CHINA'S QUEST FOR RESOURCES
Mutual convenience
Mar 13th 2008
From The Economist print edition
Congo has something China wants, and vice versa
IN POORER countries such as Congo, China's hunt for resources has more complex effects. On the one hand, Congo's long-deprived citizens are in much more desperate need of trade, investment, economic growth and the rising living standards they might bring with them. On the other hand, its corrupt and underfunded government is much less able or inclined to manage China's engagement for the benefit of its people. Nonetheless, even from the pot-holed streets of Lubumbashi, China's new needs seem like a momentous opportunity.
Congolese are constantly pointing out that their country should be one of the richest in the world. It has huge mineral wealth, including the world's biggest reserves of cobalt and tantalum, a rare metal used in the circuitry of mobile phones and laptops. It also has rich seams of copper, diamonds, gold, manganese, uranium and zinc. And much of the country is covered with virtually intact tropical forests, thick with valuable hardwoods.
In fact, though, Congo is one of the poorest countries in the world. Output per head is just $714 a year, the third from the bottom in the United Nations' global ranking—even after adjusting for the lower cost of most staples in poor countries. Over half of its citizens do not have access to clean water, and the life expectancy of a newborn baby is less than 46 years. Kinshasa, the capital, has some 15m inhabitants but no sewage system.
Dirt poor in the midst of plenty
In short, Congo has made very little of its natural resources. The Economist Intelligence Unit, a sister company of The Economist, estimates that the country's exports last year were worth only $2.6 billion—a paltry sum in a country of 60m people. This pitiful performance stems first from exploitative Belgian colonialism; then from the kleptocratic misrule of Mobutu Sese Seko, who ran the place for more than three decades until his overthrow in 1997; and then from the on-again-off-again civil war that has wracked the country ever since. Sporadic fighting continues, although UN peacekeepers have managed to instil a semblance of order which allowed elections to be held in 2006.
Western donors paid for the elections, which cost $460m, and have supported the resulting government with substantial handouts. This year's budget, for example, envisages aid of $1.3 billion—although it is not clear whether this will be forthcoming. The government has had testy relations with the International Monetary Fund, which thinks it is too lavish in its spending. That, in turn, has prevented Congo from joining the “Heavily Indebted Poor Countries” initiative (HIPC), under which Western donors agree to write off some of the debt of the poorest countries as long as the IMF approves of their economic policies.
While negotiations with the IMF on a reform package drag on, interest payments on Congo's foreign debt of $12 billion are consuming a large chunk of the budget. The remainder goes mainly to pay civil servants, leaving little for development. Moreover, complains Barnabe Kikaya bin Karubi, a member of the National Assembly and a former presidential spokesman, once the holes in the budget have been plugged, most Western aid goes into education and health care. These are important, he argues, but they do little to stimulate the economy in the short term. And all Western aid, he gripes, comes with endless strings attached: “If we say to the Europeans that we want a highway, they say, 'hold an election first, sort out your finances, crack down on corruption'—and in the end the highway never gets built.”
Congo is also receiving some private capital. Freeport McMoRan, an American mining conglomerate, has started construction of a $650m copper mine in Katanga province and hopes to begin operations by the end of this year. Last October Katanga Mining, which is listed in Toronto, secured a loan of $150m to finance the development of another copper mine nearby. The same month BHP Billiton agreed with the Congolese government to look into the construction of an aluminium smelter in the province of Bas Congo, at a cost of roughly $3 billion.
But Western firms are cautious. Freeport's mine, for example, has been in the works for over a decade as various prospective investors have balked at Congo's instability and dropped out. It has taken encouragement and financing from bodies such as the African Development Bank, the European Investment Bank and America's Overseas Private Investment Corporation to get the project up and running.
For several years now the World Bank has ranked Congo as the worst place in the world, bar none, to do business. It has a totally dysfunctional legal system, a hugely cumbersome bureaucracy and a near-total lack of physical infrastructure. Kinshasa suffers from paralysing traffic jams, due not to a surfeit of cars but to the appalling state of the roads. Last year analysts and businessmen surveyed by Transparency International, a pressure group, ranked it 168th out of 179 countries for freedom from corruption. To top it all, the government is conducting a much-needed but opaque and long-winded review of all mining contracts signed during the civil war, adding to foreign investors' anxiety.
None of this seems to deter China's state-owned firms, however. Last September Export-Import Bank, through which the Chinese government disburses all its foreign aid, signed an agreement with the Congolese government to finance $6.5 billion-worth of improvements to the country's infrastructure and $2 billion-worth of construction and refurbishment of mines, using mineral reserves as collateral. The following month a similar deal was signed with China Development Bank.
Victor Kasongo, the deputy minister of mines, says the total value of these deals could eventually reach $14 billion, a conservative estimate of the value of the 3.5m tonnes of copper reserves the government has set aside as collateral. The state-owned mining firm, Gécamines, also holds the rights to a further 13.5m tonnes of copper reserves, so if the model proves successful there is enormous scope for expansion.
Joseph Kabila, Congo's president, has labelled the Chinese deals as “exemplary co-operation”. “For the first time in our history”, he told the National Assembly, “the Congolese people will finally be able to see what the use of their cobalt, nickel or copper will have been.”
But Western governments have all sorts of questions. For one thing, they are loth to forgive billions in debt to Congo only to see it rack up similar obligations to China. They also want to be sure that firms from their countries will not suddenly find themselves at a disadvantage to Chinese ones with political connections. Nor do they want to be put at a disadvantage themselves, with little leverage over a Congolese government flush with Chinese cash. At best, that would jeopardise their recent efforts to steer Congo towards solvency and democracy. At worst, it might help to rekindle the civil war, undermine stability in the region and put 18,000 UN peacekeepers at risk.
Reuters
The power of picks and shovelsIt is true that China has sold arms to the Congolese government. But if those arms help to stem the various rebellions wracking the country, they might actually make it more stable. At any rate, China is not the only outside power to go down that road: the UN's peacekeepers, despite their title, have joined the Congolese army in an offensive against one of the most disruptive rebel groups. It is hard to see how provoking instability in the area would be in China's interests. After all, it would make it harder to get at the minerals which Chinese firms are so keen to secure. It would also generate embarrassing publicity, especially in the run-up to the Beijing Olympics in August.
It is also true that Congolese politicians chafe at the dictates of the IMF. But Congo is so poor that it cannot afford to turn its nose up at either Western or Chinese money. The government certainly could not do without the funds European donors have lent it to help balance the budget. It also desperately needs the debt relief that only the IMF can provide, through the HIPC scheme, so it is trying to get back in the fund's good books.
Anyway, there is no sign that China intends its aid as a substitute for Western handouts. In December the World Bank and China agreed to develop aid projects in Africa together. Chinese diplomats have begun attending the meetings in Kinshasa at which Western donors try to co-ordinate their development schemes, says Ross Mountain, the local head of the United Nations Development Programme. He sees no problem with a big increase in Chinese aid: the more the merrier.
The same goes for mining firms. The Congolese authorities insist that Western companies have nothing to fear from the sudden appearance of Chinese rivals. No sooner had the Chinese deals been signed than Mr Kabila flew to America to reassure both the American government and Freeport McMoRan. “We want all investors,” says Moise Katumbi, the governor of Katanga province. “We don't care what colour they are.” Mr Kasongo vows that no existing mining concessions or contracts will be voided to make way for Chinese investors. As long as Congo has undeveloped mineral deposits, he argues, it would be counterproductive to do so.
The Chinese government may well seek to use its clout on behalf of its companies, but Western governments do the same all the time. Congolese politicians like to point out that France's president, Nicolas Sarkozy, has been flitting from country to country, badgering officials to buy reactors from Areva, a French nuclear firm. And it is not as if the new Chinese arrivals were subverting a perfectly transparent system of allocating mining licences. Almost all Congo's existing mining contracts were negotiated with little scrutiny by governments of dubious legitimacy—hence the decision to review them.
Without fear or favour
The authorities do not appear to be going especially easy on the Chinese businesses that already have a presence in Congo. Mr Katumbi says he has expelled 600 Chinese found working in Katanga without proper documentation. “This week I closed three Chinese companies,” he adds proudly, citing environmental abuses. At the special office he has set up to enforce mining and customs regulations, employees show off a huge block of malachite that one Zhang Cao had tried to smuggle out of the country. A close eye, all the staff agree amid much tutting and shaking of heads, needs to be kept on Chinese firms.
That attitude should encourage Congolese and foreign NGOs who worry about how the new Chinese investors will behave. They point to neighbouring Angola, where China is paying for the construction of roads and railways but is using mainly Chinese contractors and workers, denying work to the legions of unemployed locals. There are also fears that Chinese firms will cut corners on quality, or ignore labour laws and environmental standards, or simply not prove up to the job. Some ask whether the Chinese will come to resemble European colonialists of the past, neglecting Congo's development as they loot its natural resources.
No colonialists here
But Congolese officials seem determined not to be taken for a ride. Mr Kabila has said that Chinese firms investing in the mining sector will have to take on Gécamines as a partner, process the ore they produce before exporting it and employ as many locals as possible. Mr Kasongo adds that the government will set tough deadlines for the completion of the roads and railways to be built under the ore-for-infrastructure deals, the details of which are still being negotiated. And Mr Kikaya, the MP, gives warning that the National Assembly will not tolerate “shoddy work”.
The small Chinese companies that are already operating in Katanga do not seem to behave any better or worse than their competitors. At the smelter in Lubumbashi run by Mr Lee, three-quarters of the employees are local. The trading firms that buy the smelter's output are Swiss and Belgian, he says, not Chinese. Global Witness, a pressure group, has complained about the exploitation of wildcat miners, but the main objects of its ire are Lebanese- and Indian-owned mineral-processing and export firms. It says that Chinese tradesmen, by contrast, have a reputation for paying miners promptly and well. In 2001, a United Nations report on the looting of Congo's natural resources named a number of African and European companies that were said to be pillaging the country but no Chinese ones.
Chinese firms do, however, seem to move faster than their foreign rivals. Mr Lee says that his smelter went up in six months, a quarter of the time it has taken an Indian firm to build a similar facility on an adjacent plot. Mr Katumbi, the governor, says Chinese firms find it easier to finance investment in Congo because Chinese banks have steelier nerves than their Western counterparts. Chinese companies are also keen to upgrade their plants, he says, and to expand into other businesses—something other foreigners are reluctant to do.
As for the idea that China's sudden interest constitutes a new form of colonialism, Congolese politicians seem to see it as the opposite: an opportunity to put meddling foreigners in their place. China's growing presence, Mr Kikaya says, might encourage Western governments to drop their “patronising attitude, that we know what's best for you”. He also points out that China has got involved in Congo before. In the 1970s Chinese workers came to construct a parliament building that is still in use today. In the 1990s another contingent arrived in Kinshasa to build the national stadium, Africa's largest. Those projects did not turn Mobutu into a Chinese stooge; if anything, he was seen as an American puppet.
As in Australia, some perspective is needed. China is only one of a number of countries with interests in Congo's minerals and influence over its politicians. As Mr Kasongo points out, all the government is proposing is to put 3.5m tonnes of Congo's copper reserves into Chinese hands. That is only one-third of the amount controlled by a single American firm, Freeport, as operator of Congo's huge Tenke Fungurume mine. Indeed, the biggest worry about the deal with Congo is whether it will go ahead at all: six months after it was first announced the two sides are still haggling over the details.
Tuesday, October 20, 2009
China's Quest for Resources: The Lucky Country
CHINA'S QUEST FOR RESOURCES
The lucky country
Mar 13th 2008
From The Economist print edition
Australia can't dig fast enough to meet demand from China
CHINA'S insatiable appetite for commodities has been manna from heaven for the countries and firms that supply it. Take the iron ore that feeds the smelters of Shougang Steel and its rivals. Three mining conglomerates, BHP Billiton, Vale and Rio Tinto, control about 70% of the world's trade in iron ore. Each year they negotiate annual supply contracts with their main customers, and as demand has surged, so has the price. In 2005 it rose by a whopping 72%. The rate of increase subsequently slowed, but this year some importers have agreed to rises of 68% or more. Even after these swingeing increases, demand still outstrips supply.
Rising prices have brought rising profits. Vale's quarterly earnings have grown tenfold since 2002 (partly thanks to its takeover of Inco, a Canadian rival). Rio Tinto's share price almost doubled in 2007 alone (helped by its own takeover of Alcan, a Canadian aluminium firm). Now BHP is trying to buy Rio Tinto, in part to accelerate the growth of its iron-ore business. All these mergers and bids reflect the fact that mining firms have themselves become a hot commodity, growing in lockstep with China.
The three firms are all frantically expanding their iron-ore business to make the most of the windfall prices. The main beneficiary is Australia, the world's biggest exporter of iron ore. The output from Rio Tinto's mines in the Pilbara, in the country's arid north-west, has increased by an average of 15% a year since 1999. Between now and 2013 it plans to double its output, perhaps even triple it if necessary. Most of that would come from the Pilbara, which is closer to China than rival sources of ore. But starting in 2013, Rio Tinto also plans to ramp up production at an enormous new mine in Guinea.
Rio Tinto says it would be expanding even faster if it could. It more than doubled its capital expenditure between 2004 and 2007, and plans nearly to double it again by next year (again, the takeover of Alcan has played a part). But it is constrained by runaway inflation within the industry as mining firms everywhere race to invest. Growth has been so fast that suppliers cannot keep up, creating physical shortages of crucial inputs, such as tyres for the massive trucks that haul ore around the mines and locomotives to pull the long ore trains from the mines to the coast. The delivery time on both, says Tom Albanese, the firm's boss, is currently two years.
Rio Tinto is trying to teach its staff to drive more gently to extend the life of its tyres. It is also trying to automate more of its equipment so as to limit the number of workers who have to live in the singeing, barren scrubland of the Pilbara—and ease a chronic shortage of both skilled and unskilled labour. Mr Albanese says that recruitment of engineers in Australia has risen from a few dozen a year in the lean decades of the 1980s and 1990s to hundreds now. It does not help that BHP and various other mining firms are also trying to expand their output in the Pilbara as fast as possible, and that several oil companies are building or extending liquefied-natural-gas (LNG) plants in the area—with China as an important customer.
The shopping mall in Karratha, the area's main town, is full of “help wanted” signs. The local unemployment rate is 2.2%, less than half that for Australia as a whole—which is itself at its lowest for 30 years. Demand for goods and services in the Pilbara's home state, Western Australia, grew by 11% in the year to last September, faster than in China itself. The state's chamber of commerce predicts that this will slow to a somewhat less meteoric 6.5% this year and continue at 6% or so for some time—the chief constraint being the lack of able bodies to employ.
Last year Western Australia exported some A$8.5 billion-worth of iron ore to China. Helped by these exports, the state of Western Australia and the national government are both running handsome budget surpluses now. Chinese investment in Australia's iron-ore business is also booming. Gindalbie, an Australian iron-ore miner, and Ansteel, a Chinese steelmaker, agreed last year to invest A$1.8 billion in a joint venture to develop a mine in Western Australia.
Mine, all mine
Sinosteel, a big Chinese minerals firm, has bid A$1.2 billion for Midwest, a Western Australian iron-ore producer, trumping an offer of A$900m from Murchison, one of Midwest's local rivals. Chinese firms are even said to be thinking about a counterbid for Rio Tinto, to prevent BHP from cornering the market for ore. At any rate, Chinalco, a Chinese state-owned mining giant, recently teamed up with Alcoa, an American aluminium firm, to buy 9% of Rio Tinto's shares.
And iron ore is only part of the story. Australia is also the world's biggest exporter of coal, which brings in even more revenue than iron ore, and of alumina, used for making aluminium. Its exports of diamonds, zinc, lead, gold, nickel, manganese, copper and LNG are also growing rapidly, especially to China. Australia's farmers, for their part, are sending lots of beef, wheat, lamb and dairy products to China. China is now Australia's second-biggest market for agricultural goods, and the fastest-growing.
No worries
Australians' response to all this has been overwhelmingly positive. Politicians of all stripes vie with each other to be seen as China's friend. When John Howard was prime minister, he invited Hu Jintao, China's president, to make two state visits in the space of four years. The most recent one, which took place just before a big international summit in Sydney last year, was seen as a bid to raise Mr Howard's standing ahead of an election. But Kevin Rudd, then leader of the opposition, upstaged Mr Howard with his fluent Chinese. Mr Rudd, who went on to win the election, gave an interview to China's state-owned television network in which he promised to elevate Australia's relations with China “to a whole new level”.
Australians do not seem to suffer from the faint unease about China's rapid growth that often afflicts Europeans and Americans. Instead, they see China's rise as an opportunity. In a poll conducted last year by the Lowy Institute, a think-tank, a majority of Australians said they had positive feelings towards China and saw it as their country's most important economic partner. Only 19% said they were very worried about China's growing power.
Some Australian pundits have questioned the wisdom of allowing Chinese firms to buy so many mineral rights. But they have similar misgivings about all foreigners. In 2001 the Australian government barred Royal Dutch Shell, a Western oil giant, from taking over Woodside, Australia's biggest dedicated oil company, on much the same grounds. There are also fears that Australia might become over-dependent on China—but that is a sign of its enthusiasm for doing business with China, not of any reticence.
It is important to keep China's role in the Australian economy in perspective. It was not until last year that China unseated Japan as Australia's biggest trading partner. It still accounts for only 14% of the continent's exports, and in 2006 it ranked only 17th for foreign investment in Australia. These figures are bound to rise, and China's appetite for natural resources is already making a big difference to Australia's growth. But it is not the be all and end all of the Australian economy.
The lucky country
Mar 13th 2008
From The Economist print edition
Australia can't dig fast enough to meet demand from China
CHINA'S insatiable appetite for commodities has been manna from heaven for the countries and firms that supply it. Take the iron ore that feeds the smelters of Shougang Steel and its rivals. Three mining conglomerates, BHP Billiton, Vale and Rio Tinto, control about 70% of the world's trade in iron ore. Each year they negotiate annual supply contracts with their main customers, and as demand has surged, so has the price. In 2005 it rose by a whopping 72%. The rate of increase subsequently slowed, but this year some importers have agreed to rises of 68% or more. Even after these swingeing increases, demand still outstrips supply.
