[Viewpoint] Pain ahead for inter-Korean projects

The economic exchange that has continued between the two Koreas over the past two decades is in crisis. The joint Kaesong Industrial Complex is in trouble because of North Korea’s demands for excessive wage hikes. The regime insists on raising the minimum wage for North Korean workers to $300 from $70, with annual wage increases of more than 10 percent instead of 5 percent. Since wage guidelines are prescribed by North Korean law, a legal revision would leave the South with no recourse.

The North Korean regime has also raised the lease for the complex, which has already been paid, by a factor of 31. With such demands, no company will be able to remain at Kaesong. Under such a cost structure, there is no reason to operate there over anywhere in South Korea. Although there is room for negotiation, the possibility of compromise is slim, considering the current state of inter-Korean relations.

Meanwhile, the Obama administration is weighing strong economic measures against the North. On top of the resolution of the UN Security Council, the U.S. is planning to impose extra financial sanctions. When U.S. Deputy Secretary of State James Steinberg visited South Korea and China recently, his delegation included high-ranking Treasury Department officials who were involved in blocking North Korean funds parked at Banco Delta Asia in Macao several years ago.

This suggests that the U.S. is likely to approach financial sanctions, as it did with the Macao bank in September 2005.

Strictly speaking, the action involving Banco Delta Asia was not a sanction. The bank’s name emerged during an American Treasury investigation into suspected counterfeit money from the North. Illegal money turned up in 50 North Korean accounts at the Macao bank, and U.S. banks were warned to be cautious in dealing with BDA.

Eventually, the banks voluntarily stopped all transactions with BDA. But the issue swelled, with BDA freezing $24 million in North Korean accounts when other banks became more and more reluctant to deal with them. Those banks were concerned that they could face financial reprisals from the Treasury Department if they engaged in transactions linked to North Korea.

Since trust is the most critical asset of any financial institution, banks may be forced to close their doors at a mere rumor that they may come under U.S. sanctions. The number of transactions that banks conduct with the North is low. Therefore, they believe that freezing North Korean accounts and suspending activity would be far safer.

But this time, the United States appears ready to adopt financial sanctions that will limit transactions with the North in any form. If that happens, a series of banks with North Korean accounts will likely close them or refuse to open new accounts for the North.

Meanwhile, financial transactions by the North through banks will become virtually impossible. Even Chinese banks will not be able to ignore this issue, because most of them use the U.S. dollar for transactions.

However, since economic exchanges between the two Koreas are currently being done through third-country banks, particularly those in China, it is highly likely that they will be directly affected by U.S. financial sanctions. The same can be said for direct transactions between the two Koreas.

A recent report said that counterfeit bills from North Korea were found in Busan. Under the circumstances, South Korean banks may feel reluctant to transfer money to the North, because if money for direct trade or processing trade paid to the North is transferred to North Korean accounts in a third country such as China, it may become a problem.

Since North Korea’s overseas accounts are opened under names of individuals, rather than institutions, it is difficult to track their contents. Nevertheless, it is likely they will suffer repercussions from sanctions. Unlike in 2005, when the market mostly regulated itself, the U.S. is now more determined to seek financial sanctions - and with clearer goals. If that is the case, banks will fall in line more firmly and promptly. Then, there is the possibility that inter-Korean economic exchange will be completely suspended, because monetary transactions will become impossible except at the Kaesong Industrial Complex.

As such, both the business projects at the Kaesong Industrial Complex and inter-Korean trade are on the brink of suspension. In other words, inter-Korean economic exchanges that have been maintained for about 20 years are facing the biggest crisis in their history.

However, we should view this as an inevitable process. Transactions with the North must go through a transition. Overcoming this pain will allow new chances to arise for inter-Korean economic exchange, or at least for minimal global standards to take root. But this pain will last a long time, because practices that have been formed over the past two decades will not improve overnight.

*The writer is senior fellow in the Global Studies Department at Samsung Economic Research Institute.

by Dong Yong-Sueng