23.02.2016 Author: Konstantin Asmolov

Closing Down the Kaesong Industrial Complex: Economic Impact

34535345345Closure of the Kaesong Industrial Complex, is ongoing. At 11.53 p.m. local time, on February 11, the South cut off the electricity and water supply. This is quite important as not only the Complex but the nearby town was supplied in this way. In addition, on February 11, all the 280 South Korean nationals remaining in the technology park left the complex and successfully returned to their native country.

Everything else was left to the North: as the DPRK announced that the industrial complex territory was a prohibited territory and a secured military facility, the property of the companies working in Kaesong including the equipment, materials and products, was “frozen”. However, the items, which have already been produced and taken to the RK, will be still on sale: the special pavilion in the KINTEX International Exhibition Centre, exhibiting the products of South Korean companies working at Kaesong Industrial Complex, will continue working. That is due to the fact that most companies working in the complex are not well-known and work mostly to other manufacturer’s orders.

In this regard, the issue of compensations is a burning one. Those owners whose enterprises worked at Kaesong Industrial Complex are currently actively negotiating the issue of reimbursement of the damages and the provision of financial support with the leaders of the governing and opposition forces. The corresponding plan developed by the government, in its current state, is unable to cover all the losses suffered by the Kaesong enterprises. The authorities suggested settling insurance claims, prolonging the deadlines for loans repayment and taking other measures. The business community called upon the political forces to assist in the development and adoption of a special bill aimed at the full reimbursement of the damages. Representatives of the Government and the leading Saenuri party intend to discuss this issue at the end of February after calculating the scale of the expected losses and elaborating efficient compensation measures.

The largest South Korean banks also intend to provide assistance to the companies that worked in the complex. Thus, on February 13, Woori bank will open a special temporary division in Seoul, which will work on prolonging lending periods and allocating funds to the enterprises that worked in Kaesong. The banks Kunmin, Hana and Shinhan intend to develop their own plans of support of companies based on the analysis of the situation with lending to such companies. The banks Sanop, Kiup and the Export-Import Bank have formed a dedicated working group, which together with the government is developing measures for the support of the aforementioned companies. As of November 2015, the volume of the loans provided to 124 companies that worked in Kaesong amounted to approximately $ 920 mln.

It is becoming increasingly clear that such a step will strike a blow not to the DPRK; rather it will be a blow to the RK. Even the official media say that as a result of this step the bankruptcy probability coefficient reached its maximum in the RK for the last five months. According to the data from Bloomberg, at the OTC market in New York as of February 11, the five-year credit default swap (CDS) premium came to 83 points, exceeding a similar index at previous trades by 9 points. That is a sign of the decrease in the country’s credit rating.

South Korean experts stick to a more ambivalent position. They note that the closure of the complex will have an insignificant impact on the South Korean economy. On February 10, the Ministry of Planning and Finance announced that the annual volume of production in the complex was about $500 mln. This amounts to 0.04 per cent of the country’s GDP. On the other hand, termination of the South-North cooperation in Kaesong may negatively influence the image of inter-Korean projects in general, decreasing the interest of foreign partners.

Public opinion polls also give a contradicting picture: though on the whole 48.9 per cent of South Koreans questioned are in favour of strict measures against Pyongyang and 30.9 per cent are in favour of toughening economic sanctions, only 54.4 per cent of the respondents approve the closure of the Kaesong complex, while 41.2 per cent believe that the complex should continue its operations.

Against this background, the South Korean government is trying to find a worthy explanation for their step, but so far it is “nothing to shout about”. On February 12, 2015, the Minister of Unification, Hong Yong-pyo, stated at a press conference that, as it had emerged, 70% of the revenues obtained by Pyongyang from Kaesong Industrial Complex (both the revenue from the sale of products and the money intended for the payment of salaries to North Korean workers) were allocated for the development of nuclear arms and ballistic missiles. The Minister declared that “the South Korean Government has a great deal of proof thereof” however did not provide any particular examples. This fact was noted even by the Korean media, while some authors even compared it to the recent, and no less publicized case, related to the attempt to accuse the RF of delivering secret supplies of parts for the North Korean missile (link).

The authorities of the RK also hope that the North will still suffer more, and now there are attempts to convince the public that liquidation of the complex will strike “a very significant blow” to the regime. Firstly, closing the complex upsets Pyongyang’s plans for attracting foreign investments into the country and deprives it of a major hard currency source. Secondly, it is sure to dissatisfy the population: the 54,000 people who worked at the complex enterprises not only lost their salaries: earlier, they could buy the products manufactured by the plants at low prices, which made their life so much easier. Besides, they have been left without electricity and water while the local markets have been left without goods.

However, in truth Kaesong was never a source of hard currency and the situation with the workers will be evidently quickly remedied – if not by mobilization measures then by attracting other investors, primarily Chinese investors. In total, as noted by Head of the Centre for Korean Studies of the RAS Institute of Far Eastern Studies, Alexander Zhebin, “The Americans have a concise phrase to describe those who do harm to themselves – “shoot oneself in the foot”. … by terminating the work of the Kaesong Complex, the South Koreans, as we may see, have shot themselves in both feet: in contempt of their own profit they have finally blocked inter-Korean relations and virtually buried their president’s Eurasian plans. Seoul, once again, had to forget its own national interests for the sake of satisfying the geopolitical ambitions of its senior partner – Washington.

Konstantin Asmolov, Ph.D. in History, Leading Research Fellow of the Centre for Korean Studies, Institute of Far Eastern Studies, Russian Academy of Sciences, exclusively for the online magazine “New Eastern Outlook.