Rising prices have brought rising profits. Vale's quarterly earnings have grown tenfold since 2002 (partly thanks to its takeover of Inco, a Canadian rival). Rio Tinto's share price almost doubled in 2007 alone (helped by its own takeover of Alcan, a Canadian aluminium firm). Now BHP is trying to buy Rio Tinto, in part to accelerate the growth of its iron-ore business. All these mergers and bids reflect the fact that mining firms have themselves become a hot commodity, growing in lockstep with China.
The three firms are all frantically expanding their iron-ore business to make the most of the windfall prices. The main beneficiary is Australia, the world's biggest exporter of iron ore. The output from Rio Tinto's mines in the Pilbara, in the country's arid north-west, has increased by an average of 15% a year since 1999. Between now and 2013 it plans to double its output, perhaps even triple it if necessary. Most of that would come from the Pilbara, which is closer to China than rival sources of ore. But starting in 2013, Rio Tinto also plans to ramp up production at an enormous new mine in Guinea.
Rio Tinto says it would be expanding even faster if it could. It more than doubled its capital expenditure between 2004 and 2007, and plans nearly to double it again by next year (again, the takeover of Alcan has played a part). But it is constrained by runaway inflation within the industry as mining firms everywhere race to invest. Growth has been so fast that suppliers cannot keep up, creating physical shortages of crucial inputs, such as tyres for the massive trucks that haul ore around the mines and locomotives to pull the long ore trains from the mines to the coast. The delivery time on both, says Tom Albanese, the firm's boss, is currently two years.
Rio Tinto is trying to teach its staff to drive more gently to extend the life of its tyres. It is also trying to automate more of its equipment so as to limit the number of workers who have to live in the singeing, barren scrubland of the Pilbara—and ease a chronic shortage of both skilled and unskilled labour. Mr Albanese says that recruitment of engineers in Australia has risen from a few dozen a year in the lean decades of the 1980s and 1990s to hundreds now. It does not help that BHP and various other mining firms are also trying to expand their output in the Pilbara as fast as possible, and that several oil companies are building or extending liquefied-natural-gas (LNG) plants in the area—with China as an important customer.
The shopping mall in Karratha, the area's main town, is full of “help wanted” signs. The local unemployment rate is 2.2%, less than half that for Australia as a whole—which is itself at its lowest for 30 years. Demand for goods and services in the Pilbara's home state, Western Australia, grew by 11% in the year to last September, faster than in China itself. The state's chamber of commerce predicts that this will slow to a somewhat less meteoric 6.5% this year and continue at 6% or so for some time—the chief constraint being the lack of able bodies to employ.
Last year Western Australia exported some A$8.5 billion-worth of iron ore to China. Helped by these exports, the state of Western Australia and the national government are both running handsome budget surpluses now. Chinese investment in Australia's iron-ore business is also booming. Gindalbie, an Australian iron-ore miner, and Ansteel, a Chinese steelmaker, agreed last year to invest A$1.8 billion in a joint venture to develop a mine in Western Australia.
Mine, all mine
Sinosteel, a big Chinese minerals firm, has bid A$1.2 billion for Midwest, a Western Australian iron-ore producer, trumping an offer of A$900m from Murchison, one of Midwest's local rivals. Chinese firms are even said to be thinking about a counterbid for Rio Tinto, to prevent BHP from cornering the market for ore. At any rate, Chinalco, a Chinese state-owned mining giant, recently teamed up with Alcoa, an American aluminium firm, to buy 9% of Rio Tinto's shares.
And iron ore is only part of the story. Australia is also the world's biggest exporter of coal, which brings in even more revenue than iron ore, and of alumina, used for making aluminium. Its exports of diamonds, zinc, lead, gold, nickel, manganese, copper and LNG are also growing rapidly, especially to China. Australia's farmers, for their part, are sending lots of beef, wheat, lamb and dairy products to China. China is now Australia's second-biggest market for agricultural goods, and the fastest-growing.
No worries
Australians' response to all this has been overwhelmingly positive. Politicians of all stripes vie with each other to be seen as China's friend. When John Howard was prime minister, he invited Hu Jintao, China's president, to make two state visits in the space of four years. The most recent one, which took place just before a big international summit in Sydney last year, was seen as a bid to raise Mr Howard's standing ahead of an election. But Kevin Rudd, then leader of the opposition, upstaged Mr Howard with his fluent Chinese. Mr Rudd, who went on to win the election, gave an interview to China's state-owned television network in which he promised to elevate Australia's relations with China “to a whole new level”.
Australians do not seem to suffer from the faint unease about China's rapid growth that often afflicts Europeans and Americans. Instead, they see China's rise as an opportunity. In a poll conducted last year by the Lowy Institute, a think-tank, a majority of Australians said they had positive feelings towards China and saw it as their country's most important economic partner. Only 19% said they were very worried about China's growing power.
Some Australian pundits have questioned the wisdom of allowing Chinese firms to buy so many mineral rights. But they have similar misgivings about all foreigners. In 2001 the Australian government barred Royal Dutch Shell, a Western oil giant, from taking over Woodside, Australia's biggest dedicated oil company, on much the same grounds. There are also fears that Australia might become over-dependent on China—but that is a sign of its enthusiasm for doing business with China, not of any reticence.
It is important to keep China's role in the Australian economy in perspective. It was not until last year that China unseated Japan as Australia's biggest trading partner. It still accounts for only 14% of the continent's exports, and in 2006 it ranked only 17th for foreign investment in Australia. These figures are bound to rise, and China's appetite for natural resources is already making a big difference to Australia's growth. But it is not the be all and end all of the Australian economy.
China's Quest for Resources: Iron Rations
CHINA'S QUEST FOR RESOURCES
Iron rations
Mar 13th 2008
From The Economist print edition
China is determined to make the most of its own limited resources
TO SEE just how quickly China's demand for natural resources is growing, visit Shougang Group, on the outskirts of Beijing. The story of the mill mirrors the chequered history of Chinese industry. This is one of the country's oldest firms, founded in 1919. Nationalised after the Communist takeover in 1949, it was turned into a showcase for the achievements of the People's Republic. Pictures of assorted party bigwigs donning hard hats and greeting the workers adorn the walls. During the Great Leap Forward, Zhou Enlai visited the mill to celebrate its bounding output; in the 1980s, Deng Xiaoping came as part of his drive for “socialism with Chinese characteristics”, meaning capitalism with a dose of state ownership.
In keeping with Deng's reforms, Shougang has transformed itself from a model of central planning into a cold-blooded capitalist roader. In the old days the mill was a city within a city, complete with all the frills you would expect from a workers' paradise. It still has its own newspaper and television station, and an internal bus service to ferry workers around its eight-square-kilometre compound. But the company has already shed 180,000 workers and plans to trim 60,000 more, leaving just 20,000. It has offered shares in five subsidiaries to investors on the stockmarkets in Shenzhen and Hong Kong and spent the proceeds on bigger and better facilities. Its steel has been used in many of China's best-known construction projects, including the Three Gorges dam, Beijing's curious egg-shaped opera house and a soaring suspension bridge that spans the Huangpu river in Shanghai.
At the furnaces in the centre of the compound, sparks shower down as a mechanical shovel fills a red-hot crucible with coal and iron ore; molten steel pours from another. A temperature gauge reads 1,127°C. Last year the mill turned out 8m tonnes of steel. But later this year it will close, a casualty of the drive to improve Beijing's air quality for the Olympics.
The demise of Shougang Steel's main plant, however, will not dent the firm's output for long. In conjunction with another Chinese steel firm, it is on the verge of opening an even bigger mill, on an artificial island in the Bohai Gulf in Hebei province, about 220km (140 miles) to the south-east. This will have an initial capacity of almost 10m tonnes. What with the expansion of two other mills in Hebei, Shougang is on course to increase its output from 6m tonnes in 2003 to at least 20m tonnes by 2010. A spokesman says further development is already in the works, and output might reach as much as 30m tonnes soon after. Asked whether the firm is confident that there will be a market for all this steel, he looks puzzled. China is growing so fast, he says, that there is no problem selling anything Shougang produces.
Camera Press
Heigh-ho, heigh-ho, it's off to do our bit for China's economy we goThere are many more businesses making similar assumptions. Shougang ranked only ninth by output among China's steelmakers in 2006. In all, the country has 7,000 of them, twice the number in 2002. Steel production rose by 15% last year, much the same rate of growth as in 2006. Since 2000, China has roughly tripled its output, making it by far the world's biggest producer, with 37% of global output. It accounted for about three-quarters of the global growth in steel production between 2000 and 2005.
China's domestic production of iron ore has more than doubled since 2003, again making the country the world's largest producer. But that has not been nearly enough to supply its proliferating steel mills. So imports have been growing by leaps and bounds too, from 148m tonnes in 2003 to 375m tonnes last year. They now account for half the world's seaborne trade in iron ore. Citigroup, an investment bank, estimates that they will rise to almost 900m tonnes by 2014. And over the past few years it and other banks have had to revise such estimates upwards several times, as demand has consistently exceeded expectations.
Shougang, for example, owns a mine in Hebei, conveniently close to its mills. But that does not provide enough ore for all of them, and other domestic supplies are scarce, so the firm has had to look overseas to make up the shortfall. It bought a mine in Peru in the 1990s and a stake in an Australian one in 2006. In addition to imports from both of those, it also buys ore on the international market. Its new mill is being built on the coast partly to provide easier access for such imports.
Much the same story could be told about many other commodities. Name almost any mineral, and mining firms and investment banks can produce charts depicting how Chinese demand has doubled or tripled since the beginning of this decade. Last year China's copper imports surged by 80%.
China is also importing ever more food. This is partly because more and more farmland is being given over to industry and partly because the population is growing. Moreover, as China becomes richer, its citizens are eating more meat, which contributes to rising food imports: producing meat for people to eat takes more grain than feeding people on cereals.
Squeeze every drop
The commodity that best illustrates China's abrupt transition from exporter to importer of resources is oil. In the 1950s Mao Zedong directed his mandarins to find oil to cut China's import bill and reduce the risk of a blockade by hostile capitalists. And find it they did, in the middle of the bare steppe of the north-east, at a place called Daqing. The field turned out to be one of the world's biggest, with over 14 billion barrels of reserves.
This success made Daqing a byword for industrial zeal and heroic self-sacrifice in the name of the revolution. “In industry,” ran one of Mao's most frequently invoked dictums, “learn from Daqing.” Propagandists built up Wang Jinxi, one of the drilling foremen in the field's early days, into a model worker who did not hesitate to risk his life for the good of the people. Chinese schoolchildren are still told how the Iron Man, as Wang is known, flung himself into a bubbling pool of oil and wet cement and mixed it to the right consistency with his own body to cap a well. He survived, just.
The centrepiece of the modern city of Daqing is the Iron Man museum. An imposing statue of the man himself, sleeves rolled up and chest thrust bravely forward, stands in the middle of a small park opposite, impervious to the icy wind blowing from Siberia. But nowadays Daqing is no longer living testimony to China's indomitable spirit of self-reliance. Rather, it is a symbol of the inadequacy of China's domestic resources in the face of the economy's growing thirst for oil.
Oil production from Daqing peaked at about 1.1m barrels per day (b/d) in 1997. By last year it had fallen to 830,000 b/d, and it is now declining at a rate of about 4% a year. That is better than geologists had expected a few years ago, but slowing the rate of decline has required efforts worthy of the Iron Man. The field is no longer under sufficient pressure for the oil to flow naturally, so Daqing Oil, the subsidiary of PetroChina that runs it, must keep injecting water beneath it to push the oil out of the wells. According to Feng Zhiqiang, the firm's managing director, both injection and extraction wells must be drilled with a margin of error of no more than 50cm to drain every last nook and cranny of the reservoir. The firm also injects special polymers into the field that help free droplets of oil sticking to the rocks.
All this, Mr Feng says, has allowed Daqing Oil to raise the proportion of the field's reserves that it is able to recover from roughly 35% to 45%. He hopes the firm will eventually be able to wring another 10% out of the reservoir by injecting more chemicals. But the operation involves drilling thousands of wells a year and requires a staff of 7,000 engineers.
The firm is also drilling elsewhere in the same basin in the hope of finding more oil. It has made some discoveries, but mainly of natural gas. Such new oil as it has been able to find adds up to only about 700,000 barrels a year, less than the main field produces in a day. Moreover, smaller, dispersed fields are more difficult and expensive to exploit. As Mr Feng observes with a stoic sigh, “even the thinnest camel is bigger than the fattest donkey.”
Throughout China geologists are discovering more donkeys than camels these days. Production has peaked at 10 of the 11 biggest oilfields in the country, according to the International Energy Agency (IEA). The overall amount of oil produced rose marginally in 2007, after remaining flat in 2006. But the IEA forecasts that this, too, will peak at 3.9m b/d in 2012, and then start to decline.
It hardly needs saying that China's demand for oil is moving the other way. More and more Chinese are trading in their bicycles for motorbikes and cars. Between 2000 and 2006 the number of new cars sold grew by an average of 37% a year, making China the world's second-biggest market. The IEA reckons it will overtake America to claim the top spot in 2015. The amount of oil used by Chinese industry, along with the transport networks that feed it, is growing rapidly too.
Back in 1990, China consumed just 2.4m b/d, leaving 400,000 b/d of domestic production for its oil firms to export. Now it guzzles over 7m b/d, about half of which it has to import. The IEA thinks that by 2030 it will gulp 16.5m b/d, of which some 13.1m b/d will have to be bought abroad. That is more than the current total output of Saudi Arabia.
Iron rations
Mar 13th 2008
From The Economist print edition
China is determined to make the most of its own limited resources
TO SEE just how quickly China's demand for natural resources is growing, visit Shougang Group, on the outskirts of Beijing. The story of the mill mirrors the chequered history of Chinese industry. This is one of the country's oldest firms, founded in 1919. Nationalised after the Communist takeover in 1949, it was turned into a showcase for the achievements of the People's Republic. Pictures of assorted party bigwigs donning hard hats and greeting the workers adorn the walls. During the Great Leap Forward, Zhou Enlai visited the mill to celebrate its bounding output; in the 1980s, Deng Xiaoping came as part of his drive for “socialism with Chinese characteristics”, meaning capitalism with a dose of state ownership.
In keeping with Deng's reforms, Shougang has transformed itself from a model of central planning into a cold-blooded capitalist roader. In the old days the mill was a city within a city, complete with all the frills you would expect from a workers' paradise. It still has its own newspaper and television station, and an internal bus service to ferry workers around its eight-square-kilometre compound. But the company has already shed 180,000 workers and plans to trim 60,000 more, leaving just 20,000. It has offered shares in five subsidiaries to investors on the stockmarkets in Shenzhen and Hong Kong and spent the proceeds on bigger and better facilities. Its steel has been used in many of China's best-known construction projects, including the Three Gorges dam, Beijing's curious egg-shaped opera house and a soaring suspension bridge that spans the Huangpu river in Shanghai.
At the furnaces in the centre of the compound, sparks shower down as a mechanical shovel fills a red-hot crucible with coal and iron ore; molten steel pours from another. A temperature gauge reads 1,127°C. Last year the mill turned out 8m tonnes of steel. But later this year it will close, a casualty of the drive to improve Beijing's air quality for the Olympics.
The demise of Shougang Steel's main plant, however, will not dent the firm's output for long. In conjunction with another Chinese steel firm, it is on the verge of opening an even bigger mill, on an artificial island in the Bohai Gulf in Hebei province, about 220km (140 miles) to the south-east. This will have an initial capacity of almost 10m tonnes. What with the expansion of two other mills in Hebei, Shougang is on course to increase its output from 6m tonnes in 2003 to at least 20m tonnes by 2010. A spokesman says further development is already in the works, and output might reach as much as 30m tonnes soon after. Asked whether the firm is confident that there will be a market for all this steel, he looks puzzled. China is growing so fast, he says, that there is no problem selling anything Shougang produces.
Camera Press
Heigh-ho, heigh-ho, it's off to do our bit for China's economy we goThere are many more businesses making similar assumptions. Shougang ranked only ninth by output among China's steelmakers in 2006. In all, the country has 7,000 of them, twice the number in 2002. Steel production rose by 15% last year, much the same rate of growth as in 2006. Since 2000, China has roughly tripled its output, making it by far the world's biggest producer, with 37% of global output. It accounted for about three-quarters of the global growth in steel production between 2000 and 2005.
China's domestic production of iron ore has more than doubled since 2003, again making the country the world's largest producer. But that has not been nearly enough to supply its proliferating steel mills. So imports have been growing by leaps and bounds too, from 148m tonnes in 2003 to 375m tonnes last year. They now account for half the world's seaborne trade in iron ore. Citigroup, an investment bank, estimates that they will rise to almost 900m tonnes by 2014. And over the past few years it and other banks have had to revise such estimates upwards several times, as demand has consistently exceeded expectations.
Shougang, for example, owns a mine in Hebei, conveniently close to its mills. But that does not provide enough ore for all of them, and other domestic supplies are scarce, so the firm has had to look overseas to make up the shortfall. It bought a mine in Peru in the 1990s and a stake in an Australian one in 2006. In addition to imports from both of those, it also buys ore on the international market. Its new mill is being built on the coast partly to provide easier access for such imports.
Much the same story could be told about many other commodities. Name almost any mineral, and mining firms and investment banks can produce charts depicting how Chinese demand has doubled or tripled since the beginning of this decade. Last year China's copper imports surged by 80%.
China is also importing ever more food. This is partly because more and more farmland is being given over to industry and partly because the population is growing. Moreover, as China becomes richer, its citizens are eating more meat, which contributes to rising food imports: producing meat for people to eat takes more grain than feeding people on cereals.
Squeeze every drop
The commodity that best illustrates China's abrupt transition from exporter to importer of resources is oil. In the 1950s Mao Zedong directed his mandarins to find oil to cut China's import bill and reduce the risk of a blockade by hostile capitalists. And find it they did, in the middle of the bare steppe of the north-east, at a place called Daqing. The field turned out to be one of the world's biggest, with over 14 billion barrels of reserves.
