to her advantage, Park has been able to turn a former DPRK ally away from Pyongyang.

Across the world, the pattern may be repeating itself again in Cuba. Earlier this month, Foreign Minister Yun Byung-se visited Havana, despite a lack of formal ties between the two countries. Cuba has long supported its fellow communist country, making this visit particularly key for Seoul. “For an exceptionally long 75 minutes, our talks were very friendly, serious and candid,” Yun told South Korean reporters after the meeting. “We had a broad exchange of views on bilateral, regional and global issues.”

This strategy is hardly limited to high-level visits, though. Seoul has announced they will provide $1.5 billion in development assistance to Vietnam from 2016-2020, for example. And the South Korean administration has been working to turn Myanmar away from the North with infrastructure projects and trade deals since the country began opening to the international community in 2011.

These moves have not gone unnoticed in Pyongyang. In response to Park’s recent trip, the DPRK sent Kim Yong Nam, the country’s nominal head of state, to Africa as well. There, he met with leaders from nine countries, including Chad, Gabon, Congo, Burundi and Mali. Another high-level official visited Vietnam and Laos in June.

“Pyongyang tries to maintain positive relations where it can, with countries less closely tied with its rivals,” John Grisafi, NK News director of intelligence, said in a recent NK News article. If South Korea can continue to narrow the list of countries willing to side with Pyongyang, they may be able to successfully remove what remains of North Korea’s room to maneuver in the international sphere.

And it seems like that’s exactly what Seoul is doing. It’s too soon to tell how widespread and long-lasting these shifts will be. But for now, it seems North Korea’s isolation may finally be cemented, allowing sanctions to take their full effect.

Jenna Gibson is the Director of Communications at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from Korea.net’s photostream on flickr Creative Commons.

By William Brown

September, 1961 was not a happy time in South Korea, at least according to the US Intelligence Community.  See how CIA described the dismal situation soon after junta commander Park Chung-hee’s coup d’état, in a declassified National Intelligence Estimate.

“The greatest threat to South Korea, at least in the near term, comes from within South Korea. The country lacks a sense of national purpose and faces both tremendous economic problems and a brittle political situation. The military junta seeks to provide the drive and stability which was lacking in the previous civilian government but is subject to internal factionalism and lacks general public support in confronting these enormous problems. … U.S. aid will probably succeed in preventing economic collapse. However, even under the most favorable circumstances, progress will be slow and South Korea will continue to require large-scale foreign aid for the indefinite future if it is to remain an independent nation allied with the West.”[i]  

The longer-term threat was North Korea, seen then as a vibrant economic entity, pu­­­lling the frustrated South into the communist orbit.   

“One thing seems fairly clear; both the South Korean people and the leadership face many disappointments, frustrations, and failures in the years ahead.  In such a situation, the desire for economic progress and for an end to hopeless temporizing, rising interest in unification, and continued enticements offered by the [more prosperous] North Korean regime could lead to some movement in the south toward an accommodation with the north.” 

National Intelligence Estimate 14-2/42-61, 12 September, 1961.[ii]

Within months, South Korea had set forth on what now must be seen as one of the world’s most remarkable economic and political development paths. And within about a dozen years, North Korea would default on foreign credits and begin a long decline into famine.

Not known for its prescience in such matters—just eleven years earlier the brand new CIA had boldly said China would not enter the then flaming Korean War[iii] — this pessimistic Estimate may have served as a useful warning to the Kennedy Administration which went on to put some of its best minds together to change the nature of U.S. assistance to Seoul.  Instead of commodities aid—free food—that was ruining South Korean agriculture, the aid program focused on fixing the overvalued monetary system and developing exports. Who did this and why would be a good topic for historians to revisit and our countries to honor. But I’d like to look at the take-off from the perspective of peering back into the past with an eye toward the future. How did this intelligence forecast turn out so incredibly wrong, and wonderfully so? And what can we learn in order to convince North Korea to make a similar about-face.

