By Troy Stangarone
In what is becoming an annual tradition, North and South Korea agreed to raise the wages of workers in the Kaesong Industrial Complex by the maximum 5 percent allowed to $67.05 a month under the established agreements between the two Koreas.
While the increase in wages is clearly good the 51,000 or so North Koreans working there, it raises larger questions such as what is the future of the complex and what steps might make Kaesong more dynamic? For the moment the future of Kaesong looks fairly stagnant. If wages continue to rise over the next decade at 5 percent a year, they will only hit $109.22 a month which is still significantly below the average of $167 a month workers make in China today.
Additionally, it is still unclear how profitable South Korean firms at Kaesong are. It was only in 2010 that North Korea collected its first taxes from a firm in Kaesong, when a single firm paid $7,000 in taxes. Those numbers did rise to four firms and around $153,000 in taxes on profits in 2011, at the very least that implies that if firms are becoming profitable in Kaesong for most it is only in the last few years given exemptions on the first five years of profits.
In its current state, Kaesong will likely continue on, but not much different from what we see today. However, if the intent is to return to something like the original goal of making Kaesong a platform for North Korea to experiment with economic reforms that could help revive the economy, what kind of changes might be beneficial?
Considering the question of wages, it seems clear that some workers in Kaesong are likely worth higher wages than the average salary. Allowing firms to set wages based on the productivity of their workers could be a first step in experimenting in labor market reforms. At present North Korea still manages all of the hiring, and loosening control on wages could be a first step towards broader labor market reforms that would allow firms to hire and fire their own workers.
At the same time, it might be beneficial to consider joint ventures with North Korean firms in the complex. Much of China’s economic success was built on joint ventures, and this would be another means to transfer skills and knowledge about running a market based firm to North Koreans, which could be critical if the new regime is serious about making economic reforms.
However, the real challenge for changing Kaesong’s future is finding markets for the goods produced there. Without fundamentally addressing North Korea’s nuclear program, the United States and Europe are unlikely to open up their markets to goods from Kaesong under their respective FTAs with Korea anytime in the near future.
While challenges exist, if Kaesong can serve as a laboratory for North Korea to experiment with economic reforms it could serve a useful purpose even if it continues to grow at a slow rate. However, to induce real change in North Korea its influence will have to begin extending beyond the current complex itself. That being said, the real question is whether North Korea is finally ready for reform? We’ll save that question for another day.
Troy Stangarone is Senior Director for Congressional Affairs and Trade for the Korea Economic Institute. He is currently on leave from KEI. The views expressed here are his own.