| DEVELOPMENT OF THE KAESONG INDUSTRIAL COMPLEX by Lim Eul Chul Director for Planning, ICNK April 11, 2005 (No. 05-4-11-1) ICNK Forum shares a diversity of analytical views addressing the issue of development in North Korea. Views presented in the articles are exclusively those of the authors. If you wish to receive email notice of new postings, submit an article or feedback, or have any questions regarding the forum, please email ICNK at icnk@kyungnam.ac.kr. | |
■ BACKGROUND Big Hopes at Kaesong On June 15, 2000 South Korean president Kim Dae-jung and North Korean leader Kim Jong-il realized the first historic inter-Korean summit and later shook hands on a joint declaration for economic cooperation and mutual coexistence. Three years later on June 30, 2003, a joint groundbreaking ceremony was held for a major inter-Korean project: The Kaesong Industrial Complex (KIC). In April 2004, construction work on the KIC began in earnest. By December 2004, the model site revealed its achievements: fifteen South Korean companies had moved into the 91,840-square-meter model complex and one of them, a South Korean kitchen utensil company, had manufactured and sold out all of its 1,000 sets of Kaesong-made stainless steel cooking pots only two days after hitting the South Korean market.1) These were the first ever products of the KIC, and the beginning of an inter-Korean project that symbolizes a real move toward reconciliation and peaceful coexistence between the two longstanding antagonists. From Guns to Garment Factories The KIC is located in the major North Korean city of Kaesong, approximately 170 km from the North Korean capital of Pyongyang, but just 60 km from South Korea’s largest city, Seoul. For North Koreans, Kaesong has been a highly agricultural-centered city - its surrounding area part of what is known as North Korea’s “Cereal Bowl”2) - but also a strategic military zone as it lies just north of the Demilitarized Zone (DMZ), the heavily fortified border that has separated the two Koreas for over half a century. This latter fact makes the KIC a very unique form of North Korean special economic zone (SEZ). In the 57-year history of inter-Korean relations, no such SEZ has existed - a South Korean style industrial complex on North Korean territory. Basically, in the KIC, South Korea is in charge of developing the land for factories and renting that space out to other fellow South Korean companies - in particular, garment and other labor-intensive firms that seek to benefit from the cheaper labor costs. In addition, it has been agreed that South Korean electric and phone companies will take charge of constructing the basic infrastructure. Furthermore, although the Kaesong Industrial District Management Committee is a North Korean administrative body, it is headed and managed by a South Korean national, an unprecedented symbolic concession - though maybe an unavoidable one - on the part of Pyongyang. Moreover, the KIC is managed according to thirteen laws and regulations set by North Korea that, despite skepticism surrounding the credibility of law in the North, are generally accommodating the capitalist market-economy system. But most significant may be the fact that North Korea has reconsidered its forward deployed armed forces and artillery in the Kaesong area. Much of this has been relocated. This is particularly significant considering the strategic importance of the Kaesong-Munsan (western) corridor: It is believed to be one of three primary avenues North Korea would use if it were to initiate a war with the limited aim of capturing Seoul, and was the main channel in which North Korean troops entered the South at the very start of the Korean War. In a land long governed by the gun - and since Kim Jong Il’s official ascendancy to the top leadership position of the country, “military-first politics”3) - this pull back, as well as the North Korean military leadership’s acquiescence to South Korean management of the project, can be seen as a symbolic victory for pragmatism and peace. Win-Win for Both Sides Kaesong seems to have transformed itself into a buffer zone to an open economy. It is an opportunity for North Korea to earn much-needed hard currency, but more importantly, conduct a more promising test-run of how to benefit from capitalism and cooperation. The KIC also offers small and medium-sized labor-intensive companies in South Korea suffering from high wages and an uncertain future a lifeline to capitalize on the cheaper labor costs and communication benefits of employing North Korean workers. Many of these companies cannot relocate to China or Southeast Asia to take advantage of the cheaper labor in those areas, hence the KIC offers them a viable