Although politically and ideologically divided today, North and South Korea have a shared history, language and culture. In the 1990s, South Korean president Kim Dae-jung aimed to improve inter-Korean relations through his Sunshine Policy, with the eventual goal of reunification. The policy made economic cooperation between the two countries a real possibility for the first time, as part of the overall strategy to ease tensions and foster inter-Korean connections.
In 2000, discussions regarding possible economic projects began and the special trade and economic zone, the Kaesong Industrial Complex (KIC), was agreed upon. Located in North Korea but operated by South Korean companies, the complex was to be mutually beneficial: the North would benefit from economic investment, the South from cheap labour. In addition to the economic benefit, it was hoped that the KIC would help improve inter-Korean relations by facilitating North and South Korean interactions and exchange. However, the project faced considerable challenges. Between 2004 and 2016, the complex was shut down twice as a result of political tension and ultimately failed to achieve its goals by the time of its indefinite closure in 2016.
Korea, which had been annexed by Japan in 1910, was divided into two administrative areas following the fall of the Japanese empire in 1945. The US took control in the South, and the Soviet Union in the North. In 1948, two separate Korean states were formed: the Democratic People’s Republic of Korea in the North and the Republic of Korea in the South. Emerging Cold War tensions shaped the enduring political and ideological divide that would come to separate the two countries.
The Korean War and the influence of Cold War politics on North and South Korea in the subsequent decades resulted in hostile relations between the two. However, rapprochement between China and the US in the early 1970s prompted North and South Korea to engage in dialogue with one another for the first time since 1948. On 4 July 1972, the North and South released a Joint Communiqué which outlined their commitment to their eventual unification. However, communications broke down in 1973 and there was no further contact until the following decade.
In the mid-1980s, there were cultural exchanges as well as visits between families who had been separated by the border since 1948. Ultimately, however, their impact on inter-Korean relations was limited. By the early 1990s, the international political landscape had changed significantly: South Korea had become a wealthy nation with diplomatic ties to Russia and China, while the North struggled politically and economically.
The millennium marked a shift in inter-Korean relations as North Korea was now in a stronger position. The North Korean government had declared the worst of the famine over, and the economy grew in strength each year from 1999 until 2005. South Korea’s motivation for developing ties with the North went beyond simple financial gain. Successful economic cooperation could lead to improved inter-Korean relations and a reduced possibility of military conflict. Additionally, it could allow for reunions between families who had been separated across the border since 1948. Despite having been divided into two completely distinct countries for over 50 years, their shared identity, culture and language was a key factor in the decision to bring the two nations closer through the Sunshine Policy.
Improving inter-Korean relations was a top priority for South Korean President Kim Dae-jung, who was elected in December 1997. Dae-jung created the Sunshine Policy, whose central philosophy was that “persuasion was better than force” as a means of establishing peace between North and South. Not only did he want to start a dialogue through culture, tourism and family exchanges but he also wanted to establish economic links.
The Sunshine Policy consisted of three operating principles: “no toleration of North Korean armed provocations, no South Korean efforts to undermine or absorb the North, and active [South Korean] attempts to promote reconciliation and cooperation between the two Koreas”. There were two main policy components: the separation of politics and economics, and reciprocity. The first was intended to enable economic projects to operate free of the strains and tensions of politics, although it can be argued that it also resulted in South Korea turning a blind eye to humanitarian issues in the North. The second entailed mutually beneficial cooperation between the two nations, particularly economic cooperation.
At the first inter-Korean summit in June 2000, Presidents Kim Dae-jung and Kim Jong-il met to discuss and develop relations between the two countries. As a result of the summit, both countries signed the South-North Joint Declaration, one of whose objectives was “to consolidate mutual trust by promoting balanced development of the national economy”. This commitment to economic cooperation paved the way for the agreement made between North Korea and the privately-owned South Korean company, Hyundai Asan Corporation, in August 2000 to develop a special economic zone (SEZ), which was to become the KIC.
