Sunset after the Sunshine Policy? Implications of the Kaesong Industrial Complex closure

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by Guest Post , March 6, 2016

The South Korean government’s decision to shut down the Kaesong Industrial Complex as a response to North Korea’s launching of a long-range rocket will have far-reaching political and economic consequences. A guest post by Dr. Bok Gyo Jeong.

On 10 February, the South Korean government suspended operations at the Kaesong Industrial Complex after North Korea’s nuclear test on January 6 and its long-range rocket launch a month later. Kim Jong-un, in response, quickly turned the complex into a military zone, ordering South Koreans to leave and seizing many their assets.

A major plank of South Korea’s Sunshine policy, which aims to separate politics from economics, the Industrial Complex was also one of the few areas on which the two Korea’s collaborated with one another. Seen as a clear indicator of relations between the two, its indefinite suspension portends a grim outlook for Inter-Korea relations in the short-term and is likely to have far-reaching economic consequences for business interests in the the two Korea’s.

Implications of Kaesong Industrial Complex closure

The South Korean government’s decision to shut down the KIC is most ostensibly a political measure. In the political tables, North Korea’s long-range rocket launch was criticized by the U.S. and other countries as it violates the UN Security Council Resolution and many countries called for strengthened sanctions to penalize actions against UN resolution.

Daniel Russel, the Assistant Secretary at the Bureau of East Asian and Pacific Affairs, stated that South Korean Government’s decision is consistent with the general international community, which believes that more steps are necessary to convince North Korean leaders to observe the UN Secretary resolutions.

Yet the measure will also gravely effect the economic activities of private firms in Kaesong.

Number of Companies Operating in the KIC and Production Volume. Unit: Number and Million US Dollars

Source: Ministry of Unification, South Korea (2015)

Most obviously, this shutdown of the inter-Korean KIC will take a substantial toll on 124 mainly South Korean companies, snuff out millions of dollars’ worth of bilateral trade, and put over 50,000 North Koreans out of work.

Amount of Trade by year (unit: million USD)

Source: Ministry of Unification, South Korea (2015)

More worryingly, though, it could also spell the end of the Sunshine Policy tenet. That would be disastrous; seen as a way of keeping future hopes of rapprochement alive, an end of the Sunshine Policy would not only see any economic cooperation come to an abrupt halt, it would also dash hopes the two could one day settle their differences.

Analyst still think that the complex may open once again. Similar suspensions have happened before, after all. But it remains unclear how long this shutdown will last. This is especially so given the complex political issues within the Korean Peninsula, which includes South Korea hosting its legislative election in this April, and belligerent rhetoric, including nuclear threats, coming from Pyongyang.

Making matters more difficult, too, is the ambivalence of China – who have generally acted as a mediator between the two Korea’s – this time around. With Seoul-Beijing ties currently strained, this makes the current situation more complicated and potentially more dangerous.

And regardless of the political calculations and justification of the KIC shutdown by the South Korean government, the damage out of this measure will be long-lasting and detrimental in the reshaping of the trust of this inter-Korean economic cooperation model.

Implications for investors

Once the principle of separation of politics and economics breaks down, foreign or private investors will not invest their money because of the skepticism over long-term viability of this inter-Korean economic cooperation model. Investors will consider this as a political laboratory under the government’s control, not as an economic enterprise model under the market’s invisible hand.

The last two decades of inter-Korean Sunshine Policy and its legacy era has suddenly turned into a sunset mode, a long steady decline.  The damage has been done. Any reopening is unlikely to bring the same sunny hopes for the unification within the Korean Peninsula.

Dr. Bok Gyo Jeong is a full-time faculty and lecturer in the Public Administration Department at Kean University in New Jersey. He earned his PhD degree in the fields of Public Administration and International Development from the Graduate School of Public and International Affairs at the University of Pittsburgh in 2013.  Dr. Jeong’s research includes nonprofit accountability, social enterprise and entrepreneurship, partnership between civil society and international organizations, public private partnerships, and system transformation in transitional economies.