alternative. Likewise, as South and North Koreans share the same language, firms may be able to avoid much of the communication problems that they may otherwise face if they were to relocate to China or elsewhere. If this meaningful experiment succeeds, it may convince leaders in Pyongyang to undertake reform, economic opening, and inter-Korean cooperation on a grander scale, a win-win for the growth of both economies. Logistics On top of its proximity to metropolitan Seoul, the KIC is also only 90 kilometers from South Korea’s key air logistics center, the Incheon International Airport.4) In addition, as both North and South Korean authorities agreed to establishing physical and institutional conditions suitable for the smooth exchange of human resources and goods for the construction of the KIC, reconnection of the previously severed Seoul-Sinuiju railway line and roads traversing the DMZ was agreed upon, as was agreement on passage, clearance, and quarantine. Roads opened during the first half of 2004, affording developers and manufacturers within the KIC a vital transportation link. As the South Korean government proceeds with its long-term project of building Korea into a hub of Northeast Asia and a base for economic cooperation in the region, development of the KIC would seem to complement this vision: Seoul's finance, Incheon's logistics, and Kaesong's manufacturing. First-stage Main Complex Forty percent of the whole 65.7-square-kilometer complex has been allocated toward the construction of factories (approx. 26.28 square kilometers) and the other 60 percent to residential milieu (39.42-square-kilometers). The construction for the first-stage main complex (3.3 square kilometers in factory grounds, including a 91,840-square-meter pilot zone) is to be completed in 2006; the total estimated cost is 220.5 billion won (including 109.5 billion won for infrastructure building costs). The KIC developers, Hyundai Asan and Korea Land Corporation, have signed an agreement to lease the land from North Korea for fifty years. Their plan is to prepare the site so that it is suitable for an industrial zone, then rent the land in lots to foreign and domestic (South Korean) businesses and manage those tenant businesses. This first-stage accounts for only 5 percent of the whole KIC. The plans for the remaining 62.42 square kilometers is to be formulated after South Korea's developers consult with their North Korean counterparts. ■ THE PILOT ZONE Pilot Project The pilot zone is a trial zone for the small and medium-sized businesses that already have moved into Kaesong. While fulfilling their demands, management will be conducted in the form of a pilot project, checking in advance the laws, institutions, and investment environment that might be expected once the main complex becomes operational. As of March 2005, fifteen South Korean companies have divided the available rental space at the 91,840-square-meter pilot zone, all within the 3.3 square kilometers of land set aside for the first stage of development. Two companies are currently in production, and the remaining thirteen are also scheduled to initiate manufacturing within the first half of this year. Ten companies are establishing their factories in the KIC, and 76 percent of the construction work for infrastructure has been completed (i.e., plumbing, drainage, paving of roads, etc.). Electricity The Korea Electric Power Corporation (KEPCO) has agreed to supply 15,000 kilowatts to the zone through aboveground power lines. KEPCO signed an agreement with North Korea on December 3, 2004, stating it would supply electricity and be in charge of the design and construction of the lines, and management of the supply.5) KEPCO launched its electricity service to the KIC on March 16, 2005, of which four users now receive electricity: Living Art, Shinwon, SJ Tech Co., and the Kaesong Industrial District Management Committee. The companies had previously operated independent power generators for electricity. With the line from Seoul they can now engage in full-scale productions with a stable supply of electricity. Also noteworthy is that KEPCO will provide electricity only to the fifteen South Korean companies through a 22,900-volt aboveground power line in the model pilot zone. Telecommunication Korea Telecom (KT) has agreed to provide telephone lines. After numerous negotiations with the North, KT finally signed a communications service agreement on December 30, 2004, and later a supplementary agreement on March 24, 2005. KT is to install and provide telephone and Internet service for the KIC and therefore it is in charge of linking the 15 kilometers of distance from the Unification Bridge to Kaesong. Due to some