Little sunshine on this cloudy day

Last week, North Korean Economy Watch reported Pyongyang’s irrational economic policy threats which could end the flow of millions of South Korean dollars into North Korean coffers.  I use the word “irrational” because government policies are typically designed to increase revenues to the treasury (or to coalition / constituent members), not scare them away.  Today, however, North Korea reaffirmed its commitment to closing the border with South Korea on December 1, though with some qualifications:

1. The North Koreans will end “the train to nowhere(c) NKeconWatch. This is puzzling because of all the inter-Korean projects, this one is the least “contaminating.” The South Korean government pays the North Korean government to send an empty train across the border each day.  Why jeopardize this easy money?

2. The North Koreans will end the Kaesong day tours.  This will not be good for Hyundai Asan (HA), which is already suffering losses from the idle Kumgangsan resort.  On the plus side for HA, since this project merely bussed people around Kaesong, they will not be leaving much fixed capital on the northern side of the DMZ.  Still, it is strange that the North Koreans would seek to end this program.  Although it is slightly “contaminating” in that hundreds of South Koreans are shuffled through Kaesong every day, the North’s citizens are generally isolated from their wealthy neighbors. Additionally, I estimate that this program has grossed the North Koreans nearly USD$10 million since it was launched nearly a year ago. This is not an insignificant amount of money to the DPRK.

3. The ultimate fate of the Kaesong Industrial Zone remains uncertain.  Although the North Koreans have threatened to “selectively expel” up to half of the South Koreans in the facility, some managers remain optimistic:

“(The North) never said it would halt production or expel staff related to the production process. So even in the worst case of operating with only half of the staff, we think there won’t be any problem in production,” said Lee Eun-suk, an official at Shinwon Corp, which has clothing factories at Kaesong. (Reuters, via the Washington Post)

Unless North Korea’s policy makers are terminating the flow of economic rents into the country to curb the power of some particular official or interest group, there are not many instances where these actions could be considered shrewd.  Adding to the confusion, most analysts presume that the majority of the South’s construction and wage fees are distributed to the small cohort of high-ranking North Korean policy makers who ostensibly signed off on the projects in the first place.  So why would they now decide to end their own direct funding?

These policy decisions, moreover, will likely affect the North Koreans in ways they do not yet seem to anticipate, particularly when it comes to attracting private foreign direct investment (which is desperately needed).  Private investors will not be attracted to a business environment where the rules of the game are prone to changing every few months.  Investment entrepreneurs will not risk the appropriation of large scale fixed assets.  International aid and official foreign direct investment will probably go on as usual as these tasks have more to do with political decisions than economic.

So what is going on?  That is the million dollar question, and speculation in this case is not worth all that much.  The Daily NK, however, claims to have interviewed an “official” from Pyongyang who discussed recent developments in the Kaesong Industrial Zone.  His claim is that the North Koreans made the decision to close the Kaesong Zone for internal political reasons:

Q. What is the reason that North Korea is trying to suspend the business in the Kaesong Industrial Complex?

A. In fact, the story about the suspension of the Kaesong Complex has emanated from Pyongyang since this fall, but it had been decided as an instruction of the Party in Pyongyang late last year.

It is hard to say conclusively what is happening in Kaesong, because there are so many complicated things at work. People from the Party in Pyongyang say that the Kaesong Complex and tourism should fall into disuse and the Mt. Geumgang tourism site should be left alone. Whether or not the Kaesong Complex is thrown away is only up to our economy condition and also the General (Kim Jong Il)’s decision.

Q. Do you mean that instructions on the Kaesong Complex have already been decided internally by the Party?

A.Yes, you can say that. This was because at the beginning, they started it on in the precondition of switching workers once a year, but now they know that switching workers every year is impossible.

Additionally, rumors on South Chosun have been constantly circulating among workers and their families, so illusion of the South have now become uncontrollable among the people. The authorities cannot overlook this situation.

From the Party’s view, each worker in Mt. Geumgang and Kaesong is like a poster advertising capitalism. Due to them, our socialist system could be cracked.

As I know, at least 20 affiliates with Kaesong Complex came into questioning for advertising South Chosun and capitalism.

There was a thorough reshuffling in the Party last year. There is nobody who talks about Kaesong or Mt. Geumgang.

Q. Can North Korea ignore the abundant dollars from Kaesong in practice?

A. Frankly speaking, we have relied on it due to money. Even right now, if South Korea treats things like the Mt. Geumgang shooting accident flexibly and starts the tours again, everything is okay. The money we want does not need to come only from South Korea. There are Yuan, Rubles and dollars as well. They are all the same.

Although our economy is so terrible, we will not establish the national vision only targeted on making money. You should bear this point in mind.

Thoughts and opinions apprecaited. 

Read more here:
There Is an Internal Reason for the Bluff on Kaesong
Daily NK
Jung Kwon Ho
11/16/2008

Kaesong Staff to Be Expelled
Daily NK
Kim So Yeol
11/24/2008

Kaesong Tour and Trains are Suspended
Daily NK
Jeong Jae Sung
11/24/2008

North Korea to Halt Cross-Border Rail Service, Tours
Bloomberg
Heejin Koo
11/24/2008

North Korea prepares to shut border with South
Reuters (via Washington Post)
Jonathan Thatcher
11/24/2008

N. Korea Stiffens Diplomatic Stance
New York Times
Choe Sang-hun
11/24/2008

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  • Mike

    I wonder if the DPRK will make good on its random firing threats in Kaesong. I doubt it, only because there are much bigger chunks of bean curd for the DPRK authorities to fry in Kaesong. Mr. Melvin is entirely right about the uncharacteristic irrationality in the DPRK’s position. The DPRK is in the process of alienating its southern neighbor and turning against PRC to position itself to deal with the US (and its new administration) on a bi-lateral basis, and away from the Six Party Talks. As for foreign investment; we are seeing as lot of money coming out of the Middle East. ME and SWF investment in the DPRK is less money they have to seek from other parties.

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