By Nicholas Hamisevicz

The fear that North Korea’s suspension of activities at the Kaesong Industrial Complex would have broader implications began to materialize last week when Daewha Fuel Pump Industrial Ltd. announced it failed to deliver parts in time to its Indian customer. Other companies are beginning to publicize their setbacks as well. The economic challenges for businesses like Daewha from the suspension of operations at Kaesong could have spillover effects for future investments in Kaesong and South Korea’s trade negotiation strategy. Moreover, the announcement from Daewha puts another South Korea – India economic connection into the spotlight. President Park Geun-hye and the businesses involved in Kaesong need to have patience, luck, and some business acumen in order to regain confidence from investors, economic benefits for customers, and opportunities for expansion when Kaesong is reopened.

The announcement from Daewha about its inability to maintain a steady supply to a customer was the fear of many supporters of the Kaesong operation. Without the ability to constantly supply customers, the strategic and economic advantages for Kaesong begin to dwindle for many Korean companies.

As one of the last remaining inter-Korean connections, Kaesong also helped provide an avenue for South Korea to communicate with North Korea as well as try to lay the groundwork for peaceful unification. However, with Daewha’s loss and troubles beginning to emerge with other companies, the opportunities available in Kaesong have again been questioned.

A part of those strategic and economic advantages were the potential future opportunities. Because of Kaesong’s previous success, some experts recommended that South Korea build more complexes like Kaesong. The Park Geun-hye administration also had plans to try to internationalize Kaesong and attract firms from other countries to set up in the industrial zone. Recent events will be an impediment for that goal. To revive the potential for expansion at the complex the Park administration will need a combination of good public relations (PR) and economic successes to ease the concerns of investors once Kaesong is up and running again.

Further potentially complicated by the work stoppage and the Daewha news is South Korea’s trade negotiation strategy to include language allowing for goods from Kaesong to be part of their trade deals. Future partners are now likely more aware of the political risks of increasing access to goods from Kaesong. One potential outcome from could be countries asking for language similar to the KORUS FTA that points to the development of specific conditions on the Korean peninsula before access for goods from Kaesong would be granted [Annex 22B]. This may require South Korean negotiators to repackage how they convince their counterparts to allow clauses potentially permitting goods produced in Kaesong to be included in their bilateral trade deals.

The news from Daewha was also tough PR for South Korea-India relations. Economics has been a major avenue for the two countries to work together. However, the cancellation of the partnership provides another example of an economic opportunity being damaged by political difficulties. While the Daewha example is on a much smaller economic scale than POSCO’s investment in Odisha, India, both illustrate politics affecting economic interaction between South Korea and India.

Moreover, India and South Korea are trying to reach their stated goal of $40 billion in total trade by 2015. Yet two way trade was still just below $19 billion in 2012. Even though Daewha claimed the deal was less than one percent of its sales last year, misfortunes of this nature also hold back the expanding economic relationship.

North Korea’s threats and initial suspension of the Kaesong Industrial Complex raised questions about the ability of companies to complete their orders and the future of investment opportunities in Kaesong. Unfortunately, a couple of weeks into the suspension, the impact is becoming real and damaging economic interactions beyond South Korea. These setbacks have only heighted the scrutiny of the consequences of operating in Kaesong, making it more difficult for the Park Geun-hye administration to attract investors to the complex, support the businesses there, and create opportunities for expanding the strategic and economic possibilities of Kaesong.

Nicholas Hamisevicz is the Director of Research and Academic Affairs for the Korea Economic Institute. The views represented here are his own.

Photo from Korea Economic Institute of America.

