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“In this vast area, a number of factories shall be erected by the sweat of workers from both Koreas working hard together as one.”
With these resounding words, Kim Jin-Ho, president of the Korea Land Corporation (KOLAND) commenced the groundbreaking ceremony for the Gaeseong Industrial Complex, located in North Korea.
The historic ceremony was held 10:50 a.m. June 30th in Pyeongwha-ri, Panmun-gun, Gaeseong City, just north of the Demilitarized Zone (DMZ) in North Korea, or the Democratic People’s Republic of Korea (DPRK), to give it its official name. In attendance were a host of dignitaries, 200 and 120 from North and South Korea, respectively. Co-hosts of the ceremony were, on the Southern side, KOLAND and Hyundai Asan, the business arm of the Hyundai Group dedicated to promoting business ventures in the North; and on the Northern side, the Chosun Asia/Pacific Peace Committee and National Economic Cooperation Association, the DPRK’s chief business facilitating organizations.
The origins of the Gaeseong complex project can be traced back to 1988, when Hyundai Asan and the National Economic Cooperation Association of the North agreed to form a joint North/South business venture. Fast forward to Aug. 8th 2000, when the now deceased Hyundai chairman Chung Ju-Yung and North Korean leader, Kim Jong-Il met in Pyongyang to agree on the construction of an industrial complex at Gaeseong.
 SYMBOLIC RECONNECTION According to the terms of their agreement, the complex would be 20 million pyeong to 40 million pyeong in area (66 million square meters to 132 million square meters). Also on the agenda was the Mt. Geumgang tour, now a regular service taking South Korean tourists by sea to the mountain considered sacred by Koreans. Since KOLAND would participate in the first phase of the development project with Hyundai Asan, the project was raised from a private to a quasi-governmental venture.
As of Nov. 20th 2002, North Korea enacted and promulgated the Gaeseong Industrial Complex Act, and Hyundai Asan was officially designated as its official developer Dec. 4th 2002. From then, the pace of the project picked up considerable steam.
On Dec. 23rd, Hyundai Asan acquired the rights to the use of the 20-million pyeong Gaeseong complex site for 50 years. On June 14th 2003, a ceremony close to the truce village of Panmunjeom was held to mark the symbolic reconnection of Gyeongui Railroad Line, which links Seoul to Shinuiju on the Chinese border. Fifty officials of director general rank from both sides watched a 50-meter rail put in place to reconnect the cross-border railroad line. (North Korea has yet to restore 13 kilometers of severed track on its side of the line).
The Gaeseong complex shall be built in the Panmun-gun district of Gaeseong City, 170 kilometers south of Pyeongyang and 70 kilometers north of Seoul. Of the total 20-million pyeong area of the complex, 8.5 million pyeong (28.3 square kilometers) will be dedicated specifically to plant sites. The remaining 11.5 million pyeong (38.3 square kilometers) will be earmarked for residential and amenity use.
The development plan and blueprint for the complex will be published during the second half of this year, and actual construction will commence as soon as the execution design is completed by April 2004. Construction of the $250-million Phase I part of the project is slated for completion by 2007.
 COMPETING WITH SHANGHAI Overall, Hyundai Asan plans to develop an 8.5-million pyeong (28.3-square kilometer) in Panmun-gun in three phases. In the first phase of development amounting to 1 million pyeong (3.3 square kilometers), KOLAND will act as the lead agency, and Hyundai Asan, the contractor.
While the short-term plan for the complex envisions export-oriented manufacturing operating in a customsfree environment, in the mid-to-long term, the aim will be to foster the migration and growth of cutting-edge industry, banking, commerce and tourism. The ultimate aim will be to develop the complex as an international free economic zone, which can compete with the Shimcheon or Pudung (Shanghai) Special Economic Zones in China.
Complementing the 8.5-million pyeong industrial area will be the 11.5-million pyeong (38.3 square kilometers) residential zone, which will be able to accommodate more 145,000 households in an environmentally conscious setting. (See Table 1). Hyundai Asan is currently negotiating for rights that will enable it to create an internationally competitive investment environment in the complex. Upon the conclusion of satisfactory terms with the DPRK authorities, it will then allot factory/office space to applicant domestic and foreign enterprises.
As an initial step under Phase I, it will allocate one million pyeong (3.3 square kilometers) specifically to attract highly labor-intensive businesses in order to generate large-scale local employment, create demand for local easy-to-obtain raw materials, and produce items of high market potential for export.
Typical industries targeted for attraction include fabric, clothing, shoes, leather, socks, and assembly of electrical/electronic and metal/mechanical products.
Some products may be allowed into the North Korean market to help elevate the local standard of living.
As of the end of January 2003, 912 companies had applied to enter the Gaeseong Industrial Complex. Among them, 420-odd are in the fabric/clothing/ shoe industries, 230 in are the electrical/electronic/mechanic/metal industries; 100 in the toy and bag manufacturing industries; and 150 in the stationary/glasses/wig industries.
A DEMAND THAT EXCEEDS SUPPLY Current estimations suggest that the area demanded by the would-be applicants amounts to 3.8 million pyeong, greatly exceeding the to-be allotted amount of 1 million pyeong (0.8 million pyeong, in fact, once utilities and roads are taken into account). Given the excess of demand over available space, sources close to the project say priority will be given to industries that are high on job creation and purchase of local raw materials, while conversely low on electricity and water consumption and emission of polluted water.
