At Kaesong, “engagement” teaches S. Korean corporations the dying art of slavery

slavery n 1. (Law) the state or condition of being a slave; a civil relationship whereby one person has absolute power over another and controls his life, liberty, and fortune; 2. the subjection of a person to another person, esp in being forced into work; 3. the condition of being subject to some influence or habit; 4. (Industrial Relations & HR Terms) work done in harsh conditions for low pay

A good test of whether any particular “engagement” program with North Korea has lived up to its founding promises is this simple question: “Who changed who?” In most cases, it’s the foreign investor or NGO that changed to conform to North Korea’s rules and ethics (a classic case in point: the Associated Press).

Engagement advocates cling to North Korea’s outdated self-characterization as socialist, ignoring its well-established reliance on predatory state capitalism. After all, if North Korea is socialist, one can always construct a self-serving argument that any form of trade, no matter how exploitative, is somehow contributing to reform. But at Kaesong, at least, experience proves something closer to the opposite of that.

A decade later, Kaesong has failed to induce reforms or reduce tensions.

Last month, an important paper by Marcus Noland added strong support to long-standing suspicions about the exploitative arrangements at the Kaesong Industrial Park, the flagship of the Sunshine Policy and the largest surviving “engagement” project.

To the extent the newspapers noticed it, they mostly noticed Noland’s most sensational conclusion — that each North Korean worker there nets as little as $2 a month, out of average of $130 in “wages” and “bonuses” for overtime. Noland isn’t pleased with the media focus on this point (for example), although I’d argue that it’s an important one that deserved even more attention and introspection than it got.

[image via The Atlantic]

What the Korean press largely missed, however, was Noland’s deeper conclusion that North Korea has negotiated its way to pan-opticon control over Kaesong’s work force, negating the very reformist forces that Kaesong’s promoters once promised.

Survey data on South Korean employers indicate that the North Korean government has in large part successfully circumscribed exposure of North Korean citizens both to South Koreans and to new, more market-oriented economic practices. Hiring is largely conducted via the North Korean government, which pre-screens workers (possibly on political criteria), sets wage rates administratively, demands payment in foreign currency, and takes a large cut.

South Korean managers typically do not interact directly with North Korean employees, but rather manage them through North Korean intermediaries who effectively represent state interests in monitoring and exercising control over workers. And even in firms that report direct supervision of workers, there is little statistical correlation with knowledge of working conditions or worker attitudes.

In a narrow economic sense, South Korean investment in North Korea may well be beneficial both for the firms and the workers involved, but there is no evidence of broader spillovers of the sort that proponents of engagement sometimes assert.

When Kim Dae Jung’s government first sold us the Sunshine Policy — and Kaesong, its centerpiece — it promised the world that Sunshine would, by easing North Korea’s hard currency shortages, help “create an environment in which North Korea can feel safe to open up and pursue reforms.” The North Koreans were willing to accept this arrangement because they wanted the money, and because they calculated that they could change South Korea more than South Korea could change them. They calculated that they could use Kaesong to extract increasingly exorbitant payments from South Korean investors, and ultimately from the South Korean taxpayers who subsidized them, while clamping down on any heresy by isolating and terrorizing Kaesong’s North Korean work force. They could also use Kaesong as a political lever against the South Korean government, knowing that left-of-center politicians would invariably pressure Seoul to bend to Pyongyang’s demands.

We’ve watched this experiment long enough to conclude, safely, that Kim Jong Il was right and Kim Dae Jung was wrong. Contrary to the promise that the Sunshine Policy would promote “reconciliation instead of confrontation, and cooperation instead of hostility,” North Korea is a greater threat to South Korea today that it was in 2002. It has attacked South Korea multiple times, advanced its WMD programs to an operational capability, and has never been more brazen about sharing its WMD technology with Iran and Syria. North Korea’s arbitrary taxes and its use of Kaesong as a hostage to its political moods have deterred most international investment. A recent U.N. report finding North Korea responsible for crimes against humanity will further deter investors who may fear adverse publicity.

Reports from last month contained mixed news for those investors. On one hand, Kaesong’s production levels had nearly recovered from a five-month shutdown by the North Koreans last year. On the other hand, North Korea has threatened this fragile recovery by demanding another hefty increase in the “wages” ostensibly paid to its North Korean workers, from $67 to $107 a month.

By now, it’s safe to say that Kaesong will never live up to its master plan, which once forecast that it would employ 150,000 North Koreans, without dramatic political change in Pyongyang. Kaesong’s remaining investors, most of them South Korean, still rely heavily on South Korean government subsidies.

Kaesong “wages” are confiscated through taxes and exchange rates.

South Korea’s Unification Ministry frequently asserts that Kaesong workers are paid a surprisingly high nominal wage, currently just over $67 a month. Few of the newspapers that pass that figure along to their readers ever bother to question it. In fact, only the North Koreans really know how much of “their” wages Kaesong workers are actually paid. Noland’s paper does much to reenforce those doubts. First, the regime takes a large cut off the top:

At the time of its closure in April 2013, the minimum wage at the KIC was $67.05 per month, and once all payments and bonuses were accounted for, the average wage was $130. Workers, however, were not receiving the full $130 per month; the North Korean government was thought to retain roughly 30 to 40 percent of this payment, ostensibly to cover social security payments, transportation, and other in-kind benefits. More importantly, while South Korean firms pay in US dollars, North Korea pays the workers in North Korean won converted at the wildly overvalued official exchange rate.

