Capitalism Tests the Water in North Korea

Stephen DeAngelis

June 13, 2007

Most people want the same things from life — security, hope, a job, and enough freedom to pursue activities that interest them. Despots have always tried trading those desires off against one another. They promise security but require the curtailment of freedoms. They create jobs but at the cost of personal interests. The tools they use to create these tensions often involve fear and poverty. Authoritarian regimes control the media so that intelligent debate is curtailed and opposing views squelched. People have tried many ways to break the vicious cycle of fear and poverty that keep people enslaved, but few strategies have been as successful as the introduction of ethical capitalism. I say ethical capitalism, because we are all aware that the industrial age began with the exploitation of the working class.

The transition from authoritarianism is often slower than people would like, but the direction a country is heading is important. That is why what is happening in Kaesong, North Korea, is so important to the future of that troubled peninsula. Moon Ihlwan, writing in BusinessWeek, reports on the ever-so-slight toehold that capitalism has gained in the North [“North Korea’s Super-Efficient Workforce,” 25 May 2007, and “A Capitalist Toehold in North Korea,” 11 June 2007]. In the first article, Ihlwan writes:

“The U.S. and the international community have wrestled mightily with Pyongyang to abandon its nuclear weapons ambitions. That match is far from over. But on the economic front, interesting changes are in motion. Just ask South Korean businessman Park Sung Chul, who has steadily raised his investments at an industrial park in the North. For his apparel maker at least, North Korea isn’t a threat but the opportunity of a lifetime. His company, Shinwon, is enjoying tremendous efficiency gains with its North Korean workforce. ‘It is more efficient and competitive than any factory in China, Vietnam, or anywhere in the world,’ declares Chief Executive Park.”

Expectations are that over the next couple of years nearly 300 South Korean companies, employing nearly 100,000 people, will be manufacturing in the Kaesong special economic zone. Not only does this get capitalism’s toe in the water, it is the first step towards eventual integration of the North and South. As Ihlwan notes:

“Of course, it will only be a drop in the bucket of cash needed to rebuild the shattered economy in North Korea even if the project picks up steam. But the hope is that a successful Kaesong will prompt North Korean dictator Kim Jong Il to set up several special economic zones modeled after China’s Shenzhen to start cultivating free-market economic activity and prepare the isolated country for integration into international society. Seoul certainly sees Kaesong as the first step toward economic integration in the Korean peninsula. ‘If it succeeds, a Kaesong-like project is a sure model to cut unification costs,’ said South Korean President Roh Moo Hyun in a May interview with a local newspaper.”

For South Korean firms, Kaesong offers many advantages, including low wages and decreased logistics cost.

“The wages at Kaesong are a third of those in China and a tiny slice of those in the South. Other advantages include lower logistics costs (Kaesong is only 60 kilometers from Seoul) and a highly educated and disciplined workforce. Companies that invest there can also enjoy a five-year tax holiday and corporate tax breaks. The infrastructure at the industrial level is also improving, thanks to a commitment by Seoul to spend $280 million for the project.”

While those wages remain at levels that would keep workers at the poverty level, they are much better (as are the working conditions) than most workers earn throughout the rest of North Korea. Hence, there is an economic benefit for both the North and South. The strategic advantages, however, are even greater than the economic advantages.

“‘There will be lots of hurdles, but given the economic benefits, the Kaesong project has lots of potential for coaxing Pyongyang into breaking out of its shell and accepting changes,’ says Lee Young Hoon, economist at Bank of Korea, the South’s central bank. Already, two-way trade between North and South Korea jumped 43%, to $350 million, in the first four months of this year, thanks largely to traffic to and from Kaesong. With hundreds of trucks and cars running through the DMZ—the world’s most heavily fortified border—every day, and some 50 buses ferrying nearly 15,000 northern workers every morning to the Kaesong park, a thaw may have begun on the world’s last Cold War frontier.”

In the second article, Ihlwan talks about how rapid the expansion has been at Kaesong.

“The 23 South Korean companies operating there employ some 15,000 North Korean workers—double the number of just a year ago. In March, Kaesong’s factories churned out $13 million worth of goods, up from $200,000 in January, 2005.”

Some people in Washington, according to Ihlwan, are not very excited about this toehold of capitalism.

“Hardliners take a dim view of the project, arguing that the hard currency it generates for Pyongyang only perpetuates the rogue regime of dictator Kim Jong Il. U.S.-led pressure on Pyongyang to give up its nuclear arms program forced Seoul to slow its investment in Kaesong. That resulted in a two-year delay in the project, conceived during a thaw in North-South relations in 1998 and finally opened in 2004. Under the Trading with the Enemy Act, North Korean exports to the U.S.—including those from Kaesong—are severely restricted. They face tariffs of up to 90%, while most goods from South Korea will be eligible for duty-free entry once a free-trade agreement reached in April is ratified. … Washington’s opposition could be a big problem since Seoul has a lot riding on Kaesong’s success. The South hopes the zone will give it an economic boost as the country finds itself squeezed between high-tech Japan and low-cost China. The park’s North Korean workers—mostly women who are prescreened by bureaucrats in Pyongyang and bused in daily from neighboring towns—earn $57.50 a month regardless of their job or experience. … There’s more than simple economics to the South’s interest in Kaesong. Seoul sees the industrial park as a first step toward integration of the Korean peninsula. Powered by Kaesong, two-way trade between North and South Korea jumped 43%, to $350 million, in the first four months of this year. The South has already poured some $230 million into the project and expects to invest several times that over the next decade. If things pan out, within 10 years Kaesong will develop into an economic showcase with more than 500,000 North Koreans working in a bustling boom town—helping to spur reforms in the North.”

As I’ve written before, economic changes more often than not precede political changes. There are likely to be more up- than downsides to a slow spread of capitalism in the North, in spite of Washington’s skepticism. The South, worried that a sudden collapse of the North could send its economy into the tank, is happy to exploit a measured path to economic prosperity in the North. With the success of Kaesong, economic change will likely race forward and it can’t help but touch the rest of North Korea in ways that will make its eventual integration with the South much smoother.