An excellent new book, The Korean Economy: From a Miraculous Past to a Sustainable Future, by Eichengreen, Lim, Park, and Perkins[iv], provides what is probably the school view of South Korea’s remarkable turnaround.  In looking for an up-to-date book for my ­Georgetown University course on the two Korean economies, I was pleased to discover this work, not the least because it includes a chapter on North Korea. But I must say I was disappointed in reading what it has to say about what caused the economic take-off. This is not to say that they might not be right; it just doesn’t fit with my pre-conception and I’d like to see a new, more full, academic discussion.  Perhaps objective economists in South Korea, that is academics not predisposed to punish Park for his authoritarian rule, can help with this.

At its essence this is a chicken and egg discussion.  Eichengreen and others say that it was Park’s shifting the economy from import substitution to export-led industry that allowed savings and investment to blossom, raising the productivity of Korean workers.  Exports, from a subsistence-level economy, were possible only because foreign aid provided the surplus needed to attract investment.  The pull from abroad thus lifted the economy.

In contrast, I have thought it was reforms to the money and banking system that provided incentives to save, even out of very low incomes, that created an exportable surplus which then pulled in the foreign investment that jump-started the economy. In other words, an outward push from inside Korea provided the lift.  Foreign aid was less important. An arcane, perhaps, but I think important distinction, especially as we look towards North Korea’s current predicament and to its penchant for nationalist self-reliance.

My view stems from a personal memory—admittedly a dangerous source of analytical vigor. I was a young American boy living in Kwangju, capital of South Chulla province, during this time—fortunately, my Presbyterian missionary parents had not read the secret CIA document. Early one rainy season morning in 1962, my mother got me up to search our neighboring American doctor’s house for a stash of hwan cash. The doctor and his family were away but had rung up (that is the way the old phone system worked) to say he had a bunch of South Korean money that needed to be turned in; he just couldn’t remember exactly where it was, probably in his library. Exciting in a way I’ll never forget, I found the stash of cash, in cut-away books just like you see in spy novels. The bigger story, of course, and unknown to us at the time, was the change to the monetary system and to Korea’s economy that this currency reform signaled.  The initial phase was not completely successful; apparently not enough new won notes had been secretly printed in England and brought by ship to Korea, but within months the new cash had taken hold.  So if I was to make a point estimate, June 9, 1962 was the day that made modern South Korea. It should be a holiday. Everyone was given a few days to take their hwan money, at least up to a pretty high limit, and go down to the Cheil bank and exchange it for newly printed won notes at a 10-to-one ratio; after that hwan would be useless.  Larger amounts of money had to be deposited for a year at a high interest rate but most of the hwan was converted and prices changed accordingly.  And to encourage the public to deposit and save their new won, something like 20 percent annual interest rates were offered.  Even in days before calculators, I remember figuring out how fast the money would grow and how soon I could be a millionaire—forgetting the problem of inflation that this new policy was meant to address.

I wasn’t the only one thinking this way and very quickly South Koreans shifted from being just about the worst savers in the world to being the best. Poor people stopped spending on weddings and funerals and instead saved money, and the banks used these saved resources to lend to farmers to buy small tractors, assembled from kits made in Japan, revolutionizing agricultural productivity.

The tractor that replaced the cow. Park’s Memorial Museum, Seoul

Elimination of U.S. food aid, and government support to higher agricultural prices, as well as subsequent deals with Japan and the World Bank helped, but the driving force was a decent money and banking system that gave the right incentives to the Korean public to save and invest in the future. At least that is the way I have remembered and taught the story.

Textile workers support exports. Park’s Memorial Museum, Seoul

Eichengreen and the other authors, however, use the data to paint a slightly different picture.

“Domestic savings remained in the single digits (share of GDP) in the first half of the 1960s, the takeoff period. … The most dramatic change was, in fact, the rapid growth in exports. Exports at constant prices grew by 35 percent per annum from the end of 1963 to the end of 1969.[v]

The data shown in their text, however, are at five-year intervals so I question the interpretation of the leads and the lags.  Looking at annual household savings data, (graphic below) it seems that the savings growth kicked-in in 1962 and 1963, simultaneously with the money change and a year before exports began their upward spiral from a tiny base.[vi] Admittedly 5 percent household savings are not much but it is the change from nothing that arguably sparked Korea’s real revolution.