By Phil Eskeland

During the past several weeks, international viewers were treated to a series of broadcasts from major news outlets trumpeting every bellicose statement and video from Democratic People’s Republic of Korea (DPRK).  This culminated two weeks ago, in the run-up to two North Korean anniversaries where “something” was expected to happen, with one hour specials on possible war scenarios and sensationalizing the military threat, including an analysis by a retired U.S. Army general about the possibility of North Korea seizing Pyeongchang, the site of the 2018 Winter Olympic Games.  As a result of these and other reports, some foreign investors in South Korea were considering contingency plans for production and workers.  Other firms were rethinking plans to invest in South Korea.  Yet, if you walked the streets of any city in South Korea, you would find that business was going on as normal and most people brushed off the shrill rhetoric from North Korea as a part of a regular occurrence that happens every spring when the United States and the Republic of Korea (ROK) embark on their annual military training exercises.  Nevertheless, there was a huge gap between international media coverage of North Korea in early April (be worried! prepare! be ready to go to underground shelters! imminent missile launch!) and the view from the streets of South Korea (shrug).  Now that North Korean invectives have diminished in recent days, media attention has gravitated to the next story.

However, while North Korea would be overwhelmingly and quickly defeated in any military action against South Korea, what was behind North Korea’s heightened rhetoric and actions?  We know that because regime survival is North Korea’s primary objective, their leaders are not suicidal.  Why then does North Korea make these bizarre provocations?  Many have pointed to the need for the relatively new and young North Korean leader Kim Jong Un to assert his leadership credentials and toughness, particularly by continuing with the North’s military-first policy.  Perhaps the North Korean leadership believes that China will never substantively crack down on them.  Even so, some have raised questions about North Korea suspending work at the joint ROK/DPRK Kaesong complex, which employed 53,000 North Koreans, representing 1 out of 5 people living in Kaesong, and brought in an estimated $80 million of desperately needed hard currency in 2012 for the DPRK regime.  To these observers, suspending work Kaesong didn’t make any sense and was not in North Korea’s economic interest.  In fact, they believe it hurts the North by denying work opportunities for its citizens and eliminating a valuable source of hard currency.

However, North Korea’s recent actions, including the suspension of work at Kaesong, are form of psychological and economic warfare against South Korea in response to heightened international sanctions against North Korea.  While South Korean citizens have become used to the threat from North Korea over the past 60 years and go about their daily lives, those who live outside of Northeast Asia were taken-aback by this augmented bellicose talk and action from the North.  This work-suspension order by the DPRK affects more than just the relatively small economic benefit of Kaesong.  Anything that North Korea can do to shake the confidence of foreign investors in South Korea is a political win for North Korea.  If North Korean words and actions cause any foreign investor to withdraw from South Korea for political risk concerns, that would be an immense victory for the North.  That’s why foreign investors should not be spooked by the shrill North Korean rhetoric because that only plays into the hands of the North Korean leadership.  These tactics are a non-kinetic way for North Korea to inflict damage on South Korea.  The North knows they cannot defeat South Korea militarily so the DPRK resorts to these unconventional and potentially untraceable methods.

On April 11, 2013, South Korean President Park Geun-hye met with representatives of foreign investors to reassure them that South Korea is a safe place to invest.  President Park told the participants that “a stable environment will continue to be made in which you can feel secure and make investment and conduct business.”

Whenever North Korea has embarked on their reckless course of action in the past, the South Korean economy has remained strong (see chart).  Sometimes, there was a temporary drop in the measurements of the strength of the Korean economy, but in every instance, the markets recovered and grew even stronger.  At no time did the international bond ratings of South Korea  drop as a result of North Korean threats.  The same occurred during this latest round of provocations from North Korea – in fact, the Korean Composite Stock index grew during the week of the highest tensions, and foreign direct investment reached $3.39 billion in the first quarter of this year, representing a 45 percent increase from a year ago.  Fortunately, the company representatives present at the April 11^th meeting recognized these facts and reaffirmed confidence in the business environment in South Korea.  Some companies even outlined plans for expansion and growth.  But not every foreign company with a presence or plan to operate in South Korea was present at this meeting.  These firms need to look behind the saber-rattling special reports of cable news networks on North Korea and look at the big picture – while South Korea is sufficiently prepared to deter any DPRK provocation, it is also open for business and is still an attractive place for foreign investment. Now that belligerent North Korean rhetoric has dampened somewhat, it is important for foreign investors in Korea to remember this lesson for next time, particularly as another North Korean anniversary looms on the horizon with potentially more provocative behavior by the DPRK.