This success made Daqing a byword for industrial zeal and heroic self-sacrifice in the name of the revolution. “In industry,” ran one of Mao's most frequently invoked dictums, “learn from Daqing.” Propagandists built up Wang Jinxi, one of the drilling foremen in the field's early days, into a model worker who did not hesitate to risk his life for the good of the people. Chinese schoolchildren are still told how the Iron Man, as Wang is known, flung himself into a bubbling pool of oil and wet cement and mixed it to the right consistency with his own body to cap a well. He survived, just.
The centrepiece of the modern city of Daqing is the Iron Man museum. An imposing statue of the man himself, sleeves rolled up and chest thrust bravely forward, stands in the middle of a small park opposite, impervious to the icy wind blowing from Siberia. But nowadays Daqing is no longer living testimony to China's indomitable spirit of self-reliance. Rather, it is a symbol of the inadequacy of China's domestic resources in the face of the economy's growing thirst for oil.
Oil production from Daqing peaked at about 1.1m barrels per day (b/d) in 1997. By last year it had fallen to 830,000 b/d, and it is now declining at a rate of about 4% a year. That is better than geologists had expected a few years ago, but slowing the rate of decline has required efforts worthy of the Iron Man. The field is no longer under sufficient pressure for the oil to flow naturally, so Daqing Oil, the subsidiary of PetroChina that runs it, must keep injecting water beneath it to push the oil out of the wells. According to Feng Zhiqiang, the firm's managing director, both injection and extraction wells must be drilled with a margin of error of no more than 50cm to drain every last nook and cranny of the reservoir. The firm also injects special polymers into the field that help free droplets of oil sticking to the rocks.
All this, Mr Feng says, has allowed Daqing Oil to raise the proportion of the field's reserves that it is able to recover from roughly 35% to 45%. He hopes the firm will eventually be able to wring another 10% out of the reservoir by injecting more chemicals. But the operation involves drilling thousands of wells a year and requires a staff of 7,000 engineers.
The firm is also drilling elsewhere in the same basin in the hope of finding more oil. It has made some discoveries, but mainly of natural gas. Such new oil as it has been able to find adds up to only about 700,000 barrels a year, less than the main field produces in a day. Moreover, smaller, dispersed fields are more difficult and expensive to exploit. As Mr Feng observes with a stoic sigh, “even the thinnest camel is bigger than the fattest donkey.”
Throughout China geologists are discovering more donkeys than camels these days. Production has peaked at 10 of the 11 biggest oilfields in the country, according to the International Energy Agency (IEA). The overall amount of oil produced rose marginally in 2007, after remaining flat in 2006. But the IEA forecasts that this, too, will peak at 3.9m b/d in 2012, and then start to decline.
It hardly needs saying that China's demand for oil is moving the other way. More and more Chinese are trading in their bicycles for motorbikes and cars. Between 2000 and 2006 the number of new cars sold grew by an average of 37% a year, making China the world's second-biggest market. The IEA reckons it will overtake America to claim the top spot in 2015. The amount of oil used by Chinese industry, along with the transport networks that feed it, is growing rapidly too.
Back in 1990, China consumed just 2.4m b/d, leaving 400,000 b/d of domestic production for its oil firms to export. Now it guzzles over 7m b/d, about half of which it has to import. The IEA thinks that by 2030 it will gulp 16.5m b/d, of which some 13.1m b/d will have to be bought abroad. That is more than the current total output of Saudi Arabia.
China's Quest for Resources: A Ravenous Dragon
CHINA'S QUEST FOR RESOURCES
A ravenous dragon
Mar 13th 2008
From The Economist print edition
China's hunger for natural resources has set off a global commodity boom. Developed countries worry about being left high and dry, but the biggest effects will be felt in China itself, says Edward McBride
BESIDE the railroad track, between two hillocks of rust-red soil in the midst of Congo's mining belt, three Chinese labourers appear as if from nowhere. There are lots of Chinese around these days, explains one of their compatriots, Harvey Lee, who is driving through the scrub to the nearby copper plant he runs for a Canadian metals firm. On his way, he points out several rudimentary smelters. “That one”, he says, waving at a clump of corrugated-iron sheds and belching chimneys, “is owned by a man from Shanghai.” Moments later, when another ramshackle compound comes into view, he adds, “and that one belongs to two ladies from Hong Kong.” In all, he reckons, Chinese entrepreneurs have set up half of Lubumbashi's 50-odd processing plants.
All around Lubumbashi, the capital of Congo's copper-rich province of Katanga, there are signs of a sudden Chinese invasion. Chinese middlemen have begun buying ore from the area's many wildcat miners and selling it on to processing plants like Mr Lee's. Locals point out several villas in the city's leafy colonial cantonment that are occupied by mysterious Chinese businessmen. Katanga Fried Chicken, hitherto Lubumbashi's most popular restaurant, now has three busy Chinese competitors.
If all goes according to plan, these fledgling businesses will soon be overshadowed by Chinese investment on a much grander scale. In late 2007 the Congolese government announced that Chinese state-owned firms would build or refurbish various railways, roads and mines around the country at a cost of $12 billion, in exchange for the right to mine copper ore of an equivalent value. That sum is more than three times Congo's annual national budget and roughly ten times the aid that the “consultative group” of Western donors has promised the country each year until 2010. The Chinese authorities, it seems, are so anxious to obtain enough minerals to sustain their country's remarkable economic growth that they are willing to invest billions in a dirt-poor and war-torn place like Congo—billions more, in fact, than Western governments and investors combined are putting in.
And Congo is not the only beneficiary of China's hunger for natural resources. From Canada to Indonesia to Kazakhstan, Chinese firms are gobbling up oil, gas, coal and metals, or paying for the right to explore for them, or buying up firms that produce them. Ships are queuing off Australia's biggest coal port, Newcastle, to load cargoes destined for China (pictured above); at one point last June the line was 79 ships long. African and Latin American economies are growing at their fastest pace in decades, thanks in large part to heavy Chinese demand for their resources.
China's burgeoning consumption has helped push the price of all manner of fuels, metals and grains to new peaks over the past year. Even the price of shipping raw materials recently reached a record. Analysts see little prospect of an end to the boom; the prices of a few commodities have fallen on the back of America's worsening economic outlook, but others, including oil, wheat and iron ore, continue to set new records. China, with about a fifth of the world's population, now consumes half of its cement, a third of its steel and over a quarter of its aluminium. Its imports of many natural resources are growing even faster than its bounding economy. Shipments of iron ore, for example, have risen by an average of 27% a year for the past four years. Western mining firms are enjoying a sustained boom.
Unwelcome advances
But China's sudden global reach is generating as much anxiety as prosperity. In 2005 America's congressmen, citing nebulous national-security concerns, scuppered the proposed takeover of Unocal, an American oil firm, by CNOOC, a state-owned Chinese one. The opposition candidate in Zambia's presidential election in 2006 made a point of attacking the growing Chinese presence in the country. Residents of Russia's far east fear that China is planning to plunder their oil and timber and perhaps even to colonise their empty spaces.
Some non-governmental organisations worry that Chinese firms will ignore basic legal, environmental and labour standards in their rush to secure resources, leaving a trail of corruption, pollution and exploitation in their wake. Western companies fret that the Chinese state-owned firms with which they suddenly find themselves competing have an agenda beyond commercial gain. The Chinese government, they say, is willing to pay over the odds for mining or drilling rights to secure access to physical resources. It also intervenes unfairly on its companies' behalf, they claim, by offering big aid packages to countries that welcome Chinese investment. All this, it is feared, will dent the profits of big oil and mining firms, stoke inflation and imperil the West's access to resources that it needs just as much as China does.
Diplomats and pundits, for their part, fear that the West is “losing” Africa and other resource-rich regions. China's sudden prominence, according to this view, will reduce the clout of America, Europe and other rich democracies in the developing world. China will befriend ostracised regimes and encourage them to defy international norms. Corruption, economic mismanagement, repression and instability will proliferate. If this baleful influence spreads too widely, say the critics, the “Washington consensus” of economic liberalism and democracy will find itself in competition with a “Beijing consensus” of state-led development and despotism.
Such fears are not entirely groundless if the recent conduct of some of Congo's neighbours is anything to go by. Angola, to the south, has been receiving so much aid and investment from China that in 2006 it decided it had no need of the International Monetary Fund's billions and all the tiresome requirements for transparency and sound economic management that come with them. Sudan, to the north, has shrugged off Western threats and sanctions over the continuing atrocities in Darfur, thanks in large part to China's readiness to invest in Sudanese oilfields and buy their output. Farther afield, China's eagerness to do business in Myanmar, and its consequent reluctance to chide the tyrannical generals that run the place, helped to prevent a forceful international response to the violent repression of peaceful demonstrations there last year.
Nonetheless, this special report will argue that concerns about the dire consequences of China's quest for natural resources are overblown. China does indeed treat some dictators with kid gloves, but it is hardly alone in that. Its companies do not always uphold the highest standards, but again, many Western firms are no angels either. Fifty years of European and American aid have not succeeded in bringing much prosperity to Africa and other poor but resource-rich places. A different approach from China might yield better results. At the very least it will spur other donors to seek more effective methods.
For all the hue and cry, China is still just one of many countries looking for raw materials around the world. It has won most influence in countries where Western governments were conspicuous by their absence, and where few important strategic interests are at stake. Moreover, as China is becoming more involved in places such as Congo, its policies are beginning to change. It has promised to co-operate with the World Bank in its development efforts in Africa. It no longer seems prepared to back its most objectionable allies in the face of international opprobrium. Its diplomats, for example, did eventually stop parroting their line about unwarranted interference in the internal affairs of a sovereign state and allow United Nations peacekeepers to be deployed in Sudan.
The saga over Sudan shows how sensitive the Chinese authorities have become to criticism, despite their impassive reputation. When Steven Spielberg resigned as an adviser to the Beijing Olympics in protest at China's failure to do more about Darfur, a shrill chorus of criticism arose from China's official media—suggesting that such gestures do indeed have an impact.
Chinese companies will inevitably find themselves in fierce competition with Western ones for natural resources, as they must if global markets are to work efficiently. For the most part, however, they do not operate very differently from their peers. To the extent that the Chinese government does subsidise oil production, it helps to bring down the price for everyone else (its subsidies for oil consumption are another matter). As the world's biggest consumer of many commodities, China naturally wants to ensure a steady supply of them to keep its economy going. But markets for commodities are global, and the risk of any one consumer cornering supplies, or securing them at a lower price, is negligible.
Own goal
The worst fallout from China's quest for natural resources will be seen not in the countries they come from, nor in the countries that are competing for supplies, but in China itself. Over the past few years the volume of raw materials it consumes per unit of output has risen sharply. In particular, China has gone from miser to glutton in its use of energy, and is now struggling to diet. That has involved bigger imports of oil, gas and coal, and so more foreign entanglements. But it has also led to the rapid depletion of resources that China cannot import, such as clean air and water.
China is building a huge stock of grimy heavy industry, just as its coastal provinces are getting rich enough to care about the consequences. Protests about environmental issues are on the increase. There is not enough water in the Yellow River basin, which covers a huge swathe of northern China, to supply both farmers and factories. Acid rain from coal-fired power plants is reducing agricultural yields, raising the spectre of increased rural unrest. As it is, the authorities are struggling to ensure that the air will be fit for athletes to breathe at the Olympics in Beijing this summer. All the while, the number of noxious steel mills, cement kilns and power plants relentlessly increases. Global warming, which is fed by their fumes, will make all these problems even worse.
Environmental concerns are unlikely to bring down the Communist regime, or even to stir as much resentment as the arbitrary confiscation of land currently does among China's poorest. But those concerns are certainly prompting the government to reflect on what sort of economic path it wants to pursue. So far, its efforts to temper economic growth, encourage energy efficiency and wean the country off heavy industry have had little effect. But continued failure would eventually make China a less prosperous and more unstable place.
A ravenous dragon
Mar 13th 2008
From The Economist print edition
China's hunger for natural resources has set off a global commodity boom. Developed countries worry about being left high and dry, but the biggest effects will be felt in China itself, says Edward McBride
BESIDE the railroad track, between two hillocks of rust-red soil in the midst of Congo's mining belt, three Chinese labourers appear as if from nowhere. There are lots of Chinese around these days, explains one of their compatriots, Harvey Lee, who is driving through the scrub to the nearby copper plant he runs for a Canadian metals firm. On his way, he points out several rudimentary smelters. “That one”, he says, waving at a clump of corrugated-iron sheds and belching chimneys, “is owned by a man from Shanghai.” Moments later, when another ramshackle compound comes into view, he adds, “and that one belongs to two ladies from Hong Kong.” In all, he reckons, Chinese entrepreneurs have set up half of Lubumbashi's 50-odd processing plants.
All around Lubumbashi, the capital of Congo's copper-rich province of Katanga, there are signs of a sudden Chinese invasion. Chinese middlemen have begun buying ore from the area's many wildcat miners and selling it on to processing plants like Mr Lee's. Locals point out several villas in the city's leafy colonial cantonment that are occupied by mysterious Chinese businessmen. Katanga Fried Chicken, hitherto Lubumbashi's most popular restaurant, now has three busy Chinese competitors.
If all goes according to plan, these fledgling businesses will soon be overshadowed by Chinese investment on a much grander scale. In late 2007 the Congolese government announced that Chinese state-owned firms would build or refurbish various railways, roads and mines around the country at a cost of $12 billion, in exchange for the right to mine copper ore of an equivalent value. That sum is more than three times Congo's annual national budget and roughly ten times the aid that the “consultative group” of Western donors has promised the country each year until 2010. The Chinese authorities, it seems, are so anxious to obtain enough minerals to sustain their country's remarkable economic growth that they are willing to invest billions in a dirt-poor and war-torn place like Congo—billions more, in fact, than Western governments and investors combined are putting in.
And Congo is not the only beneficiary of China's hunger for natural resources. From Canada to Indonesia to Kazakhstan, Chinese firms are gobbling up oil, gas, coal and metals, or paying for the right to explore for them, or buying up firms that produce them. Ships are queuing off Australia's biggest coal port, Newcastle, to load cargoes destined for China (pictured above); at one point last June the line was 79 ships long. African and Latin American economies are growing at their fastest pace in decades, thanks in large part to heavy Chinese demand for their resources.
China's burgeoning consumption has helped push the price of all manner of fuels, metals and grains to new peaks over the past year. Even the price of shipping raw materials recently reached a record. Analysts see little prospect of an end to the boom; the prices of a few commodities have fallen on the back of America's worsening economic outlook, but others, including oil, wheat and iron ore, continue to set new records. China, with about a fifth of the world's population, now consumes half of its cement, a third of its steel and over a quarter of its aluminium. Its imports of many natural resources are growing even faster than its bounding economy. Shipments of iron ore, for example, have risen by an average of 27% a year for the past four years. Western mining firms are enjoying a sustained boom.
Unwelcome advances
But China's sudden global reach is generating as much anxiety as prosperity. In 2005 America's congressmen, citing nebulous national-security concerns, scuppered the proposed takeover of Unocal, an American oil firm, by CNOOC, a state-owned Chinese one. The opposition candidate in Zambia's presidential election in 2006 made a point of attacking the growing Chinese presence in the country. Residents of Russia's far east fear that China is planning to plunder their oil and timber and perhaps even to colonise their empty spaces.
Some non-governmental organisations worry that Chinese firms will ignore basic legal, environmental and labour standards in their rush to secure resources, leaving a trail of corruption, pollution and exploitation in their wake. Western companies fret that the Chinese state-owned firms with which they suddenly find themselves competing have an agenda beyond commercial gain. The Chinese government, they say, is willing to pay over the odds for mining or drilling rights to secure access to physical resources. It also intervenes unfairly on its companies' behalf, they claim, by offering big aid packages to countries that welcome Chinese investment. All this, it is feared, will dent the profits of big oil and mining firms, stoke inflation and imperil the West's access to resources that it needs just as much as China does.
Diplomats and pundits, for their part, fear that the West is “losing” Africa and other resource-rich regions. China's sudden prominence, according to this view, will reduce the clout of America, Europe and other rich democracies in the developing world. China will befriend ostracised regimes and encourage them to defy international norms. Corruption, economic mismanagement, repression and instability will proliferate. If this baleful influence spreads too widely, say the critics, the “Washington consensus” of economic liberalism and democracy will find itself in competition with a “Beijing consensus” of state-led development and despotism.
Such fears are not entirely groundless if the recent conduct of some of Congo's neighbours is anything to go by. Angola, to the south, has been receiving so much aid and investment from China that in 2006 it decided it had no need of the International Monetary Fund's billions and all the tiresome requirements for transparency and sound economic management that come with them. Sudan, to the north, has shrugged off Western threats and sanctions over the continuing atrocities in Darfur, thanks in large part to China's readiness to invest in Sudanese oilfields and buy their output. Farther afield, China's eagerness to do business in Myanmar, and its consequent reluctance to chide the tyrannical generals that run the place, helped to prevent a forceful international response to the violent repression of peaceful demonstrations there last year.
Nonetheless, this special report will argue that concerns about the dire consequences of China's quest for natural resources are overblown. China does indeed treat some dictators with kid gloves, but it is hardly alone in that. Its companies do not always uphold the highest standards, but again, many Western firms are no angels either. Fifty years of European and American aid have not succeeded in bringing much prosperity to Africa and other poor but resource-rich places. A different approach from China might yield better results. At the very least it will spur other donors to seek more effective methods.
For all the hue and cry, China is still just one of many countries looking for raw materials around the world. It has won most influence in countries where Western governments were conspicuous by their absence, and where few important strategic interests are at stake. Moreover, as China is becoming more involved in places such as Congo, its policies are beginning to change. It has promised to co-operate with the World Bank in its development efforts in Africa. It no longer seems prepared to back its most objectionable allies in the face of international opprobrium. Its diplomats, for example, did eventually stop parroting their line about unwarranted interference in the internal affairs of a sovereign state and allow United Nations peacekeepers to be deployed in Sudan.
