After the launch of the Lee government, there were several concerns about the Kaesong Industrial Complex. Implementing the agreement from the first round of North South prime ministerial talks had beed delayed. The implementation originally came from the October 4 Declaration and it included the KIC relating issues such as dormitory construction for North Korean workers and resolving the communications, customs, and conveyance (3C) issues. Especially, delays in the construction of dorms, a day care facility, and the highway from Kaesong to Pyongyang made concerns about the efficient supply of North Korean labor. Not only firms but the government of South Korea demanded the resolution of 3C issues by the construction and the cost of the construction planed the inter-Korean cooperation fund originally. However, the change of government was the main reason to be delayed
Perspective of North and South
As the agreements on the construction relating to KIC was delayed and inter-Korean relations frozen by the launch of the new government, the North Korean defense ministry’s power also grew. Since October 2008, because of sending South NGOs’ sending leaflets to North made the North incensed, they restricted border crossings and began to use 3C issues as a tool to pressure the South. Finally, the North said “This and other similar harsh conditions are the responsibility of the South Korean authorities who disregard the June 15 Joint Declaration and the October 4 Declaration and pursue a policy of confrontation,” and, “From now on, the future of inter-Korean relations depend on the position of the South Korean authorities.” The North made it sure that the South should choose one of two alternatives such as closing the KIC completely and implementing the two declarations. We know the KIC project are important factors in making peaceful environment and balanced growth of the North and South. As we can saw the North made a slogan of “Strong and Prosperous Nation by the year 2012,” they will make efforts to maintain the KIC project. Even though there exist two groups of people who believe the benefit of the KIC, and tho do not, the number of people who agree that the KIC will be economically beneficial increases. In addition, It will support the North Korea regime, improve inter-Korean relations, and finally help the reunification. As North consider the KIC as a test case of market economy, if it is successful, it can be applied to other cities. However, influence of these political changes is limited.
The South has think that the North has the responsibility on the failure of inter-Korean relations. The Lee administration keep trying to get mutual benefit of inter-Korean relations from co-existence. Showing its respects of the spirit of two declarations, it made a meeting for the KIC and the ” Kaesong Industrial Complex Activation Measures Plan.” It said construction of dormitory and a fire department, and repairing road were executed by the cooperation fund for 2009. On November, 2008, the South decided to allocate 10.4 billion won to the inter-Korean cooperation fund for the KIC facilities, NGO projects, and other expenditures. The Lee government had made efforts to ensure efficient operations in KIC. Not only power, water and other services but raw materials and final products should be provided steadily. By doing so, the South believe inter-Korean relations, the current issues, the 3C issues can be resolved step by step.
The impact on the KIC
At the end of 2008, 93 South Korean businesses were active in the KIC and 38 more were under construction. Between December 2004 and November 2008, a total of around 502.61million US Dollar worth of goods had been produced, of which 94.33 million US Dollar worth had been exported. In the beginning of 2009, about 36,650 North workers are employed, and 952 South workers are residing in the complex.
On December 2008, the North government made the restrictive policy so the South firms not only had a difficulty in customs, conveyance and so on but also needed extra effort to adapt. The most difficult issue at the moment is not sufficient labor force from the North. Because of limited supply of labor from the city of Kaesong itself, the South firms have been experienced the shortage of labor and this shortage should continue to increase unless a dormitory and other facilities are not build on time. The cost to construct a dormitory was scheduled to finance by the South but it depends on not only inter-Korean relations but unclear issue from the North.
Because of the recent consecutive happenings, inter-Korean relations were still not active, so the influence on the KIC was also quite worrisome.
Most of all, actual operation rate in the KIC had decreased since December 2008. The growth rate of inter-Korean trade also declined as the several KIC projects were slow down. The volume of trade between two Koreas during 2008 was 1.82 billion US dollars and grew 1.2% relative to 2007. Especially, 810 million was from the trade related to the KIC and 83% of growth happened in 2008. However, the slowdown in KIC made overall trade volume fall after November 2008. Unless North and South resume their conversation, the current issues could not be resolved. Moreover, these issues cannot be solved by private sector. As the firm sizes of the KIC are small or medium, they are vulnerable to these situations. In addition, new companies planed to get in the KIC worried about the cancellation of contracts due to the shortage of labor.
As we know, the KIC bring lots of mutual benefit to the both North and South, for example of economic benefit, the South can invest significant level of capital to the North as rents from the land, construction of buildings, installation of equipment and so on. Additionally, the South bring almost all the raw materials to produce and labor from the North produce the final goods shipped back to the South. Some of the products shipped back to the South in the forms or partially finished or finished, and finally exported to the other countries. By doing so, the benefit of investment in KIC is realized. In the North Korean perspective, the workers earn wage from the South firm, the government collect income tax, social insurance fees and rent from the South firms, as well as sociocultural tax from wages of the North workers.
Even though investment in KIC is following the form of cost saving, it is different from the cases of China’s and Vietnam’s in the sense that it has a significant amount of delivering materials to the KIC. The usage of raw materials from the South derive benefit to the domestic economy but the North has relatively less impact than FDI in China or Vietnam because of the KIC’s isolation from the North economy.
The estimation of the KIC effect was about 510 to 670 million US dollars of production effect and about 170 to 220 million US dollars of value-added effect. However, the effects can reach about 3.6 and 4.72 billion US dollars as production effect, and about 1.19 to 1.56 billion as value-added effect if all the issues, such as shortage of labor in the KIC, nuclear issue, capital inflow and so on, are resolved as well as the development of the KIC continue.
There exist lots of obstacles in developing the KIC more rigorously. But, once it succeed, it makes the boom of North economy and spillover effect on economy as well as society.