Will N. Korea Give Up Its Cash Cow in Kaesong?

As North Korea has taken hostage the inter-Korean industrial complex in Kaesong to pressure South Korea, the facility could face shutdown.

If the complex is shut down, who will stand to lose more between the two Koreas?

▽ Expected damage to South Korea

According to the Kaesong Industrial District Management Committee and other sources, South Korean companies had 450 billion won (304 million U.S. dollars) invested in production facilities and labor in the complex as of November last year.

South Korea also invested 658 billion won (443 million dollars) to build the inter-Korean Gyeongeui and Donghae railways, roads and a logistics complex, and 311.8 billion won (210.1 million U.S. dollars) to build the complex, power and communication facilities.

If the complex is shut down, chances are high that South Korean tours to the North will end. According to main tour operator Hyundai Asan Corp., South Korea spent 305.7 billion won (205.9 million dollars) from 1998 to late 2007 to build tourist facilities around Mount Kumgang.

Experts say, however, that it is improper to calculate all investment in the Kaesong complex as losses for the South, saying investment in specific infrastructure is required to prepare for eventual reunification of the two Koreas.

The potential bankruptcies of companies investing in the North, growing security fears on the Korean Peninsula, and a decline of South Korea’s sovereign credit rating and capital flight, however, are among the possible side effects of the complex’s closure.

▽ Damage to North Korea

If the complex is shut down, North Korea will say goodbye to a source of huge revenue. Thirty two million dollars is paid every year to North Korean workers in the complex.

In addition, South Korean tourists to Kaesong generated another 12 million dollars in revenue and those visiting Mount Kumgang 18 million dollars.

North Korea’s exports reached 1.1 billion dollars last year. Assuming net export profit of 10 percent, the North earns just a little more than 100 million dollars through foreign trade. Moreover, compensation for inter-Korean economic cooperation and tourism income are major cash cows for North Korean leaders.

More importantly, the jobs of some 37,000 North Koreans will vanish if the complex is closed. This could bring on the collapse of the Kaesong economy and worsen public sentiment there.

▽ Long-term losses for North Korea

South Korea stands to suffer more damage quantitatively over the short-term if the complex is shut down. Considering that the North Korean economy is one 36th of the South’s, however, the value of 90 billion won (60.6 million U.S. dollars) is huge for the North.

As such, closure of the industrial complex in Kaesong could be a major strategic fiasco for the North.