Investing in Koreas’ Kaesong: Who Dares?

Investing in Koreas’ Kaesong: Who Dares?

By Giles Hewitt on 1:25 pm November 6, 2013.

Seoul. For a foreign investor, there must be safer bets around than a project run by two countries that are technically at war, permanently at odds, and rarely on speaking terms. But only a few months after being threatened with a pre-emptive nuclear strike by North Korea, South Korea is pushing hard for overseas involvement in the joint industrial zone the two rivals operate in Kaesong.The complex has recently reopened after a five-month closure caused by North Korea withdrawing its 53,000-strong workforce in April as military tensions surged to dangerous levels.

South Korea’s thinking is that foreign involvement would make it that much harder for Pyongyang to shut down Kaesong again in the event of another flare-up.

But why would any foreign investor even consider taking a punt on Kaesong, which lies 10 kilometers inside North Korea, over one of the world’s most heavily militarized borders?

“That’s a very difficult question to answer,” South Korean Unification Minister Ryoo Kihl-Jae acknowledged during a briefing with foreign reporters in Seoul last week.

For Ryoo, the principle of encouraging foreign involvement — in the hope that it will help promote international operating norms and standards in Kaesong — is worth upholding, even if it never actually happens.

“Whether it is possible or not is not the problem here. It is a necessary and a desirable step to take,” he said.

If that sounds contradictory, Kaesong has always been more about politics than business.

Born out of the “sunshine” reconciliation policy initiated in the late 1990s by then-South Korean president Kim Dae-Jung, it opened in 2004 and proved remarkably resilient, riding out repeated inter-Korean crises that closed down every other facet of cooperation.

The North’s decision to pull its workforce in April took most by surprise, especially as it was the North that reaped the greatest financial benefit from its operations.

The hard currency wages paid by the 120-plus South Korean firms in Kaesong are kept by the state, which passes on a fraction — in local currency — to the actual workers.

South Korean businesses setting up in Kaesong get cheap, Korean-language labor, as well as preferential loans and tax breaks from the South Korean government, which also effectively underwrites their investment.

“Kaesong wasn’t set up as, and has really never been run as, a commercial concern. It was always a political concern,” said Go Myong-Hun, an analyst at the Center for Risk, Information, and Social Policy at the Asan Institute think-tank in Seoul.

“It’s useful for South Korea because it provides North Korea with an incentive to negotiate and South Korea with a certain amount of leverage,” Go told AFP.

“But it’s hard to imagine why any foreign investor in their right mind would think about investing there,” he added.

Outside participation in Kaesong has always been possible on paper, and some foreign companies have taken a close look at the zone but, until now, none has been tempted by what they saw.

The South Korean government is considering “sweetener” legislation that would offer some of the same perks extended to domestic firms, like tax breaks and state-backed insurance against closure of the complex.

But the real barrier remains the huge potential for instability due to the total incompatibility of the two countries that operate Kaesong.

The most recent example was South Korea’s decision to cancel a Kaesong foreign investor day scheduled for October 31 because talks with the North on normalizing operations were making too little progress.

“The internationalization of Kaesong will not be successful unless drastic steps are taken to make the zone completely free from all this political maneuvering,” said Yang Un-Chul, an expert on the North Korean economy at the Sejong Institute think-tank in Seoul.

For the moment, Yang believes the pool of potential foreign investors is limited to a few Chinese or Russian firms, or possibly some independent, ethnic-Korean US entrepreneurs who might be willing to step up out of patriotic duty.

“But even then I’m skeptical,” he added.

One of the roles Seoul initially envisaged for Kaesong was as a beachhead for market reforms in North Korea that would spread from the complex and expose tens of thousands to the outside world’s way of doing business.

It’s a scenario that has singularly failed to play out.

“North Korea has ensured that Kaesong has remained incredibly self-contained,” said the Asan Institute’s Go.

“So it hasn’t been particularly useful in terms of person-to-person contact, or in tutoring North Korea in matters of market economics,” he added.

Agence France-Presse