The saga over Sudan shows how sensitive the Chinese authorities have become to criticism, despite their impassive reputation. When Steven Spielberg resigned as an adviser to the Beijing Olympics in protest at China's failure to do more about Darfur, a shrill chorus of criticism arose from China's official media—suggesting that such gestures do indeed have an impact.
Chinese companies will inevitably find themselves in fierce competition with Western ones for natural resources, as they must if global markets are to work efficiently. For the most part, however, they do not operate very differently from their peers. To the extent that the Chinese government does subsidise oil production, it helps to bring down the price for everyone else (its subsidies for oil consumption are another matter). As the world's biggest consumer of many commodities, China naturally wants to ensure a steady supply of them to keep its economy going. But markets for commodities are global, and the risk of any one consumer cornering supplies, or securing them at a lower price, is negligible.
Own goal
The worst fallout from China's quest for natural resources will be seen not in the countries they come from, nor in the countries that are competing for supplies, but in China itself. Over the past few years the volume of raw materials it consumes per unit of output has risen sharply. In particular, China has gone from miser to glutton in its use of energy, and is now struggling to diet. That has involved bigger imports of oil, gas and coal, and so more foreign entanglements. But it has also led to the rapid depletion of resources that China cannot import, such as clean air and water.
China is building a huge stock of grimy heavy industry, just as its coastal provinces are getting rich enough to care about the consequences. Protests about environmental issues are on the increase. There is not enough water in the Yellow River basin, which covers a huge swathe of northern China, to supply both farmers and factories. Acid rain from coal-fired power plants is reducing agricultural yields, raising the spectre of increased rural unrest. As it is, the authorities are struggling to ensure that the air will be fit for athletes to breathe at the Olympics in Beijing this summer. All the while, the number of noxious steel mills, cement kilns and power plants relentlessly increases. Global warming, which is fed by their fumes, will make all these problems even worse.
Environmental concerns are unlikely to bring down the Communist regime, or even to stir as much resentment as the arbitrary confiscation of land currently does among China's poorest. But those concerns are certainly prompting the government to reflect on what sort of economic path it wants to pursue. So far, its efforts to temper economic growth, encourage energy efficiency and wean the country off heavy industry have had little effect. But continued failure would eventually make China a less prosperous and more unstable place.
Special Report on The Koreas: Half-finished
THE KOREAS
Half-finished
Sep 25th 2008
From The Economist print edition
What Lee Myung-bak still needs to do
SOUTH KOREA’S story to date has in big part been the story of what is sometimes called a “developmental state”—that is, one that uses formidable powers to direct and regulate the economy to achieve growth above all else. The first “Miracle on the Han” worked because the developmental state, after 1961, mostly got things right. Or, rather, it got them right until it got them very wrong, resulting in the 1997 financial crisis. By then, the economy and the way it was financed had become far too complex for traditional guidance, and the state’s sense of omnipotence had blinded it to the need for structural reform. The recovery from crisis accomplished only half the structural reforms South Korea needs. There will be no second miracle unless Mr Lee accomplishes the other half.
AP
President Lee says he’s back on trackNow that he has recovered his poise after the beef fiasco, his supporters argue that Mr Lee is just the man for the job. Under him, says Sakong Il, chairman of the president’s National Competitiveness Council, restrictions will be lifted to augment the country’s low stock of foreign investment. Small businesses will be boosted when the government cuts through red tape and lowers the minimum capital requirement for start-ups to just 100 won, from 50m won now. And rules for investment will be eased in the Seoul metropolitan area, which businesses much prefer to the investment zones in the middle of nowhere promoted by Roh Moo-hyun, the previous president. The council plans to submit 147 laws to the National Assembly this autumn, with the aim, Mr Sakong says, of raising South Korea’s standing in the World Bank’s comparisons of national competitiveness from 30th to 15th.
All this is welcome, but it is not enough. Mr Lee, as a former chaebol executive, will need to prove that he is friendly to markets, not simply to business. “When critics say the chaebol are too big, I don’t know what they mean,” says Mr Sakong. “Bigness itself is not badness; what matters more is whether the actions companies take are legitimate or not.” That is fine as far as it goes. One test for Mr Lee will be whether he and the courts continue to treat the misdemeanours of chaebol bosses lightly. An even more telling one will be whether minority shareholders will be able to seek redress against chaebol trampling on their rights.
Old habits die hard
Traces of the developmental state persist. Although Kang Man-soo, the finance minister, blames heavy taxes, subsidies and regulation for a decline in South Korea’s investment rate, he also promises “a very ambitious plan” of subsidies and incentives for boosting internet businesses such as computer gaming. Known as “e-sports”, this has emerged out of nowhere and become a huge spectator sport, employing 25,000 people in Seoul and spawning nearly 100 game-engineering “academies”. It is an example of Korean entrepreneurial energies let loose. The government’s proposals seem to represent an old-fashioned instinct to back winners.
Both the country’s patterns of energy use and its attitude towards the environment point more towards the past than the future. Randall Jones, an economist at the OECD, notes that South Korea uses 1.5 times as much energy for every unit of GDP as does Japan. For a country that imports all its hydrocarbons, energy efficiency will, the government says, be pushed to the top of the agenda. As well as promoting a more efficient industry, that will mean weaning Koreans off their gas-guzzlers and improving mass transit.
Seoul’s air, once famously noxious, is much improved, but South Korea lags at conservation. The developmental state is also a construction state, and too often the government seems to feel that nature untrammelled is a chance wasted. Two-fifths of the country’s rich mudflats, or about 1,600 square kilometres, mainly on the peninsula’s west coast, have been “reclaimed”. That has dire consequences not only for fishermen but for seabirds and rare waders too. Almost invariably the government and the construction companies trump environmental interests.
Just as South Korea’s economy is something of a half-way house, so is its democracy. The beef protests seemed to reflect this. Only a short time after Mr Lee had been voted into office, the protesters bringing downtown Seoul to a halt argued that theirs was a more representative kind of politics. That was clearly nonsense. Yet the nation’s political establishment hardly helped its case when the National Assembly was incapable of convening.
South Korea’s labour disputes can also be ascribed to an immature democracy. Workers’ rights were suppressed during years of military dictatorship. Unions have since made up for lost time, and even illegal strikes are tolerated at some of the big chaebol. Yet the strikes do not reflect an unbridgeable divide between capital and labour: rather, nearly all South Koreans are capitalists, and many of the strikers had voted for Mr Lee. Clear leadership from him could do much to put the country’s labour relations on a more stable footing.
The sense of something half-finished colours South Korea’s diplomacy too. Mr Lee has reiterated that foreign policy rests on his country’s military alliance with the United States, which he now calls a “strategic alliance”. South Korea has already sent troops to Iraq and Afghanistan in support of American-led reconstruction, and Mr Lee says that in future it will spend more on aid and contribute more to peacekeeping and antiterrorism operations. This reinvigorated alliance, the president’s foreign-policy advisers explain, will not only boost South Korea’s global standing but also provide leverage with tricky neighbours, notably Japan and China, where relations are bedevilled by land and history.
That is probably wishful thinking. For no matter what efforts South Korea makes on the global stage, it is still a shrimp among whales in its own region, and even there the power of its American godfather may decline in relative terms. Only the unification of a divided peninsula might bring South Korea the standing it craves. And given the fearsome problems North Korea would carry with it, even that is far from guaranteed.
Half-finished
Sep 25th 2008
From The Economist print edition
What Lee Myung-bak still needs to do
SOUTH KOREA’S story to date has in big part been the story of what is sometimes called a “developmental state”—that is, one that uses formidable powers to direct and regulate the economy to achieve growth above all else. The first “Miracle on the Han” worked because the developmental state, after 1961, mostly got things right. Or, rather, it got them right until it got them very wrong, resulting in the 1997 financial crisis. By then, the economy and the way it was financed had become far too complex for traditional guidance, and the state’s sense of omnipotence had blinded it to the need for structural reform. The recovery from crisis accomplished only half the structural reforms South Korea needs. There will be no second miracle unless Mr Lee accomplishes the other half.
AP
President Lee says he’s back on trackNow that he has recovered his poise after the beef fiasco, his supporters argue that Mr Lee is just the man for the job. Under him, says Sakong Il, chairman of the president’s National Competitiveness Council, restrictions will be lifted to augment the country’s low stock of foreign investment. Small businesses will be boosted when the government cuts through red tape and lowers the minimum capital requirement for start-ups to just 100 won, from 50m won now. And rules for investment will be eased in the Seoul metropolitan area, which businesses much prefer to the investment zones in the middle of nowhere promoted by Roh Moo-hyun, the previous president. The council plans to submit 147 laws to the National Assembly this autumn, with the aim, Mr Sakong says, of raising South Korea’s standing in the World Bank’s comparisons of national competitiveness from 30th to 15th.
All this is welcome, but it is not enough. Mr Lee, as a former chaebol executive, will need to prove that he is friendly to markets, not simply to business. “When critics say the chaebol are too big, I don’t know what they mean,” says Mr Sakong. “Bigness itself is not badness; what matters more is whether the actions companies take are legitimate or not.” That is fine as far as it goes. One test for Mr Lee will be whether he and the courts continue to treat the misdemeanours of chaebol bosses lightly. An even more telling one will be whether minority shareholders will be able to seek redress against chaebol trampling on their rights.
Old habits die hard
Traces of the developmental state persist. Although Kang Man-soo, the finance minister, blames heavy taxes, subsidies and regulation for a decline in South Korea’s investment rate, he also promises “a very ambitious plan” of subsidies and incentives for boosting internet businesses such as computer gaming. Known as “e-sports”, this has emerged out of nowhere and become a huge spectator sport, employing 25,000 people in Seoul and spawning nearly 100 game-engineering “academies”. It is an example of Korean entrepreneurial energies let loose. The government’s proposals seem to represent an old-fashioned instinct to back winners.
Both the country’s patterns of energy use and its attitude towards the environment point more towards the past than the future. Randall Jones, an economist at the OECD, notes that South Korea uses 1.5 times as much energy for every unit of GDP as does Japan. For a country that imports all its hydrocarbons, energy efficiency will, the government says, be pushed to the top of the agenda. As well as promoting a more efficient industry, that will mean weaning Koreans off their gas-guzzlers and improving mass transit.
Seoul’s air, once famously noxious, is much improved, but South Korea lags at conservation. The developmental state is also a construction state, and too often the government seems to feel that nature untrammelled is a chance wasted. Two-fifths of the country’s rich mudflats, or about 1,600 square kilometres, mainly on the peninsula’s west coast, have been “reclaimed”. That has dire consequences not only for fishermen but for seabirds and rare waders too. Almost invariably the government and the construction companies trump environmental interests.
Just as South Korea’s economy is something of a half-way house, so is its democracy. The beef protests seemed to reflect this. Only a short time after Mr Lee had been voted into office, the protesters bringing downtown Seoul to a halt argued that theirs was a more representative kind of politics. That was clearly nonsense. Yet the nation’s political establishment hardly helped its case when the National Assembly was incapable of convening.
South Korea’s labour disputes can also be ascribed to an immature democracy. Workers’ rights were suppressed during years of military dictatorship. Unions have since made up for lost time, and even illegal strikes are tolerated at some of the big chaebol. Yet the strikes do not reflect an unbridgeable divide between capital and labour: rather, nearly all South Koreans are capitalists, and many of the strikers had voted for Mr Lee. Clear leadership from him could do much to put the country’s labour relations on a more stable footing.
The sense of something half-finished colours South Korea’s diplomacy too. Mr Lee has reiterated that foreign policy rests on his country’s military alliance with the United States, which he now calls a “strategic alliance”. South Korea has already sent troops to Iraq and Afghanistan in support of American-led reconstruction, and Mr Lee says that in future it will spend more on aid and contribute more to peacekeeping and antiterrorism operations. This reinvigorated alliance, the president’s foreign-policy advisers explain, will not only boost South Korea’s global standing but also provide leverage with tricky neighbours, notably Japan and China, where relations are bedevilled by land and history.
That is probably wishful thinking. For no matter what efforts South Korea makes on the global stage, it is still a shrimp among whales in its own region, and even there the power of its American godfather may decline in relative terms. Only the unification of a divided peninsula might bring South Korea the standing it craves. And given the fearsome problems North Korea would carry with it, even that is far from guaranteed.
Special Report on The Koreas: Contested Grounds
THE KOREAS
Contested grounds
Sep 25th 2008
From The Economist print edition
Of history wars and peace parks
DISPLAYED in nearly every government office in South Korea is one of two stunning landscapes, sometimes both of them. One is a volcanic mountain, with a turquoise lake in the caldera and forests on its flanks. The other is a pair of rocky islets, black-tailed gulls wheeling around the crags. These are the front lines of South Korea’s history wars.
FLPA
Good for goralsEmotions ran high this summer over the rocks, known as Dokdo in South Korea and Takeshima in Japan, when the Japanese education ministry reminded textbook writers that they were formally incorporated into Japan in 1905, when Korea was forced to cede the conduct of its foreign policy to Japan. Outraged Koreans claim historical rights to the islets going back more than a millennium.
The South Koreans are not laying claim to the volcano, Mount Paektu, which is divided in two by China’s border with North Korea, as is the lake. This was the area of one of Korea’s three founding kingdoms, Koguryo, which flourished between 37BC and 668AD. Koreans have an unshakable belief in their bloodlines, and most insist that holy Mount Paektu is the fount of their culture and myth. Tangun, Korea’s mythical founder, was born on its slopes, and Kim Jong Il, in his official biography, made sure he followed suit.
The problem is a Chinese state history project claiming that Koguryo’s ancestry and culture was Chinese, not Korean. China wants to hold the 2018 winter Olympic games on Paektu and list it as a UNESCO world heritage site. Koreans think China is stealing their mountain and may one day even claim parts of North Korea.
History wars are bad news for wildlife. China’s notion of conservation is to build golf courses and theme parks. Hordes of politicians, soldiers and tourists from South Korea now stumble around windswept Dokdo. The government has even planted trees, because the law on maritime claims suggests that trees differentiate an island from a mere islet.
Another heavily contested piece of ground could set a conservation example. The demilitarised zone (DMZ) between North and South Korea, 4km wide on average, is all that keeps two awesome lines of firepower and hair-trigger soldiery apart. But for any lover of wilderness the view through binoculars from the Seungri mountain observatory is breathtaking. Far below are willow flats and watermeadows, and the meanders of a stream that has not seen a rod in 60 years.
In the DMZ, the wilderness has smothered the human past. Below the observatory, a town and rail terminus that was thriving under Japanese occupation is now a dense wood. The zone is rich with a fauna that has disappeared from most of the rest of north-east Asia: the black-faced spoonbill, of which a total population of only about 2,000 remains; the solitary Manchurian goral (a goat-antelope); and the eagle-owl. An admirable outfit, the DMZ Forum, wants to keep the wilderness from voracious developers when north and south are reconciled. If only the nationalists left all contested ground to those species with the oldest claims.
Contested grounds
Sep 25th 2008
From The Economist print edition
Of history wars and peace parks
DISPLAYED in nearly every government office in South Korea is one of two stunning landscapes, sometimes both of them. One is a volcanic mountain, with a turquoise lake in the caldera and forests on its flanks. The other is a pair of rocky islets, black-tailed gulls wheeling around the crags. These are the front lines of South Korea’s history wars.
FLPA
Good for goralsEmotions ran high this summer over the rocks, known as Dokdo in South Korea and Takeshima in Japan, when the Japanese education ministry reminded textbook writers that they were formally incorporated into Japan in 1905, when Korea was forced to cede the conduct of its foreign policy to Japan. Outraged Koreans claim historical rights to the islets going back more than a millennium.
The South Koreans are not laying claim to the volcano, Mount Paektu, which is divided in two by China’s border with North Korea, as is the lake. This was the area of one of Korea’s three founding kingdoms, Koguryo, which flourished between 37BC and 668AD. Koreans have an unshakable belief in their bloodlines, and most insist that holy Mount Paektu is the fount of their culture and myth. Tangun, Korea’s mythical founder, was born on its slopes, and Kim Jong Il, in his official biography, made sure he followed suit.
The problem is a Chinese state history project claiming that Koguryo’s ancestry and culture was Chinese, not Korean. China wants to hold the 2018 winter Olympic games on Paektu and list it as a UNESCO world heritage site. Koreans think China is stealing their mountain and may one day even claim parts of North Korea.
History wars are bad news for wildlife. China’s notion of conservation is to build golf courses and theme parks. Hordes of politicians, soldiers and tourists from South Korea now stumble around windswept Dokdo. The government has even planted trees, because the law on maritime claims suggests that trees differentiate an island from a mere islet.
Another heavily contested piece of ground could set a conservation example. The demilitarised zone (DMZ) between North and South Korea, 4km wide on average, is all that keeps two awesome lines of firepower and hair-trigger soldiery apart. But for any lover of wilderness the view through binoculars from the Seungri mountain observatory is breathtaking. Far below are willow flats and watermeadows, and the meanders of a stream that has not seen a rod in 60 years.
In the DMZ, the wilderness has smothered the human past. Below the observatory, a town and rail terminus that was thriving under Japanese occupation is now a dense wood. The zone is rich with a fauna that has disappeared from most of the rest of north-east Asia: the black-faced spoonbill, of which a total population of only about 2,000 remains; the solitary Manchurian goral (a goat-antelope); and the eagle-owl. An admirable outfit, the DMZ Forum, wants to keep the wilderness from voracious developers when north and south are reconciled. If only the nationalists left all contested ground to those species with the oldest claims.
Special Report on The Koreas: Jaw-Jaw
THE KOREAS
Jaw-jaw
Sep 25th 2008
From The Economist print edition
The international consequences of North Korea, and all the talk about it
THE divided peninsula is the biggest and nearly the last manifestation of a cold war that ended almost two decades ago. The division, with huge armies facing each other across the border, was not entirely or even mainly of Koreans’ own making. Until the modern era Korea, the Hermit Kingdom, had kept to itself, its isolation underwritten by the ruggedness of its coast and its land border with China. But starting in the late 19th century Korea became the contesting ground of great powers. The Japanese fought to deny influence first to China and then to Russia, annexing the country outright in 1910. Japan’s colonisation until defeat in 1945 was a brutal one, even if it helped lay an industrial base. Hundreds of thousands of Koreans were forcibly conscripted into the Japanese army or sent to work as slave labour in Japanese mines.
