One can find few nations today whose experiences come close to paralleling the Republic of Korea's economic, social and political development over the past four decades. The success story is well known: rising from the ashes of war, Korea has passed the $10,000 per capita GNP level, is a member of the OECD and, once a recipient of large amounts of international assistance, now has its own foreign aid programs. Despite the current economic slowdown, Koreans can take pride in having the world's 11th largest economy. All of this has been accomplished in the face of a very formidable challenge: the serious and continuing military threat posed by communist North Korea.

For quite a few years now, Korea has been one of America's most productive economic allies. Korea's liberalization measures in recent years have created more opportunities for foreign companies here and at the same time challenged Korean companies to become more competitive abroad. Korea should continue and even expand its liberalization reforms. This is particularly important in the automotive, telecommunications and pharmaceutical sectors. The financial sector is long-overdue for fundamental reform. Korea's regulatory environment remains difficult, to say the least. What makes Korea an attractive place for foreign investment? American executives will consider such factors as labor and land costs, interest rates and government regulations. These costs and rates are high, and the regulatory environment often burdensome. As our host, Governor You, put it in an International Herald Tribune interview late last year, "Korea as a whole has not been friendly to foreign investment."

I needn't lecture anyone here on the strong competition that Korea faces from rapid-growth economies in Southeast Asia and, of course, China. Those markets are now dominating labor-intensive industries which were the engines of growth for Korea in the 70s and 80s. Korea is making the difficult transition into a more advanced economy, one specializing in services and high-technology manufacturing. For Korea to secure and maintain competitiveness in these sectors, alliances with cutting edge foreign companies will be critical. Thus, Korea should do its utmost to open its doors to these international firms.

In this regard, Governor You deserves attention and support for the special emphasis he has placed on business development in North Cholla Province. This region of Korea has lagged behind others in terms of industrialization. From the beginning of his tenure, Governor You aggressively has pursued economic development, with a strong emphasis on attracting foreign investment. He has traveled to the U.S. on several occasions, for instance, to personally urge American firms to consider investment in this province. His long-range planning is also most interesting. His Administration is promoting the Saemangum (say-mon-gum) Comprehensive Development Project for the port city of Kunsan. Over the next six years, this $2.1 billion project will produce a new international airport, a large new port and a high-tech industrial park. Governor You is pushing the central government to offer attractive incentives to foreign firms interested in the project, vowing to "put this province on the international map." I wish you all the best in this endeavor, Governor You.

Finally, let me turn to security affairs. The US-Korea military alliance remains one tightly focused on the North Korean threat. The Heritage Foundation has been very vocal in the debate over America's North Korea policy. We have been constructive critics of the current Agreed Framework process. We have been critical in that we believe that the essential policy assumptions embodied in the October 1994 US-North Korea deal are seriously flawed. We have been constructive, on the other hand, since we have not tried to scuttle the deal but rather to improve it.

During talks with the North in 1993 and 1994, U.S. policy makers spoke of a "package deal" under which Pyongyang would reap substantial rewards for giving up its nuclear ambitions and pursuing a lasting peace on the peninsula. At that time, The Heritage Foundation, among others, supported this approach and called for a generous trade and aid package from the U.S., South Korea, Japan and other concerned parties in return for Pyongyang's cooperation. Instead, the Clinton Administration offered a power plant construction scheme. What the North desperately needs now is financial assistance and economic reform, not the prospect of enhanced electric power capabilities 10 years from now. What the U.S. urgently needs now is an unambiguous end to the North's nuclear threat and rapid tension reduction in Korea.

The structure of the Geneva deal should be changed to address these critical needs. While this will require careful diplomacy, there are no legal barriers to such action. After all, a recent US Government Accounting Office report to Congress found that the Agreed Framework is not legally binding or enforceable under either U.S. or international law. The study quotes State Department officials as admitting that the deal was structured in this manner since "the United States wanted the flexibility to respond to North Korea's policies and actions..." Now is the time to respond. Seoul, in close consultation with Washington, should take following steps:

• Begin discussions among South Korea, the US, Japan and other KEDO members of a substantial package of trade and aid offers to the North. A significant portion of the billions of dollars that have been pledged for the decade-long reactor construction project should be anted up now as leverage in negotiating with the North.

• As part of this package, and with the goal of sparking systemic North Korean reforms, Seoul and its allies should consider something resembling a "Peace Corps" program for North Korea. The North has enormous social and economic infrastructure revitalization needs, beginning with its agricultural sector. A consortium of concerned and interested nations should offer technical assistance in areas ranging from farming to health care, telecommunications, transportation, electric power generation and business.

• In return for a new package offer, call on the North to engage in serious, high-level peace talks with Seoul. The base-line for those talks should be the Basic Agreements that were ratified by the North and South Korean governments in 1992. These pacts were negotiated by the prime ministers of each side and outline very specific and practical steps toward easing political and military tensions. Pyongyang should also be pressed to initiate market-oriented reforms, starting with its agricultural sector. Washington, Seoul and their concerned allies should develop guidelines that peg delivery of aid and other benefits to the North with Pyongyang's cooperation with this process.

• Ongoing programs under the Agreed Framework, including the light water reactor construction project and fuel aid supplies, should remain in place for now but should also be linked with future positive steps by the North.

It is past time for the democratic allies to offer reasoned incentives to Pyongyang and at the same time press the North hard for substantive and rapid progress toward peace and stability on the Korean peninsula. Formulating and successfully implementing such policies will take time - perhaps many months. But, the alternatives are less attractive. Current policies have done little more than preserve a status quo which does not go far enough in promoting the critical national security interests that are at stake for Seoul, Washington and for all of Northeast Asia. The current meager amounts of assistance flowing to North Korea will neither stop its economic free fall nor convince Pyongyang to take the deliberate steps necessary to achieve lasting confidence building and tension reduction. Supplying appropriate and conditioned assistance to the North now could not only expedite the quest for peace and ease the burdens on suffering North Korean citizens but also promote systemic reforms and modest economic improvements in the North. This in turn could make eventual reunification less complex and less expensive.

1 Korea in the World Today, Roger Pearson, p. 7.