An Oasis of Capitalism; South Korean Companies Explore the Possibilities of Outsourcing to the North, in a New Economic Zone

By Lee, B. J. | Newsweek International, September 19, 2005 | Go to article overview

An Oasis of Capitalism; South Korean Companies Explore the Possibilities of Outsourcing to the North, in a New Economic Zone


Lee, B. J., Newsweek International


Byline: B. J. Lee

As soon as the buses crossed the heavily fortified border of the Demilitarized

Zone and entered North Korea, a vast open pit appeared before the wide-eyed South Korean tourists. Dozens of bulldozers were busy leveling the yellow brown earth, while construction workers in helmets measured land or erected fences. To one side of the field were a dozen newly built factories and buildings bearing the logos of South Korean companies--Hyundai, Shinwon and Woori.

This sprawling 66 million-square-meter site in Kaesung is a small capitalist enclave in communist North Korea. Several South Korean companies are making clothes, watches and kitchen pots here, using cheap North Korean labor in what some southerners are hoping will be a new twist in outsourcing. Kaesung, scheduled to be completed in 2015, hopes eventually to attract as many as 3,000 southern companies, employing a quarter-million northern workers. And despite the failure of most South Korean investments in North Korea thus far, its prospects look relatively bright. "Kaesung Industrial Complex is a win-win game for both South and North Korea," says Kim Chul Soon, an executive director at Hyundai Asan, the Hyundai division hired by Pyongyang to develop and lease the land. "Both economies will complement each other through the project."

North Korea envisions Kaesung as its own version of Shenzhen, one of China's first "special economic zones," and is hoping that the area can jump-start the country's near-bankrupt economy. Previous moves to attract South Korean investments have been too timid to succeed: the opening of scenic but isolated Mount Kumgang seven years ago failed because the project was limited only to tourists. But Kaesung could be a different story. Seoul, eager for closer ties with Pyongyang, is likely to offer financial incentives for companies to invest in Kaesung. And the zone has an inescapable economic logic: cheap labor plus proximity makes for an attractive alternative to locating plants in China.

Of course, the venture poses risks for both sides. Kaesung is a major city with 150,000 people. Through the industrial zone, the locals will inevitably be exposed to what control-obsessed Pyongyang calls decadent Western culture. Already, hundreds of southern managers and engineers mingle with 4,000 northern workers at the factories. But Kim Jong Il, North Korea's leader, knows that his own hold on power depends on reviving the decrepit northern economy; in recent months he's introduced capitalist reforms, including price- and exchange-rate deregulations, in an attempt to generate growth. …

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