Conditions Influencing the Success of Kaesong Industrial Zone

|Korean Peninsula

The development of the Kaesong Industrial Zone will undoubtedly stand out as a central theme of economic cooperation between the ROK and the DPRK. Hitherto, investment in the DPRK by companies from the ROK has not yielded the results that had been anticipated, as there are limitations to the ability of individual companies to overcome the poor investment conditions, including undeveloped infrastructure and restrictions on corporate activity. Kaesong Industrial Zone is a new system of economic cooperation aimed at solving such problems.

Subordinate regulations, such as the “Kaesong Industrial Zone Law” and “Regulations for the Establishment of Corporations”, have been put in place since the DPRK designated the Kaesong Industrial Zone as a free trade zone in November 2002. Development projects within the industrial zone are progressing smoothly and the groundbreaking ceremony for the zone was held in June 2003. Some companies plan to move into the zone on a trial basis in 2004.

Located 60km north of Seoul, the Kaesong Industrial Zone boasts the geographical advantage of proximity to the ROK’s capital. It has been agreed to set the wage of laborers from the DPRK at a level of $70 a month, so this is expected to contribute to restoring the competitiveness of companies from the ROK, which have experienced difficulties due to the rise in labor costs. Within the total area of around 66 million square meters, 3.3 million square meters is due to be developed by 2007 as the first phase. It is hoped that more than 250 companies will move into the zone, generating an annual output of $2.7 billion as well as an annual wage income of $28 million.

Looking at the direction of discussions in the ROK concerning the development of the Kaesong Industrial Zone, the emphasis has mainly been on making use of the DPRK’s land and low-cost labor. The DPRK itself seems to perceive the Kaesong Industrial Zone solely as a means of obtaining foreign currencies and creating employment opportunities. However, if the zone is developed only with such limited aims in mind, it will be unable to achieve any significant results, because the indirect effects of free trade zones, such as the acquisition of technology and management systems, are greater than such direct visible advantages as obtaining foreign currencies.

In China, the policy of wai yin nei lian (introducing foreign capital and cooperating with domestic companies) was emphasized; in addition to attracting capital, technology, equipment and measures for managing the economy from developed countries, with the aim of developing a free trade zone, this policy focused on their proliferation within the country in order to achieve economic development. From this standpoint, the country tried to encourage not only foreign companies but also many Chinese companies to expand into free trade zones in order to acquire advanced technology and management systems and strengthen external competitiveness.

In the case of the DPRK too, in addition to the industrial park for businesses from the ROK in the Kaesong Industrial Zone, it is necessary to establish an industrial park for domestic businesses and encourage many companies to establish a presence there. Rather than being a one-way initiative for businesses from the ROK, the Kaesong Industrial Zone would be able to develop through cooperation and competition – not to mention confrontation – between businesses from the ROK and the DPRK. Real success will be achieved when the zone is used not only as a means of obtaining foreign currency, but also as a testing ground for economic development or as a gateway for business expansion into other countries.

[Translated by ERINA]