Kaesong Industrial Region

Kaesong Industrial Park

Construction started in June 2003, and in August 2003 North and South Korea ratified four tax and accountancy agreements to support investment. Pilot construction was completed in June 2004, and the industrial park opened in December 2004.

Initial phase

In the park's initial phase, 15 South Korean companies constructed manufacturing facilities. Three of the companies started operations by March 2005. First phase plans envisaged participation by 250 South Korean companies from 2006, employing 100,000 people by 2007. The park was expected to be complete in 2012, covering 65 km² and employing 700,000 people.

Organization

The Kaesong industrial park is run by a South Korean committee that has a 50-year lease that began in 2004. Hyundai Asan, a division of South Korean conglomerate Hyundai, has been hired by Pyongyang to develop the land. The firms are taking advantage of low-cost labor available in the North to compete with China to create low-end goods such as shoes, clothes, and watches.

Park Suhk-sam, senior economist at the Bank of Korea, predicted the industrial zone could create 725,000 jobs and generate $500 million in annual wage income for the North Korean economy by 2012. Five years later, another $1.78 billion would be earned from annual corporate taxes levied on South Korean companies participating in the industrial project.

Obstacles

The zone faces a number of obstacles. Among the most pressing are U.S. economic sanctions against the North, prohibiting imports of key technologies and goods, such as computers.

Wage and rent agreements

In May 2009, Pyongyang announced it unilaterally scrapped wage and rent agreements at the industrial park. In June 2009, they also demanded new salaries of $300 a month for its 40,000 workers, compared with the $75 they had been receiving prior.

In September 2009, a visit to North Korea by the Hyundai Group chairwoman led to a resolution to the North's demands, with mild wage increases and no change in land rents.

In 2012, wages were estimated at about $160 per month, about one-fifth of the South Korean minimum wage, and about a quarter of typical Chinese wages.

Taxes and revenue

In 2012, the Ministry of Unification was informed that 8 of the current 123 companies had received a tax collection notice. The notices were made by a unilateral decision by North Korea. The eight companies were informed of a notice to pay ₩170,208,077 ($160,000 US) in taxes; two of the companies have already paid $20,000 in taxes to the North Koreans.

Unilateral decisions by the Central Special Direct General Bureau (CSDGB) to amend bylaws is a violation of Kaesong Industrial District Law, which requires that any revision of the laws be negotiated between the North and the South.

For the first time, in 2011, the companies in the KIR recorded an average operating profit of ₩56 million ($56,241 US), finally operating in the black after years in deficit.

Green Doctors

Green Doctors, an NGO founded in Busan in January 2004, received official government permission to open a hospital in the region in 2005. Since then, it has provided medical treatment to the workers at Kaesong. The doctors who work there receive no salary. It has earned the trust of the North Korean workers and medical team, and it wishes to become a catalyst for a closer relationship between the two Koreas.

Cheonan incident

In May 2010, following the sinking of the ROKS Cheonan and South Korea's response, North Korea severed ties with South Korea and shut its Consultative Office, however existing activities in the zone maintained production activities, and transport and telephones to South Korea were operating normally.

2013 closure and reopening

On 3 April 2013, North Korea began to deny South Korean employees access to the Kaesong Industrial region. This came as tensions began escalating rapidly between Seoul and Pyongyang. On 8 April, North Korea recalled all 53,000 North Korean workers from the Kaesong Industrial complex, fully suspending its operations. However, 406 South Koreans remained at the complex after its effective closure.

On 17 April, North Korea barred a delegation of 10 South Korean businessmen from delivering food and supplies to the 200 South Korean staff who remained in the industrial zone. On 26 April 2013, South Korea decided to withdraw all remaining staff, and on 4 May, the last seven South Koreans left the Kaesong Industrial Region, which thus was completely shut down.

