N Korean industrial park a gamble on brotherhood
By Andrew Petty

SEOUL - In less than two weeks, an industrial park in North Korea is likely to get the go-ahead from Seoul and then 15 South Korean light manufacturing companies will begin moving into a pilot site in the Kaesong special economic zone just over the border, producing watches, toys, kitchen wares and other goods. It's a symbol of South Korea's controversial embrace of the North and, Seoul hopes, a step toward reconciliation.

Over a decade the park is expected to employ 725,000 North Koreans and over 100,000 South Koreans, giving the North a big boost to its economy. The theory of the project is for South Korean companies to get cheap labor, while the hunger-stricken North gets much needed jobs. North Korean labor is cheaper than Chinese labor, giving a competitive edge to South Korean manufacturers in the North.

Foreign companies, including a few German firms, have expressed interest in locating there, according to the Yonhap news agency and the industrial park builders. Diplomats from the European Union are expected to visit the pilot site this month.

United States leaders, who have no love for North Korea and its nuclear ambitions, nonetheless have expressed hope for the project's success. Experts, however, fear North Korea's knack for canceling meetings and its general unpredictability may lead to problems down the road.

For the moment, a list of high-technology items the South Korean companies will send to its factories is the last hurdle to be overcome before production begins, since the supplies and equipment must be approved under an international security act known as the Wassenaar Agreement. Authored by the US and having 33 countries as signatores, it bans the export of strategic materials to countries that are suspected of sponsoring terrorism.

A team of Korean inspectors under the Ministry of Commerce, Industry and Energy - they will give the go-ahead - is reviewing the list that includes precision machinery and high-tech gadgets like lap-top computers with Pentium III processors. Inspectors have approved about half the list of 1,600 items. A spokesperson for the Ministry of Unification said the review process should be completed in two weeks.

In late July, US officials held an emergency meeting on the Kaesong project and reminded South Korea of its obligations under the act that Seoul signed in 1996.

North Korea has accused the United States of trying to interfere and halt the project. Experts here said US officials are uncomfortable with the idea of large amounts of foreign cash flowing into the communist state. Analysts also believe that Washington prefers the two Koreas wait until all parties have resolved the problem of Pyonyang's nuclear weapons development, the subject of six-party talks hosted by China.

But during Unification Minister Chung Dong-young's trip to Washington, DC, last month, top officials of the administration - Secretary of State Colin Powell, National Security Adviser Condoleezza Rice and Defense Secretary Donald Rumsfeld - praised the industrial park effort as a peaceful means to stabilize the situation and reduce tension on the Korean Peninsula.

"The US also hopes the Kaesong project will continue without any problems," said a Seoul unification ministry spokesman.

Now that Seoul is resting easy over the United States' concerns, the black cloud that hovers over the project is its partner, the North. Pyongyang has not participated in regularly scheduled economic talks because the communist state is still upset over South Korea accepting 465 North Korean defectors last month.

The Ministry of Unification said construction at the pilot site will continue regardless of whether North Korea participates in the economic talks according to agreements between the two countries. But South Korea eventually will have to deal with Pyongyang directly as financial and labor issues arise.

Hosted by the state-run real estate firm Korea Land Corporation and Hyundai Asan, the pilot site covers 23 acres, only a fraction of the 576 acres that will be up and running by 2012. Planners envision thousands of light manufacturing companies settling in the special zone to make watches, toys, kitchen wares and other goods.

The pilot site has been ready for businesses since construction ended in June. The 15 companies hope to run assembly lines by November.

Over the next 10 years, the Bank of Korea estimates the complex will employ about 725,000 North Koreans and over 100,000 South Koreans, giving the North a big boost to its economy. The theory of the project is for South Korean companies to get cheap labor, while the hunger-stricken North gets much needed jobs.

The central bank also said the industry park will generate $600 million for North Korea in 2012 and peak at $2.28 billion in 2021.

While this model has worked in other third world countries, North Korea may present problems not seen in other cases due to the communist state's lack of experience in dealing with capital markets.

"The biggest problem is the difference between the two countries' thinking," said Dong Yong-seung, a researcher for the Samsung Economic Research Institute. He told Asia Times Online that North and South Korea may not be able to set aside their ideological differences when it comes to settling disputes. Things could get nasty concerning labor issues and distribution of earnings.

"I think North Korea will pose problems at each step. As they get a taste for money, they'll get greedy because they won't have a feel for the marketplace and value," said Michael Breen, consultant and author on North Korean issues. He pointed to such possible problems as their workers striking for higher pay, as the KEDO workers did.

"However, I think they will remain committed to the overall plan because Kim Jong-il personally approved it," Breen told Asia Times Online.

Crawling out of its hole, North Korea has slowly been introducing market reforms since 2002 and its economy grew modestly in 2003 by 1.8%. Reports say that farmers' markets are found in urban areas and citizens are allowed to open restaurants and bakeries.

The Kaesong industrial complex is the fruit of the historic June 15, 2000 summit between the two Koreas, when their leaders met and agreed to engage in reconciliation projects. To give it an extra push, the Ministry of Unification agreed to foot the bill for water, sewage and garbage disposal facilities.

Small businesses in South Korea favor the project since it gives them a competitive edge over the Chinese. Wages in the complex are expected to be $57 per month, compared with the average pay of $80 to $100 per month in China. Land is also a bargain at $39 per square meter.

North Koreans are considered skilled with their hands and firms say management and training will be easier because of the common language.

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