Pyongyang made $163m a year from joint factory park with South Korean firms

North Korean women working at a garment factory in the Kaesong Industrial Complex in 2015.
North Korean women working at a garment factory in the Kaesong Industrial Complex in 2015. PHOTO: SNG FASHION

SEOUL • North Korea raked in more than US$120 million (S$163 million) a year from a symbolic cross-border industrial zone that Pyongyang and Seoul are pushing to reopen as part of nuclear negotiations, a report said yesterday.

The Kaesong Industrial Complex - where around 55,000 North Korean workers churned out products ranging from watches to clothes for some 125 South Korean companies - was one of the most visible signs of reconciliation that followed the first inter-Korean summit in 2000.

But it was shuttered by the South's then-conservative government in 2016 in response to a nuclear test and missile launches by the North, saying profits from Kaesong were funding Pyongyang's provocations.

South Korean President Moon Jae-in has dangled reopening the complex as an incentive for Pyongyang to engage in denuclearisation talks, but doing so is complicated by the web of international sanctions imposed on the North over its weapons programmes.

At their Pyongyang summit last September, Mr Moon and North Korean leader Kim Jong Un agreed to "normalise" operations at Kaesong when conditions were "ripe", but negotiations between Pyongyang and Washington are now deadlocked and the North's media has pressed the South to implement joint economic projects.

The International Crisis Group (ICG) yesterday called for the complex to be reopened with "a modest deal involving sanctions relief".

Doing so would create "much-needed momentum for stalled peace talks and serve as a reminder to both North and South Korea of the benefits of building a sustainable peace on the peninsula", it added in a statement.

The factory park gave North Korea foreign investment in its infrastructure, employment for its people and "much-needed revenue in hard currency", it said in a report, while the South Korean businesses involved enjoyed cheap but high-quality labour - wages in China were 2.9 times higher in 2014.

In 2015, the year before it closed, South Korean firms paid the North around US$123 million for their workers, ICG calculated.

North Korea taxed the sums at 30 per cent and paid the workers 70 per cent of the remainder in essential foodstuffs and coupons for state-run shops, the report said, citing the firms in Kaesong and the South's unification ministry.

The rest was paid "in local currency at an artificially low official exchange rate", it added.

Currently the North's official exchange rate is around 80 times lower than the market rate.

If a similar ratio applied to the Kaesong workers, they would have received in cash only around one quarter of 1 per cent of the value paid to the North for their services.

"It is possible that the North Koreans were using a third exchange rate," said one of the report's authors, Mr Christopher Green, as "use of the official rate would have left workers earning very small amounts".

But he added that only limited information was available as "Kaesong workers were disinclined or unable to defect, and the South Korean side was not in a position to guarantee what the North Korean state did with the bulk payments they delivered to Pyongyang".

Profits from Kaesong were equivalent to only about 10 per cent of what the North made from coal exports to China, the report said, but "were nevertheless important... to a regime that needed all the cash it could get".

"In this sense, reopening Kaesong would unquestionably be a concession to the North," he added.

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A version of this article appeared in the print edition of The Straits Times on June 25, 2019, with the headline Pyongyang made $163m a year from joint factory park with South Korean firms. Subscribe