South Korea should close Kaesong and encourage remittances.

The Chosun Ilbo reports that as the North Korean diaspora swells, those who have escaped are forming stronger financial links with their hungry families in the homeland. And this has some people concerned:

North Korean defectors settled in South Korea are sending some US$10 million a year to their families back home, it was reported on Sunday. The amount is expected to grow as there are more than 20,000 North Korean defectors in the South and the number is increasing, a government intelligence official said. Now the government is investigating what the effects of these growing remittances may be.

After noting the potential positive effects of capitalism spreading in the North, the article finds that this threatens to punch a gaping hole in international sanctions against Kim Jong Il’s regime.

At the same time there are concerns that the increased money wired by defectors back to the North could undermine international sanctions against the communist country. North Korea earned around $300 million a year by selling seafood and sand to South Korea, but all trade was suspended after the sinking of the Navy corvette Cheonan last year. And tours to North Korea’s scenic Mt. Kumgang resort, which generated $500 million in revenues over 10 years, were halted in July 2008.

A South Korean government source said, “We cannot rule out that money is being wired to North Korea by pro-North factions in the South who are aware that it is difficult to crack down on money transfers.”

Uh huh. And just who are these devious agents of Kim Jong Il?

Some 3,000 to 5,000 of 20,000 defectors settled in South Korea are sending W1-5 million (US$1=W1,117) each to their families back home through middlemen every year, the government and defectors’ organizations believe. The North could import about 18,500 tons of Thai rice ($540 per ton) or some 43,000 tons of corn ($230 per ton) for $10 million.

I appreciate that the Chosun adds that necessary context, to which I’ll add some more: the Kaesong Industrial Park is still “pumping $50 million per month into the collapsed North Korean economy.” That’s $600 million a year, every penny of which goes directly to the regime. Maybe I missed where the Chosun Ilbo and the Administration it supports have called for Kaesong to be closed.

If there are concerns, then, about undermining sanctions — not to mention South Korea’s own credibility in calling on other nations to enforce sanctions — that’s where the concern should begin, not crumbs for hungry kids. Why, after all, would Kim Jong Il bother to tap into small-time illegal remittances when he’s raking in $600 million a year, directly from South Korean taxpayers? If South Korea is worried about complying with the spirit and letter of UNSCR 1874, let it close Kaesong. Unless it has reason to suspect that the remittances are being diverted away from starving family members — like with, say, much of our international food aid — it should keep its hand off what North Korean refugees send home.

Also interesting is who isn’t participating in this debate — that is, all of the people who were telling us during the Sunshine years that pouring aid into Kim Jong Il’s bank accounts would change North Korea. Subsequent events have resolved that question. But now we have a kind of engagement that really is transforming North Korea, because it largely circumvents Kim Jong Il and reaches the North Korean people. In that light, shouldn’t South Korea latch onto remittances to help break the economic dependency of the people on the regime, break down the socialist economy, and allow for the financing of alternative institutions and organizations? Remittances could play as important a role in the subversion of the regime as DVD’s, radios, or cell phones. The supply chains for North Korea’s markets are providing most of the other electronic instruments of subversion that are breaking North Korea’s information blockade. This is to say nothing of the humanitarian impact.

If South Korea wants to change North Korea — in exactly the way we were once told that the Sunshine Policy would — it would do everything it could to encourage these remittances. First, it could legalize money transfers to North Korea, provided they’re done through licensed transfer brokers. Licensing would be done at the advisement of the National Intelligence Service, which would help establish a registry of “reliable” money smugglers. Second, it could set up a simple insurance system to protect remitters against financial losses (you know, like it did for Kaesong). Third, it could regulate and monitor transfers to ferret out those that were in fact regime subterfuges, and to ensure (to the extent possible) that the money was sent to recipients who were in legitimate financial need. Establishing cell phone links to North Korea could eventually prove helpful to this verification. In the meantime, if you’re looking for economic inducements to transform North Korea, then find a way around Kim Jong Il. The money smugglers are showing us the way.

8 Comments

  1. Couldn’t agree with your point more Joshua!
    I spoke to a person with interest in the situation yesterday who told me that 30% of this money goes to the broker and generally the rest gets to their family member in the North. This is an opportunity for these people to make sure their family is eating while they are in the south. Not too mention these family members face an immediate danger if they are found with the extra cash, by local police or search groups.
    Let these people continue doing what their doing, because most of the money is probably going to families and not the regime. If South Korea really wants to regulate the money going into the North they should, as you suggested, close down Kaesong.




