The risk of a permanent shutdown at Kaesong

Posted on : 2013-04-29 15:32 KST Modified on : 2019-10-19 20:29 KST
Last South Korean workers, to leave on Apr. 29, but both sides would lose a lot if operations aren’t eventually resumed
 viewed from the Dora Observation Post in Paju
viewed from the Dora Observation Post in Paju

By Gil Yun-hyung, staff reporter

While the showdown between North and South Korea over the Kaesong Industrial Complex is heading toward catastrophe, neither side is talking about shutting down the complex. This is because they both know how great the ramifications of a permanent closure would be.

At present, the biggest cause for concern is the potential damage to South Korean companies. During an Apr. 27 plenary session of the National Assembly’s special budget committee, Prime Minister Chung Hong-won estimated that South Korea would lose 1 trillion won (US$900 billion) if the Kaesong Complex shuts down.

Business insiders take a different view. They argue that if you add in the 400 billion won facility investment by the South Korean government and various companies, the raw materials, supplementary materials, and finished products (worth about 500 billion won) currently inside the complex, the companies’ lost revenue (1.2 trillion won), and additional losses that subcontracting companies would face (3 trillion won), the scale of damages could grow to as much as 6 trillion won.

Even more important than this, though, is that a shutdown would mean the end of the grand vision upon which the complex was founded. The goal was to use cheap labor in North Korea to help South Korean industry transcend the limitations on growth while also helping economic development in the North.

The original plan was for the Kaesong complex to be 66.12 million m2 in size. However, because of strained tensions between South and North, the complex never expanded beyond 3.31 million square meters.

Shutting down the complex could also ratchet up military tensions between North and South. One reason is the possibility of North Korea repositioning its second corps along the route that it used to invade South Korea the Korean War. This route runs from Kaesong through Munsan then down to Seoul.

In 2004, immediately after the establishment of the Kaesong Complex, a brigade of the US 2nd army division that was based here was moved to Iraq. At the present, the region is only defended by ROK forces.

The situation would be even worse in North Korea. The wages of the nearly 54,000 employees working in the complex, which amount to US$90 million would be cut off permanently. This would mean that there would be 200,000 to 300,000 dissatisfied people on the border with South Korea - people whose livelihoods were jeopardized by the shutdown of Kaesong. Their existence could become a major headache for the North Korean government, despite the tight control it maintains over North Korean society.

This is different from the Keumgang Mountain tourism venture, which was suspended in Jul. 2008. In this case, the North was able to operate the tourist site for Chinese visitors after it evicted Hyundai Asan.

But things are not that simple at an industrial complex. If the Korea Electric Power Corporation (KEPCO) shuts down the supply of power to the complex, the assembly lines on site become inoperable.

Additionally, North Korea will only reinforce the perception that it is not a reliable partner for investment. This is bound to have a negative impact on the pending decisions of companies from China and elsewhere who have been considering investing in various special economic zones that North Korea has been promoting in locations such as Hwanggeumpyeong, Wihwado, and the Rason Special Economic Zone.

There would also be serious consequences for inter-Korean cooperation. Pulling the plug on Kaesong would mean the total discontinuation of economic cooperation between North and South, which has carried through major difficulties over the past ten years. Following the South Korean government’s enactment of the May 24 measures that cut off almost all exchange with the North, the proportion of inter-Korean commerce that the Kaesong Complex accounted for increased from 56.0% in 2009 to 99.7% last year.

The Kaesong Complex was the final safety valve holding the two Koreas together. If it shuts down, there is a high probability that it could make the “Korea discount” of artificially undervalued South Korean stocks into a reality.

Fortunately, both the North and South are in agreement about the importance of the complex, as they have both expressed.

South Korea’s Ministry of Unification released a statement on Apr. 11 saying, “Shutting down operations at Kaesong would not be beneficial for the future of the Korean people.”

And on Apr. 27, the spokesperson for the North Korean General Bureau responsible for special development said, “If Kaesong shuts down, we will be cursed and denounced before history and before the Korean people for years to come.”

We are seeing a classic game of chicken. Both sides are running at each other at full speed, each insisting that the other be the one to yield.

“The North seems to have a clear sense that it does not want to shut down the Kaesong Industrial Complex,” said Paik Hak-soon, research fellow at the Sejong Institute. “We must make an effort to tease out the North’s intentions, even if it means making a proposal for closed-door talks.”

“What the South Korean government needs to do now is give North Korea an excuse to take action,” said Jeong Se-hyun, former Minister of Unification. “After the Foal Eagle military exercises end on Apr. 30, the South Korean government needs to make a proposal for talks that would deal with various aspects of economic cooperation between North and South. They should include not only the Kaesong Complex but also a resumption of tours to Keumgang Mountain.”

 

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