disagreements negotiating the scale of North Korea's participation in the communications service project, negotiations are being held separately for the pilot and main complexes. The two parties' main points of agenda in their supplementary agreement are the telephone area code, how to install optic cables across the DMZ into Kaesong, call rates, management, income shares, and worksheet methods.6) Employment of North Koreans The Kaesong Industrial District Management Committee is working out an agreement with its North Korean counterpart on the matter of hiring a North Korean workforce. Currently, 1,900 North Korean workers are working at the KIC (as of March 2005). Approximately 730 to 740 are in training, or are manufacturing test samples and final products at the Korean companies located in the KIC; about 950 workers are working on the pavement of roads and building of the (land) foundation at the 3.3-square-kilometer first-stage construction site; and some 220 North Koreans are assisting with office work at the management committee and Hyundai Asan KIC office, or are involved in cleaning, sales (at the convenience store), or serving (at the cafeterias). The number of North Korean employees is expected to increase once the factories for the fifteen companies are built. These companies plan to employ 2,300 employees by the end of 2004 and gradually increase the number to 4,700 by 2005, and 5,900 by 2006. There are an average of 400 South Korean employees currently staying in the KIC. Commuting to Work Most of the North Korean workers commute via seven buses that drive them 7 kilometers from downtown Kaesong to the KIC, but a large number of workers also ride bicycles or walk. Once the South Korean companies hire more workers, however, other means of transportation will have to be arranged as the buses will not be able to accommodate everyone. Hyundai Asan and the Korea Land Corp. are therefore reviewing a plan to construct a bicycle lane running from the downtown area to the KIC. Shuttle bus services for South Korean employees commuting from Seoul to the KIC began in September 2004. On weekdays, two shuttle buses make two round trips daily, carrying constructions workers, developers, and others involved in the site’s construction. Training and Production Manufacturing Among the fifteen companies in the pilot zone, kitchenware manufacturer Living Art employs 270 North Koreans and produces 12,000 stainless kitchen pots a day. Three other companies, SJ Tech. Co., Shinwon, and Samduk Trading, are training 300 North Korean workers. The remaining eleven businesses have completed their training of employees and are producing test samples. Company managers acknowledged that the North Korean workers at the KIC pilot zone are learning the required skills at a much faster speed than anticipated. Wages and Work Hours The minimum monthly wage for North Korean workers employed at the KIC has been set at 57.5 U.S. dollars (i.e., minimum wage of 50 dollars, plus social welfare/social security of 15 percent), with an annual maximum wage increase of 5 percent, far lower than wages paid in China (approx. 100-200 U.S. dollars) and Vietnam (approx. 60 U.S. dollars). Wages are to be paid directly to employees. Proficient workers can also receive a bonus of an additional ten to twenty percent for higher productivity. Factories are open from 9 a.m. until 5 or 6 p.m., with the workweek set at 48 hours (longer than that of China - 44 hours), with no night shifts. Product Labels and Sales On March 8, 2005, the Korea Customs Service announced that products manufactured at the KIC will be labeled "Made in Korea," the trademark of South Korea. The new decree by the customs service - which took effect on March 10 - stipulates that manufacturers can use the English- or Korean-language label "Made in Korea" or "Made in Korea (Gaeseong)" for their products.7) Meanwhile, the Korean companies at the KIC have officially been manufacturing goods since November 2004. Due to difficulties surrounding product labeling and sales-routes, the goods made in the KIC are generally for domestic (South Korean) consumption and for export to areas free of trade barriers. Banking Woori Bank was the first South Korean bank to open a branch office in Kaesong at the KIC on December 7, 2004. It now provides banking service to the South Korean firms within the pilot zone, mainly dealing with remittances and foreign exchange services for those firms. The office began with three employees and a capital of 5 million U.S. dollars, and hired four North Korean female staff later that same month. As of August 2004, seven banks have filed applications with the South Korean government to open branches at the KIC. So