DPRK cancels Kaesong contracts

In what is certainly not good news for foreign investors, the North Korean government has announced that it is unilaterally canceling agreements with the South Koreans regarding the Kaesong Industrial Zone.

According to the Korea Times:

North Korea announced Friday the nullification of all contracts on rent, salaries and taxes at the Gaeseong Industrial Complex, asking the South to empty the industrial estate unless it honors the North’s wishes to amend related laws and rules.

The notification came about five hours after the two Koreas were unable to set a date for talks due to their wrangling over the release of a Southern worker detained by the North.

The North continued, “We are nullifying contracts and benefits on rent, salaries and taxes that we have offered in the Gaeseong complex in accordance with the June 15 Joint Declaration.”

The report added that the North will begin to adjust laws and rules to meet with the current situation.

“South Korean companies and officials must accept the notification, if not, they can evacuate from the complex,” it said.

In the article, Andrei Lonkov makes the following comment:

“North Koreans are clearly looking for some leverage over the South, and it they come to see the park as a hostage project, they will it use to put forward escalating demands,” he said.

He predicted, “If the South Korean government bows to the pressure and makes concessions, there is no doubt that in weeks or months Pyongyang manipulators will make new demands, probably more outrageous.”

“One can hope that the project will survive. Nonetheless, it will become dangerous if Seoul, in trying to save this important project, starts to succumb to Pyongyang’s blackmail. So, the project should be supported, at a cost to South Korean taxpayers, but not at the cost of unprincipled political concessions,” he added.

This has been a rough year for the Kaesong Zone.  I have kept a running timeline of events in the zone which you can see here.

UPDATES:

1. According to the Choson Ilbo: “North Korea earns some US$33.52 million a year from the Kaesong Industrial Complex, making the inter-Korean joint venture a significant cash cow for the impoverished country.”

2. According to Reuters:

News late on Friday that North Korea was cancelling all wage, rent and tax agreements with South Korea on the joint Kaesong factory park just north of their heavily armed border weighed on stocks in companies that have production units in the factory park, but had a limited impact on the broader market.

“Seoul market participants have become quite immune to North Korea-related news and tend not to react sensitively unless the development has a scale of impact that may affect South Korea’s sovereign rating,” Lee said.

3. NK pointman on South Korea, Choe Sung Chol, allegedly executed.  According to Bloomberg:

North Korea executed a former official in charge of inter-Korean relations, accusing him of allowing the population to develop a favorable image of South Korea, Yonhap News reported.

Choe Sung Chol, who was the point man on South Korea during the Roh Moo Hyun administration that ended in February 2008, was killed last year, the news agency reported last night, citing an unidentified person familiar with North Korean affairs.

While Choe was officially charged with bribery, he was executed for ignoring opponents and pressing ahead with closer ties with South Korea that threatened to make the communist state too dependant on its richer neighbor, Yonhap reported.  

4. The Choson Ilbo reports on the productivity of Kaesong’s Northern workers:

The basic monthly salary of North Korean workers at the complex is US$63.4, consisting of $55.1 in wages and $8.3 in social insurance. In addition, overtime work pay amounts to between $11 to 18.3 a month, and a welfare package subsidizing lunches, snacks and transport costs is provided at a range of between $36.6 and 47.9 per month. In total, the monthly salary of a North Korean worker ranges from $110 to 130, which, the companies argue, is comparable to that earned by workers in China and Vietnam.

A survey of some 40 firms operating at the complex was carried out after the first round of talks on April 25 to discover why these firms were having difficulty accepting North Korea’s demands. According to the survey, the productivity of an individual North Korean worker is just 33 percent that of a South Korean worker. In comparison, the productivity of Chinese and Vietnamese workers is 96 and 85 percent that of South Korean workers, respectively.

The companies also argue that it is difficult to accept North Korea’s demand to pay land use fees from next year, considering the fee they paid for building factories there. The fee for building factories in the Kaesong industrial park was $394 per one sq. m of land, compared to $122 in China and $65 in Vietnam.

5. According to the Korea Business Consultants newsletter (May/June 2009):

South Korea’s point man for North Korea said May 18 that the joint industrial enclave at Kaesong, just across the DMZ in the North, is “in turmoil” after the DPRK voided contracts governing the facility the same day, sending shares in firms that operate there tumbling. The KOSPI fell by 0.44 percent upon receipt of the news.

Read more below:
N. Korea Scraps Gaeseong Contracts
Korea Times
Kim Sue-young
5/15/2009

N. Korea declares inter-Korean contracts on Kaesong venture invalid
Yonhap
5/15/2009

N. Korea scraps contracts with South on joint venture amid tension
Yonhap
Kim Hyun
5/15/2009

Cabinet reshuffle
NKeconWatch.com

N.Korean Kaesong Workers’ Productivity Lags Far Behind S.Korean Workers
Choson Ilbo
5/19/2009

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