The KIC, an industrial park with special economic and legal status, had the aim of attracting South Korean firms to invest and operate in North Korea. South Korean businesses would profit from cheap labour, while North Korea would receive a boost to its economy. In addition, it would create the opportunity for cooperation and interaction between Koreans from both countries. The complex was located 10km from the demilitarised zone and 60km from Seoul. In November 2002, North Korea approved the “Law of the Kaesong Industrial District”, which designated Kaesong as an SEZ with special legal status, where South Korean businesses could operate with relative autonomy. The zone was duty free, required no visa for entry, and permitted the use of foreign currency and credit cards.
The planning and construction of a pilot complex got under way in 2003 under the management of Hyundai Asan and the state-owned Korea Land Corporation, with the involvement of both governments. Hyundai Asan was the main contractor for the project, while Korea Land Corporation was a concessionaire. The pilot complex, which opened in 2004 and exported its first product in April 2005, was followed by three development phases, ending in 2012, each of which modestly increased the complex’s size. However, in 2016 South Korea withdrew its workers from the KIC, indefinitely shutting the complex.
Written by Ella Jordan
The public impact
The KIC appeared to begin well, thanks to South Korea’s financial investment and political commitment. However, the value of production did not match the expected returns as laid out in the Hyundai Asan master plan, and the initial projections for the size of the complex were never fulfilled. It was estimated that by the end of the first phase in 2007, the KIC would have an annual production worth USD3 billion per year; however, the real figure was USD185 million, only 6.2 percent of the projection. The size of the complex in 2007 followed a similar trend. It was predicted that it would house 300 firms with 100,000 employees and an average production of USD10 million per firm, while the actual figures were 65 firms, 23,000 employees, and an average annual production of USD2.9 million.
By the end of the second phase in 2009, development fell even further below the predicted levels. The complex was projected to generate USD7 billion annually; however, the true figure was USD256 million, 3.7 percent of estimates. There were 118 firms as against a predicted 800, 42,960 employees versus 250,000, and the firms’ average annual value was USD2.2 million rather than a predicted USD87.5 million. In 2012, by the end of the third phase, there were 123 companies with an average output of almost USD47,000 working in the zone. There were 53,000 North Korean workers and nearly 800 South Korean workers.
Such a significant gap between projections and actual outcomes could be attributed to poor planning and design, although it has been argued that such over-optimistic estimates may have been necessary to entice North Korea to participate. Disappointing results have been noted in other SEZs globally, so the KIC is not unique in its poor performance.
Another area in which estimates were not in line with true results was productivity. Companies became more labour-intensive, but were less productive overall. One explanation for the lack of productivity was the centralised labour provision system in place. The North Korean government provided workers for the companies and controlled the wages paid by South Korea. This system enabled the government to retain a part of workers’ wages and it also discouraged the recruitment of more skilled, experienced labour.
Other factors that reduced the project’s overall success were its export markets and the ever-present political instability. Products made in the KIC, such as textiles and footwear, were destined for the South Korean market, rather than the international market as had been originally planned, so that products could be economically competitive. Additionally, the complex was often caught in the middle of political conflict, resulting in temporary closures in 2009 and 2013 and its indefinite closure in 2016.
Although the KIC was not as successful as had been hoped, and despite its closure in 2016, the project did allow Korean citizens from North and South to work alongside one another, albeit in small numbers. The infrastructure remains in place today, and there were renewed talks about the possibility of reopening the complex, following the third Inter-Korean summit, which was held in April 2018.Have an idea for a case study? Print
What did and didn't work
Stakeholder Engagement Fair
The governments of North and South Korea discussed possible economic cooperation in the June 15 Joint Declaration. Both governments devised incentives to attract South Korean businesses, such as lower wages compared to China and Vietnam, a longer working week of 48 hours in comparison to 44 hours in China and South Korea, as well as initial zero taxation and an eventual rate of 10 to 14 percent, which was lower than China’s 15 percent corporation tax rate and South Korea’s 23 to 28 percent. Wages in the KIC were lower than international rates, although they were higher than workers could expect in the rest of North Korea.
