On April 3rd North Korean border guards refused entry to Southern personnel and vehicles heading to the joint-venture Kaesong Industrial Complex (KIC) just across the Demilitarised Zone (DMZ). South Koreans at the KIC were allowed to leave.

After weeks of escalating rhetoric from the North Korean government, this is the first time the North has acted against the KIC. It was riled by comments coming from South Korean and other media, suggesting that the KIC's normal functioning gave the lie to all the war talk—and showed that the North needs the money.

Opened in 2003, the KIC houses 123 Southern small and medium-sized enterprises (SMEs) employing around 53,000 Northern workers (as of December 2012), who are paid approximately US$120 per month each (including overtime)—the low wages being the main attraction for their employers, as well as proximity and shared language. In fact, wages go to the North Korean government in the first instance, which earns around US$90m a year from the KIC overall. Last year, the zone produced mainly low-tech goods worth US$470m.

Launched in the so-called sunshine era of inter-Korean détente—a policy favouring engagement with the North promoted by a previous president, Kim Dae Jung—the KIC survived worsening ties under the former president, Lee Myung-bak, whose term ended in February. In May 2010 Lee Myung-bak banned North-South trade in reprisal for the sinking of a Southern warship, although he exempted the KIC.

The North has played border-closure games before, including in 2009 when, as now, military exercises between the US and South Korea were ongoing. It has also threatened in the past to shut down the complex. Another joint venture, the Mount Kumgang tourist zone on the east coast, has been closed since a Southern visitor was shot dead in 2008 and the South suspended further tours.

The key issue is how long the closure lasts, and how far it goes. A few days will do no great harm, but any extended ban on personnel and, more importantly, goods, would hurt the SMEs' bottom lines, unless their government compensates them. Any full closure of the KIC and expulsion of Southerners—or, worse, taking them hostage—would be very serious, both politically and for business, since it would remove the last win-win North-South project, which may, for now, still to an extent restrain North Korea's actions.

We view the latest development as representing an escalation, albeit possibly temporary, of tensions between the North and South, and we will therefore revise our forecast accordingly.

[source: Economist Intelligence Unit, April 3rd,2013]