On 4 July, both countries agreed in principle that the Kaesong Industrial Park should be reopened, as tensions between the two began to cool. Six rounds of talks were held without reaching a concrete agreement, with South Korea's insistence on a provision to prevent North Korea from closing the complex again in the future. During the first week of August, North Korea reiterated that reopening the complex was in both nations' interest. On 13 August South Korea said it would start distributing insurance payments to businesses in the complex, but also said it was open to new wording on the issue of joint control of Kaesong. The move, seen as precursor to formally closing the region, sparked a seventh round of talks which South Korea label as "final". An official agreement to reopen the complex was reached and signed on 15 August. The agreement includes provisions designed to ensure a similar shutdown cannot occur in the future. A joint committee will be formed to determine if compensation will be provided for economic losses caused by the shutdown. No date for resuming operations had been set.

On 13 September, before the reopening of Kaesong Industrial region, the two governments held a subcommittee meeting to iron out additional issues regarding entrance, legal stay, communication, customs and passing. This ongoing debate is considered crucial with the governments of both North and South Korea also discussing the resumption of the Mount Kumgang Tourist Region. The 2008 shooting of a South Korean tourist and the 2010 Cheonan incident have played a role in the Kumgang negotiations and the South wishes to bring the issue to a peaceful, non violent end.

On 16 September, Kaesong was reopened after five months. All of the 123 companies operating in Kaesong experienced losses equaling a combined £575 million ($944 million).

2016 closure

On 10 February 2016, for the first time, South Korea announced it would halt operations in the region in response to a rocket launch by the DPRK, which it says was a disguised ballistic missile test. Seoul said all operations at the complex would halt, to stop the North using its investment "to fund its nuclear and missile development". The next day, the North announced it was expelling all South Korean workers and said it will freeze all South Korean assets and equipment at the jointly run factory park. All 280 South Korean workers present at Kaesong left hours after the announcement by the North.

On Thursday, February the 11th, a few minutes before midnight, the South announced it had shut off the supply of electricity and water into Kaesong that supplied the factory zone.

In South Korean domestic politics, there were two opposing viewpoints towards 2016 closure - While Saenuri Party argued for the closure, stating that the closure was one and the only means to end North Korea's provocation, other two parties, The Minjoo Party and People's Party, objecting to Saenuri, asserted that more communication is needed and that the closure will only escalate tensions in the Korean peninsular. Saenuri Party, which was the ruling party at that moment, said during the announcement of Kaesong Industrial Region's closure, "North Korea conducted the 4th nuclear test and rocket launch regardless of persistent warnings from the South Korean government and the international society. Communication and persuasion, or the 'carrots,' do not work anymore. We need more powerful sanctions on North Korea." Some people agree to Saenuri Party, arguing that South Korea should have more threatening and uncompromising attitudes towards North Korea so that it cannot conduct such tests again. On the other hand, The Minjoo Party and People's Party, which were the opposition parties, counter-argued that North Korea has never stopped its provocation even during its Arduous March, or the North Korean famine, emphasizing that the simple closure would never bar North Korea from testing nuclear weapons and launching missiles. They also say that the Kaesong Industrial Region was the last hope for peaceful resolution to everlasting tensions between the South and the North; but now that it is closed, South Korean citizens' fear over national defense will intensify.

Transport

There are two modes of travel to Kaesong, road and rail.

Rail

Kaesong Industrial Region is served by Korean State Railway from Panmun Station through the Pyongbu Line. There is rail access to South Korea (operated by Korail) via the Gyeongui Line but it is not known what restrictions apply. An agreement to re-establish rail freight services was made in November 2007.

The closest station in South Korea is Dorasan Station, from which road access can be taken.

Road

Limited road access is available for workers from South Korea via South Korea National Route 1 to the DMZ and then into Kaesong via Asian Highway 1 in the North. The route between the two highways is a paved road and part of the AH1 network. There are no connecting roads en route and a turnaround is available only in the South before the entering the North. Access to the road is closed if there are restrictions from checkpoints upon entering the DMZ.

Air

There is no option of air travel available from Kaesong to the South. Sohung South Airport is the closest airport to Kaesong in the North, but it serves no South Korea-bound flights.

The closest airports in the South are Gimpo International Airport and Incheon International Airport, from which road access can be taken to the industrial region.