North Korea Economy: The Kaesong Industrial Zone Keeps NK Alive

In tackling the task of explaining North Korea’s marked belligerence under Kim Jong-un, not nearly two years in power and already making his mark felt on the country and its foreign policy, we must understand the country's economic foundation.

The West has subjected North Korea to sanctions for a very long time, but these have been fruitless at changing its behavior. In fact, they may have only succeeded in worsening it. The logical question to ask, then, is how North Korea is managing to defy the world and garner the resources to keep afloat sufficiently to launch a space program and become one of relatively few countries with ICBM capability? The answer lies in the Kaesong Industrial Zone, North Korea’s monetary and fiscal policies, domestic economic realities and finally, foreign direct investment and trade relations (this story is part of a series that will explore each point individually).

Despite the doubts we raise about North Korea’s intentions and abilities, the fact remains that the Kim dynasty has managed to navigate the treacherous international waters around it rather well.

The Kaesong Industrial Zone was opened in 2004 as the first joint economic project between North Korea and South Korea, to high expectation that it would symbolize the possible cooperation between two states of a divided nation. Its completion is expected in 2015, when thousands of South Korean companies are expected to operate in it and employ further hundreds of thousands of North Koreans. Currently, 50,000 North Koreans are employed in the industrial park, but Pyongyang has been vocal in threatening to close it, should apparent provocations and escalations by the South, and the United States, continue.

The primary advantage of Kaesong is that North Korean labor is educated and cheap. Seoul clearly sees a benefit in continuing the operation of the industrial zone, and even expanding it. The political significance is even greater, because should products being made at Kaesong receive favored trading status under the ROK-U.S. Free Trade Agreement (as per the linked article) it would be the introduction to greater investment flows in the area.

While much of the manufactures of Kaesong are bought back in South Korea to be re-exported or used for domestic purposes, it is beyond doubt that the industrial zone is strategically important for the country’s economy: via the connection, $1,97 billion of inter-Korean trade was conducted in 2012, with approximately $1 billion of North Korean goods entering the South and $900 million of South Korean goods going northward. Also as of 2012, the economic output of Kaesong has risen 17.5% year-on-year to total $430 million in value and the 123 South Korean companies operating there employ 53,507 North Koreans, up from 49,866 a year earlier. Average monthly wages at Kaesong also stand at an average of $128, about double from 2006 when the statistics began; in hard numbers, the total amount paid in wages to North Korean workers could hit $100 million by the end of this, or early next year.

Keeping in mind these statistics, we can see the significance of Kaesong for Pyongyang in respect to tax revenue and also any future initiatives at reforming economic policies to raise the living standard of the average North Korean. In a country as poor as North Korea, $100 million is a very significant number, helping finance not only a massive military, but the very limited social expenditures.

The next article in the series will cover North Korea’s monetary and fiscal policies.