Phil Eskeland is the Executive Director of Operations and Policy for the Korea Economic Institute of America. The views expressed here are his own.

Photo from Luther Bailey’s photostream on flickr Creative Commons.

By Troy Stangarone

As often happens with North Korea, there have recently been suggestions that the regime may be interested in engaging in economic reforms. The latest hopes spring from the appointment of Pak Pong-ju, a noted economic reformer, as prime minister and the replacement of most ministers of industry with officials believed to have been part of a task force established by Kim Jong-un to revive the economy. In conjunction with the appointments, Pyongyang announced a dual track policy of building the economy while also enhancing its nuclear weapons program. However, it would be premature to assume that these are true signs of a potential economic opening.

For years, the Chinese have been encouraging the North Koreans to follow their path to reform with little success. After the passing of Kim Jong-il, there were hopes that Kim Jong-un would embrace reform. Shortly after taking power, he remarked that North Koreans should “never have to tighten their belts again” and later that fall told a delegation from China that he was focused on “developing the economy and improving people’s livelihoods.”

However, in contrast to North Korea’s pledges to conduct this past December’s satellite launch and their third nuclear test, there has been relatively little follow through on the economic side. Over last summer and fall, expectations built that North Korea would engage in limited industrial and agricultural reforms. When North Korea announced that it would convene its parliament last September, there were hopes that it would announce economic reforms designed to introduce incentives for producers to increase   production and allowed select factories more say in what they produced and how. If successful, the reforms would be spread to the whole economy.

At the same time, North Korea mooted the possibility of agricultural reforms. A small number of farms would be allowed to sell portions of their harvest in markets. If successful, the experiment would be spread to the rest of the agricultural sector. However, the test cases did not take place, as harvests disappointed and feeding the military was seen as a priority. At best those reforms have been put off, if not shelved completely.

The prospects for current reforms also look doubtful. Shortly after announcing its new economic policy and shuffling cabinet officials, North Korea proceeded to close the border with South Korea and prevent the flow of goods and people into the Kaesong Industrial Complex.  While the tactic is not new, it is also not the step of a regime that takes economic development seriously.

Further complicating the situation at Kaesong, North Korea announced that it “will temporarily suspend the operations in the zone and examine the issue of whether it will allow its existence or close it.” This additional action, if North Korea follows through, is unprecedented. The current border closing had already forced at least 13 South Korean businesses to suspend operations, and if North Korea follows through and removes its workers, the other 110 companies located in the industrial zone would also have to suspend operations.

While all of the South Korean businesses operating in Kaesong face short term losses, North Korea’s actions could also impact the long term prospects of the industrial zone and its own economic reform measures. Businesses, especially the foreign investment that would be needed revive the North Korean economy; require stability and assurances that their access to goods and services will not be cut off at the whim of the government.

Prior to the announcement on Kaesong, there had been speculation in the South Korean press there were divisions within the regime on what steps to take next, with the press reporting that the military was strongly pushing for Kaesong to be closed, while the party supported maintaining the complex. Even if this is not the case, Pyongyang’s actions at Kaesong cast doubt on the prospects of there being a consensus to move towards reviving the economy in North Korea.

Additionally, Pyongyang’s unfriendly business policies do not just extend to South Korea. While North Korea has an investment law in place, it does not always apply even to its allies. Last fall the Chinese firm Xiyang Group went public with its story of being cheated out of a $37.1 million investment in North Korea. It claims that it is but one of dozens of Chinese firms that have experienced similar problems. Efforts at developing an industrial complex similar to Kaesong along the Chinese border have also been slow moving.

