The Factors of South Korea’s Closure

of the Kaesong Industrial Complex (KIC) in 2016

Amalia Mastur

, Siti R. Susanto

International Relations Department, Universitas Airlangga, Surabaya, Indonesia

Keywords: Kaesong Industrial Complex, South Korea, North Korea, Nuclear Proliferation

Abstract: South Korea’s decision to close Kaesong Industrial Complex (KIC) on February 10

2016 was a response to

North Korea’s nuclear testing. As a result, the closure led to economic losses for South Korean companies

of approximately 2 trillion won. KIC and its political implications are significant and need to be examined

since it was the only remaining bilateral cooperation between the two Korean states, as they had been

divided after the Korean War in 1953. This research paper aimed to examine the reasons behind the decision

that was made by South Korea to close the KIC in 2016. This research is an explanative research study that

used qualitative data analysis. The theoretical framework that was used was foreign policy and rational

choice theories. This paper found that South Korea’s response to North Korean’s nuclear testing in 2016

regarding the role of KIC was different compared to their response to the previous nuclear tests in 2006,

2009 and 2013. Regarding the last three nuclear tests, South Korea had not interrupted the operations of the

complex. On the contrary, North Korea was the one who usually disrupted the complex; they even choose to

close the KIC in 2009 and 2013. This research revealed the four determinants that influenced South Korea’s

decision to close KIC; North Korean governmental revenue, nuclear proliferation, the political tension

between the two Koreas, and pressure from the United States.

1 INTRODUCTION

Kaesong Industrial Complex (KIC) is an inter-

Korean economic cooperation project in the form of

a Special Economic Zone, officially opened in 2004

(Yang, 2016). Up until 2016, KIC was the only form

of cooperation that was left between South Korea

and North Korea. It served as part of the

implementation of the Sunshine Policy to achieve a

state of reconciliation between the two Koreas. The

KIC here had the role of being a 'lifeline' that

connected the two countries to allow them to

continue high-level dialogue as well as people-to-

people diplomacy. Through this interaction, KIC

was expected to function as a facilitator to

encourage social exchange, which then became a

springboard for reconciliation between the two

Koreas. However, on February 10

, 2016, the South

Korean government, under President Park Geun Hye

(박근혜), decided to close KIC.

South Korea's decision to close the KIC is a

surprising act to many parties. The KIC closure has

caused more than 50,000 North Korean workers to

lose their jobs and more than 120 South Korean

firms lost their place of business, causing a loss of

more than 2 trillion won for the South Korean

companies involved (Manyin, 2016; Woo, 2016).

When the KIC was operational, the region was

usually unaffected by inter-Korean political

tensions. However, the KIC was only ever

temporarily closed unilaterally by the North Korean

government in 2009 and 2013 because of annual

joint military exercises conducted by South Korean

alongside US forces.

South Korea's attitude then changed due to inter-

Korean political tensions in 2016, when North Korea

conducted its fourth nuclear test on January 6

2016, and there was the launch of a satellite

violating the UN Security Council Resolution on

February 7

, 2016. South Korea finally decided to

close the KIC in response to North Korea’s action.

Contrary to the South Korean government's attitude

Mastur, A. and Susanto, S.

The Factors of South Korea’s Closure of the Kaesong Industrial Complex (KIC) in 2016.

DOI: 10.5220/0008820602890294

In Proceedings of the 4th International Conference on Contemporary Social and Political Affairs (ICoCSPA 2018), pages 289-294

ISBN: 978-989-758-393-3

289

in previous years, this decision is interesting to

further examine, since although previously North

Korea showed provocative action, South Korea

never has previously had the intention to close the

KIC, given how it was the only form of cooperation

between two Koreas.

2 RESEARCH METHODS

This research is an explanative research study which

aimed to explain and test the hypotheses associated

with the research variables (Singarimbun, 1981).

The variables used in this study included nuclear

proliferation, government revenue, inter-state

tensions and international pressure. This study was

limited by focusing only on the causal analysis of

the KIC’s closure by South Korea in 2016. The

scope of this study began from the establishment of

KIC in 2004 up until its closure in 2016.

The data collection techniques were qualitative

which, according to Cassel and Simon, is a social

science research method that attempts to accurately

describe and interpret the meaning of symptoms that

occur within a social context (Cassel & Simon,

1994). The collection of the data required in this

research used books, journals, lecture notes, articles,

and other publications from print media, the internet

or mass media as determined to be relevant to this

thesis writing. The data analysis in this research was

in parallel with Miles and Huberman’s model

framework. The analysis was done gradually

through data reduction, data presentation, and

conclusion and verification (Punch, 2005).