A key stakeholder in the project was Hyundai Asan. Its founder and honorary chairman, Chung Ju-yung, was a supporter of the Sunshine Policy, and in December 1998 and February 1999 he visited North Korea. Following this initiative, Chung Mong-Hun, the Hyundai Asan chairman, and Kim Yoon-kyu, its president, also visited North Korea. The pair met with Kim Jong-il, and a plan for the complex started to form in August 2000.
Human Rights Watch noted in their 2006 report that North Korea does not permit independent trade unions, and there was no publicly available information as to whether workers had been consulted on the 2002 Law of the Kaesong Industrial District. There were additional concerns about how much workers actually received, as payments were centrally controlled by North Korea, which retained a part of workers’ earnings. It is thus unclear to what degree workers were engaged with and supportive of the policy.
Political Commitment Fair
The Sunshine era South Korean presidents Kim Dae-jung and Roh Moo-hyun were committed to fostering a better relationship with North Korea. However, presidents Lee Myung-bak and Park Geun-hye, who took office in 2008 and 2013 respectively, were far less accommodating of the North, ushering in a cooling of North-South relations.
At the June 2000 summit in Pyongyang, leaders from both North and South agreed to the June 15 Joint Declaration, whose primary aim was to improve inter-Korean relations. The summit was symbolic as it was the first time that leaders from the two countries had met. However, there was a large scandal when it was discovered that South Korea had effectively bribed North Korea to attend. An independent investigation in 2003 into the payment found that, of USD500 million transferred before the summit, USD400 million was intended as a legitimate business investment from Hyundai Asan, while the remaining USD100 million was “politically motivated government aid". The former director of the National Intelligence Service, Lim Dong-won, was charged with contravening laws on foreign exchange transactions and Hyundai Asan chairman, Chung Mong-hun, was charged with purposely obscuring the company’s records of the payments. South Korea also gave more than USD324 million in aid to ensure the project’s success. However, the North often appropriated such payments in order to strengthen the Kim Jong-il’s regime and North Korea’s military power.
President Roh Moo-hyun, who succeeded Dae-jung in 2003, was nonetheless supportive of working to achieve the Sunshine Policy’s ends and the KIC. Under his presidency, the second inter-Korean summit meeting took place in October 2007. An important part of the summit declaration was the continued commitment to economic cooperation and development between North and South. The declaration stated that “the South and the North have agreed to complete the first-phase construction of the KIC at an early date and embark on the second-stage development project”.
In 2008, with the election of Lee Myung-bak from the conservative Saenuri party, the Sunshine Policy came to an end. Around the same time, Kim Jong-il suffered a stroke and, as a result, “for roughly a nine-month period from November 2008 through August 2009, the North Korean military appeared to be dictating policy decisions with regard to the KIC. During this time, North Korean authorities imposed a number of restrictions on the KIC, including closing down the border for several days in March 2009, effectively trapping hundreds of South Korean workers at the complex.”
In 2013, President Park Geun-hye, Myung-bak’s successor and fellow Saenuri party member, pledged at her inauguration not to “tolerate any action that threatens the lives of our people and the security of our nation... Through a trust-building process on the Korean Peninsula I intend to lay the groundwork for an era of harmonious unification.” Although she was open to cooperating with North Korea, she took a hardline stance on any aggression, and as a result chose to close the complex in 2016 following North Korean nuclear testing.
Public Confidence Fair
Before the implementation of the Sunshine Policy in 1995-6, 30 percent of South Koreans answered that they were “fine without unification” in a survey. However, after the introduction of the Sunshine Policy, 93 percent said unification must be achieved. Another survey before the 2012 presidential elections found that only 4 percent of South Koreans thought that the improvement of inter-Korean relations and unification was the most important issue in the election.