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  2. I totally concur — and limit the money transfers to Renminbi, thereby generating conflict between the interests of the puppet State and its masters.




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  3. The NYTimes figure of 600 million a year is way off, the Kim regime makes a little more than 40 million a year from Kaesong. The Times states the annual output from Kaesong is 250 million so how could they pay 600 million a year. That wouldn’t make sense unless the pentagon secretly owns Kaesong.




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  4. I agree with Joshua completely.

    The surprisingly large sums of remittances that eventually make it to the families is good news. Even if the families have to bribe some police and state security agents, the cash will provide food and necessities to people who need it. Families of North Korean escapees will also be able to buy some security from the state security and police who are becoming increasingly predatory as the state’s distribution apparatus falls apart. The more entrepreneurial members will use the money seed businesses in North Korea’s growing underground economy.

    However, Chosun’s reporting and the misplaced concern that these remittances will somehow make it to Kim Jong Il’s coffers (forgetting about Kaesong where the money goes directly to Kim Jong Il) just shows how little the South Korean press and public know about the realities of North Korea.

    If the South Korean government were smart, it would be encouraging the remittances and clandestinely helping families get better deals with brokers.




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  5. NKEconWatch has several articles on Kaesong. It appears that formal payments of $41.31 million for land rent and wages ($4 million annually) was made from 1998-2008 (compared to over $544 million for tours to Mt Kumgang.) Perhaps $250 million of products annually were exported annually in good years — but the profits from those went to South Korea. There is also reported to be a South Korean investment finance for factories and equipment for $1.1 billion, of which 90% is underwritten by the ROK EXIM Bank.

    Presently, there are about 800 South Korean managers there — and one may assume that they are charged $100 daily by the DPRK for food and lodging. Total $29 million. Then there are now 45,332 local workers who can “earn” $90 per month with heavy overtime — or rather, the DPRK government is paid that sum in foreign exchange. Total $49 million.

    Allow for a further 50% of these three sums in bribes, duties and sundry other fees, one can see that the Kaesong facility is presently worth about $120 million, maximum, in hard currency to the DPRK — and it is still is profitable in income to the ROK companies that use it, plus its continued operation means the avoidance of $1 billion in payment of loan guarantees. It is estimated that Kaesong is working at less than 50% of capacity today.

    The facility should be closed — but, if it had still operated at full force, and Mt Kumgang still worked, there would have been almost $300 million in hard currency going to the North, instead of “only” $120 million.

    If Rason shipped 1000 containers per day for a charge of $100 per box, it would generate $35 million in foreign exchange. This figure can probably be multiplied by four, so that Rason within a year of operation, will generate over $100 million of foreign exchange for the DPRK. If a new rail line is laid from Harbin to Rason, the port could work in both ways — from China to the USA/Canada, and from the USA/Canada to Europe using the Trans-Siberian Railway line and its major offshoot to Harbin. That would probably double the figure of $100 million.




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  6. Can anybody cite South Korean, American, or UN plans in the case that Rason is completed, operational, and beneficial to the regime? What have they said so far pertaining to sanctions, and have they mentioned the role that China will play? What is the general attitude among the sanction regime leadership about Chinese contributions and infrastructure buildup in North Korea? I ask all of this because we seem to be meddling with these ideas of their economics without properly enforcing existing sanctions, or seeming to care that we’re not for that matter. Of course nobody can control the DPRK except maybe China, but since they’re unwilling to play by western direction or at least not fully, then our focus has to be on where we see the North Korean income heading in the next decade, up or down, and of course how to offset that direct national income with a larger citizen economy.

    I mean, despite their consistent facade of confidence, I wonder these days what their actual confidence level looks like, assuming the succession works, if the existing regime continues, and what their economic development plans actually mean for their perceived future. A return to greater control of the people? We seem to be seeing this happening already, whether or not they just attribute these decisions to the “youth cadre” or if the government machine is acting on its own at this point. I think they stopped believing long ago in the socialist paradise and have instead just been hanging on to the invigorating feeling of power.




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  7. I believe David Wolley’s figures are far to high. There are now around 500 S Korean managers that stay every night. The Southern companies bring in their own food so I don’t know why they would have to pay 100 a night that would work out to 25,000 per employee a year on top of a premium that SK workers must get to go north where they risk being taken hostage. I know the North fines SK workers for silly things I can’t imagine it comes to 50 million a year, I am curious could you tell me where you have gotten your info I have been unable to find info that backs up your position.




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