As I say, a chicken and eggs argument. If my memory serves, it was human hair (wigs), plywood, and leather goods that started the export push, not products that required foreign investment.  But clearly Eichengreen is right about what happens next; general and soon-to-be “president for life” Park got on the export bandwagon and the rest is history. Export growth soared giving the economy a huge boost even as savings and investment rates rose, allowing the import of capital goods for South Korean industry.  Park’s most controversial policy was then to shift from light industrial exports, especially textiles and footwear, to heavy and chemical industry, despite what appeared to World Bank and U.S. economists as a comparative advantage in labor intensive products.  By now it would be hard to argue that Park wasn’t correct but, whatever the case, on the basis of this surge in investment, South Korea’s comparative advantage has shifted, for the time being, to heavy industry.  I say for the time being since China looms as a tough competitor in all of these products and is investing even more heavily than did Korea.  Another important step, as is hinted at in the old NIE, was Park’s creation of an objective and expert Economic Planning Board that supervised the creation and publication of data that his and subsequent governments could use as the road map and guide for economic policy making (and which makes possible our current analysis of what caused the economic takeoff).  The U.S. role was critical as well.  Despite missteps with respect to aid, the U.S., soon after liberation from Japan, had supervised the fundamental change in Korea from a tenant based agricultural economy to a capitalist one with massive land reform giving land to the tenants, and, of course, by providing the security shield that protected the country from the Communists.  While initially skeptical of the currency reform—U.S. officials had not been notified in advance even though the U.S. was financing about half of the South Korean budget—U.S. balance of payments support that followed allowed the new won to achieve credibility.

But the real genius of the Park administration, it seems to me, was those early courageous and risky steps in changing the money and using the change to create a sound currency and a high-interest banking system that encouraged savings and that recognized the high returns on capital if used only in high productivity endeavors.  Now seen as a textbook solution to be sure but one that must have been complicated and risky for the generals to manage. Subsequent Seoul governments have relied too much on banking and not enough on more efficient direct capital markets—stocks and bonds—but all of that is a different story, well told in Eichengreen.

The parallels to North Korea today are interesting and I would hope officials and scholars in Pyongyang are carefully studying Park’s success.  I say carefully since they tried something similar to the South Korean currency reform in 2009 but bungled it badly.   On paper what is known as the 2009 currency redenomination must have looked similar but with critical differences. Citizens were told to change about a third of their cash into a redenominated currency of the same name at a 100-1 ratio. That ratio doesn’t matter but the fact that only a small share of cash could be converted, and the absence of a name change, are important.  North Koreans immediately saw most of their money devalued by 99 percent over the span of a few days and naturally associate that disaster with the North Korean won notes.  It isn’t clear what was supposed to happen with their bank accounts but these were artificial anyway since cash can’t be withdrawn from a bank except with special permission—maybe like a 401k that never matures—and that policy has not changed.  By sharply reducing the money supply, the move might have been designed to bring black market prices down close to the fixed ration price levels and end the arbitrage that was and continues to destroy the planned, fixed price, economy.  That didn’t work since market prices immediately soared, leading to an even larger gap between official and market prices.

Whatever the reasons for the redenomination, it backfired—even strongly socialist PRC commentators called this a theft of the people’s money.  The Kim Jong-il government executed the party finance chief and, a first, offered an apology to the public.  But once done such a deal cannot be undone and North Korean won quickly became essentially worthless, with foreign money, U.S. dollars and RMB, seeping into the circulation in large amounts. Pyongyang by now has stabilized the won at prices significantly above the pre-2009 level but the foreign money circulates without impediment, an astonishing development in a so-called Marxist and “self-reliant” economy.  To hire a taxi, you now need something like two U.S. dollars.  To buy an apartment, you need $30,000 US.

In these respects, the situation now is probably not so different than South Korea in 1961.  At least a market now exists and the command economy seems to have lost some of its sting.  Entrepreneurs make dollars buying and selling in the street markets, and former (maybe current) officials and military officers might be hoping to make it big, using their government connections and licensing abilities to make millions of dollars by building apartment buildings and selling the flats, carefully keeping enough dollar cash handy to pay off the authorities.

