The business of Korean reconciliation

By Paola Subacchi

Research Director of International Economics at Chatham House.

Can trade and commerce foster peace and mutual understanding between hostile governments? When it comes to the Koreas, this question may seem to be beside the point, given the ruthless purge now underway in the North. But it remains an essential consideration for the longer-term future of North Korea and other outcast regimes.

The Kaesong Industrial Complex, a joint venture of the North and South Korean governments, is both a tribute to the concept of diplomatic reconciliation through business and a difficult test of its feasibility. Roughly 50,000 North Korean workers are employed in 123 factories that produce about $450 billion worth of goods (mainly textiles, shoes, and household goods).

Kaesong is an expensive investment for South Korea, which provides capital and infrastructure, including a power station, a water purification plant, and a hospital. But, more than a decade after its inauguration, the complex runs at 40% capacity and has attracted only medium-size companies.

Despite generous tax incentives, South Korea's huge conglomerates, the chaebol, have spurned the experiment, at least partly because of enduring transportation and communications problems. The complex can be accessed only through the demilitarized zone separating the two Koreas, which requires entry and exit passes. The lack of mobile-phone networks and broadband Internet means that South Korean managers must communicate with their headquarters by landline phones and fax.

Of course, commercial gain is not the only motivation behind the Kaesong complex. The South Korean authorities are rightly proud of the initiative, which they view as an investment in future reunification with the North.

Seen from this perspective, North Korea's recent announcement that it will open another 14 special economic zones is a positive development - one that is underpinned by significant financial incentives. Aside from enabling the North to acquire technology and learn market-oriented business practices, the Kaesong complex generates about $80 million annually in workers' compensation (the monthly wage of $160 is far higher than in North Korea).

But political and historical tensions continue to shape daily life in Kaesong, where companies operate under the constant threat that North Korea, for whatever reason, will react rashly, even abandoning the joint project altogether. Already last year, rising inter-Korean tensions led to a temporary shutdown of the complex.

As a result, firms must dedicate considerable time and effort to dealing with North Korea's often volatile and opaque politics, exemplified in the recent execution of North Korean leader Kim Jong-un's powerful uncle, Jang Song-thaek. This challenging climate undermines the project's viability, even though the business model - based on lower-cost workers from the North producing labor-intensive goods - makes sense.

Kaesong is a bit of George Orwell's 1984, with added elements of nineteenth-century paternalism. The atmosphere is stilted and muffled, with workers moving around in silence and guards everywhere. During a recent visit - the first by a foreign delegation since 2006 - the cold and snowy weather intensified this feeling, creating the sense of being suspended in time and space.

The visit began with military jeeps escorting our convoy into North Korean territory. The vehicles' number plates were covered with white cardboard, and red flags had been affixed to the doors next to the side-view mirrors - for which none of our South Korean hosts was able to offer an explanation.

Even the preparation for our visit, which was confirmed less than 24 hours before it began, was somewhat Orwellian. Detailed packing instructions were issued, informing us that we could not bring radios, mobile phones, wireless devices, printed materials, photos, cassette tapes, or DVDs.

Despite being limited to cameras with lenses under 160mm, we were not permitted to take photos of the demilitarized zone between the industrial complex and the border, or of North Korean soldiers or workers. Our cameras were checked when we left the country to verify compliance.

The border between the two Koreas is virtually impenetrable, with gates that open for a half-hour at a time a few times per day. As a result, all personal contact occurs through official channels. Even as diplomatic visitors, we were prohibited from speaking with or giving anything to the workers, whom we watched with a mixture of curiosity and sympathy.

The North Koreans seemed to share our desire to connect, as they sought to engage with us to whatever extent they could. The diminutive border guard looked into my eyes, smiled warmly, and asked where I was from. Likewise, lined-up workers at one of the factories responded to my gesticulations with waves and smiles as we passed them.

Given the prevailing paranoia, fueled by propaganda and genuine ignorance, on both sides of the border, it is possible that our hosts were being excessively cautious. Nonetheless, our pre-trip "indoctrination" stifled our reactions, regrettably preventing us from trying harder to reach out to the workers we encountered - an experience that seemed to exemplify the difficulty of bringing North Korea into the international community.

Despite their flaws, initiatives like the Kaesong complex help to build an environment of collaboration and trust. As Asia's recent history shows, authoritarian regimes tend to open up in response to a combination of grassroots movements and gradual top-down reforms. North Koreans may well be prepared to provide the former, but whether the government is prepared to do its part remains highly uncertain, to say the least.

The expansion of special economic zones - supported by increased private investment, especially from firms that are not South Korean or Chinese - would significantly improve the odds that North Korea's regime eases its repressive rule and embraces a program of economic reform, as China did more than three decades ago. The task of defusing the threat to regional peace and stability that North Korea poses should be one that is shared across Asia.

Copyright: Project Syndicate


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