Analysis: Can industrial park help Koreas?

By JONG-HEON LEE, UPI Business Correspondent

SEOUL, July 3 (UPI) -- The idea is simple. Join South Korean capital and technology with cheap North Korean labor.

But its implementation does not seem so easy, as shown by the cautionary history of South Korean business ventures in the communist neighbor for the past decades.


The blueprint for a $5-billion project, the largest cross-border investment since its 1945 division, is ambitious. By 2007, a vast farm field less than a mile behind the world's most heavily armed border will be transformed into a mammoth industrial park jointly constructed by the two Koreas.

At the industrial complex in the North Korean border city of Kaesong, more than 1,000 South Korea's labor-intensive plants would be relocated, getting a foothold in an untapped market and benefiting from cheap North Korean labor forces.

South Korean investors will be able to directly invest in the "capitalist enclave" in the communist country, and products manufactured there will be exported to neighboring China and other counties.


The output would ease chronic shortages in the impoverished North. With the border city as its window to the capitalist world, the reclusive communist nation would eventually be integrated into the global economy.

Is this possible? Yes, say South and North Korean promoters. The first dig this week for building the Kaesong Industrial Complex heralds a new era of economic cooperation between the two Cold War rivals, they say.

But many business people and economists in Seoul remain skeptical about the ambitious project in the North, saying it is critically vulnerable to political tensions on the divided peninsula.

Major South Korean businesses have shunned investments in the communist neighbor, complaining of its rigid economic system, diplomatic isolation, political uncertainty, poor infrastructure and lack of legal guarantees.

But some small-sized businesses want to get involved in the cross-border project in order to make inroads into North Korea, hoping for unity with Korean workers in the North.

"Many factories will rise from this field, and workers of both Koreas will work together and sweat together," said Kim Jin-ho, president of the South's government-run Korea Land Corp., which is in charge of building the industrial park.

In the first phase of the industrial zone, the South Korean government and the Hyundai Business Group will invest 220 billion won ($185 million) to develop 3.5 million square feet by 2007.


Some 900 South Korean companies, most of them in textiles, leather or light manufacturing, have voiced their willingness to move to the North Korean complex, according to Seoul's Ministry of Commerce, Industry and Energy.

"In ten years, the industrial complex will generate $15 billion in production annually for South Korean firms and create 250,000 jobs for North Koreans," said Hong Joo-hyun, the spokeswoman for Hyundai Asan, which is at the forefront of South Korea business ties to North Korea. "We will also try to induce foreign investment into the complex," she told United Press International.

"The project symbolizes the beginning of active economic cooperation between the two Koreas," said Chung Mong-hun, head of Hyundai Asan. The two sides would overcome "differences in legal and cultural matters" triggered by a half-century of division, he said at Monday's groundbreaking ceremony.

North Korea also expressed great enthusiasm for the project. "The industrial complex will bring common prosperity to both Koreas," said Choe Hyun Koo, a North Korean official in charge of the construction of the joint industrial complex.

If things go well, the $5-billion industrial park could be a touchstone for cross-border economic cooperation, analysts say.

Lying only 43 miles north of Seoul, Kaesong will be linked to South Korean major cities by a cross-border railway and road under construction. Officials from the two sides were holding border talks this week over the railway reconnection.


The cross-border railway will reconnect the two Koreas' capitals and proceed on to Sinuiju, a major industrial city on North Korea's border with China. It will link up to China, Mongolia and eventually Russia's trans-Siberian railway.

"The 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," said Lee Hyung-keun, an economist at Seoul's government-run Korea Institute for International Economic Policy.

South Korean President Roh Moo-hyun, who took office in February, has vowed to improve economic ties with North Korea in order to turn the Korean peninsula into the business and logistics hub for the Asian-Pacific region.

Analysts say the joining of advanced technical power from the South with a low-cost and abundant workforce in the North is expected to create a considerable synergy effect for economic development in both countries.

Moreover, the transportation of goods in and out of North Korea via the cross-border railway and road will greatly reduce logistics costs and travel time for South Korean businessmen.

"Many manufacturers have an interest in the project in hopes of reducing their production costs," said Park Dong-ki, the head of the North Korea team at the Seoul-based Small Business Corporation. "Cheap labor, geographical merits and a common language will help them do business in the North," he said.


The project is also anticipated to accelerate the opening of North Korea's economy as it will introduce the principles of a market economy to the communist state.

Analysts say the project could be a lifeline for the North's collapsing economy, providing jobs for its starving population and helping the reclusive regime improve relations with other nations.

Kim Yon-churl, a North Korea specialist at Korea University, said North Korea was left with no option but to look to South Korea to ease its economic isolation.

In hopes of facilitating the cross-border project, the North Korean government unveiled late last week a blueprint for the development of the Kaesong Industrial Complex to "provide conveniences for business activities."

Under the regulations, South Korean and foreign investors will receive tax cuts and other benefits. They say North Korea will promote light and high-tech industries at the complex.

But there remain big obstacles to the project, including how to get electricity across the border. The biggest hurdle is of course the geopolitical risk due to North Korea's nuclear and missile ambitions.

"Without a resolution to the nuclear standoff, few major South Korean businesses would invest in the North," said an official at the Federation of Korean Industries, a big-business lobbying group.


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