Identifier
Created
Classification
Origin
06SEOUL1952
2006-06-13 00:34:00
CONFIDENTIAL
Embassy Seoul
Cable title:  

DPRK ECONOMY: PDAS STEPHENS' VISIT TO KAESONG

Tags:  PREL ETRD EINV SOCI KN KS 
pdf how-to read a cable
VZCZCXYZ0000
PP RUEHWEB

DE RUEHUL #1952/01 1640034
ZNY CCCCC ZZH
P 130034Z JUN 06
FM AMEMBASSY SEOUL
TO RUEHC/SECSTATE WASHDC PRIORITY 8395
INFO RUEHKO/AMEMBASSY TOKYO 0849
RUEHBJ/AMEMBASSY BEIJING 0775
RUEHMO/AMEMBASSY MOSCOW 7343
RUEHSH/AMCONSUL SHENYANG 2974
RUCPDOC/DEPT OF COMMERCE WASHDC 1492
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHNSC/NSC WASHINGTON DC
C O N F I D E N T I A L SEOUL 001952 

SIPDIS

SIPDIS

STATE FOR EAP/K AND EB/IFD
COMMERCE FOR 4431/MAC/OPB/EAP/DUTTON
PASS USTR FOR CUTLER, AUGEROT AND KI
TREASURY FOR IA/ISA/DOHNER AND BUCKLEY
NSC FOR CHA AND COLLINS

E.O. 12958: DECL: 06/12/2016
TAGS: PREL ETRD EINV SOCI KN KS
SUBJECT: DPRK ECONOMY: PDAS STEPHENS' VISIT TO KAESONG
INDUSTRIAL COMPLEX

REF: A. SEOUL 1266


B. SEOUL 963

C. SEOUL 559

Classified By: DCM Mark Minton, for Reasons 1.4 (b.d)

SUMMARY
-------

C O N F I D E N T I A L SEOUL 001952

SIPDIS

SIPDIS

STATE FOR EAP/K AND EB/IFD
COMMERCE FOR 4431/MAC/OPB/EAP/DUTTON
PASS USTR FOR CUTLER, AUGEROT AND KI
TREASURY FOR IA/ISA/DOHNER AND BUCKLEY
NSC FOR CHA AND COLLINS

E.O. 12958: DECL: 06/12/2016
TAGS: PREL ETRD EINV SOCI KN KS
SUBJECT: DPRK ECONOMY: PDAS STEPHENS' VISIT TO KAESONG
INDUSTRIAL COMPLEX

REF: A. SEOUL 1266


B. SEOUL 963

C. SEOUL 559

Classified By: DCM Mark Minton, for Reasons 1.4 (b.d)

SUMMARY
--------------


1. (SBU) EAP PDAS Stephens visited the Kaesong Industrial
Complex (KIC) project site on June 2, finding conditions
consistent with previous Embassy reporting (reftels). Some
new findings included additional detail on wage and
employment conditions in the complex, as well as the
existence of a small Christian chapel where South Korean
workers worship. The delegation also emerged with a better
understanding of the exponential expansion envisioned for the
project in future years. End Summary.


2. (SBU) EAP Principal Deputy Assistant Secretary Kathleen
Stephens, accompanied by Embassy officers, visited the
Kaesong Industrial Complex (KIC),located one hour north of
Seoul inside North Korea, on June 2. In addition to holding
discussions with the South Korean managers of the industrial
zone and South Korean government officials, Stephens toured
two factories -- Shinwon Ebenezer Textiles and Taesung Hata
(which manufactures cosmetics cases) -- and took a windshield
tour of the Phase One area of the project, which is currently
undergoing site preparation construction (leveling the ground
and building roads, sewers and so on).

NEW DATA ON WAGES AND CONDITIONS FOR KAESONG WORKERS
-------------- --------------


3. (SBU) According to data presented by the Kaesong
Industrial District Management Committee (KIDMC),up through
the end of 2005 North Korean workers at the project worked an
average of 54.9 hours per week, earning an average wage, as
paid by their employers, of USD 67.40 per month (including
the official 15 percent social insurance premium paid by the
South Korean employers). To date, through the end of the
first quarter of 2006, Kaesong district employers have paid a

total of about USD 2 million in wages, and USD 280,000 in
social insurance premiums. Workers have access to free
commuter buses (there are 21 buses in service) and bicycles
(1,000 units have been distributed),receive uniforms and
winter undergarments, have access to shower facilities and a
clinic, and are served "side dishes" at lunch. (In typical
Korean fashion, the "side dishes" supplement the rice brought
by Korean workers in their lunchboxes and actually form the
bulk of the meal; the items listed on the menu at Shinwon
Ebenezer were quite substantial, including hearty soups and
vegetable dishes.)


