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Five years later, however, the joint venture is posing a dilemma for both Koreas. The complex has served as a major cash cow for the impoverished North, but its communist leadership is increasingly concerned that its workers are being imbued with capitalist culture.

The North’s powerful military is worried about the spread of capitalist culture deeper in the isolated country, which could weaken the Stalinist regime's control over its population. But if the North unilaterally closes the joint industrial complex, it is certain to trigger a strong backlash from the South and keep potential foreign investors away from the cash-strapped North.

The North’s solution to this dilemma has been to make the South move first to quit the complex by putting forth "unacceptable demands" – a whopping 31-fold increase in land rent and a quadrupling of wages for North Korean workers.

If the South accepts the demands, the North can rake in US$600-$700 million, or 70 percent of its total annual exports. Much of this will go into the pockets of the ruling elite, which is facing tougher financial sanctions after the country conducted a nuclear test last month.

If the demands are rejected, the North can pass responsibility for the closure of the industrial complex to the South. Pyongyang has said that South Korea must leave the factory park, located just north of the border, unless it unconditionally agrees to higher payments.

The North’s reckless but carefully crafted demand has tossed the ball into the South’s court. Reflecting its own dilemma, Seoul's Unification Ministry just reiterated that the inter-Korean joint venture "should be maintained in a stable manner."

"The government's basic position is that such contract terms should be reviewed within the context of stably sustaining the Kaesong industrial complex," the ministry said in a statement on Friday.

Seoul cannot fully ignore the North's demand. Doing so could lead to the closure of the last remaining cross-border project, further raising geopolitical risks on the peninsula and strengthening China’s influence on the North.

South Korean companies that relocated their factories to the North to benefit from cheap labor and land are expected to see losses of 1.36 trillion won (US$1.1 billion) should the industrial park be shut down, according to a parliamentary report.

About 100 South Korean factories are operating in the Kaesong complex, employing some 39,000 North Korean workers, producing watches, clothes, kitchenware and other light industrial goods.

The South invested US$73 million in building factories at the complex and an additional 310 billion won (US$246 million) in constructing a railway linking the complex with a border town in the South.

But South Korea cannot accept Pyongyang's demand of higher cash payments for fear that the money could be used as personal funds for the North's leader Kim Jong Il.

Seoul played a key role in mapping out a package of expanded U.N. sanctions, including tougher cargo inspections and a tighter arms embargo, as part of efforts to put a strain on Pyongyang's cash flow.

Cash transfers from the Kaesong joint venture are suspected of being used by the North to develop its nuclear weapons and missile programs. The South Korean firms currently pay an average of US$75 to each North Korean employee per month, including insurance payments, which means $35 million in annual wage payments.

During cross-border talks on Thursday, however, the North called for monthly salaries to be increased to US$300 and an annual wage rise of 10-20 percent from the current 5 percent, according to the Unification Ministry.

The North also told the South to pay US$500 million in rent for the joint park, although the South gave $16 million when the park opened in 2004 for its right to develop the complex over the next 50 years.

In addition, the North called for the South to pay some $6 million annually in land use fees. If the South accepts all of the demands, the North can earn $600 to $700 million in the following year.

On Friday, the South Korean companies operating at the industrial complex rejected the North’s demand. "We cannot accept North Korea's unilateral demands," the companies said in a statement, noting that they have already incurred "unbearable losses" due to heightened military tensions due to the North’s saber-rattling measures since last year.

Earlier this week, a South Korean fur coat maker decided to withdraw from Kaesong by the end of this month due to falling orders and security concerns, making it the first company to pull out of the joint factory park. More companies are expected to follow suit unless the North drops its demand for wage hikes.

Many analysts here say the North's demand is aimed at effectively shutting down the inter-Korean industrial complex. "The North would replace South Korean companies at the Kaesong industry with Chinese investors," said Cho Bong-hyun, a North Korea analyst at the Industrial Bank of Korea in Seoul.

Kim Young-ho, an international relations professor at Seoul’s Sungshin University, advised Seoul to use the South Korean currency instead of the U.S. dollar in dealing with the North and let its neighbor spend the currency in the South’s markets to buy necessities, in order to prevent the money from being used for weapons.