How to (or Not to) Reboot the Sunshine Policy

Moon Jae-in, the Minjoo Party candidate for the South Korean Presidency, presented his North Korea policy last week. The frontrunner’s core idea is to create an “economic community” that will lead to “permanent peace for the peninsula and a solution to the North Korea nuclear crisis.” His grandiose vision centers on reviving the Kaesong Industrial Complex (KIC), the shuttered vestige of Kim Dae-jung’s “Sunshine Policy.” However, this would be a mistake, as the Kaesong experiment has already failed. Supporting smaller-scale investments in North Korea by South Korean companies offers a more promising path to achieving greater North-South economic cooperation.

No Going Back

Moon has made it clear that he not only wants to re-open Kaesong, but to expand it if possible. In February, he suggested expanding it to something like 20 times its previous size. Yet, despite popular misconceptions abroad that North Korea is still a command, planned economy, in the time between the KIC’s birth and death, North Korea has basically become a market economy.

(Maeil Business News)
(Maeil Business News)

Even at the KIC’s peak era, the limitations on its success and spillover effects into the North Korean economy were manifold. It was fundamentally a political project, forever beholden to the political whims of either capital. This ultimately resulted in a temporary shutdown by the North in 2013 and the final shutdown by the South in 2016.

Moreover, several issues with the execution of the project were disappointing. The most contentious being the adherence to North Korean demands for Kaesong’s wages to not be paid directly to the workers, which goes against international labor practices to which South Korean companies are bound. Career development opportunities for North Koreans were also constrained and linkages into the North’s economy were mostly limited to the consumerism of its workers. For instance, production materials were not supplied by North Korean companies, nor did finished goods enter the domestic market. The greatest pain-point caused by the 2016 closure of Kaesong is that 54,000 North Korean consumers of domestically-made goods lost their spending power.

Trying to re-open KIC will likely also encounter intense domestic and international opposition. And while there were exceptions for KIC in previous UN Security Council Resolutions, allowing for the political experiment to play out, those exceptions may no longer be valid; getting US and UN Security Council support for reopening KIC will be tricky in the current political environment. This is especially true since three months ago South Korea’s Ministry of Unification stated that 70 percent of the wages and fees for the project had gone towards Pyongyang’s weapons program and luxury goods for Kim Jong Un.

Consequently, the next South Korean president will not only face political hurdles at home to reopen the complex but opposition from key allies as well. After all, what South Korean company would want to invest (or return) to Kaesong? A representative organization for the companies in the KIC estimated that total losses since the 2016 closure to 1.5 trillion won ($1.3 billion) and claimed Seoul had only compensated 32 percent of that. The risks are simply too high. The government would need to offer huge incentives and insurance policies for businesspeople, creating not only a moral hazard for the companies but also making the project more vulnerable to shifts in policy from both Pyongyang and Seoul. Instead, the new South Korean President could test how serious Kim Jong Un is both about the economy as well as inter-Korean relations not by resurrecting the KIC, but by permitting smaller, market-driven investments in the North by South Korean companies. Therefore, rather than reinvesting government funds into a failed complex project, support could be given for these types of business ventures through a “Northern Enterprise Bureau.”

A “Northern Enterprise Bureau” Approach

South Korea could take a page from Singapore—in particular, the city-state’s International Enterprise Singapore (IE Singapore). IE Singapore is a government agency that helps local companies find and understand new markets while meeting foreign technical and cultural standards. Its predecessor agency was set up in 1983 and helped provide access to developed markets in Europe, the United States and Japan, but it also set its eyes on the difficult-to-navigate Chinese economy. IE Singapore helps outbound companies navigate tax regimes, supplies market research and helps partner companies with potential partners abroad. It also offers grants for some sectors and markets.

Seoul could do the same for its citizens who have an eye on the North Korean market. The Special Economic Zone (SEZ) policies North Korea rolled out in 2012 and 2013 suggested an interest in South Korean investment. Several of the SEZs certainly seem to be Southward-looking. For instance, in 2013, one DPRK official admitted to this author that rapid growth for Wonsan would probably depend on Japanese or South Korean investment. During 2010 to 2013, Pyongyang showed a willingness to experiment with the rules and frameworks governing foreign investment. That impetus has decreased somewhat in recent years, but it could be revived.

