Kaesong reopening offers no quick fix

A month after Seoul and Pyongyang struck a breakthrough deal to reopen the only inter-Korean joint economic project, Park Yoon-gyu’s clothing business is still battling to return to normal.

“My factory was in ruins,” says Mr Park, president of Fine Renown – one of 123 small South Korean manufacturers at the Kaesong Industrial Complex in North Korea, which was suspended in April by Pyongyang amid warnings of imminent war. “The sewing machines were so corroded that we had to replace all the parts, and the building was covered in mould.”

Yet even after suffering losses of Won5bn ($4.6m) during the five-month shutdown, Mr Park has no plans to abandon his business, which has reopened with 495 North Korean workers in a factory designed for 1,000. “This complex is the gateway to Korean unification,” he says.

Opened in 2004 at a time of unusually co-operative inter-Korean relations, the Kaesong complex was intended to pave the way for a broader expansion of economic ties that would ensure lasting stability on the peninsula.

But the struggles of Kaesong’s manufacturers to rebuild their businesses reflect the challenge facing South Korea’s government as it seeks to reverse a marked deterioration in the relationship with Pyongyang over recent years.

The agreement to reopen Kaesong on September 11 was hailed as a vindication of the “trust-building” policy introduced by Park Geun-hye, who assumed the South Korean presidency in February.

Subsequent developments have been less encouraging, however. On September 21, Pyongyang cancelled planned reunion meetings for families divided by the inter-Korean border, an act condemned by Seoul as “inhumane”.

Meanwhile, satellite imagery suggests that North Korea has restarted its reactor at Yongbyon, capable of processing plutonium for use in nuclear weapons.

The martial language has also resumed: last week, Pyongyang responded to the arrival of a US aircraft carrier in South Korea by saying it had readied its forces for war, and warning of “disastrous consequences”.

“The only significant leverage they have is the military threat, and I think they will continue to use it,” says Go Myong-hun, an analyst at the Asan Institute for Policy Studies.

He argues that Pyongyang is pushing for faster progress towards the resumption of South Korean tourism at the North Korean resort of Geumgangsan – a lucrative source of revenue until it was terminated in 2008 following the shooting of a tourist.

Meanwhile, North Korea is also seeking a resumption of multilateral talks that could yield economic assistance in return for concessions on its nuclear programme.

With no sign of progress towards a revival of Geumgangsan or the Six Party Talks, however, Kaesong remains the focal point of efforts to put inter-Korean relations on a steadier course. “There’s still work to be done,” says an official at South Korea’s unification ministry. “We don’t just want a return to what there was before.”

A key part of the strategy for developing Kaesong is to attract companies from outside Korea, a goal laid out in last month’s agreement, which Seoul hopes would deter Pyongyang from using the complex as a political bargaining chip.

“It’s not really North Korea that wants to attract foreign investment, it’s South Korea,” says Mr Go. “It’s part of a grander strategy to make North Korea behave according to international norms.”

South Korea’s government is mulling financial incentives for foreign investors at Kaesong, while Ms Park urged Italian prime minister Enrico Letta last month to encourage interest among her country’s manufacturers. Seoul is also poised to lobby the US next month to include goods from Kaesong in the countries’ free trade agreement, the trade ministry said earlier this month.

This complex is the gateway to Korean unification

Seoul’s unification ministry on Monday said that plans for an investor day scheduled for October had been abandoned after North Korea cancelled a meeting of a subcommittee intended to further the normalisation of operations.

And investors at Kaesong would face the further problem of internal division over the project within the North Korean state, with opposition from many military figures who view it as a potential security risk, says Moon Chung-in, a professor at Yonsei University.

“We can’t rule out the possibility – if tensions are heightened, then the North Korean military could still shut it down at any time,” he says.

There is widespread scepticism within South Korea, too, about the merits of Kaesong. One former senior government official describes it as a means for second-rate South Korean entrepreneurs to make use of cheap North Korean labour.

The companies operating at Kaesong, however, are quick to defend it. “My employees receive twice as much as the workers in Pyongyang,” says Park Yong-man, president of Rok-Sec Garments, adding that changes in behaviour among the North Korean officials over the six years his company has been in operation at Kaesong show the complex’s potential to boost friendly relations.

“Initially, they wouldn’t make eye contact with us, but nowadays they talk about their family lives,” he says.

But manufacturing at Kaesong has been a unique challenge, Mr Park admits. Even before this year’s shutdown, many customers were reluctant to place high-value orders due to fears of political risk.

Since the suspension at Kaesong, some buyers have terminated contracts, while others are considering legal action over unfulfilled orders, Mr Park says. “The side-effects are just beginning.”

Additional reporting by Kang Buseong