The crucial agreement, which coincides with new North Korean moves to reform its centrally planned economy, has the potential to free the north from its grinding poverty, analysts said.
"Economic cooperation with South Korea is the first and most crucial step necessary for North Korea's reform measures to bear fruit," said Hong Soon-jik, an economist at the private sector Hyundai Research Institute.
"Expanded cooperation with the north would also yield economic benefits for South Korean investors," he said.
The two sides agreed to begin work on a huge industrial complex in Kaesong, North Korea, which is near the border, according to a joint statement after three-day economic talks that ended Friday.
The park, which is to be constructed in a year, would be the centerpiece of inter-Korean economic cooperation. Thousands of small, labor-intensive plants in industries such as footwear would be relocated from the south, officials said.
North Korea might designate Kaesong as a special economic zone to attract more investments from the south, said a Seoul-based businessman who has rare access to North Korea's government.
The project's output could ease the north's chronic shortages, which have forced Pyongyang to raise prices in its centrally planned economy, said Lee Hyung-keun, an economist at the South Korean government-run Korea Institute for International Economic Policy.
North Koreans could enjoy products from southern-built plants, he said. "The north's industrial park will also help South Korea accomplish its ambitious plan to transform itself into a logistics and business hub of the Asia-Pacific region," Lee said, since the complex could be an important regional logistics base.
The two sides have already agreed on steps to avoid problems in four areas: double taxation, cross-border payments, investment guarantees and dispute resolution.
If implemented, these accords would put inter-Korean economic exchanges on track, officials said. South Korean businesses have shunned major investments in the communist state, complaining of insufficient legal protection for investments.
The accords require both sides to protect the investment of companies doing business in each other's territory and provide direct routes for financial transactions, rather than using foreign banks.
The Koreas will grant each other most favored nation trading status, allowing their businesses to operate freely across the border. They also agreed to create a currency, similar to the euro, to settle inter-Korean trade payments.
During this week's economic talks, the Koreas agreed to speed up efforts to implement the four trade-boosting accords.
Economic cooperation was the key to the June 2000 summit, when South Korean President Kim Dae-jung promised to promote "balanced development" of the two Koreas' economies through massive aid and investments in the north's battered infrastructure.
Under the agreement, the two Koreas have already launched a set of projects, which have been a boon to North Korea, plagued by famine and industrial decline following the collapse of European communism.
Infusions of South Korean aid and investment have helped the economy in the north grow again, after years of contraction, according to the Bank of Korea, the south's central bank.
Examples include Seoul's Hyundai group, which is paying North Korea $942 million in royalties to operate tours through 2005 to a previously off-limits mountain resort on the east coast.
Pyeonghwa (Peace) Motors has launched a car assembly complex, the first heavy manufacturing plant built by an inter-Korean joint venture and the biggest manufacturing investment so far in the north.
South Korean businessmen are expected to make further inroads into North Korea. According to statistics from the Federation of Korean Industries and the Ministry of Unification, some 50 South Korean companies, including Samsung Electronics Co. and Kolon Corp., have gained government approval for projects in the north since 1995.
The highlight of inter-Korean economic cooperation is the plan to reconnect railways across their heavily fortified border, cut off by the 1950-53 Korean War. The railway, to be completed by the end of the year, will reconnect the two Korean capitals and proceed to Shinuiju, a major city along the north's border with China.
South Korea's president has called the rail link the "Iron Silk Road," saying it will give the country a link to Russia's trans-Siberian railway, through which Seoul can deliver products to Europe, a major export market.
Russia also wants to link up with this railway, to transport South Korean exports to Europe, because it can earn billions in transshipment fees.
Meeting with North Korean leader Kim Jong Il, who traveled to the Russian Far East last week, Russian President Vladimir Putin said the rail project could revive the depressed Russian region.
Also under Friday's inter-Korean agreement, North Korea will send a survey team to South Korea in October to learn more about economic development.
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