far, only Woori Bank has set up a branch in the KIC. Product Management All materials sent to the KIC from the South are by principle managed and restricted through systematic management via the Kaesong Industrial District Management Committee. A separate management team runs a site-watch system and has one officer in charge of each business' raw materials and product goods that are transported to and from the KIC. All raw materials that enter the KIC are reported in advance, and products coming from the KIC are reported later to the management committee. All goods transported to and from the KIC fall under the responsibility of the South Korean government. However, due to U.S. export restrictions (as outlined in the Wassenaar Arrangement) and other international strategic materials export-control systems and agreements, some items are still restricted from entering the KIC. ■ ALLOCATION OF THE MAIN COMPLEX First-stage Groundwork Half Done Half of the groundwork (as of February 2005) for the 3.3-square-kilometer first-stage main complex has been completed. According to the present schedule, the process is to reach 80 percent completion by the year’s end and be finalized by the end of 2006. Another twenty-five companies will be allocated and divide a space of 165,000 square meters within the first half of this year and move into the space within the year. By the end of 2006, some 250 to 300 companies are expected to move into the KIC and begin manufacturing goods. Currently, plumbing, drainage, and roads are all under construction, while designs are nearly completed for separate infrastructure facilities for industrial water, wastewater, and factory waste treatment centers. Construction work for those projects in the design phase will commence within the first quarter of 2005. First-stage Complex to Be Finished by 2006 Once the 3.3-square-kilomter first-stage of the complex is complete in 2006, some 300 companies are to receive electricity through a 154,000-volt electric power cable line. Once this amount of electricity is provided to the KIC pilot zone, further construction will begin to provide power to the whole KIC, such as the building of transformer substations and power transmission towers. The total number of North Korean workforce needed for the first (3.3-square-kilometer) and second (11.5-square-kilometer) stages is estimated at 210,000 workers. North Korean Authorities on Foreign Companies At the moment, North Korea is expressing unofficially that it will permit foreign companies to make investment in the KIC from the second-stage complex development. However, as some EU and Japanese companies have shown willingness to invest, the South Korean developers are discussing the matter with their North Korean counterparts, and thereby one cannot ignore the possibility of doors opening officially for foreign corporations to invest. One Part of a Cooperative Triangle In the second- and third-stage development of the KIC, the South Korean government and the two KIC developers have set forth a vision of establishing a Northeast Asian economic base, attracting multinational companies that wish to expand their businesses to Northeast Asia. In this regard, the KIC is envisioned to be a crucial point of a cooperative triangle: where Seoul is the finance center, Incheon the logistics center, and Kaesong an industrial center linked to the Seoul metropolitan area. ■ KIC AND OTHER CHANGES IN THE DPRK Awareness of the Importance of Inter-Korean Cooperation Since the North Korean authorities began reforming their economy based on measures announced back in July 2002, great interest has been expressed in developing the KIC. Its expectations for inter-Korean cooperation are clearly revealed by the fact that North Korea opened one if its most militarily-sensitive areas, Kaesong, and have allowed South Korea to manage the project. Likewise, several of South Korea’s small and medium-sized companies see economic potential for themselves if they invest in this cooperative venture. Softer Negotiation Attitudes In retrospect, the South Korean KIC developers agreed that their North Korean counterparts were very flexible, and showed attitudes of making bold concessions during the KIC negotiations. As one example, the developers pointed out the internationally competitive, low wages that was agreed upon. It is also said that North Korea expressed a lot of interest in creating a better investment ambiance for Kaesong than those of areas in China and Southeast Asia with which it must compete. North Korea is adhering to presenting itself in a sincere and active manner in talks regarding pressing matters of the KIC. It has self-acknowledged the failure of its Rajin-Sonbong free