Kaesong Site Expedites S-N Economic Integration

Korea Times
Ryu Jin

At a quarter to 7 a.m. on a normal weekday, a rush to work opens the morning of a North Korean town seated just minutes away from the heavily fortified border with South Korea.

Several blue commuter buses, just like ones that can be seen in downtown Seoul, stop in front of a sign reading, “Kaesong Industrial Zone’’ and spew out hundreds of North Korean workers.

As the working time draws near, they hasten their steps toward their respective workplaces, owned and managed by people from across the border. Some 13,000 North Korean workers, mostly women in their 20s and 30s, spend most of the daytime in the small capitalist enclave in the southwestern part of their Stalinist nation.

“Welcome!’’ “Good Morning!’’ Several South Koreans say as they greet their North Korean colleagues in front of the main gate of Shinwon Ebenezer. Hwang Woo-seung, director of the apparel company’s Kaesong branch, says that they have never skipped a day _ regardless of rain or snow _ without such greetings since the factory went into operation in 2004.

Closing hours are by and large around 5 p.m. But almost half of the 13,000 laborers work overtime until 7 p.m. in order to return home early on Saturdays. By the first half of 2008, the number of North Koreans working in the joint industrial park is expected to reach 100,000, according to South Korean officials.

From Seeds to Young Plants

Launched three years ago, the Kaesong Industrial Complex has been a gauge of the situation on the Korean Peninsula, where hundreds of thousands of troops confront each other across the border, which remains as the last flashpoint of the Cold War era.

Operations, for example, had nearly stopped late last year in the wake of a nuclear test by the North. Since the Feb. 13 denuclearization agreement, however, businesses have gone back to normal.

A free trade agreement (FTA) struck in April between South Korea and the United States, which opened up the possibility of the Kaesong products being exported to America as “made in Korea’’ goods, also breathed a fresh enthusiasm into the industrial zone.

Foreign eyes watching the complex are also changing. A growing number of foreign delegates are coming to the zone, and their evaluation has been quite positive. Moody’s Investors Service analysts Thomas Byrne, who visited the site on Feb. 9, said Kaesong is the “optimistic future’’ of South and North Korea.

Currently, 22 firms _ mostly small- and medium-sized ones _ are making clothes, shoes, watches and kitchen pots in the 1 million-pyong (3.3 million-square-meters) pilot site of the Kaesong complex, which will sprawl over a total 20 million-pyong (66 million-square-meters) in the coming years.

Since the first products came out in December 2004, annual output has increased from $14.9 million (13.8 billion won) in 2005 to $73.7 million (68.4 billion won) in 2006.

Despite potential risks stemming from political uncertainty, the zone has an inescapable economic logic _ the cheap labor and land of the North combined with the capital and technology of the South.

Proximity also makes for an attractive alternative for South Korean firms looking to move their plants to China. The distribution cost in Kaesong is one-tenth that of China, land price one-fifteenth and the labor cost one-twentieth, according to statistics.

Some 300 companies are expected to fill up the whole first-stage experimental site by the first half of next year, hiring up to 100,000 North Korean workers.

“It means that an up-and-coming new city is being created in the border area with a total population of about 300,000 to 400,000, when the families of the workers are added,’’ says Kim Dong-keun, chairman of the Kaesong Industrial District Management Committee (KIDMAC).

Kaesong hopes to invite as many as 3,000 companies eventually, employing some 350,000 workers by the mid-2010s, when the fully-fledged complex (roughly the same size of Changwon) is completed with apartment buildings, hotels, shopping centers and even an amusement park and golf courses.

Way to Integration

North Korea, for its part, envisions Kaesong as its own version of Shenzhen, one of the first “special economic zones’’ in China, and hopes that the new industrial site could jump-start its near-bankrupt economy.

Since the mid-1990s, when it was severely hit by great famines amid the first nuclear standoff with the United States, North Korea has remained a wasteland plagued by the so-called triple distresses _ the shortage of food, cash (foreign exchange) and energy.

With the end of the Cold War, North Korea lost hefty aid from China and the now-defunct Soviet Union, which had propped up its flagging economy. In a desperate move, Pyongyang launched an experiment with the free market in July 2002, deregulating prices and hiking salaries.

North Koreans had also anticipated the businesses with South Korea, which started in the wake of the historic inter-Korean summit in 2000, to bring money into the cash-strapped country.

But the ambitious tour project at Mt. Kumgang above the eastern side of the border had been too fainthearted to turn profitable because it was limited only to tourists.

Kaesong was a different story. While South Koreans saw the tour project largely as symbolic, they were ready to offer more financial incentives for companies to invest in the border town.

