On the heels of the recent United Nations Security Council Resolution, which
pursued tough new sanctions against the Democratic People's Republic of Korea
(DPRK) for launching a long-range missile and detonating a second atomic bomb,
North Korea is moving aggressively against the last remaining zone of
inter-Korean economic cooperation, the Kaesong Industrial Complex (KIP).
On June 11, the North Korean news agency KCNA announced the nullification of
all contracts on rent, salaries and taxes adopted for industrial park in
Kaesong. Pyongyang wanted the minimum monthly wage to be raised fourfold (to
US$300 from $75) and demanded an immediate lump-sum land lease payment of $500
million. It asked Seoul to empty the industrial estate unless the money is
This notification came as the two Koreas are wrangling over the
release of a South Korean worker known to public only as Mr Yoo, who was
detained by the North Korean authorities for alleged anti-DPRK statements, and
inciting and DPRK citizen to defect.
"We are nullifying contracts and benefits on rent, salaries and taxes that we
have offered in the Kaesong complex in accordance with the June 15 joint
declaration.'' The report added that the North will begin to adjust laws and
rules to meet with the current situation. "South Korean companies and officials
must accept the notification, if not, they can evacuate from the complex,'' it
Even without salary increases, the 106 companies that invested in Kaesong have
been in trouble and said they are considering a request for South Korean
government support. The companies have reported that sales slipped 6.6%
year-on-year between January and April to $74.54 million, while exports dropped
56% to $ 7.15 million. They have now started withholding wages to their DPRK
staff in protest at the North's demand for increased pay and tax. A fur-maker,
Skinnet, has also become the first South Korean enterprise to announce that it
is stopping operations in the complex. With these measures, its seems that a
decade of booming inter-Korean cooperation is coming to a close.
What lessons can be drawn from the recent rise and fall of inter-Korean
economic cooperation? Pyongyang blames the South's "extreme confrontation
policy'' that has destroyed the foundations of the industrial park, adding that
the future of the complex depends on the South's stance.
Restrictions imposed by the North on all jointly operated special economic
zones will inevitably lead to substantial losses for the South Korean
government, who had guaranteed its investors up to 90% of their capital in case
of forced closure or military conflict. North Korea will also lose a
significant source of revenue but as both Kaesong Industrial Park and the Mount
Kumgang tourist resort are physically on North Korean territory, they remain
the property of the DPRK government even if they are closed or abandoned by
There are no figures indicating the extent to which the South Korean side might
have profited from these cooperation projects in monetary terms. Hyundai Asan
and the companies investing in the KIP have always been subsidized by Seoul
through direct and indirect channels, and the system of these subsidies was not
particularly transparent. The South Korean government never wanted to tell
taxpayers how much money it had spent on aiding the inter-Korean projects in
Kaesong and Mt Kumgang, it must have had serious reservations about the future
of the investment.
During the decade of Sunshine policy (1998-2008) also known as the Policy of
Peace and Prosperity, the Kaesong projects (industrial park and daily bus
tours) were frequently criticized by hawks in Washington and Tokyo, who saw
them as yet another way to indirectly subsidize the North Korean regime.
Indeed, Pyongyang was making good money out of economic cooperation in Kaesong,
amounting to $100 million per year. So why has it decided to act so resolutely?
The North's official explanation about Seoul's "extreme confrontation policy"
must be a pretext. Anti-DPRK propaganda can be disturbing and annoying, but it
hardly constituted a direct threat to the regime. After all, Pyongyang had not
been influenced by the much larger South Korean propaganda efforts prior to
The real reason could be the Kaesong project itself. It created a stage where
the large number of North and South Koreans worked together for the first time
in 60 years since the division of the country. This project provided a rare
opportunity for unauthorized exchanges. The North Koreans not only learned
modern technical skills, they also had a chance to see that their southern
compatriots do not look or behave like they are normally portrayed by the DPRK
propaganda. Cautious political discussions were possible, which in the long run
could have had a great impact on the internal situation of North Korea.
Anticipating this detrimental development, the North started cooperation with
the South on the precondition of switching workers once a year. But later they
realized that switching workers every year was impossible for technical
reasons. Inevitably rumors about life in South Korea started circulating among
KIP workers and their families. Illusions about the South became so
uncontrollable among the people that the authorities could not bear this
situation any longer. From Pyongyang's point of view, each worker in Mt Kumgang
and Kaesong was like a poster advertising capitalism that was most damaging to
the socialist system.
At least 20 affiliates with the Kaesong zone of cooperation came under
questioning for talking highly about South Korea and capitalism. In 2007, there
was a thorough cadre reshuffling in the Party to stop people talking about
Kaesong or Mt Kumgang. North Korea also purged key officials who had pushed for
reconciliation with South Korea.
