Kaesong Closure Could Impact North

A North Korean move to shut down the jointly operated Kaesong Industrial Complex could gravely harm the country’s fragile economy.

Kaesong Close 305 South Korean-owned factories located in the North Korean joint industrial complex of Kaesong, Nov. 24, 2008.
AFP Photo
SEOUL—North Korea may hope to gain concessions from South Korea by shutting down the jointly operated Kaesong industrial complex, but that would do serious damage to the already cash-strapped country, experts say.

Pyongyang has threatened to close the jointly operated Kaesong industrial complex and this week halved the number of South Korean nationals allowed to cross the heavily fortified border.

Dong Young Seung of the Samsung Economic Research Institute said North Korea had already been hit hard by the loss of dollars from South Korean tours to Mount Kumgang, losing U.S. $100 million.

“For the North Korean economy, U.S. $100 million is a significant amount of money. But when political considerations come into play, it may not seem like such a high price to pay, if the very survival of the regime is at stake.  So I wouldn’t discard the possibility that a decision to shut down the Kaesong industrial complex may be made,” Dong said.

But Dong added that such a move could ultimately cripple North Korea’s economy.

“In the long run, the closing of the complex could seriously hurt the investment environment in North Korea. The number of entrepreneurs investing in North Korea, foreigners and especially South Koreans, would decrease significantly, and the damage to the North Korean economy could be substantial,” he said.

Some 88 South Korean enterprises are now invested in North Korea, all capitalizing on North Korea’s low labor cost, Dong said, and he predicts that while the closure could increase tension and uncertainty on the Korean peninsula, shutting down Kaesong would only have a “minimal overall impact” on the South Korean economy.

Rising tensions

Kaesong, which lies just across the border between the two countries, employs nearly 36,000 North Koreans in mostly South Korean factories that manufacture consumer products such as textiles, watches, footwear, and other light industrial goods for export.

The complex opened in 2004 amid thawing relations between the North and South.

But North Korea this month cut the number of South Koreans allowed across the border to 880 from up to 1,700 previously, ended a cross-border cargo train service, and suspended tours run by a South Korean service to the city of Kaesong.

Exacerbating chronic tensions was the shooting death of a South Korean tourist last year and the policies of the South Korean government of Lee Myung-bak, as well as South Korean activists' launch of balloons carrying anti-Pyongyang leaflets.

“North Korea may think it can communicate and bargain only with the United States and turn its back on South Korea,” Kongdan Oh, a researcher at the Institute for Defense Analysis in Washington, said.

“But there are many U.S. analysts who see through Pyongyang's strategy. North Korea may want to deal only with the United States. But they are making a mistake. Severing ties with the South will also undermine the North's goal of engaging the United States,” Oh said.

Evans Revere, president of the Korea Society in New York, warned that if Pyongyang followed through on its threat to close the complex, both U.S. President George Bush and president-elect Barack Obama would take a critical view of North Korea's hard-line stance.

“They would look at this as evidence of bad faith on the part of the North,” Revere said.

Gordon Flake, executive director of the Mansfield Foundation in Washington, said it would be foolish for the North to disrupt the inter-Korean industrial complex.

“The move would make it difficult for the North to attract investments not just from South Korea, but from anywhere in the future,” he said.

A new special administrative region

The reduction in activity at Kaesong coincides with North Korea’s attempt at establishing a new special administrative region (SAR) in Sinuiju, on the border with China.

On December 1, the South-North Korea Forum, a civic organization dealing with inter-Korean economic cooperation, announced Pyongyang’s plans to develop a new SAR in Sinuiju.

“Infrastructure construction was scheduled to begin in October 2008, but it was postponed by one or two months. Full-scale infrastructure construction may begin next year. The period when investors will be able to establish their enterprises in the Region will be 2011 to 2013,” Kim Kyu Chul of the South-North Korea Forum said.

“North Koreans depend on China for about 70 percent of their basic staples. By engaging in economic cooperation with China in the Sinuiju SAR, North Korea intends to produce these basic staples in North Korea, reduce imports, and eventually even target China as an export market for goods produced in Sinuiju. And, above all, North Korea wants to avoid giving North Korean traders reasons to travel to China for their business and be 'corrupted by capitalist ideas,'” Kim said.

Original reporting by SW Park, SW Yang, and JW Noh for RFA’s Korean service. Translated by Grigore Scarlatoiu. Acting RFA Korean service director: Francis Huh. Written and produced in English by Joshua Lipes. Edited by Sarah Jackson-Han.
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