If North Korea is to take substantive steps to revive its economy and move towards normal economic growth, it will have to move beyond taking arbitrary and capricious actions. It will need to move towards the rule of law, which at the same time would constrain the power of the current regime. This would allow markets to take hold, for which the regime would have to commit to refraining from actions such as the 2009 currency reform that was designed reign in the markets and reduce the profits made by traders. The regime will also need to accept the development of alternative centers of power as lower and mid-level functionaries in the regime, and over time those not associated with the regime, acquire wealth and influence through their business ventures. This would also require Pyongyang to move beyond its tactics of using escalating tensions to illicit aid and concessions from other nations.

Under Kim Jong-il, these were steps the regime was unwilling to take for fear of suffering the same fate as the communist regimes of Eastern Europe and there were few signs of the regime being voluntarily willing to loosen its hold on the country. During periods of famine and when the public distribution system would break down the regime would tolerate the emergence of markets, but it also would push to scale them back as circumstances changed. It is unclear if Kim Jong-un and his advisors view the situation the same, but the pattern to date is much like his father’s, military strength is favored over economic reform.

If the regime is still reticent to undertake economic reforms, the recent move by Pyongyang to again stress the importance of reviving the economy may be a tactical move. Having previously written into its constitution that it is a nuclear weapons state and recently announced that its nuclear weapons are the “nation’s life” and will not be traded for “billions of dollars,” North Korea needs a means through which to deescalate the current crisis and a path for future talks with the United States, South Korea and others. If its nuclear weapons are truly off of the table, Pyongyang needs a basis for future negotiations. By restarting its nuclear facilities and offering the prospect of economic reform, North Korea may be trying to establish a baseline for future talks where it offers the prospect of a reformed economy for the price of its nuclear facilities, but not its weapons.

In light of North Korea’s past failures to follow through with real economic reform measures, the recent announcements by Pyongyang should be viewed more as a tactical move than a shift in policy. Rather than hope that North Korea has turned a corner on reform, a more prudent course would be to determine if North Korea follows through on proposed reforms and adjust accordingly. Unfortunately, the actions at Kaesong do not make this look likely. However, if Pyongyang were to implement genuine economic reform measures, the United States and South Korea should be prepared to take actions that would reinforce those reforms.

Troy Stangarone is Senior Director for Congressional Affairs and Trade for the Korea Economic Institute. The views expressed here are his own.

By Troy Stangarone

In what is becoming an annual tradition, North and South Korea agreed to raise the wages of workers in the Kaesong Industrial Complex by the maximum 5 percent allowed to $67.05 a month under the established agreements between the two Koreas.

While the increase in wages is clearly good the 51,000 or so North Koreans working there, it raises larger questions such as what is the future of the complex and what steps might make Kaesong more dynamic? For the moment the future of Kaesong looks fairly stagnant. If wages continue to rise over the next decade at 5 percent a year, they will only hit $109.22 a month which is still significantly below the average of $167 a month workers make in China today.

Additionally, it is still unclear how profitable South Korean firms at Kaesong are. It was only in 2010 that North Korea collected its first taxes from a firm in Kaesong, when a single firm paid $7,000 in taxes. Those numbers did rise to four firms and around $153,000 in taxes on profits in 2011, at the very least that implies that if firms are becoming profitable in Kaesong for most it is only in the last few years given exemptions on the first five years of profits.

In its current state, Kaesong will likely continue on, but not much different from what we see today. However, if the intent is to return to something like the original goal of making Kaesong a platform for North Korea to experiment with economic reforms that could help revive the economy, what kind of changes might be beneficial?

Considering the question of wages, it seems clear that some workers in Kaesong are likely worth higher wages than the average salary. Allowing firms to set wages based on the productivity of their workers could be a first step in experimenting in labor market reforms. At present North Korea still manages all of the hiring, and loosening control on wages could be a first step towards broader labor market reforms that would allow firms to hire and fire their own workers.

At the same time, it might be beneficial to consider joint ventures with North Korean firms in the complex. Much of China’s economic success was built on joint ventures, and this would be another means to transfer skills and knowledge about running a market based firm to North Koreans, which could be critical if the new regime is serious about making economic reforms.

