19.02.2016 Author: Konstantin Asmolov

Closure of the Kaesong Complex – a Pity if it’s for Good

45345345South Korea’s government has decided to terminate cooperation with the North at the Kaesong Industrial Complex as of February 10. South Korea’s Minister for Unification, Hong Yong-pyo, made this announcement, indicating that this decision had been taken as part of countermeasures toward North Korea. Hong noted that the South Korean government did everything possible in Kaesong for the industrial complex according to international standards. Pyongyang, however, used the complex to achieve its own aims in building nuclear weapons and ballistic missiles. Therefore it became necessary to take more decisive and radical measures to pressure the North. Otherwise, continued development of Pyongyang’s nuclear and missile programs will threaten the security on the Korean peninsula and in northeast Asia.

As a reminder, the Kaesong Technopark has been in operation over 10 years as the largest economic collaboration project between the two Koreas: 124 small and medium-size businesses from South Korea, whose production lines employed 53,000 North Korean workers. The main benefit for the South was cheap labor. A Southeast Asian migrant worker at a similar textile plant in Seoul earns roughly 10-times more than a North Korean in Kaesong.

We will take a short detour to understand the history of the matter: in August 2000, the South Korean Corporation, Hyundai Assan, and North Korean authorities signed an agreement for the development of an industrial zone. This was during the time of nominally left rule, when South Korean corporations were trying to serve as a kind of “second path”, as part of the Sunshine Policy. Construction works began in June 2003, and in December 2004 the complex began to yield the first product specimens.

By 2007, the complex’s overall income reached 100 million dollars, after which the assumption spread from someplace among “experts” that the Kaesong Complex specifically was the main supplier of hard currency, vital for the North Korean regime’s existence. In reality, even then this was not really the case – North Korean “temp workers” in China and Russia, and also revenue from sales of valuable mineral resources to China provided significantly more. However, the “main cash cow” statement went viral in analytical columns.

Just as widespread was the notion that the complex was a money losing project from the start, which the South Korean side had been supporting exclusively to demonstrate effective “North-South” cooperation.

When the conservatives came to power, the general cooling of relations between the Koreas impacted the project, and in March 2008, the North demanded that representatives of South Korean authorities leave the complex. Eleven civil servants were forced to do so. In June 2009, North Korea demanded 500 million dollars for use of the land, and also that the workers receive 300 dollars per month in salary (the level of low-paying jobs in South Korea). The South refused, but for the first time a few companies ceased operations in the complex.

In May 2010, given the situation after the sinking of the corvette Cheonan, sanctions affected the complex from the southern side. In particular, any attempts to invest in the complex and expand its infrastructure were forbidden. In 2013, with tensions escalating in connection with the North’s preceding nuclear test, North Korea responded to attempts to hurt it economically by “slamming the door shut”, and withdrew all personnel from the complex, after which many experts rushed to write the project off. The crisis lasted from April to September 2013, after which the complex resumed operation at the usual tempo. Nonetheless, based on results as of December 2013, output at the facilities of this industrial park reached 352.9 million dollars, which is slightly lower than the level of the corresponding period from the previous year, when that indicator was 364.2 million dollars. Afterward, however, difficulties arose periodically during operations, which, as a rule, were related more or less to labor reasons: in 2014, it was revealed that the South was paying overtime, not with money, but with cheap biscuits, and in another instance, Pyongyang demanded repairs to sewage pipes, through which water that flowed through purification structures on the Complex, was being piped to Kaesong’s residential sector.

In 2015, a certain crisis arose when North Korea unilaterally raised the minimum employee wage from 70.35 to 74 dollars per month (5.18%). Pennies, but the South Korean authorities were resolutely against the increase. Moreover, in this and previous instances, the South Korean press presented this as: the North is attempting to destroy this valuable object of North-South dialogue, but we will stand up for it and defend our businessmen’s interests. Even if the businessmen themselves had demonstrated willingness to accept North Korea’s conditions, the authorities would have demanded inflexibility from them. Both sides flexed their muscles, but eventually agreed to a five percent increase.
And then, in February 2016, the South Korean side suspended operations at the complex. The point is not so much that the South Korean authorities made a 180-degree change to their rhetoric regarding the development of North-South relations, but rather that, the author feels, they made a really bad mistake. In the first place, they adhered once again to the fundamentally counterproductive policy of sanctions, and poured lots of gas on the fire of North-South escalation. It was no coincidence that the next day, the North Korean side ordered that all the South Korean citizens leave the Kaesong Industrial Complex immediately, announced its closure, froze the property, equipment, and finished products that belonged to South Korean companies. The territory of the complex was declared a forbidden zone and secured military site. At the same time a cutoff of communication channels with the South in the area of Panmunjom and along the militarized line was announced, which was so difficult to achieve at the end of the August 2015 escalation.

Secondly, from the investment point of view, similar actions demonstrate that not only the North may suddenly violate agreements and sacrifice economic interests to political trends, but also the South. Moreover, it turns out that the decision to terminate work at the complex was taken exclusively within the political framework, and under the banner of “we can’t think up anything serious, but must still do something not to look like weaklings!”

Thirdly, an additional split has appeared in the relationship between the authorities and medium and small businesses. It is no accident that this decision has already met assorted responses by representatives of various political parties. If the leader of the Saenuri ruling party, Kim Moo-sung, considered termination of the complex’s operations as a necessary decision by the government, and expressed the need to introduce harsher and more effective sanctions toward Pyongyang, then the leader of the Toburo parliamentary fraction of the opposition Democratic party, Lee Young-ho, criticized termination of operations, noting that the Kaesong Industrial Complex served as a connecting bridge toward unification of the nation and, in general, an industrial zone brings greater benefits, not to North Korea, but to domestic companies. Therefore, closure of the complex is not an instrument for sanctions against North Korea, as long as it affects South Korean businesses negatively.

In the fourth place, North Korea will not suffer from the project’s closure, but the South will lose a very profitable and useful space. A complete shutoff of oxygen to the North Korean regime will not happen in any case. But South Korea is decreasing opportunities for economic levers in North-South relations (penetration of North Korean markets, tying the North to the more economically developed South, and creation of a layer of people, who would be economically interested in the development of relations between the Koreas), and in reality handing these spaces over to China, which is strengthening its status as North Korea’s main trading partner. The situation in 2010 is repeating itself when, thanks to sanctions, all sites that could have been used for North-South cooperation, turned out to be occupied by Chinese businessmen.

Therefore, the author is left with a hope that, like in 2013, the complex will eventually start up, proving that the North and South Koreans may work together, and economic benefit will in the end prove stronger than political trends.

Konstantin Asmolov, Konstantin Asmolov, Ph.D (History), Chief Research Fellow of the Center for Korean Studies, Institute of Far Eastern Studies, Russian Academy of Sciences, exclusively for the online magazine “New Eastern Outlook.“

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