In 2011, a poll of South Koreans’ views on the KIC itself showed that the average response to the statement that it should be maintained was 2.68 out of 5, responses being on a five point scale from agree strongly to disagree strongly. Those surveyed felt more favourably disposed towards reopening the tourist resort Mount Keumkang, for example, than maintaining the KIC. When the complex shut in 2016, one poll conducted by Gallup Korea found that 55 percent of South Koreans supported the closure as against 33 percent who opposed it.
There are no means of assessing public opinion in North Korea. The regime is notable for its extreme restrictions on freedom of speech. Freedom House, an international organisation that analyses countries in terms of democracy and freedom, has repeatedly found that North Korea stifles any criticism or opposition to its regime both for individual citizens and in the state-owned media. Though the constitution technically allows for freedom of speech, in reality, citizens are tightly controlled and prevented from expressing their opinion. 
Clear Objectives Good
South Korea stated that the purpose of the complex would be to “develop an industrial park in which South Korean businesses could manufacture products using North Korean labour, provide an opening for North Korea to liberalise and reform its economy, and ease tensions across the DMZ [demilitarised zone]”.
Hyundai Asan stated their performance objectives for the complex in their master plan, which comprised three development phases as well as an expansion zone. According to the plan, the first phase from 2002-2007 would cover 800 acres with 300 companies and 100,000 employees. The second phase, 2006-2009, would expand by a further 1,200 acres with 500 more companies and 150,000 more employees. The final phase, 2008-2012, would add 2,800 acres and be home to an additional 700 companies with another 200,000 employees. The expected annual production value was USD3 billion dollars for phase one, and an additional USD4 and USD5 billion dollars for phases two and three respectively. However, due to the complex’s slow progress, which fell far short of the projected goals, a reassessment of objectives and strategies was needed (see also Public Impact above).
In August 2013, North Korea and South Korea agreed to reopen the KIC after closing it for three months. After seven rounds of talks, they came to a new five-point agreement. Among the key points they agreed to were to “guarantee the normal operation of the complex”, to “develop the complex into one with international competitiveness”, and to “form and operate the Inter-Korean Joint Committee on the KIC and station subcommittees necessary under the committee”.
In defining the Sunshine Policy and setting up the KIC, South Korea drew on the successful German experiences arising from the West German policy of Neue Ostpolitik. Before the KIC was fully launched there was a pilot scheme which was completed in June 2004 and included fifteen companies.
It also noted a previous example of setting up an SEZ in North Korea, which had shown disappointing results. In 1991, North Korea had created the Rajin-Sonbong SEZ, where foreign businesses could invest and operate, in the north-east of the country near the China-Russia border. Despite obtaining some foreign investment, Rajin-Sonbong proved unsuccessful owing to a lack of infrastructure, an underdeveloped local market, and its isolated location, not to mention the famine that affected the country at the time.
The North Korean government passed the “Law for Kaesong Industrial District” in November 2002 to make provisions for the SEZ. In 2007, South Korea passed a law that made it possible for SMEs in the KIC to claim state subsidies equal to those in South Korea. However, the legislation that was passed had some flaws, such as a lack of regulations and imprecise language.
Funding for the KIC was provided by the Hyundai Asan and the South Korean government. Hyundai Asan secured a 50-year lease on the Kaesong site from North Korea for USD12 million in 2004. The Korea Land Corporation were granted permission to develop and design construction sites. The cost of the first phase was USD374 million, USD223 million of which was provided by the South Korean government.
The South-North Cooperation Fund, financed by South Korea, made low-interest loans available. The fund encouraged SMEs to invest in the KIC and, by the end of 2005, USD40 million in loans had been granted. South Korea also provided SMEs in the KIC with political risk insurance that would compensate them for up to 90 percent of financial loss up to a total value of almost USD5 million. Out of the first 26 firms to either begin operations or contemplate beginning operations in the near term, 25 applied for loans from the Inter-Korea Cooperation Fund.