However, the real challenge for changing Kaesong’s future is finding markets for the goods produced there. Without fundamentally addressing North Korea’s nuclear program, the United States and Europe are unlikely to open up their markets to goods from Kaesong under their respective FTAs with Korea anytime in the near future.

While challenges exist, if Kaesong can serve as a laboratory for North Korea to experiment with economic reforms it could serve a useful purpose even if it continues to grow at a slow rate. However, to induce real change in North Korea its influence will have to begin extending beyond the current complex itself. That being said, the real question is whether North Korea is finally ready for reform? We’ll save that question for another day.

Troy Stangarone is Senior Director for Congressional Affairs and Trade for the Korea Economic Institute. He is currently on leave from KEI. The views expressed here are his own.

By Sarah K. Yun

At the recent talks between North Korea and the United States in Beijing, U.S. Special Representative for North Korea Policy, Glyn Davies, once again stressed the importance of restored inter-Korea relations in order to resume the Six-Party Talks to Kim Gye Gwan, North Korea’s First Vice Minister of Foreign Affairs.  Although the two Koreas are the parties most directly impacted by the security issues surrounding the Korean Peninsula, inter-Korea relations have been tense over the years, although some landmark accomplishments remain as symbols of inter-Korean cooperation.  On the other hand, the Cross-Strait relations have improved dramatically since 2008.  What caused such different outcomes?  What lessons from the Cross-Strait relations can be applied to inter-Korea relations?

Inter-Korea relations and Cross-Strait relations are inherently different in nature, history, and scope.  However, the two cases have interesting parallels from their Cold War split, largely driven by the ideological divide between capitalist democracy and communism.  They are also similar in that domestic politics plays an important role within the relations.  Additionally, the U.S. has played a key and complementary role in both relations through its support for Taipei’s engagement with Beijing and President Lee’s efforts to deter provocations by North Korea.

Despite these similarities, the two Koreas and the two China’s have taken divergent approaches to resolving their long standing separations. Experts have characterized Cross-Strait relations as “No Talks, Many Actions.”  There have been few official talks between the two sides but, a recent influx of trade, visits, investments, and exchanges.  However, these have been recent changes. Historically, communication between China and Taiwan ceased during the Cold War.  In 1979, after gaining confidence within the international community, China proposed the “Three Links” (trade, postal service, and transportation) and “Four Exchanges” (academic, culture, sports, and science and technology) to Taiwan.  Taiwan was not prepared to accept China’s offer at the time, therefore responded with the “Three Nos” policy of no contact, no negotiation, and no compromise.  In 1987 that changed. Taiwan began to allow visits to China and established two trade zones for Taiwanese companies in Fujian province in 1989.  During this period, Taiwan also renounced intentions to militarily recapture China.  In 1991, Taiwan officially declared end to hostilities and recognized the legitimacy of the Chinese Community Party.  Just when relations were on the road to improvement, then President Lee Teng-hui and his successor Chen Shui-bian argued for a Taiwan national identity separate from mainland China.

All of this was reversed dramatically by the election of president Ma Ying-jeou who argued for the improvement of Cross-Strait relations in six stages: 1) charter and direct flights, 2) economic and financial cooperation, 3) investment and trade, 4) Taiwan’s participation in international organizations and non-governmental organizations, 5) promotion of a Cross-Strait common market and Taiwan’s participation in the East Asian economic integration, and 6) a peace accord and confidence-building measure.  He also implemented his own “Three Nos” policy to include no unification, no independence, and no use of force.  The current challenge, however, is that the Cross-Strait relations are successful at cooperation and exchange, but unsuccessful at creating a linkage between economic relations and political transformation.  In other words, this framework is effective in maintaining status quo, but ineffective in creating political spillovers.  The ultimate goal is not reunification, but a comparative advantage that China and Taiwan are able to gain economically and diplomatically from improved Cross-Strait relations.  The Economic Cooperation Framework Agreement (ECFA) was the epitome of improved Cross-Strait relations based on the economy-first paradigm.