4. (SBU) Regarding the key question of how much money the
workers actually receive, KIDMC President Kim Dong-keun told
our delegation that the North Korean authorities say that
they garnish about 30 percent of the wages before giving
North Korean cash to the workers, leaving them with roughly
70 percent. This is justified as taxes and fees of various
sorts, since the North Korean authorities provide housing,
education and other services. KIDMC President Kim said that
conversations with workers confirm that actual wage receipts
vary, ranging perhaps from 60 to 75 percent depending on the
individual.


5. (SBU) As reported previously, our delegation confirmed
that when North Korean workers sign their time sheets each
month, they can see the U.S. dollar totals paid by the South
Korean employer for their labor. The time sheets, however,
do not mention the additional 15 percent social insurance
premium paid to the North Korean authorities by the South
Korean employers on behalf of each worker.


6. (SBU) KIDMC President Kim and Ministry of Unification
(MOU) Director General Ko Gyoung-bin stated that the wage
payment situation will be more transparent once the South
Korean employers are able to directly deposit funds into a
North Korean bank in the names of the individual workers.

This is a step they said the North Korean authorities have
agreed to take, once necessary banking facilities are opened.
However, examined more closely, such a change may not
fundamentally change the arrangement. KIDMC President Kim
confirmed that the South Korean employers, lacking access to
North Korean Won, will still deposit the wages in U.S.
dollars in the North Korean bank. Subsequent to that, the
employer will not be able to check the exchange rate used
(the current official exchange rate is 170 North Korean Won
per dollar; the black market rate is roughly 3,000 per
dollar). Therefore, the South Korean employer will not be
able to ascertain how much of the wages are garnished by
North Korean authorities. In response to our question, KIDMC
indicated that there has been no discussion with the North
Korean authorities of paying the workers directly at the
factory in North Korean Won.


7. (SBU) The first annual wage increase has yet to be
negotiated with North Korean authorities. Also still under
discussion is wider differentiation in wage rates to account
for differing productivity and skill levels between workers.


8. (SBU) Working conditions observed at Shinwon Ebenezer and
Taesung Hata appeared good, and compared favorably to
manufacturing facilities we have seen in South Korea and
elsewhere in East Asia. The plants are well-lit, comfortable
and appear safe, although the repetitive work performed by
the unskilled and semi-skilled workers in the factories is no
doubt monotonous. Workers appeared animated and energetic,
although they became more serious when visitors were nearby.
As reported previously, many workers appear to be putting on
weight; South Korean employers say that the change in energy
levels and apparent healthiness has been noticeable. KIDMC
President Kim observed that when the North Korean workers
first began working at the KIC, most brought rice mixed with
other grains in their lunchboxes; now he observed they
brought higher-quality white rice prized by Koreans. Kim
attributed this upgrade in diet to increased household income
thanks to their KIC employment.


9. (SBU) Asked about worker complaints, KIDMC said there have
been few reported to the project's managers. If a worker has
a complaint that cannot be resolved by their direct
supervisor (whether North or South Korean),they could go to
the North Korean government management authority, or approach
their company's South Korean management. KIDMC said that
they believe that workers' biggest complaint has been with
transportation arrangements, since the commuter buses are
very crowded. Six more buses are on order to complement the
existing 21 vehicles. KIDMC staff members noted that the
North Korean workers have gradually become more relaxed in
their behavior; for example, they no longer strictly abide by
the North Korea-imposed rule that they always move about in
pairs, and more readily initiate and engage in casual
conversations with South Koreans and each other.


10. (SBU) Asked how workers are hired, KIDMC explained that
its North Korean partner supplies workers to be interviewed
by the South Korean employers. These workers are not
recruited individually, but rather the North Korean
organizing committee contacts work units in Kaesong City and
asked them to volunteer individuals for the KIC. Thus far,
all KIC workers are residents of Kaesong City, obviating the
need to build or provide new company housing.


11. (SBU) We noted that seamstresses at Shinwon Ebenezer sew
South Korean price tags directly on to the garments they sew.
Many are priced well above USD 200, a small fortune in the
DPRK, with the prices listed in South Korean Won.