3 RESULTS AND DISCUSSION

3.1 KIC Funding Flow Potential for

North Korea's Revolutionary Fund

as a South Korean Security Threat

The main objective of the KIC closure was to

pressure North Korea to halt its nuclear

development. This is because South Korea saw that

North Korea used the money originating from the

KIC to fund its nuclear program development

instead of using the money to improve the welfare of

North Koreans.

The argument was proven by KIC's significance

to North Korea's hard currency revenue. Up until the

KIC closure in 2016, South Korea served as North

Korea's second largest trade partner (KOTRA,

2016). The hard currency here is an important

revenue source for a country conducting transactions

related to the development of nuclear technology,

and the KIC here plays an important role as a hard

currency contributor to North Korea. In this case, the

KIC's role to provide a surplus of hard currency for

the North Korean government can be seen from the

payment system used in KIC.

Article 34 of the Employment Act in KIC

stipulated that South Korean companies must pay

the North Korean workers' wages directly in cash

(KIC Council of Industry Representatives 2006).

However, at the request of the North Korean

government, the South Korean company was

required to send the salaries to the North Korean

government. The KIC wage payment process was as

follows: the North Korean workers' wages were paid

in hard currency first to the KIC's Special Bureau of

Public Regions for KIC. Later on, the Bureau

distributed some of the wages received from the

South Korean company to the North Korean

government, and then handed it over to North

Korean workers after the North Korean government

cut the wage due to social insurance and other

expenses.

The 15 percent wage deduction mentioned by the

Ministry of Unification, from what was received by

the North Korean workers, was for social insurance.

The remainder of their workers salary was cut again

for the 15 percent or 30 percent socio-cultural tax

(Korean Institute for National Unification 2006).

Only $35 is paid to the workers in cash in North

Korean won or it is exchanged with the daily

necessity coupons for food, clothing and other basic

necessities (Korean Institute for National Unification

2006). Up until it closed in February 2016, North

Korean workers at the KIC received only 250,000

KPW as described by the North Korean government

and an additional bonus of 50,000 KPW (Lee 2016).

In fact, the minimum wage prior to the closure of

KIC increased to $73.78 and was capable of

reaching $150 per month (Ministry of Unification,

2016b). Given the amount calculated based on the

USD and KPW exchange rates, the amount earned

by the North Korean government was much greater

than what was estimated. The exchange rate of 1

USD equals 8,200 KPW. Therefore, based on the

exchange rate, 250,000 KPW was received by the

North Korean workers, equivalent to 30 USD or

about 20 percent of the $150 that the North Korean

workers should earn. Based on the number of wages,

the North Korean government not only cut as much

as 30 percent, but they even cut up to 80 percent

ICoCSPA 2018 - International Conference on Contemporary Social and Political Affairs

290

from the total salary payment from the South Korean

companies.

The funding therefore flows to the North Korean

government, and the KIC also channelled its funds

indirectly to the North Korean leaders, called

'revolutionary funds'. The revolutionary fund is one

of the funds contained in the North Korean financial

system that can only be obtained through foreign

trade. The main function of the revolutionary fund is

to maintain the leadership’s power in North Korea.

In addition, the fund could also be used by North

Korean leaders to import luxury goods for the North

Korean elite, as a source of corporate funding under

the guidance of North Korean leaders and to run

state-owned enterprises and institutions (Kim, 2017).

When viewing some of the functions of the

revolutionary fund, they all have the same final

effect - maintaining the regime and increasing the

regime's leadership in North Korea. To maintain

leadership in North Korea, nuclear development is

one of the ways that its leaders continue to do so.

3.2 The significance of KIC Revenue

for North Korea Hard Currency

Revenue

The revolutionary fund that serves to maintain

leadership in North Korea can only be obtained

through foreign trade. In addition to South Korea,

North Korea's largest foreign trade partner is China,

which occupies the first position as North Korea's

largest trading partner. Thus, in order to know the

significance of the KIC fund flows for North Korea,

a comparison of China's foreign trade volume with

North Korea and South Korea with North Korea was

made. It should be noted that KIC contributes to 99

percent of the total foreign trade between South

Korea and North Korea (Ministry of Unification,

2016c).

It can be recalled that KIC has an increasingly

significant role in the North Korean government’s

revenue, especially the North Korean leader's

revolutionary fund. The increasing volume of trade

between South Korea and North Korea shows that

North Korea has a tendency to become increasingly

dependent on South Korean trade. Although not yet

able to exceed the total trade with China, South

Korea has reached half of the total trade of China

and North Korea in 2015. In recognising the

increasingly significant hard currency received by

North Korea through KIC, it is a rational choice for

South Korea to decide to close the complex to avoid

potential revenue to North Korea’s revolutionary

funds that could threaten South Korea's security.

