NORTH AND SOUTH KOREA: Inter-Korean Business

NORTH AND SOUTH KOREA: Inter-Korean Business to Be Funded by Private, Public, Global Investment

Criticism of South Korea's economic assistance to North Korea is mounting after the 2007 South-North Korean summit. Reports say that the assistance is one-sided, not synergistic, discouraging economic collaboration and widening the ideological gap between the two. South Korean economic investment in the North is both public and private. Public assistance by the governemnt is aimed at providing core industrial infrafastructures to improve the investment environment in North Korea. Private investment is aimed at generating profits. Taking the Gaeseong Industrial Complex (GIC) as an example, the price for lots was extremely burdensome for South Korean SMEs when the complex first opened. So, the government initially provided critical manufacturing resources such as electricity and water to bring down the overall costs. Gaeseong Industrial ComplexSome fault the South Korean government's efforts to help SMEs form inter-Korean businesses as being counter productive. Still, many South Korean manufacturers have so far chosen to invest in North Korea despite the high risks from an underdeveloped market and the nuclear problems. South Korean SMEs have been struggling since tne early 1990s, when labor-intensive small- and mid-sized manufacturers lost their competiveness with the rise of Chinese rivals. They began to move their bases to East Asian countries and China. Korean manufacutrers have steadily gained ground in China, but most investment has been made by robust conglemerates, not SMEs. The GIC's opportunities threw a lifeline to SME owners who were being squeezed by lower-priced foreign competitors but lacked the capital to relocate production off the peninsula.

It is unreasonable to call government assistance to these SMEs as unrewarding. Recently, media have been reporting that most corporations in the GIC are operating in the red. First of all, it is important to note that a company's profit status depends a lot on the timing of the analysis. Inter-Korean Donghae Line on the east coastSecond, no company reaches the break-even point in the initial phase wheter it is domestic or foreign investment. Korean SMEs in China, Vietnam and India break even 3 to 5 years after operation. GIC firms however have broken even only 10 months after launch and plan to expand their operation luring more investment from outside. It is true that the GIC has obstacles blocking investment, but the situation is gradually improving. Another erroneous argument about North Korean investment is that the South Korean government is compensating for losses -- as much as 70 billion won according to one article. The government merely provides insurance through the Inter-Korean Cooperation Fund to cover unforseen accidents beyond the employers' control, including war. Some are concerned about how to maintain financial suport for inter-Korean cooperation projects. They estimate the required budget from one to 116 trillion won, which is groundless. The financial burden for the South Korean government is much lighter than their expectations because most resources will come from private investment. Government's investment will be limited to the necessary infrastructure establishment. Foreign countries are also showing interest in inter-Korean economic collaboration. For example, China and Russia are reviewing support for North Korea's railway refurbishment. European countries, including Germany, intend to participate in the linking of the inter-Korean railway to inter-continental railroads. What counts is how much North Korea is willing and ready to attract international monetary support. Once North Korea is removed from the list of terror-sponsoring states and economic sanctions are lifted, many countries are likely to invest in its economy. Although such investment will not be huge, it will be a great starting point for economic recovery. When investments from the private sector, the government and international entities are combined, they will not only reduce the cost of unification but also lay the groundwork for inter-Korean economic integration.


From http://www.korea.net/ 11/05/2007