AP
Token of good intentBefore the end of the second world war, the United States and the Soviet Union had, without troubling to consult Koreans, agreed to partition Korea into respective spheres of influence and military occupation. In 1945, on the day of Japan’s surrender, the line was drawn along the 38th parallel. The Republic of Korea (that is, South Korea) declared independence on August 15th 1948, with the approval of its American godfather. On September 9th the Democratic People’s Republic of Korea (North Korea) emerged out of the Soviet occupation. Both states have just celebrated their 60th anniversary.
In June 1950 North Korea invaded and overran much of the southern part of the peninsula. An American-led United Nations force pushed it back across the border, making gains deep inside North Korea. That led Mao Zedong to order China into the war. By 1953, after immense physical destruction and the deaths of 3m soldiers and civilians, the two sides had fought themselves to a standstill along the original border. An armistice was signed and a buffer established: today the “demilitarised zone” (DMZ) is the most heavily militarised border in the world.
Technically the combatants remain at war, but the north has lost nearly all outside military help. When the Soviet Union collapsed in 1991, Russia dropped its material support for North Korea. China, for its part, has made clear it no longer feels bound to come to its defence. Though the north’s armed forces are huge, swallowing up a third of the national budget, they are also backward. By way of compensation, North Korea has amassed stockpiles of chemical and biological weapons as well as a handful of plutonium bombs, and its missile technology to deliver its warheads is improving. At least rhetorically, the regime of Kim Jong Il keeps the country on a near-permanent war footing, forever giving warning of imminent imperialist attack by America or, on occasion, Japan.
It does so mainly to boost its own legitimacy at home, yet there is little doubt that North Korea feels beleaguered, even if its own behaviour is chiefly to blame. About 30,000 American forces are stationed in the south, many of them in a huge base in downtown Seoul. Until 2012 the United States will remain in overall command in case of a war or the collapse of the north. Those numbers will fall (and the base will be closed) as part of plans both to reconfigure America’s military presence in the Pacific and to hand back command of South Korean forces.
Even so, President Lee Myung-bak has reasserted South Korea’s alliance with America as the cornerstone of its foreign and defence policy, and his country has American nuclear guarantees. The United States is racing to equip South Korea (as well as Japan) with destroyer-based missile-defence systems to counter the nuclear threat. South Korea’s military spending has risen by more than 70% since 1999, and though troop numbers are to be cut, the savings will be spent on ship-to-air missiles, unmanned spy planes and new fighter planes. North Korea is hopelessly outclassed, and any war would result in its utter destruction. That is why more than anything its regime wants security guarantees from America—especially after George Bush named North Korea as part of his “axis of evil” in 2002.
Knocking heads together
Though the chief burden of making the peninsula whole will fall to South Korea, historical responsibility and strategic necessity have brought together China, America, Russia, Japan and the two Koreas in the so-called “six-party process”, which since 2003 has been aiming, step by reciprocal step, to persuade Mr Kim to abandon his nuclear weapons and programmes in return for material aid, security guarantees and American diplomatic recognition.
American hawks condemn the exercise for allowing a monster regime to blackmail the outside world. The talks’ defenders, none of whom has illusions, point to progress, however glacial—for North Korea never passes up the chance to miss a deadline. Alexander Vershbow, America’s outgoing ambassador to South Korea, says that the latest round of talks, which began in March 2007, has produced few unpleasant surprises. The north has allowed international inspectors into the Yongbyon nuclear facility and shut down the main, Soviet-era reactor there. This summer it blew up the cooling tower that is the most visible mark of its nuclear-weapons programme. America sent the first instalment of 500,000 promised tonnes of grain. Others have provided oil.
Now the sticking-point is North Korea’s promise to produce a full list of its nuclear programmes. America has complained that the means of verifying what North Korea has declared to date fall short of what is required—not least because the declaration makes no mention of existing nuclear bombs, a suspected programme for enriching uranium or proliferation in the Middle East. Piqued, the north threatened in late August to suspend the dismantling of the Yongbyon facility. As The Economist went to press, the two sides appeared to be stalled. But any deal would probably entail Mr Bush accepting less than cast-iron assurances on verification if he wants the prize of a commitment to freeze North Korea’s plutonium programme before the end of his term. In return, America would, at long last, remove North Korea from its blacklist of state sponsors of terrorism. That would pave the way for the country to join multilateral institutions such as the World Bank and embark on reforms.
The hawks will scream. But Yu Myung-hwan, South Korea’s foreign minister, says verification is the key issue, and without agreement “the six-party talks will collapse.” That, he worries, will deprive the world of the best means for “coaxing North Korea into our sphere”.
Even if agreement is reached, the next phase of the talks—persuading North Korea to give up its existing weapons—will be far harder. Mr Vershbow argues that whatever the doubts about Mr Kim’s intention to give up his weapons, the six-party process offers the only means of “getting him to change his cost-benefit analysis”.
AFP
Six-part danceSo the question-mark over the six-party process is whether giving up nuclear weapons and coming out of his shell are compatible with the survival of Mr Kim’s regime. Mr Vershbow says coyly that the collapse of North Korea’s regime is not his government’s policy. China dreads such a collapse, which would risk releasing a flood of refugees and causing chaos along its border. South Korea’s “sunshine policy” vis-à-vis the north, launched by Kim Dae-jung a decade ago and continued by Roh Moo-hyun, aimed for engagement not in order to hasten collapse but rather to postpone it for as long as possible, using money and material aid—$500m in bribes alone, it turned out, for Mr Kim’s historic summit in 2000 with Kim Jong Il, and unconditional food aid under Mr Roh.
Mr Lee’s line is tougher. He came to office saying that aid should depend on progress in the six-party talks and even on human rights. That caused North Korea to throw a hissy fit and cut all communication with the south. Matters worsened in July, when a North Korean soldier shot dead a South Korean tourist at the Mount Kumgang resort, where the north earns much-needed hard currency. Still, government officials in the south expect North Korea to come back to the negotiating table. They too stress a policy of engagement and even predict that Mr Lee will hold a summit with Kim Jong Il before his term is out. Mr Lee is just as wary as his predecessors of a sudden implosion of the north.
Nightmare scenarios
Forecasting collapse of the north has been unfashionable ever since a flood of false predictions after the death in 1994 of Kim Il Sung, the country’s political and spiritual father since 1948. At the time most Western experts argued that Kim Jong Il utterly lacked his father’s legitimacy and could not last. Loyalty to Kim Il Sung had been forged by a guerrilla war against Japanese imperialists waged in Manchuria. In creating a state cult around himself, Kim blended communism with something that, with rich irony, most closely resembled Japan’s emperor system between the wars: he became a neo-Confucian sun king, the nation’s moral as well as political father.
In predicting that Kim Jong Il could not pull off the dynastic succession, the experts were wrong not just because the state retained its grip on all the instruments of repression to keep the masses in line; they also underestimated the moral authority of the Kim family among the ruling elite. The band of Manchurian guerrillas who had attended the state’s birth appeared bound by almost chivalric oaths of fealty, trust and reciprocal obligation. These oaths passed to a second generation, and the families of that early band of brothers now occupy nearly every significant position in the state.
No one can claim to know whether the regime is capable of surviving succession to a third generation, but the odds are surely longer. Though the state retains its monopoly of force, people at the bottom are now less frightened. At the top, chivalric ties are presumably getting weaker.
If Mr Kim has a succession plan, he has not announced it. His children do not appear to be the stuff of leadership. In 2001 his eldest son was caught entering Japan on a false passport in the hope of visiting Tokyo Disneyland; he later moved to Macau, China’s casino enclave. Of the two younger sons, still in their 20s, all that is known is that one is obsessed by Eric Clapton. Perhaps Mr Kim, an ardent family man, does not want a family successor. After all, the consequences of giving up power are certainly not a comfortable retirement in Monte Carlo. The North Korean gulag and the regime’s willingness to let 1m people die of hunger rather than loosen its grip on power amount to crimes against humanity.
Speculation has its bounds. Yet if collapse came, it could come quickly, posing a huge challenge for the region’s powers. It is assumed that South Korean troops would rush in to provide humanitarian help and restore law and order, but it is not clear how they would deal with factional fighting, or with floods of North Koreans heading south. American special forces would presumably be dropped in to secure weapons of mass destruction, but where would they look for them? Meanwhile, faced with refugees pouring over its own border, China might send in its own army. As Bill Emmott, a former editor of The Economist, puts it in his latest book, “Rivals”: “There would be little time to think, to discuss, to calculate. It is at such moments that a move by one country can be misinterpreted, or that a country might decide that it has to move quickly if it is to move at all and by doing so could miscalculate and bring the great powers into conflict. It is all an extremely risky thought.” Particularly so since, as Chinese, American and South Korean officials admit in private, so far they have drawn up only the sketchiest contingency plans among themselves.
Jaw-jaw
Sep 25th 2008
From The Economist print edition
The international consequences of North Korea, and all the talk about it
THE divided peninsula is the biggest and nearly the last manifestation of a cold war that ended almost two decades ago. The division, with huge armies facing each other across the border, was not entirely or even mainly of Koreans’ own making. Until the modern era Korea, the Hermit Kingdom, had kept to itself, its isolation underwritten by the ruggedness of its coast and its land border with China. But starting in the late 19th century Korea became the contesting ground of great powers. The Japanese fought to deny influence first to China and then to Russia, annexing the country outright in 1910. Japan’s colonisation until defeat in 1945 was a brutal one, even if it helped lay an industrial base. Hundreds of thousands of Koreans were forcibly conscripted into the Japanese army or sent to work as slave labour in Japanese mines.
AP
Token of good intentBefore the end of the second world war, the United States and the Soviet Union had, without troubling to consult Koreans, agreed to partition Korea into respective spheres of influence and military occupation. In 1945, on the day of Japan’s surrender, the line was drawn along the 38th parallel. The Republic of Korea (that is, South Korea) declared independence on August 15th 1948, with the approval of its American godfather. On September 9th the Democratic People’s Republic of Korea (North Korea) emerged out of the Soviet occupation. Both states have just celebrated their 60th anniversary.
In June 1950 North Korea invaded and overran much of the southern part of the peninsula. An American-led United Nations force pushed it back across the border, making gains deep inside North Korea. That led Mao Zedong to order China into the war. By 1953, after immense physical destruction and the deaths of 3m soldiers and civilians, the two sides had fought themselves to a standstill along the original border. An armistice was signed and a buffer established: today the “demilitarised zone” (DMZ) is the most heavily militarised border in the world.
Technically the combatants remain at war, but the north has lost nearly all outside military help. When the Soviet Union collapsed in 1991, Russia dropped its material support for North Korea. China, for its part, has made clear it no longer feels bound to come to its defence. Though the north’s armed forces are huge, swallowing up a third of the national budget, they are also backward. By way of compensation, North Korea has amassed stockpiles of chemical and biological weapons as well as a handful of plutonium bombs, and its missile technology to deliver its warheads is improving. At least rhetorically, the regime of Kim Jong Il keeps the country on a near-permanent war footing, forever giving warning of imminent imperialist attack by America or, on occasion, Japan.
It does so mainly to boost its own legitimacy at home, yet there is little doubt that North Korea feels beleaguered, even if its own behaviour is chiefly to blame. About 30,000 American forces are stationed in the south, many of them in a huge base in downtown Seoul. Until 2012 the United States will remain in overall command in case of a war or the collapse of the north. Those numbers will fall (and the base will be closed) as part of plans both to reconfigure America’s military presence in the Pacific and to hand back command of South Korean forces.
Even so, President Lee Myung-bak has reasserted South Korea’s alliance with America as the cornerstone of its foreign and defence policy, and his country has American nuclear guarantees. The United States is racing to equip South Korea (as well as Japan) with destroyer-based missile-defence systems to counter the nuclear threat. South Korea’s military spending has risen by more than 70% since 1999, and though troop numbers are to be cut, the savings will be spent on ship-to-air missiles, unmanned spy planes and new fighter planes. North Korea is hopelessly outclassed, and any war would result in its utter destruction. That is why more than anything its regime wants security guarantees from America—especially after George Bush named North Korea as part of his “axis of evil” in 2002.
Knocking heads together
Though the chief burden of making the peninsula whole will fall to South Korea, historical responsibility and strategic necessity have brought together China, America, Russia, Japan and the two Koreas in the so-called “six-party process”, which since 2003 has been aiming, step by reciprocal step, to persuade Mr Kim to abandon his nuclear weapons and programmes in return for material aid, security guarantees and American diplomatic recognition.
American hawks condemn the exercise for allowing a monster regime to blackmail the outside world. The talks’ defenders, none of whom has illusions, point to progress, however glacial—for North Korea never passes up the chance to miss a deadline. Alexander Vershbow, America’s outgoing ambassador to South Korea, says that the latest round of talks, which began in March 2007, has produced few unpleasant surprises. The north has allowed international inspectors into the Yongbyon nuclear facility and shut down the main, Soviet-era reactor there. This summer it blew up the cooling tower that is the most visible mark of its nuclear-weapons programme. America sent the first instalment of 500,000 promised tonnes of grain. Others have provided oil.
Now the sticking-point is North Korea’s promise to produce a full list of its nuclear programmes. America has complained that the means of verifying what North Korea has declared to date fall short of what is required—not least because the declaration makes no mention of existing nuclear bombs, a suspected programme for enriching uranium or proliferation in the Middle East. Piqued, the north threatened in late August to suspend the dismantling of the Yongbyon facility. As The Economist went to press, the two sides appeared to be stalled. But any deal would probably entail Mr Bush accepting less than cast-iron assurances on verification if he wants the prize of a commitment to freeze North Korea’s plutonium programme before the end of his term. In return, America would, at long last, remove North Korea from its blacklist of state sponsors of terrorism. That would pave the way for the country to join multilateral institutions such as the World Bank and embark on reforms.
The hawks will scream. But Yu Myung-hwan, South Korea’s foreign minister, says verification is the key issue, and without agreement “the six-party talks will collapse.” That, he worries, will deprive the world of the best means for “coaxing North Korea into our sphere”.
Even if agreement is reached, the next phase of the talks—persuading North Korea to give up its existing weapons—will be far harder. Mr Vershbow argues that whatever the doubts about Mr Kim’s intention to give up his weapons, the six-party process offers the only means of “getting him to change his cost-benefit analysis”.
AFP
Six-part danceSo the question-mark over the six-party process is whether giving up nuclear weapons and coming out of his shell are compatible with the survival of Mr Kim’s regime. Mr Vershbow says coyly that the collapse of North Korea’s regime is not his government’s policy. China dreads such a collapse, which would risk releasing a flood of refugees and causing chaos along its border. South Korea’s “sunshine policy” vis-à-vis the north, launched by Kim Dae-jung a decade ago and continued by Roh Moo-hyun, aimed for engagement not in order to hasten collapse but rather to postpone it for as long as possible, using money and material aid—$500m in bribes alone, it turned out, for Mr Kim’s historic summit in 2000 with Kim Jong Il, and unconditional food aid under Mr Roh.
Mr Lee’s line is tougher. He came to office saying that aid should depend on progress in the six-party talks and even on human rights. That caused North Korea to throw a hissy fit and cut all communication with the south. Matters worsened in July, when a North Korean soldier shot dead a South Korean tourist at the Mount Kumgang resort, where the north earns much-needed hard currency. Still, government officials in the south expect North Korea to come back to the negotiating table. They too stress a policy of engagement and even predict that Mr Lee will hold a summit with Kim Jong Il before his term is out. Mr Lee is just as wary as his predecessors of a sudden implosion of the north.
Nightmare scenarios
Forecasting collapse of the north has been unfashionable ever since a flood of false predictions after the death in 1994 of Kim Il Sung, the country’s political and spiritual father since 1948. At the time most Western experts argued that Kim Jong Il utterly lacked his father’s legitimacy and could not last. Loyalty to Kim Il Sung had been forged by a guerrilla war against Japanese imperialists waged in Manchuria. In creating a state cult around himself, Kim blended communism with something that, with rich irony, most closely resembled Japan’s emperor system between the wars: he became a neo-Confucian sun king, the nation’s moral as well as political father.
In predicting that Kim Jong Il could not pull off the dynastic succession, the experts were wrong not just because the state retained its grip on all the instruments of repression to keep the masses in line; they also underestimated the moral authority of the Kim family among the ruling elite. The band of Manchurian guerrillas who had attended the state’s birth appeared bound by almost chivalric oaths of fealty, trust and reciprocal obligation. These oaths passed to a second generation, and the families of that early band of brothers now occupy nearly every significant position in the state.
No one can claim to know whether the regime is capable of surviving succession to a third generation, but the odds are surely longer. Though the state retains its monopoly of force, people at the bottom are now less frightened. At the top, chivalric ties are presumably getting weaker.
If Mr Kim has a succession plan, he has not announced it. His children do not appear to be the stuff of leadership. In 2001 his eldest son was caught entering Japan on a false passport in the hope of visiting Tokyo Disneyland; he later moved to Macau, China’s casino enclave. Of the two younger sons, still in their 20s, all that is known is that one is obsessed by Eric Clapton. Perhaps Mr Kim, an ardent family man, does not want a family successor. After all, the consequences of giving up power are certainly not a comfortable retirement in Monte Carlo. The North Korean gulag and the regime’s willingness to let 1m people die of hunger rather than loosen its grip on power amount to crimes against humanity.
