Economic Experiment of the Two Koreas Is Fighting for Its Survival

By Blaine Harden
Washington Post Foreign Service
Friday, June 19, 2009

SEOUL -- Soon after North Korea tested its first nuclear bomb in October 2006, a three-star general from Pyongyang showed up at the Kaesong Industrial Complex.

His mission was to calm the nerves of the South Korean businessmen who were investing hundreds of millions of dollars in the collaborative venture, a cluster of factories just north of the heavily armed border that divides the two Koreas. Mollified, investors went on to hire 40,000 North Koreans and begin pumping $40 million a year into the impoverished communist state.

"The general told us not to worry," said Song Ki-suk, chairman of Korea Micro Filter, a South Korean auto parts company that invested $5 million in Kaesong and employs 420 North Koreans there. "He told us the bomb was just politics. He said, 'We fully support you.' "

North Korea exploded its second nuclear bomb May 25, but no one from Pyongyang has come to Kaesong to calm anyone down. The nurture of South Korean investors has been trumped by political maneuvering in Pyongyang, where leader Kim Jong Il is ailing, his third son is apparently being groomed to take over and the military appears to have elbowed out the economists.

As a result, the five-year-old industrial park -- by far the most successful symbol of economic cooperation between North and South Korea -- is on a death watch.

"Something much more important than money must be going on inside North Korea," Song said. "Businessmen at Kaesong are in a panic situation."

Reasons for panic multiply almost weekly. Last Thursday, North Korea demanded a fourfold increase in the base wage of workers at Kaesong, which would make it more expensive for employers than similar factories in Vietnam or China. The North also demanded a 30-fold increase in rent from the South Korean entities that developed the complex. The South has rejected the demands; another North-South meeting is scheduled for Friday.

After meeting with President Obama at the White House on Tuesday, South Korean President Lee Myung-bak warned the North to temper its call for more money at Kaesong. "We urge North Korea not to make any unacceptable demands, because we really do not know what will happen if they keep on this path," Lee said.

Anxiety at Kaesong is not all about money. In March, the North detained a South Korean technician who worked in the complex, accusing him of criticizing its communist system and trying to lure a North Korean woman to defect. Pyongyang officials refuse to say where he is being held. The arrest has alarmed many South Korean executives, including Song, making them reluctant to visit their own factories.

Outside the industrial park, there is much else to fret about. Besides last month's nuclear test, which triggered a new round of U.N. sanctions, the North has launched several missiles and pledged to launch more. It has also sentenced two U.S. journalists to 12 years of hard labor, declared that it will never give up nuclear weapons and threatened "merciless" war against its neighbors and the United States.

A clothing manufacturer pulled out of Kaesong on Monday, the first company to halt operations there. But many others have begun hedging their bets, quietly transferring production back to South Korea or to China or Vietnam. The volume of exports from the industrial park dropped 56 percent in the first four months of the year, according to South Korea's Unification Ministry.

A large-scale exodus will probably happen soon, said Cho Bong-hyun, who works for the research arm of the Industrial Bank of Korea.

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