Choe Sung-chol, who for a number of years was in charge of DPRK relations with
South Korea, reportedly was fired and executed last year. He was held
responsible for wrong predictions about Seoul's new conservative government,
that has ditched its predecessor's decade-long policy of engagement toward
Pyongyang. Choe might have been also caught taking payments from South Korean
corporations, which happened often during the years of blooming inter-Korean
All this must have been a crucial consideration for Pyongyang, as the survival
of the North greatly depends on maintaining the myths about the "poor and
desperate" South, which starves under the yoke of American imperialism. In
recent years, the spread of smuggled South Korean DVDs and first-hand
communication with southerners in special economic zones has made this
propaganda image unsustainable.
The new propagandistic theme claims that the South, while economically
affluent, is getting morally corrupt and socially discriminative. Thus, the
southerners increasingly admire the national independence of the North (known
as Juche) and accept the guidance of Kim Jong-il, who is said to be as
popular in the South as he is in the North. The Pyongyang leadership does not
want this myth to be exposed, making people realize how poor and backward the
North is in comparison to the South.
In this context, Kaesong and Mt Kumgang projects from the outset were a
dangerous gamble. For some 10 years the top bureaucracy tolerated cooperation
with the South because the monetary rewards were handsome and political risks
manageable. Perhaps, when the principal decision was made in 1989 for Mt
Kumgang and 2002 for Kaesong, they also wanted to check whether the spread of
dangerous information could be contained. At that time North Korea was going
through a period of unprecedented political relaxation and experimentation with
reforms. However, the period of relaxation ended with the beginning of the
nuclear crisis in October 2002.
Since 2003, North Korean leaders have worked hard to turn back the clock. All
news coming recently out of North Korea has been about greater control and
tougher restrictions. Busy markets are a nightmare for Pyongyang retrogrades.
The DPRK government is now confiscating land from individual tillers,
Japanese-made buses and trucks are taken from small businesses. The sale of
many consumer goods at the markets is restricted, while the Public Distribution
System, which dominated the country's economic life before 1996, is
In the past couple of years several instances of public unrest made the North
Korean government nervous, but they managed to retain control and prevent the
mutiny from spreading. Cabinet Decision No 61, made in November 2008,
stipulated that in 2009 all markets across the country should work only three
days per month, similar to how they worked in medieval Korea. Currently, there
are reports about the government plans to close down the Pyongsong Market, the
largest wholesale market in the country.
Ruediger Frank and Sabine Burghart, in their report, Inter-Korean Cooperation
2000-2008, compare the inter-Korean cooperation with the East European
experience. When analyzing South Korea's Sunshine Policy and describing its
dangers for the North Korean regime, they remind us that "everyone who has
lived under socialism in Europe can confirm how this slow ideological poison
spreads like cancer, how these cells grow and how they finally unfold their
destructive, lethal power, hollowing out the system from within." In this
connection, Frank and Burghart cite Kim Jong-il himself who is recorded as
saying in 1995 that "the most serious lesson of the collapse of socialism in
several countries is that the corruption of socialism begins with ideological
North Korea cannot afford to emulate the success of China in transforming its
economy as this would require a considerable relaxation of domestic police
control. China has survived such a relaxation, but there is a great difference
between North Korea and China. The Chinese leaders did not have to deal with
the existence of a rich and powerful "other", where people speak the same
language but enjoy significantly higher level of freedom and prosperity. The
DPRK leaders believe that political unrest is unavoidable if their citizens
learn how prosperous South Korea really is.
Over the past few years all this made Kaesong and Mt Kumgang something of an
anachronism. These two projects, which could function only with a greater level
of openness and transparency than in the rest of North Korea, became too
dangerous for Pyongyang to be tolerated and were put under direct control of
the People's Army.
The era of relaxation and experimentation, which prompted the beginning of
inter-Korean cooperation, is well and truly over. Nowadays North Korea is
heading for a major retreat, back to military communism. Only those elements of
market economy which are necessary to keep the country afloat are being
preserved. It already looks as if the government turned the clock back,
restoring the system that existed before the 1990s.
Conservatives in Seoul might hope that this decision will deprive the North
Korean regime of revenues and bring its end closer. But the truth is that the
regime can survive much longer in isolation because poor and weak people do not
have the energy or weapons to rebel, particularly when they have little
knowledge and understanding of how different their life could have been.
Therefore, by closing the borders and shutting the zones of inter-Korean
cooperation the North Korean elite is buying extra time to stay in power at the
expense of the common people's suffering. The complexity of regional politics
and the current state of the global economy also contributed to the early
demise of inter-Korean economic experiment. Nevertheless, the last 10 years of
the Sunshine policy did make a difference and changed the Korean people's
perceptions of each other, making a new attempt at cooperation possible.
Leonid A Petrov (PhD), Research Associate, Division of Pacific and Asian
History Research School of Pacific and Asian Studies, Australian National