Speculation has its bounds. Yet if collapse came, it could come quickly, posing a huge challenge for the region’s powers. It is assumed that South Korean troops would rush in to provide humanitarian help and restore law and order, but it is not clear how they would deal with factional fighting, or with floods of North Koreans heading south. American special forces would presumably be dropped in to secure weapons of mass destruction, but where would they look for them? Meanwhile, faced with refugees pouring over its own border, China might send in its own army. As Bill Emmott, a former editor of The Economist, puts it in his latest book, “Rivals”: “There would be little time to think, to discuss, to calculate. It is at such moments that a move by one country can be misinterpreted, or that a country might decide that it has to move quickly if it is to move at all and by doing so could miscalculate and bring the great powers into conflict. It is all an extremely risky thought.” Particularly so since, as Chinese, American and South Korean officials admit in private, so far they have drawn up only the sketchiest contingency plans among themselves.
Special Report on The Koreas: Survival of the Fittest
THE KOREAS
Survival of the fittest
Sep 25th 2008
From The Economist print edition
North Korean society is turbulent and in flux
WHAT with North Korea being a cold-war state and a nuclear one to boot, the fixation on its missiles is perhaps not surprising. Around the world that fixation has spawned a veritable industry of think-tankers, journalists and officials past and present, many with an axe to grind, who make a living from parsing the intentions of the regime and second-guessing the leader’s health and even thoughts. Yet much Pyongyangology is futile, because no outsider has a line into the ruling elite. Almost certainly the upper levels of the regime have never been infiltrated by Western or South Korean spy agencies. The most recent high-level North Korean defection was in 1997.
The keenest insights into Kim Jong Il and his court have come from more surreal angles. For instance, a well-known Italian chef, brought in to pamper the dictator, later wrote about the experience. And there is Shin Sang-ok, a legendary South Korean film director whom Mr Kim, a film buff, kidnapped and held with his actress wife, hoping to improve the North’s film industry. “All our movies are filled with crying and sobbing,” an indignant Mr Kim told the pair, hauled out of prison to attend a cocktail party in their honour. “I didn’t order them to portray that kind of thing.”
A fixation on North Korea’s missiles can “end up obscuring a great deal of other things worth knowing,” as Christian Caryl, a journalist based in Asia, put it in the New York Review of Books. Most worthwhile of all is knowing just how the mass of ordinary North Koreans act, think and feel. It is still too widely assumed that such things are unknowable. After all, foreigners, and especially reporters, have always found it hard to get into North Korea, and those who do are assigned minders. Only the minders offer the chance to learn about life and leaders—which is why they are often supplied in pairs, to mind each other.
So a visit to North Korea—which usually means only to Pyongyang, with its empty boulevards, its traffic policewomen in skirts and boots, pirouetting with fixed smiles, and its old-fashioned communist propaganda—leads many to the conclusion that the North is set in amber. A reconsideration of this view is overdue. For a new picture is emerging that shows a protean society in flux, one that in the face of harsh realities is adopting an improvisatory approach to survival, and some people are thriving.
The uses of famine
The roots of this change lie with the famine of 1995-98 that killed up to 1m people, or over 4% of the population, and brought outsiders—aid agencies and non-governmental organisations (NGOs)—to North Korea. The regime made it hard for these groups to get aid to those who needed it, and kicked some of them out after the famine was over, notably the UN’s World Food Programme (WFP). Other NGOs, however, continue to work there in inconspicuous ways. Aid groups have filled big gaps in outsiders’ knowledge about life and death in the provinces. Good Friends, a South Korean Buddhist outfit, publishes regular reports on food supplies across North Korea, the latest government campaigns and evidence of popular discontent. Not every detail can be substantiated. But the latest bulletin reports some dozens of deaths from hunger and the ill-effects of eating grass among farming families in the southern part of the country. Earlier this year Good Friends reported the public execution in North Hamgyong province of 15 North Koreans, mainly women, for having attempted to cross into China.
The risks of crossing the border illegally are high, but during the famine the rewards easily outweighed them. That was particularly so for those from the north-eastern provinces near China where food shortages were most severe because of a breakdown in the public food-distribution system in industrial areas: uniquely, North Korea’s was as much an urban famine as a rural one.
Thus for the first time the famine brought North Koreans to the outside world. At the peak, perhaps 80,000 North Koreans were hiding in north-east China looking for food, work or a clandestine route to South Korea. These crossings bred a habit: whereas leaving North Korea was unthinkable before, since the mid-1990s more than 500,000 North Koreans have crossed into China, legally or illegally. Most have eventually returned (indeed, many make multiple trips), with startling evidence of a very different world outside.
Surveys among these North Koreans in China’s border provinces offer the best insights to date about ordinary life in North Korea. Ground-breaking work by three scholars, Yoonok Chang, Stephan Haggard and Marcus Noland, published this year by the Peterson Institute for International Economics (IIE), offers a psychological as much as a material portrait of North Korea. It is clear that the famine and the government’s brutal mismanagement of it (both in denying food to those who most needed it and in criminalising people’s response to hunger) cast a long shadow.
In their survey of 1,300 North Koreans, the authors draw a harrowing picture. Some 23% of men and 37% of women say family members died of hunger. More than a quarter report being arrested, and of those who were held in political detention (about a tenth of the survey sample), 90% witnessed forced starvation, 60% saw deaths due to beating or torture and 27% said they had witnessed executions.
The findings underscore earlier clinical reports of psychological distress akin to post-traumatic stress disorder: doctors working with North Korean refugees put rates of distress at 30-45%. Clearly, some of the stress is associated simply with getting to China. But beyond that, the IIE authors find that certain groups of refugees are particularly disturbed. These include those imprisoned by the regime, and those who lost family members to hunger or illness.
Strikingly, the psychological effect is as great or greater among the group of interviewees who were aware of international aid programmes for the starving but who did not believe that they themselves had been beneficiaries. At its peak, the humanitarian programme was supposedly feeding more than a third of the population, yet a large minority of those interviewed had never heard of the programme. Of the majority who had, 96% believed they had not benefited from it; they assumed that the armed forces had appropriated the aid. This group, the authors find, was “profoundly embittered”. Modelling conservatively, they estimate that 35% of the North Korean population were in a famine area, knew of the aid but thought they were not receiving any of it. That makes it hard to argue that Mr Kim, even as his public appearances are greeted with mass displays of emotion, still commands the people’s loyalty. It seems that the regime itself does not think so: it has long classified more than half the population as hostile or at best wavering in their loyalties. Possibly this assessment is no longer paranoid.
Holding up more than half the sky
Border surveys also cast light on life in North Korea since the famine, with a proliferation of informal markets and an increase in unofficial movements subverting people’s relationship with the state. The factories of the command economy have ground to a halt: fuel and other inputs are too expensive to run them, and workers often go unpaid. Frequently, it is not just a factory’s output that its managers have sold on the black market but all its plant and equipment too, leaving a shell.
Yet most men in the state system still sign on each day, even if they sit about. In the countryside the men have the backbreaking work of farming without mechanisation: again, fuel is dear, and many powered irrigation systems have broken down. In the main, it is women who have been responsible for the explosion of markets and other entrepreneurial activity.
The degree of marketisation of this socialist paradise, although noted by foreign observers, seems to have been underestimated. One young defector recently disparaged Seoul’s famous street market of Dongdaemun, sniffing that it was not a patch on markets up north. (As for the feral orphans, or kotjebi—literally, “flower swallows”—who were a post-war feature of Dongdaemun, they now flitter around North Korea’s black markets, scavenging or stealing what they can.)
In the IIE survey four-fifths of interviewees agreed that anything in North Korea can be bought for money, something they say has been true since at least the mid-1990s. This corrects another widely held misconception. Marketisation was not a consequence of a set of economic liberalisations trumpeted by the regime in 2002, leading some to wonder whether North Korea would at last go down the Chinese path of reform. Rather, these policies were the state’s belated acknowledgment of an unstoppable force set off by the famine, described by Messrs Haggard and Noland (in a separate work, “Famine in North Korea”) as “coping mechanisms”: foraging, barter and petty trade.
In North Korea, then, everything, as the Korean expression goes, is for sale except cats’ horns: household belongings, vegetables from private plots, grain that is supposed to be distributed by the state, consumer electronics, designer brands, Mercedes cars and any kind of official paperwork you care to name (a passport is $60; what is known as a “VIP defection” to South Korea, with every detail taken care of, costs $1,500 and can be arranged within a month). North Korea’s elite has always been relatively well off, and some of its members have dived into business. And people are making money on the Chinese border, where both official trade and smuggling have boomed.
As well as humans for work or sex (another area of competitive advantage for women entrepreneurs), the Chinese pay for medicinal herbs foraged in North Korea’s hills, furs and drugs (methamphetamines). In addition, Chinese businesses are investing in the northern part of the country, buying underworked mines and factories on the cheap. They are hated for it, but their money is now starting to splash around the North Korean economy.
North Korean traders returning from China stock up on clothes, secondhand sewing machines and consumer goods. Paradoxically, those social groups that in the past have borne the brunt of the regime’s persecution have gained most from this growth in private trade. Japanese-Koreans have used remittances from relatives overseas as start-up capital for new trading businesses. North Koreans of Chinese origin and those with Korean-Chinese relatives across the border take advantage of their relative freedom to travel.
The daily grindAs much as the economic impact, the cultural effect of this cross-border exchange is already huge and still unfolding. Andrei Lankov of the Australian National University, an astute observer of North Korea, describes how a relatively minor technological revolution in China changed the lives of many North Koreans. Earlier this decade DVD players fell dramatically in price, so South Korean households quickly dumped their old VCRs in favour of the new players. Smugglers picked up the old units for next to nothing and sold them in North Korea for $40 or so apiece—a price that plenty of urban North Korean families could afford if they saved up.
The consequence was what Mr Lankov calls a “video revolution”: a flood of South Korean soap operas, melodramas and music videos entering North Korea by the same route and delighting new audiences. The impact of the astounding affluence on display—the stars’ clothes and cars, Seoul’s glittering skyline—exposes the central lie on which the regime bases its claim to rule: that South Korea is backward, impoverished and exploited. Korean-language programming from abroad on radio sets imported from China (and thus not tuned permanently to state radio) reinforces this discovery. Thus, disillusion and anger with the regime only mounts. In the IIE surveys nine-tenths of the interviewees disagreed that either the regime or the economy were getting better.
On the border
In the face of what Mr Caryl, the journalist, calls the “profound epistemological shock” of North Koreans who have glimpsed another world, the regime has adopted an ambivalent attitude. Although those caught crossing the border can face harsh punishments, the regime, if it was minded to, could be much more brutal. The penal code was revised in 2004 to differentiate between “economic” refugees and “political” ones (though refugees say judicial proceedings under the new code are often skipped and torture is still used). Border-crossers can buy a degree of protection by bribing local authorities; border guards are even rotated every six months so that more of them can get a share of the spoils. The border with China is, as Peter Beck, a scholar of North Korea, describes it, both the regime’s safety valve, providing an alternative living to the dysfunctional state economy, and its Achilles heel.
In daily life, the regime appears to be re-establishing its grip in some areas but losing it more often in others. Since 2005, after a decent enough harvest, the regime sought to take control of burgeoning markets, redirect grain supplies through the public distribution system and get people back to their work units. First men were banned from selling in the markets, and more recently women under 50 too. The attempt at control has been only partly successful.
The state manufacturing economy has officially stayed aloof from the new market economy, though parts of the regime have proved opportunistic. For instance, railways are the major conduits for the new trade, and railway stations often serve as lively markets. Rather than clamp down on them, railway staff and police take a cut. The armed forces, too, have leapt into the black market: after all, they have the transport, the personnel and the weaponry to enforce a protection racket. This may be profitable for the state’s agents, but it hardly reinforces their moral authority. A Western diplomat recounts seeing a group taking a sofa up a subway escalator in Pyongyang to sell on the street. Guards were bawling at them to get out of the way, but nobody paid the slightest attention.
It all adds up, reckons Mr Lankov (whose life in the former Soviet Union informs his view of changes in North Korea), to something of consequence: North Korea is no longer the ruthless Stalinist state it was, but a shoddy, corrupt little tyranny. And now the people know it.
Survival of the fittest
Sep 25th 2008
From The Economist print edition
North Korean society is turbulent and in flux
WHAT with North Korea being a cold-war state and a nuclear one to boot, the fixation on its missiles is perhaps not surprising. Around the world that fixation has spawned a veritable industry of think-tankers, journalists and officials past and present, many with an axe to grind, who make a living from parsing the intentions of the regime and second-guessing the leader’s health and even thoughts. Yet much Pyongyangology is futile, because no outsider has a line into the ruling elite. Almost certainly the upper levels of the regime have never been infiltrated by Western or South Korean spy agencies. The most recent high-level North Korean defection was in 1997.
The keenest insights into Kim Jong Il and his court have come from more surreal angles. For instance, a well-known Italian chef, brought in to pamper the dictator, later wrote about the experience. And there is Shin Sang-ok, a legendary South Korean film director whom Mr Kim, a film buff, kidnapped and held with his actress wife, hoping to improve the North’s film industry. “All our movies are filled with crying and sobbing,” an indignant Mr Kim told the pair, hauled out of prison to attend a cocktail party in their honour. “I didn’t order them to portray that kind of thing.”
A fixation on North Korea’s missiles can “end up obscuring a great deal of other things worth knowing,” as Christian Caryl, a journalist based in Asia, put it in the New York Review of Books. Most worthwhile of all is knowing just how the mass of ordinary North Koreans act, think and feel. It is still too widely assumed that such things are unknowable. After all, foreigners, and especially reporters, have always found it hard to get into North Korea, and those who do are assigned minders. Only the minders offer the chance to learn about life and leaders—which is why they are often supplied in pairs, to mind each other.
So a visit to North Korea—which usually means only to Pyongyang, with its empty boulevards, its traffic policewomen in skirts and boots, pirouetting with fixed smiles, and its old-fashioned communist propaganda—leads many to the conclusion that the North is set in amber. A reconsideration of this view is overdue. For a new picture is emerging that shows a protean society in flux, one that in the face of harsh realities is adopting an improvisatory approach to survival, and some people are thriving.
The uses of famine
The roots of this change lie with the famine of 1995-98 that killed up to 1m people, or over 4% of the population, and brought outsiders—aid agencies and non-governmental organisations (NGOs)—to North Korea. The regime made it hard for these groups to get aid to those who needed it, and kicked some of them out after the famine was over, notably the UN’s World Food Programme (WFP). Other NGOs, however, continue to work there in inconspicuous ways. Aid groups have filled big gaps in outsiders’ knowledge about life and death in the provinces. Good Friends, a South Korean Buddhist outfit, publishes regular reports on food supplies across North Korea, the latest government campaigns and evidence of popular discontent. Not every detail can be substantiated. But the latest bulletin reports some dozens of deaths from hunger and the ill-effects of eating grass among farming families in the southern part of the country. Earlier this year Good Friends reported the public execution in North Hamgyong province of 15 North Koreans, mainly women, for having attempted to cross into China.
The risks of crossing the border illegally are high, but during the famine the rewards easily outweighed them. That was particularly so for those from the north-eastern provinces near China where food shortages were most severe because of a breakdown in the public food-distribution system in industrial areas: uniquely, North Korea’s was as much an urban famine as a rural one.
Thus for the first time the famine brought North Koreans to the outside world. At the peak, perhaps 80,000 North Koreans were hiding in north-east China looking for food, work or a clandestine route to South Korea. These crossings bred a habit: whereas leaving North Korea was unthinkable before, since the mid-1990s more than 500,000 North Koreans have crossed into China, legally or illegally. Most have eventually returned (indeed, many make multiple trips), with startling evidence of a very different world outside.
Surveys among these North Koreans in China’s border provinces offer the best insights to date about ordinary life in North Korea. Ground-breaking work by three scholars, Yoonok Chang, Stephan Haggard and Marcus Noland, published this year by the Peterson Institute for International Economics (IIE), offers a psychological as much as a material portrait of North Korea. It is clear that the famine and the government’s brutal mismanagement of it (both in denying food to those who most needed it and in criminalising people’s response to hunger) cast a long shadow.
In their survey of 1,300 North Koreans, the authors draw a harrowing picture. Some 23% of men and 37% of women say family members died of hunger. More than a quarter report being arrested, and of those who were held in political detention (about a tenth of the survey sample), 90% witnessed forced starvation, 60% saw deaths due to beating or torture and 27% said they had witnessed executions.
The findings underscore earlier clinical reports of psychological distress akin to post-traumatic stress disorder: doctors working with North Korean refugees put rates of distress at 30-45%. Clearly, some of the stress is associated simply with getting to China. But beyond that, the IIE authors find that certain groups of refugees are particularly disturbed. These include those imprisoned by the regime, and those who lost family members to hunger or illness.
Strikingly, the psychological effect is as great or greater among the group of interviewees who were aware of international aid programmes for the starving but who did not believe that they themselves had been beneficiaries. At its peak, the humanitarian programme was supposedly feeding more than a third of the population, yet a large minority of those interviewed had never heard of the programme. Of the majority who had, 96% believed they had not benefited from it; they assumed that the armed forces had appropriated the aid. This group, the authors find, was “profoundly embittered”. Modelling conservatively, they estimate that 35% of the North Korean population were in a famine area, knew of the aid but thought they were not receiving any of it. That makes it hard to argue that Mr Kim, even as his public appearances are greeted with mass displays of emotion, still commands the people’s loyalty. It seems that the regime itself does not think so: it has long classified more than half the population as hostile or at best wavering in their loyalties. Possibly this assessment is no longer paranoid.
Holding up more than half the sky
Border surveys also cast light on life in North Korea since the famine, with a proliferation of informal markets and an increase in unofficial movements subverting people’s relationship with the state. The factories of the command economy have ground to a halt: fuel and other inputs are too expensive to run them, and workers often go unpaid. Frequently, it is not just a factory’s output that its managers have sold on the black market but all its plant and equipment too, leaving a shell.
Yet most men in the state system still sign on each day, even if they sit about. In the countryside the men have the backbreaking work of farming without mechanisation: again, fuel is dear, and many powered irrigation systems have broken down. In the main, it is women who have been responsible for the explosion of markets and other entrepreneurial activity.
The degree of marketisation of this socialist paradise, although noted by foreign observers, seems to have been underestimated. One young defector recently disparaged Seoul’s famous street market of Dongdaemun, sniffing that it was not a patch on markets up north. (As for the feral orphans, or kotjebi—literally, “flower swallows”—who were a post-war feature of Dongdaemun, they now flitter around North Korea’s black markets, scavenging or stealing what they can.)