Evaluated at the more realistic black-market rate, North Korean workers may have been netting less than $2 per month (if the entire dollar amount were converted into won at the black market exchange rate). Alternatively, market prices for rice have been on the order of 4,000 to 5,000 (North Korean) won per kilo, suggesting that monthly after tax wages might purchase roughly 2 to 3 kilos of rice.3 These figures imply that the real wages of KIC workers are low. Nevertheless, while conditions in Kaesong may be exploitative, they probably are considerably better than those existing elsewhere in North Korea, and there appears to be no shortage of North Koreans willing to work on these terms.

What Noland can’t know, of course, is what these particular workers were doing before they were drafted into Kaesong. Presumably, they were from families with good political backgrounds, so they probably weren’t among North Korea’s poorest. For all we know, they were successful market traders who were forced to abandon more lucrative professions to enrich the state instead.

Next, Kaesong workers probably receive very little of what remains:

Given that wages are usually paid to the North Korean government, the firms hiring via the government were asked if they knew exactly how much money their workers were in turn receiving from the government. A majority of the employers refused to answer the question. Of those that did, their responses were split nearly evenly between those that said they knew (21 percent) and those that said they did not (18 percent). In other words, only one in five firms indicated that they knew how much their workers were actually paid. 

And also, 21 percent of those surveyed lied. At least 21%.

Remarkably, none of the firms that reported paying piecework rates indicated that they knew how much the workers were paid—they simply paid their North Korean counterparty and left it at that. However, when asked the follow-up question whether they believed that the government took a large amount of money that was supposed to go to their employees, a majority responded affirmatively (76 percent overall, 77 percent in the KIC, 71 percent outside the KIC). The implication is that those firms claiming to be paying piecework wages cannot know for sure if they actually are. 

But what about payment of the workers in rations, or access by the workers to alternative forms of exchange like ChocoPies? As it turns out, the North Koreans have made additional demands to suppress the ChocoPie trade, too:

[C]hoco-Pies, a South Korean snack similar to American Moon Pies, emerged as a kind of parallel currency in the city of Kaesong. Originally providing Choco-Pies to workers as a snack, South Korean firms, unable to vary wage rates or reward particularly productive workers, began using extra allocations of the snacks as a way to lure workers away from their competitors. (The cakes circulated as a kind of parallel currency in the environs of Kaesong, so that providing workers with extra cakes that could be sold outside the KIC effectively amounted to granting them a bonus.4) 

Like cigarettes in prison?

The North Korean government became sufficiently concerned over these developments that in November 2011, North Korean officials, the South Korean KIC management committee, and the employers agreed to rules to limit the distribution of the snacks. Choco-Pie rules were on the agenda when North and South Korea negotiated the reopening of KIC after its closure in 2013.

What you make of this depends on your perspective. I doubt that most North Koreans would find the existence of packaged snack cakes in South Korea to be particularly subversive, but I suppose the regime differs with me on that. The more important point is that, a decade into this experiment in arbeit-macht-frei, North Korea remains intolerant of even the smallest foreign heresy.

Most Kaesong workers are “managed” by North Korean security forces.

North Korea has also negotiated away most of the human contact between North and South Koreans. South Korean firms doing business in Kaesong do not supervise North Korean workers directly. Instead, the supervision is done by North Korean “intermediaries”:

Apparently supervision via North Korean intermediaries is a highly imperfect substitute for direct supervision. This may come from the fact that the North Korean intermediaries are not individuals who are assigned to Kaesong because of any managerial expertise, but who essentially play a political function; indeed, it is plausible that such intermediaries reduce the efficiency of Kaesong businesses, as has been reported anecdotally with respect to other foreign-invested businesses.

This isn’t really news. We’ve known since at least 2007 that the North Koreans had seized control of the management of the workers. In circumstances that are still unclear, in 2009, a South Korean worker was arrested after being accused of trying to induce a North Korean worker to defect. North Korean workers are reportedly under close supervision by the regime. Draw your own conclusions, but it’s reasonable to assume that these intermediaries are security forces officers (it would be naive to doubt it).

In spite of all this, Kaesong workers may still be the envy of their wretched countrymen, which is saying a lot. But if they had no choice in the matter of their assignments to work at Kaesong, where they earn a pittance for hard work and long hours, they are effectively slaves.

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To summarize, the North Korean government prescreens and drafts Kaesong’s workers, sets wage rates arbitrarily, demands wage payments in foreign currency, taxes a high percentage of those wages and other payments off the top, steals most of what remains by converting it to worthless local currency and paying that to the workers, and denies the workers the right to organize or strike.

The Korean Confederation of Trade Unions, needless to say, has never uttered a peep about any of this. And what of the South Korean government that once promised to make Kaesong an engine of change? Noland finds, “To date, there is no evidence that the South Korean government has undertaken any steps that would encourage or require its firms to abide by any standards whatsoever.” Remember, South Korea is supposed to be the “good,” “free” Korea.

The likelihood that Kaesong’s workers receive just a fraction of their nominal wages is an important ethical question. Noland discusses the limitations of international law in setting clear standards to address it, and advocates for a business code of ethics akin to the Sullivan Principles, which major investors once applied to apartheid-era South Africa. For that, I really suggest you read Noland’s own paper and discussion. But as much as the adoption of some ethical limits would be a welcome improvement, the problems with Kaesong are more than ethical, they are also legal. Setting up the legal discussions that will follow tomorrow is the principal reason why I wrote this post. (Its intentionally provocative title is another.)

I’ll discuss those legal issues in tomorrow’s post. The greatest of them — and the one that the Unification Ministry fears the most — is this: if the money isn’t going to the workers, where is it going?