In fact, it is interesting to think that the 1961 NIE might work well today, simply exchanging “North” for “South” Korea. Land reform that gives farmers’ ownership rights; stopping the inflow of disrupting foreign aid that discourages export development; and an export push all are within the capabilities of even a sanction-limited Pyongyang government. But most important is creating a money and banking system that allows the North Korean people to do their own saving and investing.  If Kim Jong-un wanted to link such a policy to his grandfather, all of this could be placed in a “juche” nationalist and self-reliance context.  Clearly, against the advice of many non-Koreans, Park Chung- hee managed to change South Korea from a beggar, aid-dependent country to a self-reliant lending and aid giving powerful and well-liked country.  One would think the young Kim would like to do the same. But before any of this can work, he needs to fix his rapidly dollarizing monetary system and adopt capitalist tools to raise savings and create private incentives to invest in the future. A decent bank and a decently positive real interest rate would do wonders.  And like Park, Kim might be able to use a little American and Japanese help to get this done.

So, where is the briefing book that we can give the young General that will properly explain what he needs to do?  I’m pretty sure the junta leader’s daughter can give the lecture.

William Brown is an Adjunct Professor at the Georgetown University School of Foreign Service and a Non-Resident Fellow at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photos courtesy of the author.

By Troy Stangarone

On May 1, South Korean President Park Geun-hye will travel to Iran for a three-day summit with the newly emerging regional power. Her visit will represent the first summit meeting between Iran and South Korea since the two nations established relations in 1962. However, while relations with Iran hold significant promise with the removal of economic sanctions, they also have the potential to be extremely complex.

The summit meeting comes shortly after the implementation of an agreement between Iran and the P5+Germany to place limits on Iran’s nuclear program in exchange for the removal of international sanctions that had cut off Iran’s access to international markets through financial, maritime insurance, and secondary sanctions.

For Asian, European, and in the future, American investors, Iran represents an appealing economic opportunity. With the world’s fourth largest oil reserves and largest reserves of LNG, coupled with a population of 80 million that is largely under the age of 30, Iran holds significant economic potential as both an energy producer and consumer market.

The Economic Promise of Improved Relations with Iran

For South Korea, Iran holds significant economic potential. The impact of the oil embargo on Iran and its removal from the SWIFT financial system has severely cut into trade between South Korea and Iran. Trade between South Korea and Iran had reached a high of $17.4 billion in 2011, the year before the EU oil embargo went into effect. Since that time, bilateral trade has declined by 65.5 percent to $6.1 billion in 2015.

From 2011 to 2015, the value of oil imports from Iran declined from $9.4 billion to $2.2 billion. This was due to both a drop in the price of Dubai crude, which was around $100 a barrel in 2011 but had dropped into the $40 range by 2015, and a drop in the overall volume of imports which fell by 54 percent.

However, trade with Iran was not only impacted in terms of petroleum imports, but South Korea also saw its exports to Iran decline by 39 percent over the same period. In 2011 South Korea was exporting over $235 million in refrigerators and $270 million in vehicles and even more in vehicle parts to Iran. By 2015, sales of refrigerators were down significantly, but sales of vehicles had shot up to more than $372 million after having been well below $100 million in the period of 2012-2014.

As Iran’s economy revives and its young consumer base sees increases in wages, South Korean consumer goods from cars, to smartphones, to televisions, to durable goods such as refrigerators are well placed to make significant gains.

Beyond consumer goods, Iran holds promise for helping to meet Seoul’s energy needs. South Korea lacks domestic petroleum reserves and is therefore dependent upon imports for its energy needs, for which petroleum based products account for nearly 40 percent of energy consumption.

South Korea can benefit from an enhanced energy partnership with Tehran in multiple ways. First, Iran can serve as another significant source for South Korea’s energy needs and if energy exports only return to pre-2012 levels we should expect to see South Korea’s imports of Iranian petroleum to at least double. Second, South Korea stands to benefit from investment projects in Iran’s energy industry, and the South Korean construction industry stands to benefit from Iran’s economic revival more broadly. Iran is expected to engage in $186 billion in construction projects between now and 2020. This boom in projects comes at a time when the Korean construction industry is struggling abroad.  Lastly, as Iran looks to increase its exports of oil, South Korea’s shipping industry hopes to benefit from Iranian efforts to modernize its tanker fleet.

