Burden of Kaesong Closure to Mostly Fall on S. Korean Firms

Aiming to punish North Korea for a rocket launch on Sunday, South Korea's government said earlier this week it will shut down the Kaesong industrial complex. It accused North Korea of using the cash it earns from South Korean involvement in the rare venture between the two Koreas to finance its weapons programs.

Pyongyang responded Thursday, February 11, by announcing a military takeover of the complex near the border of the two countries, ordering all South Koreans to leave, and seizing the possible bounty of equipment and assets left behind.

North Korea, impoverished due to the isolation imposed by decades of authoritarian rule, earned $560 million from the park since it started operating in 2004, including $120 million last year alone, Seoul says.

South Koreans were divided by their government's decision. The project that combined cheap North Korean labor with the capital and technology of affluent South Korea has long been viewed both as a test of the potential for reunification of a peninsula divided by the 1950-53 Korean War and a symbol of intractable tension.

South Korean businesses at the park urged the government to reconsider the shutdown.

"It seems like the complex was nearly sentenced to death," said Jung Ki-sup, chair of the association of 124 South Korean firms at Kaesong. "I feel very bitter and resentful of the government's abrupt decision."

When North Korea pulled out its workers in 2013 during another episode of high tension, the five-month disruption cost 700 billion won for the South Korean companies, according to the government, and more than 1 trillion won according to the companies.

Analysts said the closure of the park, one of strongest nonmilitary measures available to South Korean President Park Geun-hye, will not be debilitating for North Korea's economy. Its annual exports to ally China are more than 20 times what it is estimated to earn from Kaesong in a year.

The decision hurts the South Korean businesses involved but overall is not a significant factor for the economy of South Korea. The finance ministry estimated that annual production from Kaesong accounted for less than 0.04 percent of the South's gross domestic product.

On one level, the shutdown shows Park's willingness to act decisively. That may help drum up support from other countries for sterner sanctions against North Korea, which has tested crude nuclear weapons and is trying to develop long-range missiles.

But analysts say it's unlikely China, which is the North's main political and economic prop, would take any measures that imperil the regime of North Korean leader Kim Jong-un 

"It has a symbolic effect of showing a strong commitment but it is unlikely to be fatal to North Korea's weapons programs," said Hong Soon-jick, a senior research fellow at Hyundai Research Institute

The South Korean government's decision caused 54,000 North Korean workers to become jobless overnight. They were paid about $74 a month by South Korean firms.

But North Korea can send those workers to China or Russia where they can earn three times more than their wages in Kaesong, analysts said.

South Korean officials believe North Korea sends tens of thousands of its workers overseas to earn dollars.  

"It will take a toll on North Korean workers who lost their jobs at the Kaesong park," said Cheong Sung Chang, a senior research at the Sejong Institute. "But it will take a bigger toll on the small and medium South Korean businesses" that operated at the park.

Most South Korean businesses at Kaesong manufactured labor-intensive products such as clothing, electronic components and wristwatches.

South Korea's government and companies have invested more than 1 trillion won ($852 million) to pave roads and erect buildings in the park, which lies on the outskirts of Kaesong, North Korea's third-largest city.

South Korea's government said it would find ways to compensate the businesses affected by its decision.

AP