In the IIE survey four-fifths of interviewees agreed that anything in North Korea can be bought for money, something they say has been true since at least the mid-1990s. This corrects another widely held misconception. Marketisation was not a consequence of a set of economic liberalisations trumpeted by the regime in 2002, leading some to wonder whether North Korea would at last go down the Chinese path of reform. Rather, these policies were the state’s belated acknowledgment of an unstoppable force set off by the famine, described by Messrs Haggard and Noland (in a separate work, “Famine in North Korea”) as “coping mechanisms”: foraging, barter and petty trade.
In North Korea, then, everything, as the Korean expression goes, is for sale except cats’ horns: household belongings, vegetables from private plots, grain that is supposed to be distributed by the state, consumer electronics, designer brands, Mercedes cars and any kind of official paperwork you care to name (a passport is $60; what is known as a “VIP defection” to South Korea, with every detail taken care of, costs $1,500 and can be arranged within a month). North Korea’s elite has always been relatively well off, and some of its members have dived into business. And people are making money on the Chinese border, where both official trade and smuggling have boomed.
As well as humans for work or sex (another area of competitive advantage for women entrepreneurs), the Chinese pay for medicinal herbs foraged in North Korea’s hills, furs and drugs (methamphetamines). In addition, Chinese businesses are investing in the northern part of the country, buying underworked mines and factories on the cheap. They are hated for it, but their money is now starting to splash around the North Korean economy.
North Korean traders returning from China stock up on clothes, secondhand sewing machines and consumer goods. Paradoxically, those social groups that in the past have borne the brunt of the regime’s persecution have gained most from this growth in private trade. Japanese-Koreans have used remittances from relatives overseas as start-up capital for new trading businesses. North Koreans of Chinese origin and those with Korean-Chinese relatives across the border take advantage of their relative freedom to travel.
The daily grindAs much as the economic impact, the cultural effect of this cross-border exchange is already huge and still unfolding. Andrei Lankov of the Australian National University, an astute observer of North Korea, describes how a relatively minor technological revolution in China changed the lives of many North Koreans. Earlier this decade DVD players fell dramatically in price, so South Korean households quickly dumped their old VCRs in favour of the new players. Smugglers picked up the old units for next to nothing and sold them in North Korea for $40 or so apiece—a price that plenty of urban North Korean families could afford if they saved up.
The consequence was what Mr Lankov calls a “video revolution”: a flood of South Korean soap operas, melodramas and music videos entering North Korea by the same route and delighting new audiences. The impact of the astounding affluence on display—the stars’ clothes and cars, Seoul’s glittering skyline—exposes the central lie on which the regime bases its claim to rule: that South Korea is backward, impoverished and exploited. Korean-language programming from abroad on radio sets imported from China (and thus not tuned permanently to state radio) reinforces this discovery. Thus, disillusion and anger with the regime only mounts. In the IIE surveys nine-tenths of the interviewees disagreed that either the regime or the economy were getting better.
On the border
In the face of what Mr Caryl, the journalist, calls the “profound epistemological shock” of North Koreans who have glimpsed another world, the regime has adopted an ambivalent attitude. Although those caught crossing the border can face harsh punishments, the regime, if it was minded to, could be much more brutal. The penal code was revised in 2004 to differentiate between “economic” refugees and “political” ones (though refugees say judicial proceedings under the new code are often skipped and torture is still used). Border-crossers can buy a degree of protection by bribing local authorities; border guards are even rotated every six months so that more of them can get a share of the spoils. The border with China is, as Peter Beck, a scholar of North Korea, describes it, both the regime’s safety valve, providing an alternative living to the dysfunctional state economy, and its Achilles heel.
In daily life, the regime appears to be re-establishing its grip in some areas but losing it more often in others. Since 2005, after a decent enough harvest, the regime sought to take control of burgeoning markets, redirect grain supplies through the public distribution system and get people back to their work units. First men were banned from selling in the markets, and more recently women under 50 too. The attempt at control has been only partly successful.
The state manufacturing economy has officially stayed aloof from the new market economy, though parts of the regime have proved opportunistic. For instance, railways are the major conduits for the new trade, and railway stations often serve as lively markets. Rather than clamp down on them, railway staff and police take a cut. The armed forces, too, have leapt into the black market: after all, they have the transport, the personnel and the weaponry to enforce a protection racket. This may be profitable for the state’s agents, but it hardly reinforces their moral authority. A Western diplomat recounts seeing a group taking a sofa up a subway escalator in Pyongyang to sell on the street. Guards were bawling at them to get out of the way, but nobody paid the slightest attention.
It all adds up, reckons Mr Lankov (whose life in the former Soviet Union informs his view of changes in North Korea), to something of consequence: North Korea is no longer the ruthless Stalinist state it was, but a shoddy, corrupt little tyranny. And now the people know it.
Special Report on The Koreas: Reformed Characters
THE KOREAS
Reformed characters
Sep 25th 2008
From The Economist print edition
The chaebol have mostly learnt their lesson, but some lapses continue
THE rapid international rise of companies such as Samsung Electronics and LGE underlines a sea change in South Korea’s chaebol in just a decade. Before the Asian financial crisis the leading 50-odd chaebol were heavily indebted. With the help of cheap credit they had been able to get into any business that took their—or the government’s—fancy. After the crisis, about half the chaebol went to the wall; at the time, Daewoo’s collapse was the biggest corporate bankruptcy in history. The remainder were forced to shed hundreds of businesses or divisions in order to keep afloat and concentrate on what they did best. Those that learnt the lesson have done very, very well.
Alamy
Now with added transparencyMany of the changes have gone deep. After the crisis, foreign investors were welcomed, and now around half of the shares of Samsung Electronics and LGE are foreign-owned. South Korea made a vigorous attempt to improve corporate governance, increasing the rights of minority shareholders, boosting the role of outside directors, punishing improper disclosure and requiring the chaebol to publish consolidated financial statements. Shareholders may now, at least in theory, pursue class-action suits against the country’s biggest companies.
The previous two progressive administrations, less enamoured of big business than the current one, also took aim at the dominance of the biggest chaebol and their controlling families. By putting a ceiling on shareholdings in other companies held by chaebol-related firms, the Korea Fair Trade Commission (KFTC) hoped to cut through the rat’s nest of cross-shareholdings through which the founding families typically exercise control. The KFTC argued that the complex structures discouraged transparency, disadvantaged minority shareholders and raised the risk that bankruptcy in an affiliate might bring down the whole group.
In practice the new rules were hardly draconian. Exemptions were made for chaebol that had good internal monitoring systems or that formed a holding-company structure. Moreover, no South Korean government appears able to resist the temptation to use the chaebol for policy ends. Some of the biggest ones were exempted from the ceilings on outside shareholdings because they were giving support to Roh Moo-hyun’s favourite initiatives, such as investing in sectors designated as “growth engines”, promising to help build the “enterprise cities” that Mr Roh hoped would spread growth to the regions, or even attempting to do business with North Korea. As a result, the founding families of large business groups, using circular chains of shareholdings, continue to exercise control even though, says the OECD, they hold an average of only 6% of their group’s shares.
In almost any other OECD country this would be a scandal. In South Korea such foibles are too easily tolerated. Moreover, the chaebol’s ruling class displays an extraordinary degree of delinquent behaviour, and only rarely does it suffer the consequences, as it did in the case of Kim Woo-choong and Daewoo’s collapse.
Still behaving badly
A roster of recent misdemeanours illustrates the point. Last year Kim Seung-youn, the chairman of Hanwha, an explosives, construction and insurance group, confessed to going to a bar and, helped by his goons, beating up the staff. He said it was in retaliation for his own son having been hurt in a scuffle. Last year, too, the chairman of Hyundai Motor (and son of Hyundai’s founder), the world’s fifth-biggest carmaker, was convicted of embezzling $90m from his company. In 2003 the head of SK Group, a telecoms, oil-refining and construction conglomerate, was convicted of illegal share swaps designed to keep the group in family control. All three men were pardoned by President Lee Myung-bak on South Korea’s national day in August. Only Mr Kim served any time in jail.
The biggest case concerns the Samsung Group, South Korea’s largest, and its recent chairman, 66-year-old Lee Gun-hee. Samsung has long been accused of corrupt practices: Mr Lee was convicted of political bribery in the 1990s, though escaped without penalties. In April he was charged with tax evasion and breach of trust. But more serious allegations of bribery were dropped—even though he had been fingered by Samsung’s former chief lawyer, who spoke of a huge slush fund.
Mr Lee has also been charged with transferring control to his 40-year-old son and heir, Jay Y. Lee, by arranging for Samsung affiliates to sell shares to the younger Mr Lee at artificially low prices. After the charges he resigned, on live television, “to take legal and moral responsibility”. Yet though Mr Lee technically faces a life sentence, few believe he will spend much, if any, time in jail. Nine other Samsung officials have been charged, but none has been detained—partly, the government says, out of concern that the economy might be harmed. Although Mr Lee is no longer chairman, Samsung executives in private talk as though he were still running the group.
How do the chaebol families get away with it? Many of them grew from black markets, smuggling and other rackets that thrived after the Korean war in the early 1950s, thanks to vast amounts of American aid and military spending, and to the policies of import substitution favoured by South Korea’s strongman, Syngman Rhee. When Park Chung-hee seized power in 1961, the junta marched many of the racketeers through Seoul wearing dunce caps and placards with slogans such as “I am a corrupt swine”. As Mr Cumings recounts, it was Lee Gun-hee’s father, Lee Byung-chol, who proposed to Park that the swine seek foreign capital and equipment to launch the South Korean economy. Park called in ten of the leading businessmen and agreed not to jail them if they invested their “fines” in new industries that would sell to foreign markets.
The rest is history. To this day chaebol families are more admired for their economic contribution than reviled for their criminal propensities, which are often viewed as the foibles of a ruling aristocracy. The chaebol families are the closest thing South Koreans have to royalty. The clans intermarry and their shenanigans fill the gossip pages, as well as providing much of the inspiration for the television soap operas of the “Korean wave”—yet another South Korean export hit.
Reformed characters
Sep 25th 2008
From The Economist print edition
The chaebol have mostly learnt their lesson, but some lapses continue
THE rapid international rise of companies such as Samsung Electronics and LGE underlines a sea change in South Korea’s chaebol in just a decade. Before the Asian financial crisis the leading 50-odd chaebol were heavily indebted. With the help of cheap credit they had been able to get into any business that took their—or the government’s—fancy. After the crisis, about half the chaebol went to the wall; at the time, Daewoo’s collapse was the biggest corporate bankruptcy in history. The remainder were forced to shed hundreds of businesses or divisions in order to keep afloat and concentrate on what they did best. Those that learnt the lesson have done very, very well.
Alamy
Now with added transparencyMany of the changes have gone deep. After the crisis, foreign investors were welcomed, and now around half of the shares of Samsung Electronics and LGE are foreign-owned. South Korea made a vigorous attempt to improve corporate governance, increasing the rights of minority shareholders, boosting the role of outside directors, punishing improper disclosure and requiring the chaebol to publish consolidated financial statements. Shareholders may now, at least in theory, pursue class-action suits against the country’s biggest companies.
The previous two progressive administrations, less enamoured of big business than the current one, also took aim at the dominance of the biggest chaebol and their controlling families. By putting a ceiling on shareholdings in other companies held by chaebol-related firms, the Korea Fair Trade Commission (KFTC) hoped to cut through the rat’s nest of cross-shareholdings through which the founding families typically exercise control. The KFTC argued that the complex structures discouraged transparency, disadvantaged minority shareholders and raised the risk that bankruptcy in an affiliate might bring down the whole group.
In practice the new rules were hardly draconian. Exemptions were made for chaebol that had good internal monitoring systems or that formed a holding-company structure. Moreover, no South Korean government appears able to resist the temptation to use the chaebol for policy ends. Some of the biggest ones were exempted from the ceilings on outside shareholdings because they were giving support to Roh Moo-hyun’s favourite initiatives, such as investing in sectors designated as “growth engines”, promising to help build the “enterprise cities” that Mr Roh hoped would spread growth to the regions, or even attempting to do business with North Korea. As a result, the founding families of large business groups, using circular chains of shareholdings, continue to exercise control even though, says the OECD, they hold an average of only 6% of their group’s shares.
In almost any other OECD country this would be a scandal. In South Korea such foibles are too easily tolerated. Moreover, the chaebol’s ruling class displays an extraordinary degree of delinquent behaviour, and only rarely does it suffer the consequences, as it did in the case of Kim Woo-choong and Daewoo’s collapse.
Still behaving badly
A roster of recent misdemeanours illustrates the point. Last year Kim Seung-youn, the chairman of Hanwha, an explosives, construction and insurance group, confessed to going to a bar and, helped by his goons, beating up the staff. He said it was in retaliation for his own son having been hurt in a scuffle. Last year, too, the chairman of Hyundai Motor (and son of Hyundai’s founder), the world’s fifth-biggest carmaker, was convicted of embezzling $90m from his company. In 2003 the head of SK Group, a telecoms, oil-refining and construction conglomerate, was convicted of illegal share swaps designed to keep the group in family control. All three men were pardoned by President Lee Myung-bak on South Korea’s national day in August. Only Mr Kim served any time in jail.
The biggest case concerns the Samsung Group, South Korea’s largest, and its recent chairman, 66-year-old Lee Gun-hee. Samsung has long been accused of corrupt practices: Mr Lee was convicted of political bribery in the 1990s, though escaped without penalties. In April he was charged with tax evasion and breach of trust. But more serious allegations of bribery were dropped—even though he had been fingered by Samsung’s former chief lawyer, who spoke of a huge slush fund.
Mr Lee has also been charged with transferring control to his 40-year-old son and heir, Jay Y. Lee, by arranging for Samsung affiliates to sell shares to the younger Mr Lee at artificially low prices. After the charges he resigned, on live television, “to take legal and moral responsibility”. Yet though Mr Lee technically faces a life sentence, few believe he will spend much, if any, time in jail. Nine other Samsung officials have been charged, but none has been detained—partly, the government says, out of concern that the economy might be harmed. Although Mr Lee is no longer chairman, Samsung executives in private talk as though he were still running the group.
How do the chaebol families get away with it? Many of them grew from black markets, smuggling and other rackets that thrived after the Korean war in the early 1950s, thanks to vast amounts of American aid and military spending, and to the policies of import substitution favoured by South Korea’s strongman, Syngman Rhee. When Park Chung-hee seized power in 1961, the junta marched many of the racketeers through Seoul wearing dunce caps and placards with slogans such as “I am a corrupt swine”. As Mr Cumings recounts, it was Lee Gun-hee’s father, Lee Byung-chol, who proposed to Park that the swine seek foreign capital and equipment to launch the South Korean economy. Park called in ten of the leading businessmen and agreed not to jail them if they invested their “fines” in new industries that would sell to foreign markets.
The rest is history. To this day chaebol families are more admired for their economic contribution than reviled for their criminal propensities, which are often viewed as the foibles of a ruling aristocracy. The chaebol families are the closest thing South Koreans have to royalty. The clans intermarry and their shenanigans fill the gossip pages, as well as providing much of the inspiration for the television soap operas of the “Korean wave”—yet another South Korean export hit.
Special Report on The Koreas: The Export Juggernaut
THE KOREAS
The export juggernaut
Sep 25th 2008
From The Economist print edition
Heavy industry is South Korea’s sweet spot
JUST as South Korea, in historical terms, sees itself as a little thing among overbearing powers, so many of its businessmen and policymakers now feel that the country’s export machine, the thumping heart of the economy, is being squeezed by two giants. On one side is Japan, whose high technology and sophisticated production give it an edge in exports. On the other is China, whose low wages allow it to compete ruthlessly on cost, even as it learns to make ever more complex products. What, South Koreans wonder, is their economy’s place in Asia’s future?
They may be overreacting. Certainly, China’s rise up the production chain has been swift and, in some cases, ferocious; and the South Korean won has been the strongest of the region’s currencies since Asian growth took off earlier this decade, even if it has softened somewhat this year. Yet South Korea has responded admirably to increased competition and a stronger currency, notching up double-digit export growth for the past five years. It is now the world’s tenth-biggest exporter, and apart from a cyclical slump in Asian export growth that appears to be caused by America’s and Europe’s sharply slowing economies, there is plenty of reason to think that its success can continue for a while.
To date, China has proved a boon for South Korea’s exports. Having overtaken America in 2003 to become South Korea’s largest trade partner, it runs a bilateral trade deficit thanks to large imports of capital equipment and parts from South Korea. This growing bilateral trade reflects the knitting-together of production networks all over Asia, centred on China. China’s share of South Korea’s total exports of unfinished goods—that is, parts—rose from just 1% in 1992 to 27% in 2004, according to the IMF. Now China’s bilateral deficit is narrowing as South Korea imports more intermediate goods from there. Yet much of this is the result of South Korean investment in China.
South Korean manufacturers are still improving their own competitiveness. Partly thanks to modest wage growth, labour productivity in manufacturing has grown by an average of 10% a year since 2002. Indeed, the stronger won appears merely to be the flip side of that productivity growth. Currency strength, certainly, is squeezing profits in some areas, notably for small- and medium-sized businesses that are less efficient than larger firms, as well as for the big carmakers.
South Korean exports have not only grown but become more sophisticated as production has shifted out of low-value-added goods such as textiles that rely mainly on cheap labour. Korea’s spending on research and development is equivalent to nearly 3% of GDP a year, one of the highest rates among developed economies. According to the IMF, high-value-added products—things like cars, consumer electronics and top-of-the-range ships—now make up half of Korea’s exports, up from a quarter in 1990.
South Korea today is more of a whale than a shrimp in several global industries. In memory chips it is home to the world’s biggest maker of flash memory (Samsung Electronics) and the two biggest makers of DRAM chips (Samsung and Hynix). It has the third-largest steelmaker (POSCO), the fifth-largest carmaker (Hyundai Motor), and the world’s three biggest shipbuilders (Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering, or DSME). It is a leading producer of mobile handsets and of LCD screens for televisions, computers and much more.
