KAESONG INDUSTRIAL COMPLEX: THE INTER-KOREAN

C O N F I D E N T I A L SEOUL 002144

SIPDIS

SIPDIS

E.O. 12958: DECL: 07/18/2017
TAGS: PREL PGOV ECON KS KN
SUBJECT: KAESONG INDUSTRIAL COMPLEX: THE INTER-KOREAN
PROJECT TO WATCH

REF: A. 2005 SEOUL 1746

B. SEOUL 1931

Classified By: Amb. Alexander Vershbow. Reasons 1.4 (b/d)

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SUMMARY
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1. (C) The Kaesong Industrial Complex (KIC),a tidy enclave
where 24 South Korean companies employ almost 16,000 North
Korean workers on DPRK soil, is the most tangible and
significant aspect of North-South relations. By our
calculation using parallel market exchange rates, the North
Korean government keeps as much as USD 56 out of the 58 USD
monthly salary for each worker. Exploitation? Of course.
But even that USD 2 salary and benefits associated with
working in KIC are better than the employment benefits for
most North Koreans. More important, however, is KIC's
potential for educating an expanding slice of the North
Korean workforce about free markets and, over time, about
open societies. Developer Hyundai Asan envisions a
Manhattan-sized complex and city housing 2,800 companies,
employing 350,000 workers, and producing USD 20 billion in
goods per year by 2020 -- not to mention two golf courses and
an amusement park. That vision is part hype; initial
development has moved more slowly than projected.
Nonetheless, the expansion plan is backed by substantial
investment in infrastructure and high-level ROKG support.
Prospects are that KIC will send an increasingly powerful
message to the North Korean population about the benefits of
South Korean-style free markets and the superiority of South
Korean society. END SUMMARY.

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KIC WAGES
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2. (C) The ROK initially believed that North Korean workers
at KIC would get their salaries directly each month (ref A),
but that has not turned out to be the case. Instead, USD
payments from ROK employers to North Korean authorities at
KIC amount to a significant hard currency source for the
DPRK, probably close to USD 900,000 per month, as explained
during our June 21 visit to KIC (ref B).


3. (C) Kim Dong-un, a South Korean who is Chairman of the
Korean Industrial District Management Committee, and who now
lives at KIC, and Hyundai Asan Vice President Jang Whan-bin,
who has managed the details of this Hyundai Asan-led project
since its early days, said that South Korean companies make a
monthly cash payment of USD 58 per worker (more if overtime
is paid) to the DPRK's Central Special Direct General Bureau
at KIC. The DPRK then deducts 30 percent of wages, or USD
17.40 for social insurance and other benefits, leaving USD
40.60. But the North Korean workers never see U.S. dollars.
Of the remaining USD 40.60, 80 percent or 4,547 NK won is
credited to workers' accounts at special public distribution
centers in Kaesong City. Kim said he had visited the
distribution centers -- he goes to Kaesong City several times
a month after giving advance notice of his plans -- and had
seen that they were stocked with "food, clothes and shoes."
Another 20 percent or 1,261 NK won is paid to workers in
cash, for a total wage of NK won 5,684, using the official
exchange rate of 140 NK won/USD.


4. (C) The black-market value of the USD in North Korea --
which Canadian diplomats who traveled to Pyongyang in June
reported was 2,800 NK won/USD -- is relevant here, because it
means that the DPRK authorities can provide NK won 5,684
worth of goods and cash for the equivalent of about USD 2.00.
Hence, DPRK authorities could be seen as netting about USD
56.00 per worker per month (USD 58.00 minus the USD 2.00
value of consumer goods and NK-won cash paid to workers),or
USD 870,000 per month for the North Korean workforce of
15,579 (leaving aside any costs for social insurance and
benefits that the DPRK incurs). Still, the wages that North
Korean workers get at KIC are significantly higher than what
production workers are believed to receive elsewhere in North
Korea. Under North Korea's centrally planned economy,
remuneration is primarily in kind rather than in cash, and
prices for basic necessities are set artificially low.
Kaesong workers therefore probably have considerably greater
disposable purchasing power than most of their compatriots.
They also have the additional benefits of certain meals
provided on site, hot showers, and the ability to do laundry,
Kim said.

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WORKER ATTITUDES
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5. (C) Asked to characterize the North Korean workers, Kim
replied that the workers are "educated, diligent, and expect
a better life." As we toured the KIC facilities and ate
lunch at the Hyundai Asan cafeteria, he noted that KIC's
workforce now includes representatives from about one-third
of Kaesong City's 55,000 households (apparently limited to
one worker per family),so people had to be talking about it
among themselves. Some workers had also told him, quietly,
that "the market economy is better," but he added that the
workers were required to attend two-to-three hours of
ideological training in Kaesong City on Saturday afternoons
(anecdotally said to be standard across much of North Korea).
He added that North Korean authorities were initially
concerned that South Korean companies would try to influence
the workers, perhaps talking to them about democratic values,
but the North Koreans had relaxed after they realized that
the companies were only interested in profits.