On the other hand, inter-Korea relations have been described as “No Actions, Talks Only.”  Although many official-level talks took place and declarations were announced between the two Koreas, it has had limited political spillover due to the fact that the Kim regime habitually exploited the cooperation projects.  Inter-Korea relations have for the most part been sustained by large-scale projects such as the Kaesong Industrial Complex, Mount Kumgang tourism, reunion of  separated families, and a few others.  A complete replication of the Cross-Strait framework would be difficult for the Korean Peninsula since North and South Korea have too much asymmetry of economic and political power as a result of North Korea’s military-first policy.  In essence, the current inter-Korea relations are focused on a framework of politics-first.

What if the inter-Korean model also focused on economic integration first by stabilizing economic and trade relations?  This could create a platform for North Korea’s economy to be integrated into the region and provide an opportunity for North Korea to rethink its position in the world economic order.  In return, South Korea could play the role of Taiwan in supplying needed capital to a reforming command economy and would be able to benefit from  lower labor costs, access to raw materials, and decrease future reunification cost by reducing the economic gap between the two Koreas.  This would require a framework change in a way that the two Koreas view the inter-Korea relations from a perspective of ideology to one of practical economic interest.  Focusing on the economic aspects would bring political spillover effects, as in the case of Kaesong Industrial Complex where more than 50,000 North Koreans are employed by the South Korea-run companies.  These North Korean laborers are empowered financially and economically compared to others across the country.  Overall, a comprehensive strategy like the Ma Ying-jeou’s six-step plan may be needed in Korea, but it would require two willing partners.

Whereas inter-Korea relations have undergone many challenges in the recent years, Cross-Strait relations have faced a dramatic détente.  The key point is that China reached out to Taiwan only after it gained status and confidence in the international community.  In other words, it did not feel threatened by Taiwan nor the international system, which was a product of China having a better economic foothold in the world.  From this, one can gather that unless North Korea’s economy is developing and industries being diversified, reconciliation and reunification may face more challenges.  Although  inter-Korean and Cross-Strait relations are not the same, a lesson learned from China and Taiwan’s experience is that economic cooperation is a key to closing the gap and improving inter-Korean relations.

Sarah K. Yun is the Director of Public Affairs and Regional Issues for the Korea Economic Institute. The views expressed here are her own.

Photo from  Beautiful Taiwan’s photo stream on flickr Creative Commons.

By Yu, Byoung-gyu 

The sudden death of North Korean leader Kim Jong-il has increased uncertainty regarding the future of inter-Korean economic cooperation. The prospects for economic cooperation between the two Koreas can be considered from both short term and a medium to longer term perspectives.

In the short term, deadlock on economic cooperation will likely continue. North Korea needs to work to stabilize the new political regime under Kim Jong-un and to promote the policies of necrocracy, while in the current environment, South Korea lacks much impetus to try and increase its economic relations with the DPRK.

But from a mid-to long-term perspective, it is plausible that economic cooperation between the two Koreas could be revitalized in a stronger way than ever seen before. The North Korean government needs this cooperation to sustain itself, and in realizing the goal of creating a “strong and prosperous nation”.  It is absolutely essential for North Korea to present a long term vision to resolve its basic economic difficulties. In the months preceding his death, this may have been why Kim Jong-il focused so much time in visiting sites related to economic activity.

In 2011, Kim Jong-il made a total of 143 public visit around the country in which he made 59 economic visits (41.3%), 39 military visits (27.3%), 16 visits related to foreign affairs, (11.2%), and 29 visits in the category of “other” (20.3%). It is anticipated that North Korea will proceed in expanding the limited reforms and in opening up the economy to secure foreign capital and improve people’s living standards. In particular, as the “guardians” of Kim Jong-un, people like Jang Sung-taek (constructed 100,000 housing units in Pyongyang, led development in Hwanggeumpyeong and Nason, visited Seoul as economic inspector), Kim Kyong-hui (Director of the light industry Department of the Worker’s Party of Korea), and Kim Yang-gun (Director of the United Front Department of Chosun), are all expected to have significant interest in areas such as securing foreign capital and improving people’s living standards.