While there is significant promise in new economic ties with Iran for South Korea. Expectations should also be tempered. During the recent sanction period, trade between the two countries could only be settled through won-based accounts in Seoul. Because the financial institution involved in those transactions, Woori Bank, has U.S. dollar denominated accounts it found its access to the U.S. financial system at risk had its won transactions with Iran been in violation of sanctions. With sanctions now removed, however, European firms have seen slow progress in arranging deals with Iran due to the reluctance of banks to finance transactions with Iran due to new U.S. sanctions on Iran’s missile program. South Korean firms may run into similar difficulties.

South Korea’s Security Interests in the Middle East

As South Korea’s economic relationship with Iran develops, there is also a security dimension for Seoul to consider. In 2015, more than 80 percent of its petroleum imports came through the Strait of Hormuz. As imports from Iran increase, Seoul’s dependence on the Middle East for petroleum will likely only rise.

Dependence on the Middle East for energy imports creates risks for the South Korean economy. In the past, Iran has threatened to mine the Strait of Hormuz, an action which would put South Korea’s energy lifeline at risk. As a result, Seoul has a strong interest in peace and stability in the region. However, Iran continues to support groups such as Hamas and Hezbollah, and is engaged in a competition with Saudi Arabia for regional influence. Some have expressed concerns that an economically stronger Iran could further destabilize the region.

The North Korean Dimension

While South Korea playing a greater role in encouraging stability in the Middle East is an important dimension to the security portion of President Park’s trip, the more direct security interest for South Korea is Iran’s relationship with North Korea, which President Park is expect to raise with Ayatollah Ali Khamenei if they are able to meet.

As South Korea and the international community try to isolate North Korea, encouraging Tehran to distance itself from Pyongyang will be an important part of the trip. Iran and North Korea are known to have shared technology on missile development, and there has long been concern that they might be sharing information on their nuclear programs as well.

Beyond the nuclear and missile programs, Tehran may, if only indirectly, be supporting the North Korean regime. Iran and its proxy Hezbollah have been providing arms and financial support for the Assad regime in Syria. In 2013, Turkey seized gas masks, arms, and munitions from North Korea bound for Syria. Under the new UN sanctions, all arms purchase from North Korea are prohibited and South Korea should encourage Iran to push its allies to enforce the sanctions on Pyongyang.

Seoul’s outreach to Iran could be the beginning of a fruitful new relationship for South Korea and Iran. The initiative holds significant economic potential for South Korea, and the prospect to gain additional influence with a key partner of North Korea. Tehran stands to gain significantly from increased trade and investment with South Korea as it seeks to upgrade its infrastructure, boost its economy, and improve the life of its people. However, North Korea holds the potential to be a sticking point in any new relationship, and as long as Iran maintains cooperation with Pyongyang there is also the potential for it to be an increasingly complex relationship.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are his own.

If you are interested in more information on this topic, you can also listen to our podcast on the South Korea-Iran summit with Alex Vatanka of the Middle East Institute at keia.podbean.com.

Photo from peyman abkhezr’s photostream on flickr Creative Commons.

By Nicholas Hamisevicz 

February was another difficult month for inter-Korean relations. After a nuclear weapons test in January, North Korea then conducted a satellite launch that also served as a ballistic missile test. The Park Geun-hye administration in South Korea closed the Kaesong Industrial Complex (KIC) in response, leaving no continuous projects or connections left for inter-Korean cooperation.  After punishments through sanctions by individual countries and by the international community through the United Nations Security Council resolution, South Korea will have to figure out how it will engage North Korea, if at all. The two Koreas have made it through troublesome times at the beginning of the year before, but with more factors being added to the mix each month, this period during the first quarter of 2016 could be the toughest challenge yet for the Park Geun-hye and Kim Jong-un.

North Korea launched a rocket carrying a satellite that appears to have made it into orbit on February 7. Once again, this launch was viewed as attempt to test ballistic missile technology. Three days later, the Park Geun-hye administration announced that it was suspending operations of the KIC because North Korea was using the funds to support its nuclear and ballistic missile programs.