economic zone that was established back in 1991, and for the KIC, it has permitted the South to introduce the market-economy system. Furthermore, North Korea set the regulation that the KIC district be managed by a South Korean. These alone indicate an immense change in thinking on the part of the North Korean government, since back in January 2001 (when North Korean representatives met with Hyundai Asan and discussed the KIC project) North Korea is said to have shown negative signs on the idea of placing Kaesong under the management of a South Korean national. ■ FUTURE AGENDA Development of the Pilot Zone The South Korean developers intend to go forth with their set plan to start full-scale operations of the first pilot zone in the first half of 2005. That is, developers intend to have all fifteen factories up and running, as well as hire about 4,000 North Korean workers to staff them. Electricity has been partially supplied and the agreements for telecommunication services have been signed. Goals have been set to complete the road, plumbing, and drainage constructions. Development of the Main Complex and Its Allocation Despite the international political tensions caused by the North Korea nuclear impasse, the South Korean government and private developers of the KIC plan to continue with the project, believing that cooperation is a must to ameliorate the growing security instability in the region. Construction for foundation work is scheduled to begin within the second quarter of this year, and social infrastructure that includes 100,000 kw of electricity and 2,000 phone lines and water treatment facilities are to be provided to the KIC businesses by the end of 2006. Allocation of the main complex will be conducted gradually in the first half of 2005 on the additional 165,000 square meters of the first-stage KIC, taking into account the developments in infrastructure construction and also the political situation, such as the process of the six-party nuclear talks designed to deal with the North Korea nuclear issue. In allocating the land to companies, KIC developer Korea Land Corp. will give priority to businesses whose raw material exports to the KIC are not subject to export restrictions (i.e., high-tech, strategic material, or double usage items) or “country-of-origin” restrictions (i.e., product label). The Korea Land Corp. is also studying various forms of allocation, like apartments-style factories and a collective complex. A Robust KIC Regardless of the preparations and plans, both governments and developers have their work cut out for them, as many tasks still need to be addressed regarding export restrictions, enactment of relevant new laws, flow of goods and human resources, and so forth if the KIC is to be successful. Of these tasks, however, the main one will be attracting businesses to the complex - a crucial component for the success of any special economic zone. Resolution of the North Korea nuclear impasse will be critical factor in this regard. If all parties work cooperatively, this will come to pass. A future robust KIC will bring a brighter future for both Koreas in terms of economic growth, co-prosperity, cooperation, and, in the long-term, help contribute to the unification of Korea. ------------------------------------------------------ 1) “‘Made in Kaesong’ Sold Out in Two Days,” Korea Times, December 17, 2004. 2) For more on Kaesong’s recent agricultural production, see the Food and Agriculture Organization and World Food Program special report on North Korea (Special Report: FOA/WFP Crop and Food Supply Assessment, Mission to the Democratic People’s Republic of Korea), October 30, 2003, online at www.fao.org/documents/show_cdr.asp?url_file=/docrep/006/J0741e/J0741e00htm. 3) For analysis of “military-first politics,” see Dae-Sook Suh, “Military First Politics of Kim Jong Il,” Asian Perspective, vol. 26, No. 3 (Fall, 2002), pp. 145-67. 4) Once the second airport bridge that connects the Incheon International Airport and the new Songdo Port on the island of Songdo in the South is finished in 2008, the airport will create an infrastructure suitable for an ideal sea and air logistics center. 5) “S. Korea to Supply Electricity to North From Tomorrow,” March 15, 2005, online at cis.kepco.co.kr/cis/eng/about/press_view.jsp?sn=2772&div=A&sch=&kwd=&pagenum=1. 6) See KT Corp. press release at www.kt.co.kr/kthome/eng/press/press/press_kt_view.jsp?family_flag=1&news_seq=63¤tPage=1. 7) “Kaesong Products to Be Tagged ‘Made in Korea’,” Yonhap News, March 8, 2005. “Gaeseong” is South Korea's English spelling of “Kaesong.” |
DEVELOPMENT OF THE KAESONG INDUSTRIAL COMPLEX
2005. 5. 3. 오전 9:30:38
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