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     Apr 6, 2006
Kaesong zone a troubled Korean jewel
By Andrew Salmon

KAESONG, North Korea - It may be the jewel in the crown of North-South Korean economic relations - but economically, is an industrial complex in one of the world's most isolated, insulated and ill-reputed states a viable proposition?

The Kaesong Industrial Complex, opened in 2003 on North Korean soil with southern capital, has been championed by Seoul's Roh Moo-hyun administration to the extent that the South Korean president last year reportedly extended an informal invitation to

US President George W Bush to visit. (To nobody's surprise, that visit did not transpire.)

Questions hang, however, over whether the complex can fulfill the dream of its founders, who see it as the blueprint for future North-South economic relations and a potential regional hub for low-cost manufacturing. And with the nuclear crisis simmering steadily, the shadow of a hawkish Washington hangs over Kaesong's future.

On the ground
Having said that, on the ground, things look rosy. A factory complex is rarely a thing of beauty, but amid the desolate landscape of North Korea, it adds a splash of color to the dominant browns and grays.

The 10-hectare complex sits in the midst of a dusty plain of excavated ground just north of the Demilitarized Zone (DMZ) separating the two Koreas. It is some 15 kilometers from the city of Kaesong, an ancient Korean capital, and an hour's drive from Seoul. Every day, convoys of some southern 300 cars and trucks trundle north along the barbed-wire-lined four-lane highway that cuts through the DMZ to the complex.

Fifteen small and medium South Korean enterprises - 11 are already operational - have established factories in this enclave of capitalism. About 6,000 North Koreans labor under South Korean direction, producing pots, footwear, textiles and other products primarily for the Southern market.

With the complex's South Korean backers clearly keen to sell the North on the joys of capitalism, these factories are no Third World sweatshops. They are spacious, well lit and equipped with industrial-safety features; the zone even boasts a gleaming red fire engine. Amenities include a bank, a convenience store and accommodation for the 500 South Koreans who currently work here, receiving a 50% hardship bonus. Electricity is piped in from the South. Cross-border telephone lines were laid in December - a historic event in itself - but there is, as yet, no Internet access or cell-phone use in the zone.

Officials from Hyundai Asan, the Southern conglomerate that has pioneered economic relations with the North, and the state-run (South) Korean Land Corp, were ebullient as they welcomed 120 foreign reporters on a tour of the US$220 million complex recently. "The North Korean workers are very diligent, with high manual skills," enthused Kim Dong-keun, the president of the complex's Industrial District Management Committee. "Their productivity level is, on average, 80% that of [their] South Korean counterparts."

One of the few Northern workers wheeled out to face the press was the delightful Kim Hyo-jung. "This is the first such attempt to work with South Koreans, so there is pride," said the attractive young female interpreter after delivering a snappy PowerPoint presentation, complete with laser pointer.

The monthly wage paid to Northern workers, $57.50, is about one-tenth to one-twentieth what employers pay in the South, estimated Moon Chang-sup, president of Stafild, a sports-shoe manufacturer that is planning to relocate its main operations from South to North in the near future. (Ironically, the only currency used in the complex is the US dollar.) A further boon for South Korean management used to dealing with unruly unions at home is the discipline of the Northern workforce: there have been no labor disputes.

Future vision, future issues
Planners envisage a grandiose future for the industrial zone. By 2012, they plan to expand it to 6,610 hectares, developing it into a regional manufacturing hub marrying Southern capital and expertise with the skills of 700,000 Northern laborers - who are a cheaper bunch even than their Chinese comrades. Meanwhile, Kaesong city itself is envisaged as a cultural tourism zone, attracting the history-hungry citizens of Seoul with the world's largest extant collection of Korean traditional architecture.

Unlike the planned free economic zone on the Chinese border at Sinuiju - a proposal that has been indefinitely shelved after the man Pyongyang chose to head it, Dutch-Chinese entrepreneur Yang Bin, was arrested by Beijing authorities in 2002 - Kaesong has realistic possibilities, some believe. Its proximity to a South whose small enterprises face a labor shortage and whose government is keen to build an economic bridgehead on the soil of its communist neighbor, grant it a fighting chance.

But tellingly, despite entreaties from Hyundai Asan, the promise of cheap, disciplined labor, and its adjacency to the lucrative Southern market, no foreign investors have yet signed up for the zone. And there are concerns that, with the United States at odds with South Korea over how to deal with the North, the Kaesong project could founder on the rocks of geopolitics.

Washington requires high-tech products destined for North Korea that include US intellectual property to undergo stringent export controls. This has irritated many in the South - particularly after the process delayed the transfer of telecommunications equipment. It also appears highly unlikely that Kaesong-built products will be included in a free-trade agreement between Seoul and Washington that is under negotiation.

"Kaesong is clearly getting in the way of the US putting a financial stranglehold on North Korea, so there is a looming showdown between Seoul and Washington on whether the project should move forward," said Peter Beck, who heads the International Crisis Group in Northeast Asia. "It is a pillar of North-South cooperation, but I think South Koreans are going to be in an increasingly difficult position when nuclear talks go nowhere; they are going to face pressure to slow down or pull back."

Outstanding issues
And even today, there are issues. The contrast between the complex, with its modern buildings, utility poles and street lighting - even a lawn - and its surroundings is striking. Beyond the 8.6km green perimeter fence, soldiers patrol. Against one section of fence is a drab village. The gray concrete of the shabby houses, set amid plots of brown dust, is cracked and crumbling. Many of their windows, lacking glass, are filled instead with sheet plastic.

Officials of the complex say they have assisted local villagers with heating briquettes and rice, but there is otherwise neither trade nor contact across the fence, indicating that the experience of capitalism is strictly insulated. This assumption is buttressed by relations inside the complex: despite talk of inter-Korean fraternity, social contact between Northern and Southern workers is non-existent.

"It is absolutely impossible to socialize; it is prohibited by the authorities," said Yoo Nam-yeol, a South Korean production manager at Taesang Hata, a firm producing cosmetics containers.

In addition, there is little transparency in wages, which are paid not to workers but to a North Korean government agency. "We have no idea what happens next," admitted one Southern factory foreman.

Beyond the red-dressed Kim, North Korean workers were reluctant to speak to reporters. "I was picked for this job by the government, but I cannot tell you my salary; it is best to ask the company," said one textile worker, who, like her colleagues, takes a bus to the complex daily.

Logistics are a further issue. While the railways between the two Koreas were reconnected in early 2004, theoretically linking Seoul and Sinuiju on North Korea's Chinese border, it is uncertain when trains will start to run through Kaesong.

"There will be talks on opening the line in July, but it is not certain," said a South Korean official at Dorasan Station, a giant steel-and-glass edifice on the southern side of the border. The lack of rail transport complicates his firm's logistics costs, said Stafild's Moon, whose head office is on the south coast of the peninsula, in Busan.

Andrew Salmon is the Seoul-based author of American Business and the Korean Miracle: US Enterprises in Korea, 1866 - the Present and a frequent contributor to the South China Morning Post, the Washington Times and The Times.

(Copyright 2006 Asia Times Online Ltd. All rights reserved. Please contact us about sales, syndication and republishing .)

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