Depending on how Phase I goes and the expansion demands of resident companies, Phase II, (to be started two to five years later) and Phase III (between five and nine years) will be built to attract technology intensive light industries, heavy industries, and industrial equipment manufacturers. While barred from Phase I, foreign companies will be invited to locate in Phases II and III. Hyundai Asan projects that a total of 2,000 companies will locate in the complex, employing a workforce of 150,000 by the time Phase III is up and running.
The Hyundai affiliate will eventually divide the complex into industrial, residential and commercial zones. In addition, a hotel, resort and golf course facilities will be developed in parallel. The Korea Research Institute for Human Settlements (KRIHS) forecasts the Gaeseong complex would eventually generate 170,000 jobs and $21.1 billion in value added. The project also gets two thumbs up from the Federation of Korea Industries (FKI), the mouthpiece of Korea’s chaebol, or massive conglomerates, which estimates that the two Koreas would benefit by $723 billion from the economic synergy the complex is expected to create.
The complex is blessed with certain locational advantages compared with the DPRK’s previous two efforts to create special economic zones, the first at Najin/Seonbong and the second at Shinuiju, development of which has been delayed indefinitely.
PROVEN FLAIR AT WORK First, the Gaeseong complex has the advantage of being able to easily access Southern Social Overhead Capital (SOC), and so compensate for deficiencies of the same in the North simply because of its geological adjacency to South Korea. For example, the newly connected railroad will make it possible to access the seaports and airports of the South. In regard to electrical power supply, it would be possible to transmit electricity from the South until the North constructs sufficient power generating capability of its own.
Second, development of the complex at Gaeseong will represent an extension of the Gimpo-Incheon-Yeongjongdo industrial belt and the synergies it offers. Long term, there is a possibility of forming linkages with the cutting-edge industries of the Seoul Metropolitan Area.
Third, when the Gyeongui rail line is reconstructed to eventually run through Gaeseong City, transportation between the two Koreas will become far more convenient than has hitherto been possible. Other advantages will flow from the reconnection of road links between the Koreas, which is now in progress.
Fourth, besides its ease of access to South Korea, manufacturers in the Gaeseong complex will be well placed to reach markets in China (via land) and Southeast Asia and North America (via the Gyeongui and Gyeongbu line connections to Southern ports).
Fifth, most importantly, unlike the Najin/Seonbong or Shinuiju special zones, the main engines of development (and, indeed the operation of the complex) will be major South Korean corporations. With their proven flair for accessing and exploiting the market economy, these colossi that bestride the industrial landscape are the best guarantee of the success of the North’s latest venture into the competitive and difficulty fraught field of international special economic zones.
 DEEP COST DISCOUNTS On top of the locational advantages, the most significant advantage for South Korean companies at Gaeseong are the deeply discounted production expenses owing to low costs of labor and land plus low tax rates. For example, following negotiations between the DPRK’s Chosun Asia/Pacific Peace Committee, Hyundai Asan and KOLAND, it was agreed that the average monthly salary of a North Korean worker hired by a company in the complex would be $65 including social welfare payments.
This level of salary is equal to or below that which domestic small and medium companies based in China and Southeast Asia pay their local employees, and is only 4 percent of the salary a South Korean worker in the manufacturing industry earns. For reference, the average monthly salary for a manufacturing industry worker in South Korea, according to the Department of Labor was $1,525 in 2002. The selling price of 1 pyeong of land in the complex is likely to be in the order of $80, which is a mere 50 percent of the going rate ($149 per pyeong) in a South Korean industrial complex.
Furthermore, the corporate taxes will be set at a generous 14 percent in Gaeseong, far lower than the 27 percent companies must pay in the South.
If the Gaeseong complex project goes ahead without significant hitches, it is likely have a positive impact on the greater East Asian region as well as the Korean Peninsula in regard to politics, economics, society and culture. Here’s how: non-economic pay-offs could include improvements in North/South relations, building of mutual trust, relief of tensions on the peninsula, convergence of laws between the two Koreas, and the entry of the DPRK into the international arena.
With respect to the economic pay-offs the two Koreas might anticipate, both intangible and tangible benefits may be expected. Possible intangibles include reorganization of the industrial structures in both Koreas, a more balanced regional development in the South, the recovery of price competitiveness, efficient employment of underutilized plant, and building a better base from which to trade with Southeast Asia.
INVIOLABILITY OF INVESTMENT Tangibles that might result from the creation and operation of the complex as far as the South is concerned include heightened facility investment, infrastructure and factory construction and an improved investment environment, all of which will serve to spur foreign capital inflows and consequently, the domestic economy.
For North Korea in particular, possible benefits might encompass an enhancement in the quality of life, augmentation of industrial infra/capital, greater employment and heightened competitiveness.
However, in order for the complex project to succeed certain obstacles must be overcome. The most urgent issue to be addressed is the preparation of legal measures to guarantee the inviolability of investment and the free movement of labor to enable business to operate in atmosphere of security. Also, there is a critical need to establish a distribution network such as a road system to link the complex with the Gyeongui and other railroad lines for the shipment of finished goods, plus the installation of infrastructure such as electrical power and communication facilities.
The breaking of ground at Gaeseong last June 30th heralded to the world how far the two Koreas have come since the first tentative meeting between Hyundai and the DPRK 15 years ago.
If the complex project is successful it will mark an important step on the difficult road to national reconciliation and eventual reunification.
Moreover, it will greatly assist the presently divided Korean nation to achieve its full economic potential.
Meanwhile, the strained relationship between the United States and North Korea over the nuclear issue remains the most critical external variable that will determine the success or failure of the Gaeseong Industrial Complex.
by Shin Seung-Hoon (shshin@kotra.or.kr)
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