As KEI’s Troy Stangarone elucidated, it doesn’t look likely that the Park Geun-hye administration will attempt to reopen Kaesong. Increasing the grimness of the outlook is the fact that North Korea seemed unimpressed by any inter-Korean related cooperation project put forward by the Park administration. North Korea barely agreed to family reunions. It has only been through many negotiations and tension relieving measures that the two Koreas have had family reunions twice under Park Geun-hye and Kim Jong-un. The reopening of tours from South Korea to Mount Kumgang in North Korea had no chance, as South Korea wants security guarantees for its citizens and apology by North Korea over the death of a South Korean who was killed during a visit. North Korea desires to have South Korea re-pay for everything and re-start the tours immediately. Park Geun-hye’s peace park idea along the DMZ doesn’t appear to have been seriously considered by North Korea either. The cooperation effort between South Korea and Russia to ship Russian coal through North Korea’s Rajin port was slow and has currently been suspended as well by South Korea.

Thus, since there is currently no inter-Korean cooperation projects in operation, conceivably any idea could be brought forward as an option. However, it is also likely that whatever ideas is put forward by South Korea, either by Park Geun-hye or her successor, North Korea’s price for agreeing to the arrangement will be much higher to make up for lost revenue and to get back at South Korea.

In order to get to a point where the two Koreas can even consider negotiating over a new inter-Korean cooperation project, they must get through these first five months, and likely, a much longer stretch of time as well. Even with the stakes seemingly much higher now without any inter-Korean cooperation project, the two Koreas under Park Geun-hye and Kim Jong-un have made it through this complicated part of the year before. In 2013, North Korea denied access to Kaesong and operations had ceased for five long months. Last year, North Korea demanded higher wages for the workers at Kaesong, setting off more intense negotiations. Moreover, the arrest of a South Korean student by North Korea made things difficult for inter-Korean relations.

Although Kaesong continued in these instances, the two Koreas can make it through the next few months. There has already been tough talk and provocative moves of small rocket fires and cyber attacks by North Korea. However, both sides have the ability to manage the tensions in a way that can get the countries to late May without a detrimental conflict. By then, North and South Korea could be in a more positive environment to address the possibility of some constructive interaction or at the very least a stalemated atmosphere of no engagement, positive or negative.

It has been normal for contentious rhetoric and little contact to occur between the two Koreas during the first quarter of the year. However, after the first two months of 2016, the new normal now appears to be no substantive contact between North and South Korea for the last year and a half of the Park Geun-hye administration. Despite making it through the first few months of the year in the past, both Koreas will have to work harder than before to reduce the possibilities of the lack of contact being accompanied by provocative actions throughout the rest of the year.

Nicholas Hamisevicz is currently undertaking a PhD in World Politics at Catholic University. Previously he was the Director of Research and Academic Affairs for the Korea Economic Institute of America. The views here are the author’s alone. 

Photo from Chris Marchant’s photostream on flickr Creative Commons.

By Troy Stangarone

As we look back at the events that helped to shape the Korean peninsula in 2015, it is also an opportunity to review the events we highlighted on The Peninsula in our annual 10 Issues to Watch For on The Korean Peninsula in 2015 blog and the key events that we did not predict.

Looking back at the 10 issues raised in last year’s blog, all have resonated on the Korean peninsula this year, but not all in the ways we thought they might. On five of the issues, things have largely played out as we expected, while one did not and for four others the outcomes are less clear.

Here’s a brief look back at the 10 issues and what happened:

1.      Dealing with North Korea: Understanding North Korea is never easy and it is only made more difficult by the regime’s continued pursuit of nuclear weapons. One area we highlighted to watch in 2015 was progress on North Korea’s weapons programs and discussion of the deployment of the U.S. Thermal High Altitude Area Defense (THAAD) system in South Korea to protect against the nuclear and missile threat from North Korea. While North Korea took a major step towards developing submarine launched ballistic missiles, which would give it a second strike capability, South Korea has indicated it will not be discussing the deployment of THAAD with the United States. On this issue, our prediction was half right as North Korea has continued developing its weapons programs, but there has been less progress on deploying THAAD, or some other missile defense system than we expected.