For the South Korean decision-makers, Kaesong became the site of an experiment to transplant capitalism to the Stalinist state, plagued by an inefficient bureaucracy and pervasive malnutrition.

Of course, the venture poses risks for the tightly controlled hermit kingdom, which has been ruled by hereditary “monarchs’’ _ the late leader Kim Il-sung and his son Kim Jong-il _ for more than half a century. A major city with about 150,000 residents, Kaesong will inevitably be exposed to what the North Korean leadership calls decadent Western culture.

Suh Ye-taik, an executive director of Hyundai Asan, selected by the North as its major business partner, recalls that it was an offer that nobody expected when the North Koreans first proposed Kaesong. Pyongyang originally wanted to develop other places such as Shinuiju and Haeju.

“It was an unexpected offer in political terms,’’ he said. “But we decided to opt for Kaesong in consideration of the proximity and other conditions of location.’’

Kaesong, seated about 140 kilometers south of Pyongyang and some 60 kilometers north of Seoul, is on a point of strategic importance in the case of a military conflict between the two Koreas. North Korea even yielded some kilometers by withdrawing its conventional artillery.

Kim Jong-il, however, seems to be well aware of the fact that his own hold on power depends on reviving the economy. Kim Heung-kwang, a defector from the North who had worked as a professor at Pyongyang Computer Technology University, predicted in a recent thesis to the Korea Institute of Science and Technology Information (KISTI) that North Korea would open up the Internet to individuals as early as 2009.

“Security guarantees and restoration from the economic plight are the top priorities for the survival of the North Korean regime,’’ said Yang Moo-jin, a professor at the University of North Korean Studies in Seoul. “They realize opening is the only way out of their predicament.’’

While Kaesong is a touchstone for economic integration in the unification process, the workplaces in the industrial zone are test boards for cultural and societal assimilation of the two Koreas, which have walked different paths for the past several decades since the 1950-53 Korean War.

Shinwon is a good example. South Korean managers say they now see drastic changes in the attitudes of North Korean workers. People from across the border had kept an awkward silence in the first years. But smiles and small chatter has become part of the atmosphere.

“The quality of the products here is good because the Northern workers are very productive,’’ said Hwang, the head of the apparel company’s Kaesong factory. “They now learn skills much faster than they did in the initial years.’’

They are also getting familiar with dialects from the other side of the border. In the three-storied factory of Stafild that produces medical walking shoes by some 1,800 North Korean workers, visitors overheard “One for all, all for one’’ _ the motto of the Stalinist state.

For Brighter Future

While its ambition is grand and lofty, the Kaesong complex still faces major hurdles _ both from inside and outside. One of the biggest problems is the U.S. economic sanctions against North Korea, which ban the sale or shipment of key strategic goods such as high-tech computers.

Though the South Korean government is trying to attract the investment of some information-technology (IT) companies in the long term, no high-tech firms have so far advanced in to Kaesong.

So, what the zone really needs is a genuine political thaw between North Korea and the U.S., government officials as well as experts point out. A strong inter-Korean relationship is another important factor to affect the joint project.

Labor conditions in Kaesong are a problem of its own. The average wage is only $57.50 per month, which is not provided in cash. North Korean workers receive coupons to get the necessities of life, though their standard of living is much higher than those in other areas of the country.

Largely focused on red brick industries, which led the economic growth of the South until the 1980s, some workplaces in the zone are exposed to dangerous environments and workers are not entitled to the core labor rights, such as the right of collective action.

Foreign investment will be a touchstone of the venture’s success in the long term. South Korea plans to invite U.S. investors to the industrial estate in October in an effort to expedite foreign investment.

“Foreign investment will help stabilize the operation of the industrial complex and will be a good experience for the management of other firms,’’ said Kim Dong-keun, the KIDMAC chairman.

South Korean officials also expect that from now on some large South Korean enterprises will come into the zone to continue the development of the Kaesong industrial park.

“So far, the zone has been occupied largely by small- and medium-sized companies,’’ Unification Minister Lee Jae-joung said at a breakfast lecture late last month. “We expect the international credit rating of Kaesong will improve if leading enterprises move in.’’

On April 27, the National Assembly of South Korea passed a law that supports the industrial zone. Firms operating in Kaesong will be provided with the same benefits enjoyed by the small- and medium-sized companies in other areas such as a 7-percent tax exemption. South Korean workers in Kaesong will also be eligible for the Labor Standard Act and the country’s four major insurance policies.

“Kaesong Industrial Complex is a win-win situation for both the South and the North,’’ Kim said. “Both economies will complement each other through the project and will be the steppingstone to national unification and integration.’’


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