The Kaesong Industrial Complex is an enclave in North Korea, close to the border with the South and the DMZ, where it was agreed that South Korean companies could invest and employ North Korean workers, taking advantage of low labour costs and a disciplined, Korean-speaking workforce. Construction started in 2003, and earlier this year the site was employing 53,000 NK workers and 800 staff from South Korea (ROK).
This was widely regarded as a major breakthrough, and an opportunity to start engaging NK with the rest of the world. I (and many others) hoped it would be a model for future development, with perhaps a number of such zones. Kaesong was explicitly for ROK companies to invest in, but many Korea-watchers hoped that future such zones might be extended to accommodate companies from elsewhere as well. The Kaesong site had direct road and rail access to the South, and the project carried high hopes of success.
Several problems arose along the way. In 2009, Pyongyang unilaterally tore up rent and wage agreements and demanded much higher wages (which are paid not to workers, but to the NK government, by the way).
Worse was to come. Earlier this year, in one of their periodic fits of petulance (North Korea has a policy of artificially ramping up tension and then backing off — see my earlier piece “Land of Cognitive Dissonance”, they decided to block ROK staff from the site, and to withdraw the 53,000 local workers. Since then there has been an agreement in principle to re-open the site, but as usual they have failed to reach any consensus on the details.
ROK investors have of course become very concerned about lost production, but also about maintenance of equipment in a site that has effectively closed. When I was in NK earlier this month we heard that agreement had been reached to allow investors to remove finished goods and work-in-progress — but not to withdraw manufacturing plant and equipment.
We raised this issue in our meetings with the Vice-Ministers of Trade and Foreign Affairs, and were treated to a long litany of excuses and justifications. (If excuses were a tradable commodity, NK exports would surge). I have observed before that when one flags up the lamentable economic performance of the North with officials of the régime, they will blame anything and everything — the Americans, the sanctions, the weather, natural disasters, the topography — everything except, of course, their own policies, which (they seem to think) are above criticism.
I had to explain to them — courteously but very robustly — that a key issue for international investors is political risk. We in the UK should know a lot about that. Our energy market is in disarray largely because of political risk. Potential investors don’t know which way the government will jump next; whether policies and subsidies will be altered at the stroke of a pen. They see Angela Merkel in Germany peremptorily deciding to close the German nuclear fleet, and conclude that they don’t need those sorts of risks in the UK.
But I digress. I explained to our NK friends that before politics, I spent a third of a century in international businesses, and have some knowledge of investing in emerging economies (I opened one of the first foreign JVs in Saigon, Vietnam in 1989). And I told them in no uncertain terms that international investors would have no interest at all in excuses and explanations. They would simply observe that the Kaesong project had been cut off at the knees, and they would cross North Korea off their list.
I don’t know if the NK officials understood the point. They certainly should have done, because I was very clear. They will not achieve the second plank of their Beloved Leader’s strategy, economic development, as long as they are prepared to put posturing and petulance, prevarication and provocation, ahead of prosperity and progress.