Though fraught with challenges, smaller South Korean investments in North Korean SEZ’s (most outside of the KIC) have many potential upsides:

First, the financial outlays would be minimal. This might be the biggest advantage: such a project would be small and scalable. Costs would be limited to office space, marketing and outreach, the salaries of lawyers and bureaucrats, and attendant expenses. Perhaps a Northern Enterprise Bureau (NEB) could begin by opening a liaison office in Dandong rather than focusing on direct border links and other inter-Korean security hot potatoes. If the initiative goes well, they could expand the office and perhaps move it to Kaesong or somewhere in Gyeonggi Province, north of Seoul. If it goes badly, it could also be scaled down and run with a skeleton staff.

Second, it would simultaneously test Kim Jong Un’s commitments to economic development, inter-Korean cooperation and diversification away from China. Kim Jong Un’s domestic brand is connected to economic growth, which is coming under pressure as the North’s nuclear and missile programs continue and sanctions expand. Is Kim ready to try new formulas for economic growth? Does he want to improve North-South relations? Does he want non-Chinese investors? Promoting South Korean investment in North Korean enterprise zones would be a low-cost way to test those propositions.

Third, the market and (more) normal risk assessments would decide what projects go ahead. Does South Korean company X think it’s too risky to build the manufacturing plant and surrounding infrastructure that North Korean company Y is asking for? Fine, then perhaps it tries to refurbish an existing factory first to see if it can be run profitably. Or perhaps it invests nothing and decides to wait. For example, there is currently at least one South Korean brewery that wants to collaborate to make a jointly brewed product with a North Korean beer-maker. Perhaps this could lead to an expansion of cooperative brewing projects and even a permanent business relationship, or maybe not. But such low-risk interactions would allow southern businesspeople to test relationships, understand the commercial environment and scale accordingly.

Fourth, security would and should be a concern (and Moon has attempted to cast himself as a “Security President”). In that regard, Seoul could impose security restrictions on South Korean companies that want to work with North Korean entities. For example, it could require that all electronic communications have to be conducted via unencrypted platforms, and establish explicit requirements for monitoring of investments and communications.

Overcoming Barriers

Over the years, South Korean companies have fared well in entering tough markets in China, Vietnam and Myanmar, but North Korea is tougher nut to crack. On top of the legal vagaries and corruption similar to these other markets, overlapping sanctions regimes would have to be navigated. Although this would be a heavy burden for most companies, there are ways the South Korean government could help. For instance, Seoul could maintain a clear blacklist and whitelist that would not only help South Korean companies stay compliant but also empower non-military and non-security connected companies in the North by offering them money-making opportunities that are denied to certain other entities.

Similarly, lack of transparency is another problem that Seoul could help South Korean companies work around. Reputations of North Korean companies and institutions would quickly develop amongst the Southerners (and vice-versa, of course). A NEB could be a clearinghouse to share such information. Are Ministry A’s officials trustworthy and able to execute projects? Does Company B know how to train its workers? Does company C keep reasonable accounting standards? With a more open North-South economic environment and more Southern money potentially available, Northern business actors could become more transparent and more accountable as they compete with each other for reliability.

Money transfers would pose a final hurdle. Seoul would probably have to set up a new state-owned bank to handle transfers and either get an exemption from UNSCR regulations or find a means to comply with them. It may require a creative solution like the DPRK setting up a bank in Kaesong and moving bulk cash. Avoiding the ire of the US Treasury will be difficult, but again, a NEB could assist South Korean companies by establishing these and other safeguards.

Indeed, with sanctions unlikely to disappear or diminish in the medium-term and a new hard-to-read US administration, the NEB could become responsible for coordinating with Washington on a number of fronts regarding inter-Korean economic relations. Again, the small-at-first, scalable approach here is better: it allows for a constant monitoring of political shifts in the US capital, testing reactions as the project develops.

Thinking Smaller is Smarter

This more modest approach to inter-Korean economic cooperation would test Pyongyang’s commitment to improving North-South relations, provide new opportunities for its large and small companies, and allow for competition with Chinese influence in the North Korean economy. If this initiative goes well, it would create a number of positives both in the North and between the two Koreas. Of course, smaller projects might end up trapped between factionalism and inter-Korean competition as well, but they would not create a bullseye for conflict, the way the Kaesong mega-project did.

Moreover, if the project tanks, the sunk cost and the risks will have been minimal. Given the vicissitudes of Pyongyang’s foreign relations and the current mood in Washington, a NEB may well go nowhere, but a revival of a massively expensive and politically contentious Kaesong project would be far more problematic. Why not go with the lower-cost and lower-risk alternative? Moon Jae-in clearly wants to save the legacy of the Sunshine Policy. To do so he should make sure he doesn’t repeat the mistakes of the past.

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