South Korea is a 21st-century manufacturing power and digital economy with one of the most wired citizenry on the planet. North Korea is an economic basket case. It's home to the malnourished and run by Kim Jong Il, the North Korean Dear Leader who isn't exactly anyone's notion of a bold economic reformer. The wealth gap between these two societies -- separated by a 155-mile-long demilitarized zone (DMZ) that bisects the Korean peninsula -- is absolutely mind-boggling.
The Korean problem is the last unfinished piece of business left over from the Cold War era, and political unification between North and South is certainly many decades away. Yet you'd be surprised by the economic linkages starting to materialize across the fabled DMZ. Just after 7 a.m. every morning from Monday to Saturday, some 29 buses ferry North Korean workers to the fenced-off Kaesong industrial complex on the Northern edge of the DMZ.
CHEAP-WAGE MANUFACTURING BASE. The pilot project is operated by a South Korea-run committee under a 50-year lease that started in 2004. There, managers from about a dozen South Korean companies are working with a Communist Party workforce numbering about 6,000 or so and employed at 11 factories. Another 28 South Korean companies have signed agreements to set up plants there in the next couple of years.
The projects under way are producing all manner of low-end goods, such as shoes, clothing, kitchen pots, and watches. The idea behind this effort is easy to grasp: North Korea is home to a huge, cheap, and largely underutilized workforce. South Korea needs a cheap-wage manufacturing base to stay competitive with China.
If the project takes off as expected, it will mark a huge breakthrough for both economies. Park Suhk Sam, senior economist at Bank of Korea, figures the industrial zone could create 725,000 jobs and generate $500 million in annual wage income for the North Korean economy by 2012. Five years later, another $1.78 billion would tumble in from annual corporate taxes levied on South Korean companies participating in the industrial project.
To put that number in perspective, the total $2.28 billion the project would generate is about 12% of North Korea's total economic output. Throw in the economic spin-off effects of creating supply contracts for small North Korean companies, and the "overall impact on the North will be hugely significant," figures Park.
POLITICAL SELF-PRESERVATION. That the Kaesong park exists at all is perhaps of even great significance, as it represents an economic thaw of sorts by one of the most reclusive and repressive regimes anywhere in the world. And it could be the beginning of more joint projects to come. The reason: North Korean watchers in Seoul think Kim has little choice but to experiment, given the dire condition of the North Korean economy. As recently as the mid-1990s, the country experienced massive famine conditions.
True, Kim's first priority is political self-preservation, so any opening up to foreign trade and investment will be measured. Still, since 2002 there have been signs that North Korea realizes the utility of economic reform. Kim's regime has introduced market-economy reforms. State-owned farms and factories that exceed production targets are now rewarded higher wages by the government. Pyongyang has also eased price and wage controls, and tolerated the creation of private markets where Koreans can trade foodstuffs and consumer goods.
"North Korea is pushing ahead with changes to the extent they will not jeopardize its regime," says Paik Hak Soon, a Pyongyang specialist at the Seoul-based Sejong Institute, a security think tank.
Seoul has its own motives for tying up with the North. South Korean wages are far higher than those in China. The loss of jobs in high-cost industries where South Korea doesn't have a unique manufacturing or technology edge is a huge concern. It would be less of one if North Korea could eventually evolve into a manufacturing outsourcing hub for South Korean manufacturers.
CONFLICTING VIEWPOINTS. Consider that the North Korean workers at the Kaesong industrial zone earn about $50 a month, around half of average labor costs in China. On top of that, South Korean companies can employ workers that speak the same language and are fairly skilled. The "Kaesong complex offers better business conditions than China," says Moon Chang Seop, president of Samduk Stafild, one of 11 South Korean companies at the industrial park about an hour's drive from Seoul.
More than 1,000 South Korean companies are rethinking planned production shifts to China or Southeast Asia, and are seriously thinking about Kaesong, according to the government. Samduk, a shoemaking company based in Busan, a port city at the southeastern tip of the Korean peninsula, has invested just over $10 million in a Kaesong factory since 2004. It churns out some 112,500 pairs of shoes a month and employs 1,200 North Korean workers. The company plans to double its investment there by the end of 2006.
South Korean President Roh Moo Hyun figures projects like Kaesong are the most effective way of drawing North Korea into the international community, and encouraging Pyongyang to drop its nuclear-weapons programs and participation in international drug trafficking. Some U.S. critics think it will have the exact opposite impact by giving Kim more economic resources to prop up his regime, or even further his nuclear-weapons program.
INCREASING ECONOMIC TIES. One thing is clear: The more confrontational approach of the Bush Administration is considered anathema in Seoul, which after all has much more to lose should North Korea collapse in the event of international economic sanctions or some sort of U.S.-imposed military regime change. "We simply can't handle the consequences of a regime change in North Korea," says one senior official at the Roh administration. "We believe there's no other option but to engage the North."
Economic sanctions unilaterally imposed by the U.S. -- or collectively by the U.N. -- would probably knock Kaesong out of action.
The southern half of the DMZ is controlled by the U.S.-led U.N. Command, and the Bush Administration could stop traffic through the DMZ from the South if it decides to slap economic sanctions against Pyongyang.
With any luck, it won't come to that, and the economic ties between North and South will continue to deepen. Two-way trade last year jumped 51% to a record $1.06 billion, according to Korea International Trade Association. (That's about two-thirds of $1.58 billion of bilateral trade between North Korea and China, Pyongyang's only official ally.) And trade with South Korea is crucial to the North. It not only props up economic growth, the sale of South Korean fertilizers and rice has helped stave off famine.
OUTSOURCING MECCA. This year, Pyongyang agreed to let South Korean companies explore potential domestic minerals and iron ores deposits, in exchange for supplies of consumer products. Just how far this economic thaw will progress will be one of the more fascinating stories to watch in Asia. North Korea has certainly not evolved into the kind of workers' paradise its Communist founders (including Kim's father, Kim Il Sung) had in mind when the regime was established back in 1948.
In fact, North Korea's best bet now may be to refashion itself into an outsourcing mecca for South Korean companies. It's not exactly what Marx and Engels had in mind, but it could buy the younger Kim's regime some valuable time.
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