September 1, 2003｜Korean Peninsula
Deputy Director, The Export-Import Bank of Korea
On August 20th this year, a four-point economic cooperation pact took effect between the ROK and the DPRK, covering four areas: investment protection, the prevention of dual taxation, dispute settlement mechanisms and the opening of clearing accounts. With the exchange of documents notifying the other side of its entry into force, following the agreement of both parliaments, this pact became legally binding two years and eight months after ministers from the ROK and the DPRK signed it in December 2000.
First of all, the pact that has just become effective is significant because it is the first institutional mechanism to be applied to economic cooperation between the ROK and the DPRK. Until now, as there had been no institutional safeguards, private companies had had to bear all the risks themselves in implementing projects in the DPRK. However, with this pact’s entry into force, the uncertainties accompanying trade and investment have been reduced, creating a more stable business environment for such companies.
In the cases of companies investing in the DPRK, their investment asset will be protected, while the burden of dual taxation on investment income will be reduced. In addition, by opening clearing accounts, trading companies will be able to curtail transaction costs and collect payments for exports immediately. Furthermore, a system has been established for solving problems through an arbitration body, in the event of disputes occurring due to defects or delivery being delayed.
The government of the ROK has announced a plan to take follow-on measures in order to provide practical support for businesses as the economic cooperation pact takes effect. This support involves accepting assets invested by ROK companies in the DPRK as security on loans by the government-controlled inter-Korean cooperation fund, while also implementing a system similar to industrial insurance in order to help cover any losses.
However, while companies in the ROK agree that the agreement’s entry into force would be a milestone in economic cooperation with the DPRK, they have some reservations. At this stage, many companies think it is too risky to conduct proactive investment in the DPRK. They believe that fully-fledged investment will become possible when political instability is reduced through the solution of nuclear issues concerning the DPRK and freer economic activities are permitted.
Although the entry into force of this pact has put in place the institutional foundations needed for inter-Korean economic cooperation, it will not suffice on its own. First of all, the in-depth mechanisms necessary for opening clearing accounts and solving business disputes should be established. Systems for supporting economic activities, such as free passage and communications, should be coordinated promptly. It is crucial that efforts be made to reduce uncertainty and unpredictability through such institutional measures.
In addition to establishing institutional mechanisms, a vision for economic cooperation should be laid out, in order to ensure that economic cooperation is beneficial for both sides. It is necessary for this vision to be not merely a vague hope, but something that can be demonstrated through tangible acts and results. If companies make a profit through economic cooperation, not only domestic, but also foreign companies in the ROK will become proactive in investing in the DPRK. Just as the ROK and the DPRK put the pact into effect by combining their wisdom, so it is hoped that they will together create successful examples in the future, so that profits can be made.
[Translated by ERINA]