Ripping off Foreigners I: South Korea Edition

October 23, 2012 4:00 AM

With its bloated military, numerous money-losing state-owned enterprises, and generous welfare benefits (at least for the privleged few) the North Korean state has a great demand for resources. Several recent stories revolve around a common theme of the trying to extract rents from foreigners. We start today with South Korea and the pipeline and take up some Chinese stories tomorrow.

As I mentioned in an earlier post, the North Korean government appears to have gotten aggressive over what it asserts is underpayment of taxes by South Korean firms at the Kaesong Industrial Complex. Now Joongang Ilbo is reporting that “Pyongyang made revisions of the taxation regulation on running the Kaesong Industrial Complex on July 18 without the consent of Seoul or companies running factories there” altering 117 out of 120 clauses in the regulations. The paper goes on to report that “Under the new clauses, the North Korean regime can unilaterally determine how much tax it will levy on the Southern companies and demand overdue taxes for up to eight years.” Alice in Wonderland tax collection: your taxes are what we say they are. (Sort of like the AMT.) According to the MOU, the South Korean firms are knuckling under. And since much of the KIC operation reflects direct and indirect subsidy from the South Korean government, this amounts to a transfer from the South Korean taxpayer to the North Korean government. It could also amount to killing the goose that lays the golden eggs: data from MOU reputedly show that by the end of this year, KIC-related payments to North Korea will have exceeded $300 million.

My colleague Steph Haggard has frequently written about the issue of credibility and the “hold-up problem” in relation to foreign investment in North Korea, specifically in relation to the prospective gas pipeline.  So I was bemused to come across the recent headline in Chosun Ilbo “N.Korea Demands 'Rip-off Fee' For Gas Pipeline.” Nothing like calling a spade a spade, or as Yorkshireman Aidan Foster-Carter would put it, “a bloody shovel.” According to the story, the North Koreans are demanding “a transit fee that is two to three times more than international rates.” But not to worry: they promise not to disrupt supplies to South Korea and Japan once the pipeline is built.

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Marcus Noland Senior Research Staff

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