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MORE CAUTIOUS VIEWS
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6. (C) Walter Paik, an advisor to Grand National Party (GNP)
Presidential contender Park Geun-hye, told us on June 29 that
the GNP supported KIC as a "capitalist project" that could
"blow the winds of democracy and market economics" into North
Korea. He offered, however, two caveats: that GNP would
want to slow down expansion of KIC (along with South Korean
tourism to Mt. Kumgang in North Korea) until Pyongyang showed
signs of change. He argued that the level of trust between
the North and South was too low, and that it was absurd that
KIC workers did not receive their wages directly. He said
Hyundai Asan's projections for KIC's growth were overblown
because South Korean companies would prefer to seek low wages
in places like Vietnam and Cambodia rather than put up with
political uncertainty at KIC.


7. (SBU) At a June 14 Seoul dinner in honor of former ROK
President Kim Dae-jung, long-time North Korea watcher Leon
Sigal, now director of the Northeast Asia Cooperative
Security Project at the Social Science Research Council in
New York, told the audience that he had visited KIC for the
first time the previous day and found its existence amazing.
But he said he also came away with questions about its
future. For example, if a North Korean worker were severely
injured at KIC, would he or she be taken to a North or South
Korean hospital? Similarly, would a major fire bring a
response from a fire department in the South? He also said
that there were more general unanswered questions, such as
whether KIC was teaching workers about markets and democracy,
or just about the process of acquiring goods. We later posed
the injury and fire questions to Kim Dong-un. He said
doctors at KIC would treat all injuries, but they were not
expected to be serious because KIC focused on light
manufacturing, and the KIC's fire department would handle all
fires. Kim sidestepped a question about when KIC would be
open to internet communication, so that a potential investor
could count on being able to do research and development,
answering that KIC would be sure to supply workers who were
qualified for investors' needs.

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INFRASTRUCTURE BUILT, INCREASING PRODUCTION,
AND AMBITIOUS PLANS
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8. (C) While those questions about KIC's future remain, the
infrastructure -- electricity, eight-lane roads, water supply
and treatment -- is in place for a major expansion. (NOTE:
The ROK Ministry of Commerce, Industry and Energy on June 21
announced the dedication of a substation in Kaesong that can
receive 100,000 kilowatts of electricity, enough to serve up
to 30,000 households, from the South via 154-kilowat power
cables across the DMZ. END NOTE). KIC statistics also show
labor productivity increasing. Hyundai Asan's presentation
during our June 21 visit depicted workers' rising
productivity since KIC's initial factory hired the first 255
workers in December 2004; now it is at 85 percent of South
Korean workers' levels, or "on par with South Korean
workers," according to Jang. Monthly production per worker
was USD 230 in January 2005 but rose to USD 1250 as of June

2007. Exports quintupled from USD 2.3 million during
January-April 2006 to USD 11.3 million during January-April

2007.


9. (C) Jang said that North Korean authorities wanted rapid
expansion of KIC, but their "tug-of-war" on operational
details clashed with that enthusiasm. For example, DPRK
authorities had only recently agreed to allow vehicles to
transit the DMZ every half hour, or 23 times per day. That
had helped relieve congestion, but it had taken too long to
get to that point. Another frustration was that the
Hyundai-Asan-built KIC train station, complete with a large
portrait of Kim Il-sung, was only a stone's throw away from
the gates of the KIC but had not been used except for the
ceremonial border-crossing on May 17. Hyundai Asan would
also like trains to transport workers to and from Kaesong
City. Wider political conditions played a role too: Hyundai
Asan had planned to launch the new 1.25 square mile Phase I
area, expected to house 300 firms employing 70,000 workers,
by the fall of 2006: but the DPRK's missile and nuclear
weapon tests had forced a delay. Now the area was still
waiting for the next set of factories to be built. Jang
noted with pride, however, that when the first 150 factory
sites were made available for applications from May 28 to
June 5, 356 companies had applieQ including seven existing
companies planning to expand operations.


10. (C) Deputy Foreign Minister Shim Yoon-joe told us on
June 22 that KIC's real impact would come when the workforce
increased to the point that North Korean authorities needed
to draw on labor from beyond Kaesong City -- not only because
of the greater number of individuals affected, but also
because transportation systems and living quarters would have
to be improved. News reports suggest that the DPRK is
already planning to send up to 3,000 workers to KIC from
Pyongyang.

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COMMENT: KIC IS THE ENGAGEMENT PROJECT TO WATCH
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11. (C) On the downside, KIC is clearly a source of hard
currency for the DPRK, raising questions about how it uses
these funds. At the same time, KIC, especially as it
continues to expand, sends a powerful message to North
Koreans -- directly to workers and indirectly to many others
-- about a market economy, much more powerfully than any
rhetoric. Since the ROK has virtually no other means of
demonstrating market economics on a daily basis on North
Korean soil, we believe this demonstration effect and the
influence it exerts outweigh concerns about the misuse of
funds. We agree a workforce expansion could have
wide-reaching effects on the DPRK. KIC's growth would be an
unmistakable rebuke to the North's command economy, the
results of which are visible outside the KIC fence in the
form of hollowed-out buildings without windows or electricity
and farm laborers plowing the soil by hand. If the KIC did
not exist, and the possibility arose for several thousand
North Korean workers to be transported to the South for one
day to see ROK manufacturing in action, we would jump at the
chance to give those workers a glimpse of the outside world.
The KIC may be the camel's nose under the tent.
STANTON