NORTH/SOUTH AGREE TO WAGE HIKE AT KAESONG

C O N F I D E N T I A L SECTION 01 OF 02 SEOUL 002531 SIPDIS SIPDIS AMEMBASSY MOSCOW -- PLEASE PASS TO AMCONSUL VLADIVOSTOK STATE FOR EAP/K NSC FOR WILDER, MCGANN AND ALLEN JCS FOR GENERAL PACE, LT GEN SATTLER USFK FOR GENERAL BELL E.O. 12958: DECL: 08/16/2017 TAGS: ECON ELAB PGOV PREL KS KN SUBJECT: NORTH/SOUTH AGREE TO WAGE HIKE AT KAESONG INDUSTRIAL COMPLEX REF: SEOUL 2144 Classified By: DCM Bill Stanton for reasons 1.4 (B&D). Summary -------------- ¶1. (C) On August 3, North and South Korean authorities agreed to give North Korean workers at the Kaesong Industrial Complex (KIC) a 5-percent pay raise, effective September 10. DPRK authorities had sought two earlier pay raises since the KIC broke ground in 2003, but this pay hike is the first ever. It will boost the amount of hard currency paid directly into DPRK government coffers because the DPRK will continue to receive the wages in USD and pay them out in the form of special coupons and DPRK Won. North and South Korean representatives also agreed to hold wage negotiations on an annual basis in the future, thereby fostering greater "wage transparency" for the workers and general public. This goal remains largely hortatory because information remains tightly controlled in the DPRK, and no new method has been established to convey wage information to workers. On balance, the pay raise reflects new confidence in the growing commercial potential of the KIC now that its first phase of development has been completed. A new wave of investors is in the wings, including two PRC companies, that should swell the KIC labor force from about 16,000 to 19,000 this Fall. End summary. Wage Agreement -------------- ¶2. (C) The Kaesong Industrial District Management Committee (KIDMAC),the ROK's quasi-governmental non-profit organization negotiating on behalf of KIC-based firms, and the DPRK's Central Special Development Guidance Bureau (CSDGB) held talks from July 24 to August 3 at the request of the CSDGB to address its request for a 15-percent pay hike for KIC workers. Following ten days of grueling talks, both sides agreed to a five-percent wage raise, the maximum allowed on an annual basis under the orginal KIC agreement. In its press release, KIDMAC cited the completion of the first phase of the Ministry of Unification's KIC Development Plan as justification for this first-ever wage increase. Both sides also agreed to hold wage discussions annually, according to a Ministry of Unification (MOU) official who participated in the talks. Pay System -------------- ¶3. (C) Since the KIC broke ground in June 2003 (and companies began operating there in December 2004),KIDMAC has paid worker wages directly to the CSDGB in the form of USD. In turn, the CSDGB has distributed the wages in the form of special coupons and DPRK Won to KIC workers after deducting health insurance and social welfare taxes of about 30 percent from the wage packet, according to several independent sources. The pay coupons are redeemable for daily necessities at government-run stores in Kaesong City. These stores were well-stocked and appeared to be government-subsidized, according to an Australian who recently visited Kaesong for business. ¶4. (C) To date, KIDMAC and MOU officials have not been able to determine through official DPRK channels the monetary value and terms of KIC wages paid out by the CSDGB. If we assume the CSDGB uses the official DPRK exchange rate of 150 Won/USD (as opposed to the recent black market rate of about 2,800 Won/USD, reftel),KIC workers receive only a small fraction of the total compensation paid to them by ROK companies. More important, the DPRK government now garners about USD 1.1 million per month from KIC worker wages. We SEOUL 00002531 002 OF 002 calculate this amount by multiplying 16,000 (the current size of the work force) by USD 70 (the average pay packet, including the new wage hike and overtime). Wage Transparency? -------------- ¶5. (C) The MOU's KIC Project Chief Jeong Joon-hee confirmed to us that "wage transparency" was a sticking point in the recent talks. To help aid negotiations, KIDMAC had requested clarification from the CSDGB on how it paid out KIC wages. The CSDGB politely ignored this request and later simply refused to provide any details. Nonetheless, both sides did agree to foster greater "transparency" by holding annual talks on wages in the future. Jeong wryly noted that KIDMAC left its request for greater wage clarity on the table, while the CSDGB chose to focus on the agreement to revisit the pay issue annually. (Note: At present, KIC companies inform workers about the amount of their wages only if asked. Many workers request such information to verify their overtime pay. End note.) COMMENT -------------- ¶6. (C) KIC workers receive limited compensation for their labor, both in terms of how they are paid and how they can spend their earnings. While able to request the amount of their USD pay packets, they remain under the heavy thumb of the DPRK government's controlled system of labor approval, movement, and compensation. This system is a two-edged sword. It contains the potential for economic and social change within DPRK society by repressing the creation of a middle class and free labor system. It cannot eliminate, however, the spread of information about a prosperous capitalistic system that provides higher wages for its workers. ¶7. (C) On balance, the pay raise reflects new confidence in the growing commercial potential of the KIC now that its first phase of development has been completed. A new wave of investors is in the wings, including two PRC companies, that should boost the KIC labor force from about 16,000 to 19,000 this Fall. By 2010, KIDMAC anticipates a labor force of 95,000 workers at KIC. The DPRK government would thus realize USD 6.7 million in foreign exchange per month from the KIC wage payout that year, based on current compensation levels. As a result, future wage talks represent not only a cash cow for the DPRK regime but also a clear incentive for it to keep increasing the KIC work force under its tightly supervised labor system. End comment. VERSHBOW