12. (SBU) Asked about taxes, KIDMC staff members explained
that no South Korean firms have yet had to pay taxes, given
the incentive tax exemption of five years. They admitted
that the transfer pricing of materials shipped into North
Korea will be an issue of intense interest to North Korean
auditors, since that pricing will largely determine how much
tax is paid in North Korea and how much in South Korea by the
investing firms.

A HIDDEN CHURCH IN NORTH KOREA
--------------


13. (C) Our delegation, upon visiting Shinwon Ebenezer, was
surprised to be shown a locked room that serves as a
Christian church for South Korean workers at Shinwon and
other firms. A digital photo has been forwarded to EAP/K.
MOU Director General Ko asked that we be careful not to make
the photo public, or to widely disseminate information about
the church, for fear that Pyongyang-based officials may shut
it down.


14. (C) KIDMC staff members indicated that North Koreans are
not allowed to attend the church, where services take place
on Sunday when the factory is closed. They do appear to be
aware of the locked room, however. One incident was related
to us: A stack of bibles left outside the door of the room
disappeared, perhaps taken by North Korean workers. When the
incident was discovered, local North Korean authorities
demanded that Shinwon shut the church. The Shinwon CEO, a
devout Christian, visited Kaesong to solve the problem, and
won over North Korean authorities when he threatened to close
the entire factory if the church were closed.


15. (SBU) According to our South Korean guides, Shinwon's
investment in North Korea is motivated in part by its owners'
Christian faith and a desire to have a Christian presence,
albeit limited, in North Korea.


16. (SBU) It is interesting to note that North Korean
representatives accompanied us throughout the day, and were
present even as we asked hard questions about wages and
conditions, and when we visited the Shinwon chapel.

GENTLE CAMPAIGN FOR INCLUSION IN FTA
--------------


17. (SBU) MOU Director General Ko and accompanying Ministry
of Foreign Affairs and Trade (MOFAT) officials were clearly
interested in USG attitudes concerning inclusion of the KIC
in the U.S.-Korea Free Trade Agreement (FTA) currently under
negotiation -- and went out of their way to present the case
as best they could. Asked about a parallel project
worldwide, for instance, MOU Director General Ko described
the Bintan factory complex in Indonesia, which is owned and
managed by Singapore and uses materials imported from
Singapore before re-export. Director General Ko no doubt
used this example because he is aware that the Bintan project
has special status in the U.S.-Singapore FTA. In response,
EconMinCouns explained why it would not be possible to
include the KIC in the U.S.-Korea FTA.


18. (SBU) MOU Director General Ko noted that the South Korean
government would soon submit technology lists for review for
the next batch of 24 firms that is already starting to build
their factories in the KIC. This will follow the same
procedure as used for the previous 15 firms. Director
General Ko anticipated few problems this time, as the firms
selected are all relatively low-tech enterprises, many
involved in textiles piecework.

COMMENT: DRAMATIC EXPANSION PLANNED FOR THE COMING YEARS
-------------- --------------


19. (SBU) Perhaps most striking to our delegation was the
dramatic presentation provided by the Hyundai Asan
Corporation -- and delivered in part by an English-speaking
North Korean briefer in the presence of other North Korean
officials -- outlining the firm's highly ambitious plans to
build in three phases, by 2012, a complex of some 3,200 acres
with hundreds of companies employing hundreds of thousands of
workers (the figure of 700,000 workers was cited),and
ultimately expanding to include commercial, residential and
tourist site development. In fact, Hyundai Asan envisions a
modern, high-tech city inside North Korea which would be home
to tens of thousands of South Koreans and with infrastructure
directly linked to the North Korean economy. KIDMC President
Kim said that his North Korean counterparts regularly
complain about the "slow" pace of Kaesong's development,

relative to Hyundai Asan's grand vision.


20. (SBU) It is hard to see how such a vision matches current
realities. Such an extensive development, unlike the current
small-scale factory park, could not be contained in its
socio-economic and political impact, and would inevitably
have an immense impact on North Korean social consciousness.
KIDMC President Kim, in a one-on-one with PDAS Stephen,
readily agreed that, absent overall progress toward reform in
North Korea, North Korean authorities were unlikely to allow
development to proceed that quickly or that far.


21. (SBU) This message was cleared by PDAS Stephens.

VERSHBOW