While legislative and financial measures were put in place to facilitate the KIC’s success, the volatile political landscape meant that challenges to the project were almost inevitable. In particular, military displays and nuclear testing had the potential to undermine the KIC’s role in improving inter-Korean relations.
The KIC was a collaborative effort between the governments of North and South Korea, Hyundai Asan, and the state-owned Korea Land Corporation. There were good management structures to facilitate communication between North and South Korea as well as with the workers within the KIC.
North Korea’s Central Special District General Bureau was the group in charge of industrial zones. Its responsibilities included: assisting the KIC’s management organisation; providing necessary resources, such as labour and water; promoting sales of manufactured goods in the North; and acting on behalf of the North Korean state.
Representing the South was the KIC Management Committee, whose duties included: attracting investment; approving businesses and issuing permits; supporting companies’ management; and establishing operating guidelines for the management committee.
The South Korean government appointed a chief director and administrative staff from Hyundai Asan and Korea Land Corporation. South Koreans were generally senior staff holding executive and management positions, while North Koreans were primarily low-skilled workers providing labour, with the exception of a few managers.
Within the complex, North Korean workers could approach the General Bureau and Management Committee if they had any concerns relating to labour conditions, while South Koreans could approach the KIC Management Committee. To resolve any disputes, it was the job of workers and employers to address any issues directly. However, if they were unable to do so, it fell to the management committees to mediate and try to fix the problem.
The economic success of the KIC can be assessed from the projected figures in Hyundai’s master plan set against actual figures (see Public Impact above). However, assessing whether the KIC had an impact on inter-Korean relations and easing political tensions is somewhat harder. Although South Korea’s Ministry of Unification published figures relating to the performance of the complex, it is unclear to what extent such measurements as well as any potential information on inter-Korean relationships were used to influence the development of the complex.
In March 2009, following US-South Korean military drills, North Korea imposed restrictions on the KIC. It was closed for several days, and South Koreans had no means of leaving. In 2013, the complex shut for five months from 9 April, when North Korea withdrew its workers in response to UN sanctions and joint military exercises by South Korea and the US.  In a bid to address the problem and enable the complex to reopen, North and South Korea formed a new agreement outlining their commitment to the KIC. However, this ultimately proved unsuccessful as the KIC closed indefinitely in 2016 after South Korea decided to halt production in response to North Korean nuclear tests.
In addition to political tensions at a national level, there were also episodes of conflict at the KIC. On 30 March 2009, North Korea detained a South Korean worker on suspicion of criticising the North Korean regime. South Korea demanded to know about the progress of the investigation, but North Korea was unresponsive to South Korea’s requests for information. South Korea warned the North that the detention was not only breaking previous agreements but was also impairing inter-Korean relations. After three rounds of working-level meetings with delegations from the two countries in June and July, no solution was found and both sides walked away from the talks without resolving the issue. The worker was later repatriated in August 2009.
Human Rights Watch voiced concerns about the 2002 Labour Law and to what extent it guaranteed workers’ rights. The law made provisions for certain working conditions, but there are omissions when compared with international human rights treaties. For example, workers at the complex do not have freedom of association or the right to collective bargaining, which would allow them to petition employers for working rights and conditions. Furthermore, North Korean workers did not have the right to change employers as recruitment was conducted by North Korea’s Central Guidance Agency on SEZ Development, a cabinet-level administrative body. This rule was intended to provide a stable workforce and prevent escalating labour costs, but it was inconsistent with internationally recognised labour rights.
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 Joint Operation of a Special Economic Zone by Enemies: The case of Kaesong Industrial Complex, John Walsh, 2014, The International Journal of Nepalese Academy of Management
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