2.      Key Summits in 2015: Here we highlighted a series of key summits for the year ahead. While Kim Jong-un ultimately did not go to Russia for the May 9^th ceremony commemorating the end of World War II or make any international visits, thus eliminating the prospect of a meeting with South Korean President Park Geun-hye, each of the summits played a key role this year. Japanese Prime Minister Abe Shinzo did make a positive statement on issue of history with the 70^th anniversary of the end of World War II approaching, even if it did not meet everyone’s hopes. Trilateral summits among Korea, China, and Japan also resumed. Lastly, Indian Prime Minister Narendra Modi held a bilateral summit meeting with President Park in what could become an important relationship in the future.

3.      Korea-Russia Relations: In 2014, North Korea began courting Russia and our expectation was that greater cooperation would be announced at a meeting between Kim Jong-un and Russian President Vladimir Putin. However, that meeting never happened and cooperation between the two seems to have fizzled. Though, Russia and South Korea did announce efforts to expand relations at the end of the year.

4.      Better Relations Between Korea and Japan: Here our key insight was correct, as the bilateral summit meeting took place between President Park and Prime Minister Abe after Prime Minister Abe had issued his statement on World War II. At the summit meeting, both sides agreed to work on resolving the Comfort Women issue and recently announced that resolution laying the groundwork for improved relations between the two countries.

5.      Constructing Legacies: With President Barack Obama’s term in office coming towards an end, our expectation for 2015 was that he would seek to build on his legacy as president, but not look to North Korea for a potential legacy issue. While President Obama has cemented deals on Iran’s nuclear program and climate change, there has been no progress on North Korea. For President Park, the agreement reached with North Korea in August to reduce tensions seemed to be a way forward, but subsequent talks with North Korea failed to make progress.

6.      Two Major Moves on Trade: South Korea has had an ambitious free trade agenda  that we expected to continue in 2015 with two major efforts – concluding and implementing an FTA with China and making efforts to join the Trans-Pacific Partnership (TPP). The FTA with China was implemented in December, but while South Korea has continued to express interest in joining TPP, the agreement’s late conclusion has limited Seoul’s ability to join.

7.      A New Nuclear Energy Cooperation Agreement: The United States and South Korea were looking to conclude a new agreement on civilian nuclear cooperation, or 123 agreement, to replace an extension to the 1974 agreement that was set to expire next year. The two sides successfully reached an agreement in June of 2015 and updated agreement is now in effect.

8.      The Diversification of South Korea’s Energy Supplies: South Korea is highly dependent on imported fuel with more than 85 percent of its petroleum imports passing through the Strait of Hormuz. Our expectation was that in 2015 South Korea would begin to diversify those supplies. While there have been efforts to import more condensate from the United States, low petroleum prices have made imports of U.S. LNG less attractive. However, now that Congress has passed legislation allowing for the export of oil, this will be an issue to continue to watch in the years ahead.

9.      Samsung’s Future and Its Frenemy Relationship with Apple: After a loss of market share in key markets such as China and India for its smartphones, as well as falling revenues and profits, 2015 was expected to be an important year for Samsung to reverse its fortunes while managing its beneficial and competitive relationship with Apple. While Samsung saw an increase in profits in the 3^rd quarter, it was due to strong results in the semiconductor and display sectors as its smartphone segment continued to face challenges. It relationship with Apple continued to remain complex as Samsung has appealed part of their legal case with Apple to the U.S. Supreme Court, but also been chosen by Apple to supply microprocessors and displays for the iPhone.

10.  Feeling the Effects of Social Change in Korea: This was perhaps our most bold insight for 2015 and in truth one that reflected more long-term trends rather than issues that might specifically come to a head over the past year. As South Korea ages and continues to grow in prosperity, it will face the social changes that come with those trends. The level of social welfare and the definition of what it means to be Korean are issues that will continue to shape South Korea. Some social issues, such as public health, came to the fore in 2015 due to outside events such as the spread of Middle East Repertory Syndrome.