Heavy industry, as Shaun Cochran of CLSA, a brokerage, puts it, is the country’s “sweet spot”. Take shipbuilding. As Hyundai’s founder, Chong Ju-yung, was boasting posthumously in those television advertisements this summer, there was no shipbuilding industry in South Korea until the 1960s. When the country’s dictator, Park Chung-hee, summoned Chong and told him to produce oil tankers, for which there was a sudden demand, Chong went straight to Greece and scooped up two contracts to build 260,000-tonne tankers, promising his customers delivery within two years, sooner than anyone else. He had neglected to mention that at that moment he lacked even a shipyard. He then waved the order in front of Barclays Bank, which lent him enough money to build a modern yard. No one in South Korea knew how to do that, so Chong dispatched 60 engineers to Scotland to learn. The ships were delivered before the deadline. This famous story, concedes Bruce Cumings of the University of Chicago in a refreshingly revisionist modern history, “Korea’s Place in the Sun”, may be apocryphal in its details, yet it has a strong whiff of truth about it.
The shipping forecast
Korea’s three big shipbuilders are thriving. Competing fiercely against each other, though by unwritten agreement not for staff, their order books are nearly full up to 2013. South Korea has two-fifths of the world market in new ships (which account for 8% of its exports), whereas China and Japan have to make do with a quarter-share each.
Seen from a helicopter, the vast DSME yard at Okpo Kojé island, near the south-eastern industrial port of Busan, looks impressive: great walls of steel rise up from the dry docks as enormous gantries offer up bows and other hull sections to assemble the world’s biggest container ships, liquefied natural gas (LNG) carriers and giant floating depots for storing and processing offshore oil and gas. On the ground, all notions of human scale are lost.
OnAsia
The stuff of legendsDSME’s chief executive, Nam Sang-tae, says that China is not a chief competitor, despite the state aid from which its shipbuilding industry has benefited. It cannot match South Korea for prompt delivery, and although Chinese shipyards offer low costs, they turn out relatively low-tech vessels, such as bulk carriers and run-of-the-mill oil tankers. South Korean yards are more interested in building, say, high-tech LNG carriers, which keep their cargo at -163ºC. A new type which Daewoo Shipbuilding was the first to build regasifies the methane before it is piped ashore. The design and manufacture of deep-sea rigs, much in demand now that many oil and gasfields on the world’s continental shelves have been exploited, is even more challenging than building advanced ships, and offers higher profit margins; indeed DSME wants to operate as well as build specialised offshore oil rigs because oil companies pay such lucrative fees.
All the South Korean shipbuilders throw a lot of money at research and development. Each has a large design institute, and they generously support university engineering faculties.
Mr Nam is also sanguine about the effect of shipping’s notorious boom-and-bust cycles on his business. Patterns of global logistics are changing, he says, spurred by a growth in world trade and a China-led hunger for resources, so more ships are needed overall, not just new kinds. Climate change, Mr Nam says, offers further opportunities. The potential viability of Arctic sea routes in future is prompting a demand for vessels strengthened to withstand ice. Another growth area is “winterising” oil rigs to cope with drilling in cold climates. Pressure for cleaner transport also helps (bunker fuel used by most of the world’s shipping is filthy).
Okpo is a company town where DSME has its own hospital, cinemas and international school for the families of overseas clients who come to keep an eye on their ships under construction. There are dormitories for single young men and women respectively, one on each side of the bay. Internet forums host thriving dating and matchmaking services, and newly married couples get to move out of the dormitories into their own flats. The town has an income per person of over $30,000, the second-highest in the country.
Iron constitution
Daewoo Shipbuilding was nationalised when the Daewoo chaebol of which it formed a part continued to pile up debts even when the financial crisis was over, entering new businesses with what turned out to be criminal insouciance. Kim Woo-choong, the chaebol’s founder, eventually admitted to accounting fraud and embezzlement worth over $30 billion, and in 2006 was sentenced to ten years in jail before being pardoned. Yet the company’s shipbuilding arm has thrived.
The government has floated a minority of DSME’s shares on the stockmarket. Later this year it is due to sell the controlling stake to one of four prospective buyers. Among the bidders is POSCO, the shipbuilder’s main steel supplier, which itself was started from scratch by the state in the late 1960s, using $120m of war reparations paid after Japan and South Korea normalised their relations. Foreign investors and development experts in Washington, DC, had given warning that a dirt-poor country like South Korea should not aim for self-sufficiency in steel. Yet the company, which was privatised after the 1997 financial crisis, has become a symbol of national pride. POSCO fed the country’s industrial beast and is now, by several measures, the world’s most efficient steel producer.
South Korea’s industrial structure is unusual, says POSCO’s boss, Lee Ku-taek. Its steel consumption per person is the fourth-highest in the world, yet most of the steel eventually goes overseas: nearly 100% in the case of POSCO’s shipbuilding clients, and 60% in the case of Korean carmakers. The steelmaker also serves South Korean construction companies abroad, for example in Dubai. Its customers’ eagerness to conquer fiercely competitive markets overseas may have kept POSCO lean. “Steel’s competitiveness here has made South Korea what it is,” says Mr Lee, “and I’m hugely proud of that.”
Now that he is hoping to buy DSME he sees the chance to double the shipbuilder’s value, which the stockmarket currently puts at $6 billion, by concentrating on complex products such as oil rigs. In shipbuilding, Mr Lee points out, the less you need to weld, the more you save. POSCO, he says, can tailor plates to specific ships, making the product much cheaper.
After two decades of building up its domestic market, says Mr Lee, POSCO will spend the next two decades establishing a powerful presence overseas, through greenfield sites and acquisitions, including in mines that can secure the company’s supply of ore. It will be following the example of South Korea’s consumer-electronics companies, which sometimes used almost military methods for their push overseas. At LG Electronics (LGE) they tell a story of a country manager who was dropped into Algeria during the civil war when other multinationals kept away, put off by the risk. When he emerged several years later, he had built up a multimillion dollar franchise.
The country’s biggest successes in consumer electronics are LGE and Samsung Electronics. Only a decade ago consumers abroad hardly knew them, and if they did it was as makers of cheap knock-offs of classier brands, notably Sony. Today they have annual sales of $43 billion and $92 billion respectively, along with a reputation for making hip and sophisticated mobile handsets, MP3 players, televisions, digital cameras and more. LGE, for instance, is the world’s largest maker of plasma televisions; Samsung has recently overtaken Motorola to become the second-biggest maker of mobile phones. Samsung’s stockmarket capitalisation, at over $80 billion, has raced past Sony’s and is second only to Apple among consumer-electronics companies. Samsung Electronics now makes the televisions on which Sony sticks its name badge.
All we need is love
Dermot Boden, LGE’s new chief marketing officer, explains that much still needs to be done to realise the company’s global ambitions, but his appointment, as a non-Korean, indicates the direction in which the best South Korean companies are going. South Korean companies, like Japanese ones, tend to recruit managers internally, rewarding length of service and often putting generalists into positions calling for special expertise. Exceptionally, LGE this year brought five overseas specialists to form part of the 20-strong top team of executives, among them Mr Boden, an Irishman who had earned a reputation for building consumer-goods brands.
Branding, says Mr Boden, is what LGE needs now. The company has superb products and offers excellent service. (It needs to in South Korea, where impatient customers put down the phone if it is not answered within ten seconds.) Yet emotional attachment to LGE’s products, Mr Boden points out, remains low. Products come and go: a new mobile-phone model, for instance, is typically on sale for only about six months. It is a brand that encourages the customer to keep coming back—and if he likes LG mobile phones, he might consider buying, say, an LG television. Samsung has already gone down this road, raising its profile by sponsoring the Olympics and Chelsea football team.
The export juggernaut
Sep 25th 2008
From The Economist print edition
Heavy industry is South Korea’s sweet spot
JUST as South Korea, in historical terms, sees itself as a little thing among overbearing powers, so many of its businessmen and policymakers now feel that the country’s export machine, the thumping heart of the economy, is being squeezed by two giants. On one side is Japan, whose high technology and sophisticated production give it an edge in exports. On the other is China, whose low wages allow it to compete ruthlessly on cost, even as it learns to make ever more complex products. What, South Koreans wonder, is their economy’s place in Asia’s future?
They may be overreacting. Certainly, China’s rise up the production chain has been swift and, in some cases, ferocious; and the South Korean won has been the strongest of the region’s currencies since Asian growth took off earlier this decade, even if it has softened somewhat this year. Yet South Korea has responded admirably to increased competition and a stronger currency, notching up double-digit export growth for the past five years. It is now the world’s tenth-biggest exporter, and apart from a cyclical slump in Asian export growth that appears to be caused by America’s and Europe’s sharply slowing economies, there is plenty of reason to think that its success can continue for a while.
To date, China has proved a boon for South Korea’s exports. Having overtaken America in 2003 to become South Korea’s largest trade partner, it runs a bilateral trade deficit thanks to large imports of capital equipment and parts from South Korea. This growing bilateral trade reflects the knitting-together of production networks all over Asia, centred on China. China’s share of South Korea’s total exports of unfinished goods—that is, parts—rose from just 1% in 1992 to 27% in 2004, according to the IMF. Now China’s bilateral deficit is narrowing as South Korea imports more intermediate goods from there. Yet much of this is the result of South Korean investment in China.
South Korean manufacturers are still improving their own competitiveness. Partly thanks to modest wage growth, labour productivity in manufacturing has grown by an average of 10% a year since 2002. Indeed, the stronger won appears merely to be the flip side of that productivity growth. Currency strength, certainly, is squeezing profits in some areas, notably for small- and medium-sized businesses that are less efficient than larger firms, as well as for the big carmakers.
South Korean exports have not only grown but become more sophisticated as production has shifted out of low-value-added goods such as textiles that rely mainly on cheap labour. Korea’s spending on research and development is equivalent to nearly 3% of GDP a year, one of the highest rates among developed economies. According to the IMF, high-value-added products—things like cars, consumer electronics and top-of-the-range ships—now make up half of Korea’s exports, up from a quarter in 1990.
South Korea today is more of a whale than a shrimp in several global industries. In memory chips it is home to the world’s biggest maker of flash memory (Samsung Electronics) and the two biggest makers of DRAM chips (Samsung and Hynix). It has the third-largest steelmaker (POSCO), the fifth-largest carmaker (Hyundai Motor), and the world’s three biggest shipbuilders (Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering, or DSME). It is a leading producer of mobile handsets and of LCD screens for televisions, computers and much more.
Heavy industry, as Shaun Cochran of CLSA, a brokerage, puts it, is the country’s “sweet spot”. Take shipbuilding. As Hyundai’s founder, Chong Ju-yung, was boasting posthumously in those television advertisements this summer, there was no shipbuilding industry in South Korea until the 1960s. When the country’s dictator, Park Chung-hee, summoned Chong and told him to produce oil tankers, for which there was a sudden demand, Chong went straight to Greece and scooped up two contracts to build 260,000-tonne tankers, promising his customers delivery within two years, sooner than anyone else. He had neglected to mention that at that moment he lacked even a shipyard. He then waved the order in front of Barclays Bank, which lent him enough money to build a modern yard. No one in South Korea knew how to do that, so Chong dispatched 60 engineers to Scotland to learn. The ships were delivered before the deadline. This famous story, concedes Bruce Cumings of the University of Chicago in a refreshingly revisionist modern history, “Korea’s Place in the Sun”, may be apocryphal in its details, yet it has a strong whiff of truth about it.
The shipping forecast
Korea’s three big shipbuilders are thriving. Competing fiercely against each other, though by unwritten agreement not for staff, their order books are nearly full up to 2013. South Korea has two-fifths of the world market in new ships (which account for 8% of its exports), whereas China and Japan have to make do with a quarter-share each.
Seen from a helicopter, the vast DSME yard at Okpo Kojé island, near the south-eastern industrial port of Busan, looks impressive: great walls of steel rise up from the dry docks as enormous gantries offer up bows and other hull sections to assemble the world’s biggest container ships, liquefied natural gas (LNG) carriers and giant floating depots for storing and processing offshore oil and gas. On the ground, all notions of human scale are lost.
OnAsia
The stuff of legendsDSME’s chief executive, Nam Sang-tae, says that China is not a chief competitor, despite the state aid from which its shipbuilding industry has benefited. It cannot match South Korea for prompt delivery, and although Chinese shipyards offer low costs, they turn out relatively low-tech vessels, such as bulk carriers and run-of-the-mill oil tankers. South Korean yards are more interested in building, say, high-tech LNG carriers, which keep their cargo at -163ºC. A new type which Daewoo Shipbuilding was the first to build regasifies the methane before it is piped ashore. The design and manufacture of deep-sea rigs, much in demand now that many oil and gasfields on the world’s continental shelves have been exploited, is even more challenging than building advanced ships, and offers higher profit margins; indeed DSME wants to operate as well as build specialised offshore oil rigs because oil companies pay such lucrative fees.
All the South Korean shipbuilders throw a lot of money at research and development. Each has a large design institute, and they generously support university engineering faculties.
Mr Nam is also sanguine about the effect of shipping’s notorious boom-and-bust cycles on his business. Patterns of global logistics are changing, he says, spurred by a growth in world trade and a China-led hunger for resources, so more ships are needed overall, not just new kinds. Climate change, Mr Nam says, offers further opportunities. The potential viability of Arctic sea routes in future is prompting a demand for vessels strengthened to withstand ice. Another growth area is “winterising” oil rigs to cope with drilling in cold climates. Pressure for cleaner transport also helps (bunker fuel used by most of the world’s shipping is filthy).
Okpo is a company town where DSME has its own hospital, cinemas and international school for the families of overseas clients who come to keep an eye on their ships under construction. There are dormitories for single young men and women respectively, one on each side of the bay. Internet forums host thriving dating and matchmaking services, and newly married couples get to move out of the dormitories into their own flats. The town has an income per person of over $30,000, the second-highest in the country.
Iron constitution
Daewoo Shipbuilding was nationalised when the Daewoo chaebol of which it formed a part continued to pile up debts even when the financial crisis was over, entering new businesses with what turned out to be criminal insouciance. Kim Woo-choong, the chaebol’s founder, eventually admitted to accounting fraud and embezzlement worth over $30 billion, and in 2006 was sentenced to ten years in jail before being pardoned. Yet the company’s shipbuilding arm has thrived.
The government has floated a minority of DSME’s shares on the stockmarket. Later this year it is due to sell the controlling stake to one of four prospective buyers. Among the bidders is POSCO, the shipbuilder’s main steel supplier, which itself was started from scratch by the state in the late 1960s, using $120m of war reparations paid after Japan and South Korea normalised their relations. Foreign investors and development experts in Washington, DC, had given warning that a dirt-poor country like South Korea should not aim for self-sufficiency in steel. Yet the company, which was privatised after the 1997 financial crisis, has become a symbol of national pride. POSCO fed the country’s industrial beast and is now, by several measures, the world’s most efficient steel producer.
South Korea’s industrial structure is unusual, says POSCO’s boss, Lee Ku-taek. Its steel consumption per person is the fourth-highest in the world, yet most of the steel eventually goes overseas: nearly 100% in the case of POSCO’s shipbuilding clients, and 60% in the case of Korean carmakers. The steelmaker also serves South Korean construction companies abroad, for example in Dubai. Its customers’ eagerness to conquer fiercely competitive markets overseas may have kept POSCO lean. “Steel’s competitiveness here has made South Korea what it is,” says Mr Lee, “and I’m hugely proud of that.”
Now that he is hoping to buy DSME he sees the chance to double the shipbuilder’s value, which the stockmarket currently puts at $6 billion, by concentrating on complex products such as oil rigs. In shipbuilding, Mr Lee points out, the less you need to weld, the more you save. POSCO, he says, can tailor plates to specific ships, making the product much cheaper.
After two decades of building up its domestic market, says Mr Lee, POSCO will spend the next two decades establishing a powerful presence overseas, through greenfield sites and acquisitions, including in mines that can secure the company’s supply of ore. It will be following the example of South Korea’s consumer-electronics companies, which sometimes used almost military methods for their push overseas. At LG Electronics (LGE) they tell a story of a country manager who was dropped into Algeria during the civil war when other multinationals kept away, put off by the risk. When he emerged several years later, he had built up a multimillion dollar franchise.
The country’s biggest successes in consumer electronics are LGE and Samsung Electronics. Only a decade ago consumers abroad hardly knew them, and if they did it was as makers of cheap knock-offs of classier brands, notably Sony. Today they have annual sales of $43 billion and $92 billion respectively, along with a reputation for making hip and sophisticated mobile handsets, MP3 players, televisions, digital cameras and more. LGE, for instance, is the world’s largest maker of plasma televisions; Samsung has recently overtaken Motorola to become the second-biggest maker of mobile phones. Samsung’s stockmarket capitalisation, at over $80 billion, has raced past Sony’s and is second only to Apple among consumer-electronics companies. Samsung Electronics now makes the televisions on which Sony sticks its name badge.
All we need is love
Dermot Boden, LGE’s new chief marketing officer, explains that much still needs to be done to realise the company’s global ambitions, but his appointment, as a non-Korean, indicates the direction in which the best South Korean companies are going. South Korean companies, like Japanese ones, tend to recruit managers internally, rewarding length of service and often putting generalists into positions calling for special expertise. Exceptionally, LGE this year brought five overseas specialists to form part of the 20-strong top team of executives, among them Mr Boden, an Irishman who had earned a reputation for building consumer-goods brands.
Branding, says Mr Boden, is what LGE needs now. The company has superb products and offers excellent service. (It needs to in South Korea, where impatient customers put down the phone if it is not answered within ten seconds.) Yet emotional attachment to LGE’s products, Mr Boden points out, remains low. Products come and go: a new mobile-phone model, for instance, is typically on sale for only about six months. It is a brand that encourages the customer to keep coming back—and if he likes LG mobile phones, he might consider buying, say, an LG television. Samsung has already gone down this road, raising its profile by sponsoring the Olympics and Chelsea football team.
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