Economic improvement in North Korea is also very important to the South, potentially helping to alleviate tension and bring peace to the Korean Peninsula. Additionally, cooperation would provide the economy of the South with a new dimension for economic growth. Above all, cross-border cooperation will help expand domestic demand. The volume of domestic demand is determined by the size of population as well as income levels. A nation is required to secure a certain level of population in order to independently manage its own economy while promoting industrial development. However, South Korea`s population is declining due to its record-low birthrate. If inter-Korean economic cooperation is stimulated, a market with a population of nearly 100 million consumers can be secured. It will offer new hope for light industries and small to medium-sized companies, which have deepened an economic bipolarization due to their falling competitiveness. In fact, some textile and footwear manufacturers which invested in China or Vietnam after securing competitiveness and profitability at the Gaeseong Industrial Complex in North Korea, are now showing signs of relocating their operations back to the Korean peninsula. At the Gaeseong complex, a project that marries South Korean capital and technology with cheap labor from the North, South Korean companies produce clothes, utensils and watches, as well as electronic and machinery parts, employing more than 47,000 North Korean workers.

The creation of new demand will also ease excess supply concerns of the South Korea’s key industrial players, including manufacturers of steel, cars and ships. Geopolitical risks on the Korean peninsula can also be reduced if the two Koreas increase economic dependence on each other, as evidenced by the relations between China and Taiwan. These two countries have steadily expanded bilateral economic cooperation in spite of their prolonged military confrontations. They eventually signed the Economic Cooperation Framework Agreement, accomplishing the so-called “Chi-wan” (China+Taiwan) economic integration. The deepening of economic interconnections will ultimately help eliminate ideological confrontations by increasing the opportunity cost caused by military conflicts.

It will be important to have enthusiasm and willingness to maintain and expand inter-Korean economic cooperation under a strategy to promote the sustained prosperity of the Korean nation in the future. Regardless of political party, faction and ideology, mid- to long-term visions and strategies for inter-Korean economic cooperation should be established and faithfully carried out. Like China-Taiwan relations, the two Koreas should take advantage of practical strategies and measures to fully guarantee business cooperation regardless of mounting military tensions. In fact, the activity of private enterprises should be used to ease military tensions and safeguard communication channels. In order to ripen the environment for inter-Korean economic cooperation, it is essential to foster working-level experts on North Korea rather than political theorists.

Multilateral measures should be also pursued to enhance international cooperation to ensure the success of inter-Korean economic cooperation. If China, Russia, the United States, Europe and international organizations become involved in various inter-Korean economic cooperation and development projects, they can proceed smoothly regardless of conflicts between the two Koreas. Eventually, the economic cooperation between South and North Korea will and should be increased.

Yu, Byoung-gyu is the Executive Director of Hyundai Research Institute & also a visiting scholar at SAIS 

By Troy Stangarone

Years ago, The Economist developed the Big Mac Index to track how much a MacDonald’s Big Mac cost in countries around the world. The idea was to provide an understandable measure for purchasing power parity across countries since the Big Mac is a basic commodity that has spread across the world. Of course, there are no MacDonald’s in North Korea and statistics on economic activity are often hard to come by or have to be inferred by data reported from foreign countries that trade with North Korea. However, some recent reporting might point the way to a commodity that could at least signal the direction of economic developments in North Korea – the Choco pie.

About a month ago, the Chosun Ilbo reported that North Korea had asked South Korean companies working in the Kaesong Industrial Complex to stop giving its workers Choco pies and that daily consumption in the Complex had dropped from 200,000 to below 150,000. The pies are not only a big hit among North Korean workers, but also on the North Korean black market. Reporting indicates that the pies go for about 100 grams of rice in open air markets and that a year ago they were worth about $9.50 on the black market where 2.5 million pies may be traded a month. The trade has become so successful, that some traders only deal in the pies.