3.3 North Korea's Nuclear Capability

Improvement since KIC’s Opening

The closure of KIC is related to the increasing threat

from North Korea, which continues to conduct

provocative actions through nuclear and missile

tests. The use of KIC funds acquired to develop

nuclear weapons can be proven through North

Korea's ability to expand its nuclear power, both in

terms of quantity, quality and intensity. In terms of

intensity, this can be seen from the increasing

frequency of the nuclear tests and missiles compared

to ten years before the opening of KIC. During that

time, North Korea had only conducted a one-time

missile test in 1998. Since the opening of KIC in

2004, North Korea conducted four nuclear tests in

2006, 2009, 2013 and 2016 and seven missile

launches in 2005, 2006, 2007, 2012, 2014, 2015 and

2016 before its closure.

In terms of quantity, an increase also occurred in

the amount of raw materials for nuclear weapons

that is possible to be produced by North Korea.

North Korea has had the capability to produce one of

the main sources of nuclear material, plutonium,

through its nuclear reactors in Yongbyon since the

1980s. In February 2003, exactly one year before the

KIC was opened, North Korea reactivated the

reactor. North Korea is able to process uranium fuel

and produce about 7 kilograms of plutonium per

year (Niksch, 2002) compared to the plutonium

production before the closure in 1994. In mid-2006,

it was estimated that North Korea had produced at

least 15 kilograms of plutonium. In 2008, this

increased to 38.5 kilograms and in 2009, North

Korea stated that the country had started uranium

enrichment. This uranium enrichment, according to

David Albright and Chritina Walrond (2012), has

the potential to produce 17 kilograms of uranium-

grade weapons per year.

Since the early development of ballistic missile

technology in the 1970s, North Korea was able to

produce and deploy short-range missile systems

(SRBM) including artillery missiles and short-range

rockets, including Scud missiles and a new SS-21

variant called KN-02 with a distance of 120 - 170

kilometres (Albright 2015). Scud-B and C, with a

range of 300km and 500km respectively, began to be

developed in the mid-1980s (Albright 2015). In the

late 1990s, North Korea fielded a 1,300km (MRBM)

missile and then the Scud-ER, which expanded the

scud's previous range (Wit and Ahn 2015). To date,

North Korea has several medium-range missiles that

have been tested and that are able to operate such as

Hwasong, Pukguksong and Nodong. They have the

The Factors of South Korea’s Closure of the Kaesong Industrial Complex (KIC) in 2016

291

ability to shoot from 1000 to 1600 kilometres away,

which can be used to threaten South Korea and

Japan. However, in line with the North Korean

treaty which was not to develop its nuclear arsenal

since 1999, there was no increase in its missile-firing

capability until 2003.

Nevertheless, since the KIC operations, the

abilities of the missile types owned by North Korea

became increasingly sophisticated. After North

Korea decided to re-develop its nuclear program in

2007, three years after the opening of KIC, North

Korea was able to deploy its first long-range missile

(IRBM), the Musudan missile with a minimum

distance of 3,000 km (ROK Ministry of Defence,

2014). The IRBM missile is expected to be able to

reach Guam, which is a United States territory. In

April 2015, Admiral Bill Gortney, commander of the

North American Air Defence Command (NORAD),

also confirmed that North Korea is developing two

other ICBM missiles; KN-08 and KN-14 (Harper,

2015). In 2016, North Korea successfully conducted

its first test of an ICBM missile when it launched

Taepodong 2 as a launch vehicle space (SLV) called

"Unha 3" on February 6

, 2016. It is believed to be

able to reach the United States mainland. The launch

came three days before South Korea finally decided

to close KIC (NTI, 2016).

3.4 KIC Failure to Bridging the Peace

between the two Koreas

The main objective of the formation of KIC was to

reduce the tension between the two Koreas.

However, since the KIC’s inauguration and up until

its closure in 2016, tensions and conflicts between

the two Koreas still happened. This shows that KIC

failed to achieve its main objective to strengthen

bilateral cooperation. The conflicts and threats

happened almost every year after KIC began

operating. There have been four crises caused by

nuclear testing, and four crises when the conflict was

caused by gun attacks. There was one border conflict

and there was a verbal threat three times.

On 12

November, 2009, South Korea and North

Korea engaged in a battle along the Northern Limit

Line. This conflict was preceded by a North Korea

ship that crossed the NLL toward the West Sea near

Daecheong Island, which was then involved in

fighting with a South Korean ship. On March 26

2010, a conflict broke out which further complicated

South Korea's and North Korea's ties, which

involved the sinking of the Cheonan ship that killed

46 South Korean sailors. The investigation

conducted showed that North Korea was the

mastermind of the incident (BBC, 2016).

