Workers make sneakers at a factory in Kaesong inside North Korea. Xinhua / Zuma Press
KAESONG, North Korea—On a brightly lit, modern factory floor, North Korean workers rarely look up as they churn out fluorescent sneakers bound for South Korea.
“I’m too busy to talk,” says one worker as she rapidly feeds fabric through a sewing machine.
This is the Kaesong Industrial Complex, a few miles north of the heavily armed inter-Korean border. Over 100 small South Korean manufacturers employ around 50,000 North Koreans in a rare state-sanctioned capitalist enterprise in the North. It was closed for five months this year during spiraling tensions on the peninsula, but output has almost fully recovered since its September reopening.
Since the revival, North Korea has made announcements about developing new special economic zones across the country, attracting foreign investment and increasing overseas trade. It says a new “high-tech” industrial park will be built near the Kaesong complex. Singapore-based Jurong International said in October it had signed a memorandum of understanding for the project.
The shift in the external message after a spring of intense war rhetoric is seen as a new push by Pyongyang to develop its decrepit state-sector economy. But North Korea watchers are asking whether this time will be any different from previous failed attempts.
The count
ry has repeatedly flirted with the idea of a market economy since the 1990s and has opened up some areas to foreign investment. But its existing SEZs on the Chinese and Russian borders have remained moribund for years.
“We have had a long and rich history of the failure of these initiatives,” said Nicholas Eberstadt, an expert on the North Korean economy and a resident scholar at the American Enterprise Institute.
It is clear that the North wants to learn from outsiders. In October, 85 North Korean officials met with economists and experts from eight countries in Pyongyang to discuss the management and governance of SEZs.
Park Kyung-ae, a professor at the University of British Columbia, organized the conference and said the North Koreans were “surprisingly enthusiastic” about the development of the special economic zones and asked many questions. “It shows how desperate they are about economic interests,” she said.
Yet the barriers to progress are manifold.
North Korea says the new zones will allow foreign currency and “different economic rules,” which it says will protect foreign investors. Details remain vague but the statements may be an acknowledgment of North Korea’s record of seeking rents and imposing sudden sweeping contractual changes on foreign investors. In September 2012, China’s Liaoning Xiyang Group said Pyongyang unilaterally suspended its project in North Korea to process iron ore. In a rare response from its state media, North Korea said Xiyang hadn’t met investment commitments.
Other major hurdles include a lack of institutions to support economic zones, such as a banking system, and rigid labor restrictions.
But the paramount obstacle to economic revival remains North Korea’s militarism and subjugation of economic goals to its political objectives. After withdrawing all of its workers from the Kaesong complex in April because of perceived insults from the South against its leaders, North Korea threatened to turn the site into a military base.
Earlier this month, North Korea announced the execution of Jang Song Thaek, the uncle of leader Kim Jong Un, who had been seen as one of the most pro-business figures in the North Korean leadership.
North Korea’s continued development of a nuclear-weapons program in defiance of United Nations sanctions ensures it remains a pariah for many investors. This spring, the regime wrote into law conflicting policy priorities of building up a nuclear arsenal while trying to develop its economy.
At the Kaesong complex, South Korean officials say North Korea is cooperating to help the industrial park grow by agreeing to relax customs and transport restrictions. Hong Yang-ho, the president of the management company for the complex, speaks optimistically of expanding operations beyond the level before it was closed in the spring, which was only 40% of full capacity.
So far, only South Korean businesses have facilities at the plant, but Seoul is trying to encourage foreign businesses to invest as a means to discourage the North from pulling out again.
None have made commitments but Michael Ertl, chief executive officer of German footwear company ME & Friends AG, says his company is in the final stages of talks with its South Korean partner to set up a joint venture in the complex, possibly in the first quarter of next year.
Even if it does continue to grow unhindered by political interference, the Kaesong complex illustrates how despite North Korea’s stated desire for economic growth, it fears the lifeblood of capitalism: the free flow of information.
The two Koreas hold regular meetings about developing the complex but Mr. Hong says one issue on which they remain far apart is the South’s call for businesses to have cellphone and Internet access at the plant.
North Korean workers at the plant are also kept largely separate from their South Korean managers, while visitors such as a delegation of finance officials and journalists from Group of 20 nations that visited recently was escorted by North Korean security officials who monitored conversations.
Resistance to allowing potentially destabilizing information into the country ensures that even if any of its planned SEZs do gain traction they are likely to remain largely cut off from the rest of the North Korean economy and society.
But for the time being, Seoul is just looking for North Korea not to sabotage the Kaesong plant again.
“If North Korea can’t do a good job with the Kaesong complex, the chances of other zones succeeding are very slim,” said a senior official at South Korea’s Unification Ministry, which handles coordination with North Korea.
—Jeyup S. Kwaak contributed to this article.
Source: http://www.wsj.com/articles/SB10001424052702304753504579281770272632030