By Troy Stangarone
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These are the questions that will ultimately determine if Pyongyang's current dialogue with South Korea and the United States is successful, but the question for South Korea is on what terms will it be willing to economically engage North Korea?
With a potential window for resolving the North Korean nuclear issue, it is natural that there is growing interest in South Korea for economic engagement with North Korea.
In his Liberation Day address, President Moon Jae-in laid out a vision of a Korean Peninsula at peace, where North and South Koreans have increased opportunities to experience prosperity, and economic cooperation could grow to 170 trillion won ($152 billion) in three decades. It is an ambitious vision.
A future with the potential for the people of North Korea to experience the type of prosperity that those in the South have experienced would be a significant shift in North Korea's economic history, but achieving that vision will require understanding the limitations of prior economic engagement with North Korea.
A vision of economic engagement with North Korea is important for driving the process forward, but just as crucial will be the terms under which economic engagement with North Korea is conducted. Merely picking up where prior efforts at economic engagement left off would limit the benefits for the North Korean people.
Whether connecting South Korea's rail lines to North Korea or the eventual resumption of the Gaeseong Industrial Complex, South Korean firms will need to employ North Korean workers and contract with North Korean firms.
When economic engagement restarts, it should be based on market principles and help to reinforce the transition to a market economy rather than reinforce the parts of the North Korean state that may have an interest in limiting the growth of a market economy.
Thinking about the future of the Gaeseong Industrial Complex is a good place to start. Before the complex was shuttered by the Park administration, nearly 55,000 North Koreans worked in the complex according to the Ministry of Unification. However, South Korean firms had limited choices in whom they hired, the workers weren't paid directly, and there were restrictions on the use of internet and cell phones in the complex.
When the time comes to reopen the complex or start new projects, the old model for economic engagement with North Korea needs to be reformed.
Workers and firms should have the ability to negotiate freely, but most importantly the workers should be paid directly rather than indirectly by the North Korean state. This is something North Korea has already agreed to, but has not allowed to be enforced in the past.
According to the Code of the Act and Regulations for the Gaeseong Industrial Zone, "Each enterprise shall pay labor remuneration in cash, directly to each of its employees," so it is not a question of reaching a new agreement with North Korea, but ensuring that regulations are followed.
Beyond how the workers are paid and hired, Gaeseong and other economic projects in North Korea should reinforce the markets that have continued to grow under Kim Jong-un.
While some raw materials and foodstuffs for the operations in Gaeseong were previously purchased in the North, integrating the complex into the North Korean economy rather than maintaining it as a separate island could help to further spur economic activity in North Korea. This can be accomplished by allowing firms to purchase needed materials from other producers in the North, but also to sell their goods in the wider North Korean economy.
Improving labor standards and opening up the market in North Korea will also be critical for attracting international investment in the future. When the Park administration tried to internationalize Gaeseong, only one foreign firm, the German manufacturer Groz-Beckert, set up shop and did so to service the South Korean firms in Gaeseong rather than to utilize North Korean labor.
Without an improvement in labor rights and the direct payment of workers, reputable foreign firms will be reluctant to invest in North Korea and risk damaging their reputations internationally. At the same time, the experience of Orascom and Chinese firms in North Korea are reminders of the challenges of investing in North Korea without reform.
Successful economic engagement with North Korea will be about more than joint economic projects, it will also be about how those projects are conducted and the changes that they produce in North Korea.
Troy Stangarone (ts@keia.org) is the senior director of congressional affairs and trade at the Korea Economic Institute.
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