The Kaesong Inter-Korean Industrial Complex: Perspectives and Prospects 1

IntroductionThe KIC is of interest to the United States and the two Koreas for six primary reasons.3 First, South Korea wants the United States to consider products made in the KIC as South Korean in origin for the purposes of the Korea-U.S. Free Trade Agreement. Second, the KIC has become a growing source of foreign exchange for North Korea. Third, the KIC is part of South Korea's strategy to ease tensions with North Korea. Fourth, the KIC is an important part of the North Korean economic reforms. Fifth, the KIC raises issues of security, human rights, and working conditions in North Korea. Sixth, U.S. government approval is needed for South Korean companies to ship to the KIC certain U.S.-made equipment that is currently subject to U.S. export controls.Table 1 shows the brief history of the Kaesong Industrial Complex. The KIC started in August 2000, with the signing of a contract between Hyundai Corporation and North Korea's Asia-Pacific Peace Committee. In November 2002, the KIC took a big step forward when the North Korean government released the Regulations for the Kaesong Industrial District. During the three years of its preparation, the North and South Korean governments worked on ensuring free passage across the DMZ, and on establishing tax, accounting, banking, and labor laws to be applied to the KIC. Although the KIC is geographically located in North Korea, general North Korean laws do not apply; instead, it is governed by a special set of laws. A ground-breaking ceremony was held in Kaesong to officially inaugurate the KIC in 2003; in June 2004, the first 15 companies set up their plants; and by December 2004, the first Kaesong-made products rolled off the production lines.4Table 2 shows that South Korean firms in the KIC produced a total of $525 million dollars in goods during the period 2005-2008, and exported $96 million of their output for the same period, 18 percent of their total production. All products made in the KIC are shipped to South Korea for sale there, or for export via South Korean customs clearance. The major export destinations are China, Europe, the Middle East, and Russia. Companies in the KIC use labor-intensive manufacturing processes, with raw materials and intermediate goods supplied from South Korea to Kaesong for final assembly. As the KIC has expanded, however, there has been more scope for companies to produce some of their manufacturing inputs locally. Furthermore, the number of North Korean workers in the KIC increased from 7,621 in 2005 to 38,931 in 2008, a five-fold increase. However, the KIC has faced a most serious challenge since February 2008, when a conservative government replaced the liberal governments that had ruled South Korea for ten years.As of February 28, 2009, 93 South Korean firms were operating in the KIC, with a total of 36,650 North Korean workers along with 952 South Korean workers; it is important to note that there were 1,370 South Korean workers and about 40,000 North Korean workers before North Korea began its border clampdown in November 2008. Another 45 factories are under construction. The project was supposed to be carried out in three stages for years to come; the first stage was well under way and was expected to be completed in 2010, and the complex was supposed to employ 100,000 North Korean workers and have 450 tenant companies by the end of 2010. However, such rosy projections about the KIC ended when North Korea cut the reconciliation dialogue with South Korea after its President Lee, a conservative, took office in February 2008. Lee pledged to get tougher with North Korea, which refuses to abandon its nuclear program. Lee has intentionally raised awareness of North Korea's human rights problems and called for efforts to scrap the nuclear programs. In response to such tough policies by South Korea, North Korea has adopted a series of hard-line policies against South Korea.The rest of this paper is organized as follows. …