Beyond the issues we expected to see addressed in 2015, other important developments included:

1.      North Korea’s Provocation in the DMZ: On August 4, two South Korean soldiers were maimed after stepping on landmines placed by North Korea in areas of the DMZ that are known to be patrolled by South Korea. This raised tensions along the DMZ as South Korea responded by resuming broadcasts from loudspeakers across the DMZ and North Korea threatened to attack the loudspeakers. The crisis was ultimately resolved as the two sides reached an agreement for North Korea to apologize, South Korea to suspend the broadcasts, and the two sides to arrange for a reunion of separated families.

2.      October Family Reunions: One of the positive outcomes of the August provocation was the two sets of family reunions held in October. The first family reunion saw some 100 South Koreans meet their family members for the first time since the Korean War and another 250 were able to do so during the second reunion.

3.      Agreement on the Comfort Women: While not accepted by all of the Comfort Women, the agreement by Japan to issue an apology and provide compensation was one of the major unforeseen events of 2015.

4.      Middle East Repertory Syndrome (MERS): South Korea faced a medical emergency earlier this year as MERS spread through the country causing the death of 38 individuals and another 16,000 to be quarantined.

5.      The Passing of Kim Young-sam: A former activist for democracy who later became president of South Korea passed away at the age of 87.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from Eugene Lim’s photostream on flickr Creative Commons.

By Jenna Gibson

What interests you about this job? What are your greatest strengths and weaknesses? What are your measurements?

One of these questions would raise red flags if asked by a potential employer here in the United States, but it is still relatively common in Korea. One woman who recently applied for a job as a nursery school teacher said she was asked about her family’s economic background, her weight, and whether she planned to continue working after getting married. She is not alone – according to the Korea Herald, in 2014 there were 630 reported cases in which job postings asked for “good-looking” candidates. And surely many more of these types of incidents went unreported.

Technically, these types of questions and other discriminatory practices are illegal in Korea. But they are still so commonplace that the Ministry of Employment and Labor announced on November 3 that they would be cracking down on violations.

According to Labor Ministry official Nah Young-don, who is in charge of youth and women policy, “The corporate culture that violates job seekers’ privacy by asking about marital status and appearance is a problem, but what’s more worrisome is that many companies are not aware of the illegality of such practice.” To help remedy this, the Ministry is sending information on discrimination rules to thousands of major companies. Specific guidelines include: do not specify that a post is for men or women only without a specific reason, do not ask personal questions during the job interview, and do not include requirements related to appearance in job postings.

Violating discrimination laws does carry a 5 million won ($4,400) penalty, but according to the Korea Herald many companies have merely been issued warnings in the past. The Ministry says it will now start handing out fines more broadly.

Of course it’s important to crack down on blatantly discriminatory questions and requirements. However, the Korean government has to go a lot farther if it is going to solve the issue of gender inequality in the workforce.

One major issue that remains is the use of photos on resumes. What good is it to ban interview questions about appearance when the employer will still be able to view the applicant before they even step into the room? The use of photos on resumes is discouraged by the Labor Ministry, which released a standardized resume format in 2007 that excluded categories like height, weight and family background. However, a bill that would specifically ban the inclusion of photos in job applications has been lingering in the National Assembly for three years with no sign of movement.

Korea scored the lowest in the OECD on The Economist’s recent “glass-ceiling index,” which measures female labor-force participation, wage gap, and women in leadership positions. The United States has room to grow as well – at 58.2 points, America is below the OECD average of 60.3 on this index.

During her presidential campaign in 2012, President Park Geun-hye emphasized the importance of addressing the issues women face in the workforce, saying, “More participation of women in the economy is a core engine for the nation’s growth.” And her administration has taken some steps to ameliorate the situation, strengthening the coordinating role of the Ministry of Gender Equality and Family and setting a target ratio for female managers across the public sector.  Despite these steps, major obstacles remain for Korean women in the workplace. Tackling the discrimination they face before even being offered a job will not solve all these issues, but it certainly is a good place to start.

Jenna Gibson is the Associate Director for Communication Technology and Programs at the Korea Economic Institute of America. The views expressed here are the author’s alone. KEI intern Juni Kim contributed to the infographic in this post.

Photo from Republic of Korea’s photostream on Flickr Creative Commons.