Interview: Kaesong 'Changing Fundamentals' of Inter-Korean Ties

North Korea has shut indefinitely the Kaesong industrial park—the most visible symbol of cooperation between the two Koreas—and all North and South Korean workers have been withdrawn amid military tensions. South Korea has dismissed an "incomprehensible" list of North Korean demands for reviving the jointly run industrial park in North Korea. Changsop Pyon of RFA's Korean Service interviews Bradley Babson, a North Korea expert, about the impact of the park's closure. Babson, a former official of the World Bank for 26 years, is head of the DPRK Economic Forum at the U.S.-Korea Institute at Johns Hopkins University.

Q: What do you make of Pyongyang's decision and motivation?

A: To me, the fundamental issue is what it means for the inter-Korean relationship, and it represents a relatively positive and strong element of the mutual cooperation for mutual benefits that's been pretty successful for a substantial period of time, in a way that survived all the difficulties for the last five years up until the last six months or so. It's obviously an important component of a relationship that was developing under the Sunshine Policy, which became more complex and difficult during the Lee Myung-bak era. And I think the fact that they're withdrawing from Kaesong, for me, is more about trying to clarify and redefine what the future of inter-Korean relationship is really going to be.

Q: According to the news reports, about 53,000 North Korean workers at Kaesong made about U.S. $90 million annually, a major source of foreign exchange for the North Korean regime. Do you think Kaesong's closure deals a big financial blow to the North Korean regime bent on earning foreign currency?

A: I don't think it would be fatal. Any country could absorb U.S. $90 million of loss, even North Korea. They have alternatives. They're making a bet they can absorb these losses for some time, and achieve a larger objective, whatever that objective is. I think this is a price they're willing to pay because they want fundamentally to change the context of inter-Korean relationship. And this is the message they've chosen to find a reason to talk seriously and in a different way with South Korea, and I think they also want to do with the U.S., changing the fundamental elements of their relationship and try to put things on a different kind of course in the future.

Q: It's been almost 10 years since Kaesong started operating in 2003. Many people were really surprised at North Korea's willing decision to embrace the project, given that it would lead to more economic opening on the part of North Korea as well as the North Korean workers' growing exposure to South Korea. Why do you think they made such a decision?

A: Well, in the early days of the Sunshine Policy there was a genuine effort to build bridges across the relationship in multiple ways. It was not just Kaesong, also Kumgang, family reunions, and military direct communication lines. You know, there were a number of different dimensions in which inter-Korean relations were becoming more engaged, and Kaesong was an important part of that because it was rooted in commercial interests, not just political interests. What North Korea gained out of that [were] the money and foreign exchange earnings, some of which went to labor and some of which went to Kim Jong Il. So, U.S. $90 million a year is a significant amount of exchange. Obviously they've been in need of foreign exchange earned on a commercially acceptable basis, and this gave him a commercially and politically acceptable way of earning a significant amount of foreign exchanges.

Q: As you pointed out, North Korea earned a significant amount of foreign exchanges through Kaesong. In addition to foreign exchange earnings, don't you think Pyongyang also enjoyed other benefits such as learning Western-style business management?

A: Well, from a business point of view, it did provide an opportunity for North Koreans to learn something from South Korea both about managing business in today's world and international standards. So, business management and technology involved production systems, labor relations, and how effective they are in developing productivity of North Korean labor. North Korea had a real learning curve through observing and participating in the way that Kaesong became commercially successful, and in combining comparative advantages of their cheap labor with the management expertise and technology, and access to the market that the South Koreans could provide.

Q: According to some reports in the South Korean press, one of the chief reasons North Korea decided to withdraw its workers was their 'ideological contamination.' Do you agree?

A: One of the risks they face now in withdrawing everybody is I can't imagine the 50,000 people who left their jobs two weeks ago are very happy right now. I do think you have people who have become used to a discipline of having a good job, going to work every day, getting a nice lunch and health services, and Chocopies which you can sell in the market for some extra money. By denying these people those benefits and their current lifestyle, I can't imagine they're very happy. You raised the question of workers' ideological contamination—but they've been ideologically contaminated for years, and it's nothing new. So, I don't think that's a current factor. The change in mindset of the people in Pyongyang becoming more engaged in market trading and market economies, and making money from entrepreneurship is much more threatening to the regime's longer-term interests than a bunch of factory workers in Kaesong. I don't think ideological contamination was a rationale for making this move now.

Q: In fact, one of the chief benefits North Korean workers enjoyed while working at Kaesong was a sort of genuine freedom that they could not feel inside North Korea. Do you feel the same?

A: People rediscovered their freedom, and particularly the elites of Pyongyang are interested, and everybody under their 40s is more interested in making money than participating in a patronage system. Nobody wants to join in the government or military. They want to go out and do business, or get involved in trading, and that mentality, which is a mindset, has a different vision of the future. The mindset of the old school wants to go back to the socialist control and ideological control, etc. I do think there is a battle of mindsets taking place within the country, and that's not related just to Kaesong, it's more related in many ways to what happens with the growth of the market and entrepreneurship. That's the same mindset that pushed back when they tried to do currency reform back in 2009 and 2010, when they tried to go back to socialist model and pushed back. And push-back reflects the fact that the people's minds are in a different place, not trapped in an old kind of thinking when it really hurts. Some of the old-timers and the military hardliners look at this as ideological contamination. Other people look at it as the unleashing of entrepreneurial  freedoms.