Now comes word that Choco pies may also be becoming a way for companies in the Kaesong Industrial Complex to provide their workers with a benefit beyond their salaries. It has long been known that the companies provided their North Korean workers with extra food that they could take home to their families, hence how the Choco pie craze began. But now it seems that the amount of pies given to workers by companies varies and that they try to outdo each other in the amount of pies they give to workers. This means that companies have found a way to basically vary compensation to workers in terms of salary and benefits, even if the North Korea state still assigns workers and sets wages through agreements with the South Korean government. The immediate impact of this of course is to maintain morale at individual plants, but at the same time it’s beginning to set a precedent for the future competition between companies for workers in the Complex based on wages, benefits, and skills.

North Korea seems concerned enough about the popularity of the pies and these developments that it has asked companies to either provide other types of food or cash instead. The companies so far have declined to do so. Given the spread of the pies across North Korea, perhaps it’s time to consider developing a Choco Pie Index for North Korea to track what is becoming one of the most popular mediums of exchange in the country?

Troy Stangarone is the Senior Director for Congressional Affairs and Trade for the Korea Economic Institute. The views expressed here are his own.

By Troy Stangarone

Despite the financial crisis of 2008, the global downturn that followed in 2009, and a year of tension between North and South Korea, the Kaesong Industrial Complex has been remarkably resilient. New numbers from the Ministry of Unification show that production at the complex was up 38 percent in September from a year earlier to $36.8 million, setting a new monthly high. The number North Koreans working in Kaesong’s 123 factories also set a new high of 48,242, up 8.4 percent from a year ago.

The growth at Kaesong is interesting in light of the challenges of recent years. After the Cheonan was sunk, South Korea implemented a series of sanctions against North Korea. New investments in the Kaesong complex were prohibited and ongoing expansions were halted. While some of the restriction on investment have recently been lifted, they would be unlikely to account for the increase in production over the last year. At the same time, visits to Kaesong by South Koreans were limited to essential personnel.

The continued growth of Kaesong is also bucking recent global economic trends. While South Korean trade as a whole was down 20 percent in 2009 from the global economic recession, trade with North Korea through Kaesong has continued to grow. Inter-Korean trade from Kaesong was up 7.9 percent in 2009 and 48.9 percent in 2010 despite North Korea’s provocations. Through the first half of this year it is up 19.5 percent from last year and a significant 135.8 percent since 2009.

As we approach 2012, a symbolically important year for North Korea, production growth at Kaesong is likely to continue. South Korea is working to improve road access from Kaesong to the industrial complex and providing additional buses to transport workers from their homes. Additionally, after removing the restriction on construction in the complex, South Korea is moving ahead with the construction of a fire station, medical facility, and resuming construction on facilities for seven companies that had already received permits, including three metal and machinery plants, three textile factories, and one electronics factory.

However, while trade has been up, and the increase in workers and wages means North Korea will earn more from the complex, below the surface the picture is less robust.  An increasing number of firms are facing bankruptcy, and at the end of August 40 firms wrote to the government to request a grace period for their debts.

Despite being enticed to Kaesong with some combination of low interest loans, preferential tax rates, political risk insurance, and state subsidies, the political risk has clearly taken its toll on some firms in the complex. Even prior to the sinking of the Cheonan, it was unclear how profitable firms were in Kaesong, and the sanctions from May 24 likely only increased losses for firms that saw a halt to the importation of needed equipment, continued construction, or a decrease in orders. While some firms have suffered from the sanctions, the complex as a whole has sought to increase the supply of North Korean labor to boost production. These two factors likely explain why production has significantly increased as more firms face financial difficulties.

Troy Stangarone is the Senior Director of Congressional Affairs and Trade at the Korea Economic Institute. The views expressed here are his own.