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DONG Yong-Sueng

Kaesong Industrial Park: Current Development and its Future

DONG Yong-Sueng

June 14, 2006

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North and South Korea have agreed on developing an industrial park of 1 million pyong (a pyong equals 3.3 square meters) in size in Kaesong, 70 kilometers north of Seoul beyond the Demilitarized Zone, by 2007. Even before completion of the project, the two sides have started operation of a 28,000-pyong-sized pilot section. Of the 15 South Korean companies projected to move in, 11 have already their factories inside the area.

About 6,000 people are currently working for the Seoul-invested companies. South Korean workers arrive to their workplace each morning by crossing the Demilitarized Zone, while North Korean workers use commuter buses and bicycles, provided by the southern companies. In the early days of the project, North Korean workers would not have lunch together with their southern counterparts. Nowadays, they have a bit more freedom in working with their colleagues from the south.

A variety of infrastructure is under construction. Five wells have been dug up, and the South has opened a draining system to treat waste water. The North has provided 15,000 pyong site for the incineration and waste disposal. The (South) Korea Electric Power Corporation initiated supplying 15 megawatts of power to the southern invested-companies on March 16, 2005. Cable telephone services between the South Korea and the Kaesong Industrial Park started on December 28, 2005. As of March 2006, 236 telephone lines were in use. Procedures for entering the complex have been simplified and administrative services improved.

The Kaesong Industrial Park is perceived in different ways by the government and corporations. The South Korean government has given its full backing to the complex since it believes that its successful operation will pave the way for eventual reunification. South Korean companies have also showed interest in the project as they qualify for many benefits in exchange for their investment in the park.

As for Pyongyang, it hails the project as it earns approximately US$500,000 in wages each month from the South Korean companies. Despite the benefits, there are many obstacles for a successful operation of the complex.

In particular, the Kaesong project places an enormous financial burden on Seoul. When the pilot site was developed, the Korea Land Corporation and Hyundai Asan from the South sold one pyong of the park's space for around 149,000 South Korean Won, as opposed to the real price of 300,000 Won. While running the pilot site of 28,000 pyong, the Seoul government paid 4.2 billion Won to make up for the shortfall resulting from the price difference. If the South succeeds developing 1 million pyong in the first development phase, this would require 150 billion South Korean Won. If the industrial complex expands further to 20 million pyong in the second development phase, it would need approximately 3 trillion Won, and if the additional costs for establishing the necessary infrastructure are added, the final price tag would be much higher.

Furthermore, companies in the industrial complex face labor shortages. About 3,000 North Koreans are now working for the South Korean companies in the pilot area. This means that one South Korean company hires around 300 North Koreans. Under the assumption that each company would use 2,000 pyong of land, 500 companies can move into the Kaesong Industrial Park with its size totaling 1 million pyong and hiring 150,000 North Koreans.

Given the size of Kaesong's population, the North will have no alternative but to hire workers from outside Kaesong city. In such case, housing and amenity facilities will be needed for the workers, which will likely fall on the shoulder of the South Korean government. Already, companies in the South are complaining about shortage of young workers.

If the North and South enter the second development phase and expand the size of Kaesong Industrial Park to 200 million pyong, labor shortage could worsen. In such case, companies operating in the complex would need a total of 1.2 million workers. (Assuming that 8 million pyong will be developed into factory sites and 12 million pyong will be used for building housing and amenity facilities.) In order to provide a 1.2-million-strong workforce, Pyongyang would have no alternative but to reduce its military manpower and send youths to factories. Given the North's inclination to maintain a strong military force, the companies inside the park will have hard time finding labor.

Wage payment is another challenging issue to a smooth operation of the industrial park: a North Korean worker receives about US$100 a month. North Koreans are paid in North Korean currency by a North Korean government agency, not directly by the Southern companies. The North's agency pays 15,000 North Korean Won to each worker based on the official exchange rate of 150 North Korean Won per 1 US dollar.

The Northern workers are satisfied with the income level as it surpasses income of average North Koreans outside the Kaesong complex. The North has a dual foreign exchange system - the value of the North Korean Won stays between 2,000 Won and 3,000 Won per US dollar irrespective of the black market rate. Understanding the difference between the official exchange rate and that on the black market, the US Special Envoy for North Korean Human Rights, Jay Lefkowitz, has argued that the North embezzles a large amount of money, which should have gone to North Korean workers. If the Kaesong Industrial Park expands to 1 million pyong, the aggregate salaries of 150,000 workers will run to US$15 million a month and US$180 million a year.

Despite the rising complaints from outside, Pyongyang will not change the current payment system. If it pays the salaries at black market rates, this would send shockwaves throughout the North Korean economy, and its revenues would fall sharply. The US government believes that its bargaining power may weaken in dealing with Pyongyang if the pay intended for North Korean workers keeps flowing into the hands of the North Korean regime. Unless the South Korean government comes up with effective measures to deal with the salary payment issue, the US could ban the southern workers from crossing the Military Demarcation Line under control of the US since the Armistice Agreement in 1953.

The export rules imposed by the US Department of Commerce are also standing in the way of a smooth operation of the Kaesong Industrial Park. North Korea is subject to economic sanctions of the US, and the Kaesong complex is not an exception. In the future, therefore, South Korean companies should seek approval from the US government before building factories within the Kaesong complex. It took more than three months for 15 South Korean companies to go through such approval procedures. Without the US government's cooperation, South Korean companies cannot run their businesses smoothly in the complex.

In this context, the success of Kaesong complex depends on relations between the US and North Korea. The future of the Kaesong Industrial Park would be rosy if the US factor was ignored. However, the US intervention may change the fate of the complex. The South Korean government therefore needs to strengthen its efforts to ensure the success of the Kaesong complex, so that it can draw much needed cooperation from the US .

The writer formerly headed the Economic Security Team at the Samsung Economic Research Institute. He is now vice president of Trinity Capital Development Partners, Inc. The views expressed are his own and do not reflect those of the publication that carries them.
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