South Korean Businesses in the North Going Broke

The handful of South Korean businesses that are seeking to operate in North Korea have always had a tough time. Now, as relations have deteriorated between Seoul and Pyongyang, they have had their ability to operate severely cut back.

Some 800 of the 1106 companies registered to do business in the North are on the verge of bankruptcy and will soon go under if the government doesn’t do something, according to a coalition of businesses and civic groups that work in North Korea. The group says it is launching a campaign to get Seoul to allow them to get back to business.

The May 2010 sinking of the South Korean corvette Cheonan by a North Korean mini-submarine was the turning point. After that, the Lee Myung-bak administration implemented the so-called ‘May 24 measures’ which banned all investment in North Korea, with the exception of the Kaesong industrial complex, which now accounts for nearly all of inter-Korean trade. Even there, while businesses have continued to operate, planned expansion has been frozen.

Lee Jhong-keun is CEO of Dream East, a textile firm that had operated in North Korea, and a former adviser to the Korean International Trade Association. Lee has worked in North Korea for 24 years and says the situation for cross-DMZ commerce is the worst it has ever been.

“After May 24, all our business stopped. We don’t even hope to make much money now, we are just trying to survive,” Lee told Asia Sentinel.

When the measures were passed, the South Korean government argued that the projected annual losses of US$250 million to US$300 million would drive the North to better behavior. But sanctions on North Korea have generally been shown to be ineffective at changing the regime’s actions. The officials in Pyongyang tend to prefer doing their own thing even if that means regular people starve.

“Before the May 24th measures, inter-Korean trade amounted to nearly US$1.8 billion. But it has seen a gradual decline since the sanctions. The bilateral trade volume last year was US$1.7 billion, down 10.4 percent from 2010. When excluding the trade via the Kaeseong Industrial Complex, the trade volume remains almost at zero levels, reflecting that inter-Korean trade was severely hit by the sanctions,” Cho Bong-hyun, researcher at the Industrial Bank of Korea Economic Research Institute, told KBS Radio on the second anniversary of the measures earlier this year. A May 23 report by the Hyundai Research Institute showed approximate losses of US$8.3 billion between 2008 and 2011.

The impetus for most of the investment came during the so-called Sunshine Policy put in place by the late South Korean president Kim Dae Jung, who won the Nobel Peace Prize for his initiatives. The Kaesong Industrial Complex, which employs more than 50,000 North Koreans, was built starting in 2003 during Kim’s presidency.

However, the hard-line Lee Myung-bak administration has had terrible relations with Pyongyang pretty much since its inauguration. Commercial, diplomatic and strategic cooperation with the North has all been cut back steadily throughout Lee’s time in office.

According to South Korea’s Ministry of Unification, 319 of the registered South Korean companies have gone out of business since Lee came to power. The remaining 800 or so may not be far behind.

Having caused losses to South Korean firms, the May 24 measures don’t appear to have been all that effective in making North Korea more open to cooperation on its nuclear or human rights issues.

Reduced exchanges with the South have brought North Korea closer to China, which has been expanding its trade and manufacturing operations steadily in the North. The two countries recently announced they are development of two new special economic zones, following extensive development of the Rason area in the north of the country.

According to a May 30 report by the Korea Trade Promotion Corporation, in 2011, North Korea conducted 89 percent of its trade with China. In 2004, that number was 48.5 percent. South Korea is still North Korea's second-largest trading partner, followed by Russia.

South Korea will elect a new president in December. The new leader will almost certainly be more open to cooperating with the North than the outgoing Lee regime. There is talk now about Kim Jong-un making efforts to develop the North’s economy, and their estranged brethren in the South are natural partners.

It remains to be seen how much Kim Jong-un will actually change North Korea’s economy. According to Lee Jhong-keun, the economic status quo will stay in place as long as North Korea’s reactionary political establishment remains as it is. But the changing nature of North Korea’s trade and development – falling with South Korea while China’s increases – diminishes further whatever leverage the United States and other western powers might have on the north’s regime.

“North Korea’s basic problem is its system. They have had the same system for so long and have made no changes to the leadership. If anyone thinks they can leave the regime as it is and have the economy improve, they are wrong,” said Dream East’s Lee.

Could North Korea become a reliable place for foreign firms to invest? Again, not as it is currently constituted, says Lee. He says for commerce to flourish in the North it would require a western concept that Pyongyang is not likely to adopt: the rule of law and the sanctity of contract. There are cases of Chinese and South Korean firms signing contracts with North Korean partners, only to have them fail to execute the deal and be left with no product or method of recourse.

“There is no trust at all,” says Lee. “There is no way to trust a contract. If they really want to change the system, they need to change that.”