On February 19

, 2012, a telegram issued by

North Korean officials threatened that they would

launch an attack on South Korea if South Korea still

continued with their military training. Two months

later, on April 13

, 2012, North Korea launched a

satellite that worsened the relationship between the

two Koreas. On August 4th, 2015, two South Korean

soldiers conducting a patrol in the DMZ area were

seriously wounded by landmines stationed outside

the South Korean guard post. The UN investigation

found that the mines were planted by North Korean

troops, which was immediately opposed to by the

North Korean side (United Forces Korea, 2015). On

August 9

, 2015, the South Korean government

responded to this incident by continuing its

propaganda through a loudspeaker in the border

areas, where both countries had agreed to stop their

military actions since in 2004. In response to this,

North Korea fired four bullets into South Korea, and

in return, South Korea responded with artillery fire.

3.5 United States’ Pressure to Close

KIC

The United States, as South Korea's biggest ally,

encouraging the sanctions toward North Korea

following the nuclear tests in January 2016. The US

has always helped South Korea to face the North

Korea's provocative actions through military aid and

guarantees South Korea its protection. It firmly

states that the nuclear tests that have been conducted

by North Korea have violated the previous

resolutions and clearly pose a threat to international

peace and security. The United States Ambassador

to the UN, Samantha Power, said that the

international community should respond to this

incident by "increasing the pressure" and upholding

the sanctions continuously (US Mission Korea,

2016).

The United States, as one of the UN Security

Council members, will step up the economic

sanctions against the North Korean regime and

propose sanctions to discontinue North Korea's

access to the international financial system and hard

currency sources (Kim, 2017). By the United States

continuing to put pressure on North Korea, this gives

North Korea limited options to survive:

denuclearisation or face the collapse of their regime.

In addition, in response to the post-nuclear tests

conducted by North Korea, White House press

secretary Josh Earnest said that the President of the

United States had spoken separately with the South

ICoCSPA 2018 - International Conference on Contemporary Social and Political Affairs

292

Korean and Japanese leaders, Park Geun-Hye and

Shinzo Abe on the phone, and convinced the two

that the country will commit to ensuring the security

of the US’s allies both in Asia and around the world

(The White House, 2016).

The United States did not directly ask South

Korea to close the KIC, but the United States was

pushing to increase the multilateral sanctions and

closing access for North Korea to the international

financial system in order to stop the country from

developing its nuclear weapons. The pressure placed

from the United States onto South Korea was limited

to increasing the multilateral sanctions for North

Korea and increasing the US-allied commitments to

achieving peace and security on the Korean

Peninsula. As an ally of the United States under the

protection of the nuclear umbrella of the United

States, South Korea interpreted the United States'

strong response to North Korea's nuclear test and

decided to close the KIC in 2016. The KIC’s closure

is the most effective bilateral sanction that South

Korea can provide.

As previously mentioned, the KIC is a hard

currency source for North Korea. Therefore, closing

the KIC for North Korea is equivalent to putting

more economic pressure on North Korea, hoping to

halt its nuclear development. Furthermore, South

Korea's decision to close KIC also provides a higher

bargaining position for South Korea at the UN, to

encourage the increase of sanctions against North

Korea. If South Korea decides to keep the KIC

operational, then it means South Korea indirectly

supports North Korea in its nuclear development.

In the process of developing nuclear technology,

hard currency is a crucial source of income,

especially for a closed country like North Korea

which has limited sources of hard currency. Thus,

realising the collapse of KIC in relation to achieving

its ultimate goal of easing inter-Korean tensions and

the US’s pressure to increase sanctions for North

Korea, the closure of KIC is the most rational choice

for the South Korean government. This is because

South Korea no longer benefits from the region, but

the region threatens South Korea's security since that

the flow of KIC funds is for North Korea's nuclear

development.

4 CONCLUSIONS

It can be concluded that the reason behind the South

Korean government's decision to close KIC is

influenced by three factors. The first is because KIC

served as the main source of revenue for the North

Korean government’s nuclear proliferation that

could threaten South Korean security. This is proven

by the increasing intensity, quality and quantity of

North Korea's nuclear development since the

opening of KIC.

The second is because the KIC failed to achieve

the main goal of reducing inter-Korean tensions.

Although the KIC was established as the main point

of cooperation between the two Koreas, tensions and

conflict between them still happened. Tensions

occurred almost every year since 2006 until the

KIC’s closure in 2016. The third was because the

United States put on pressure to close the KIC. This

proves the United States' strong response to North

Korea's nuclear test by increasing sanctions on North

Korea. South Korea's position here is an ally of the

United States under the US "nuclear umbrella",

which has a strong influence on South Korea’s

decision to close the KIC.

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