Last of three parts 

GAESEONG Industrial Complex—In this slice of North Korea, just 60 kilometers from Seoul, management offers many sweeteners for investors. At $46 per square meter, a locator gets 50-year exclusive rights to land use, including the privilege to sell, rent, gift or pass on as inheritance.

Locators, now numbering 22 and expected to close at 39 this year, are exempted from paying corporate income tax for five years and have a three-year window to pay only 50 percent.

Property tax is a low 0.1 percent for manufacturing and 1 percent for entertainment—a couple of golf courses are planned and karaoke complexes should not be far behind—with a five-year exemption for every new building. Business tax is only 1 percent to 2 percent of service sector revenues; energy and infrastructure firms are exempt.

A training center ensures a steady supply of skilled workers. The country has a 99-percent literacy rate and where one in five adults has completed middle school.

“We’re surprised by the quality of our workers,” says Kim Dong Keun, chief of the industrial district management committee, who places local labor on a par “or even better” with those in China’s economic zones.

But the urbane executive, who chats easily with North Korean minders, says the host needs to improve political stability and integrate with the world economy.

Working in a state that bans any disparaging remarks on its totalitarian ways, Kim is surprisingly blunt, calling North Korea “the only remaining Stalinist country in the world.”

“But we’ve started change,” he tells journalists, citing the modification of some rules—customs, immigration—for this experiment in economic cooperation.

Kim, who forecasts more than 2,000 South Korean and foreign locators employing from 300,000 to half a million North Koreans by 2020, believes the next decade will slowly bring in market economy and mechanisms.

Hybrid unification

Paik Nak Chung, emeritus professor at Seoul National University and editor of The Quarterly Changbi, describes the current atmosphere as reunification in progress. It is a hybrid, contrasting with the two known reunification models: Germany’s peaceful coexistence followed by integration with the collapse of the Berlin Wall and that of Vietnam, enforced by the victory of communist forces.

Paik and many Seoul-based leaders say neither will work for Korea.

Korea’s division in 1945 resembled prewar Vietnam more than Germany. But the Vietnam War ended with a rout of the US; in Korea it ended with a truce.

Paik says the structure of the division has since acquired a measure of stability. The 1990s, however, destabilized that division with the loss of Pyongyang’s chief communist patrons and the South’s democratization and rise as an economic power.

The increasing imbalance between the two Koreas prompted the imperiled North to fall back on military force to the extent of undertaking nuclear armament.

“Overzealous pursuit of reunification would pose a threat to peace because the North will resist at all costs the German type of peaceful annexation, let alone military invasion,” Paik warns. Simplistic discourse of national unity, he adds, would only fan popular fear of sudden reunification.

Former President Kim Dae Jung and executives of Hyundai Asan, the South Korean pioneer in ventures with the North, see “economic reunification” within 10 years.

Of political reunification—which also happens to be the dream of Pyongyang and the reason for the existence of one of the world’s largest standing armed forces—the South Koreans sigh and say, “much later.”

Awkward dance

The inter-Korean business model is on a roll here. The complex’s 2006 production output was five times that of the previous year, despite a halt in new land lease offerings following North Korea’s ballistic missiles launching in July and a nuclear test in October. As of January 2007, production output hit $100 million.

South Korea needs the new economic zones. High labor costs in that country and militant unionism have slowed down the entry of investments. A rapidly aging population and what investors call a lack of regulatory transparency have held growth rates to the low 4-percentage level, from the 9 percent to 10 percent at the close of the millennium.

A major problem for Seoul is the exodus of small corporations to China and other lower-wage countries, including the Philippines. But with China itself rushing into economic superpower status, labor-intensive firms—now faced by $150 monthly wages—say they need to find a substitute. In this complex, workers are paid a monthly average of $60.80.

But there is only one foreign venture here, a Japanese-South Korean tie-up. Several European and American delegations visited in the last quarter of 2006 and the first months of this year. Few are biting despite a South Korean government guaranty to pay 90 percent of investment costs in the event of closure due to political reasons.

For one, there are complications posed by US sanctions on North Korea, including a possible freeze on financial assets for aiding a “terrorist” state.

Gaeseong products are a sore point in current bilateral trade talks between the US and South Korea, with the latter batting for these to be categorized as South Korean products under the 60-percent input law. The US is reluctant; conservatives in the Bush administration fear economic growth under the hybrid program could prop up Pyongyang and take away incentives for political reforms.

European nations and, more recently, Southeast Asia have accepted the complex’s products as South Korean-made, paving the way for greater export receipts from the current $21-million level.

However, Europeans, with their bias for human rights and civil liberties, are leery about the perceived lack of safeguards here. There is little leeway for the industrial management district committee to verify whether workers’ wages—pegged at $7.10 million in 2006—actually go to the proper recipients or are diverted for imports or, worse, channeled to the arms program.

Jang Whan Bin, Hyundai Asan’s senior vice president for business and investor relations, dismisses the latter notion. “That figure and the $4.4 million we have paid for the Mount Kamgung development is too small for the development of war machinery,” he notes.

Jang has been to Pyongyang and says the funds received from the joint ventures have helped “restart electric trains and buy more food for the people.”

Former president Kim, who is being pushed by South Koreans to set another meeting with the North Korean leader, advises greater openness from the United States. He says the superpower, bogged down in the Middle East, does not have enough capability to spare in attacking North Korea.

“Economic sanctions are also of little use in the current situation unless China actively joins in,” adds Kim. “For President Bush, who was unable to achieve success in the Middle East, it has become important to reap diplomatic success on the Korean peninsula.”

At the same time, he tells North Korea it has run out of excuses for stonewalling, with the US agreeing to security guarantees, the lifting of economic sanctions and normalizing bilateral ties. Pyongyang’s stubborn ways, Kim warns, could prod Japan or Taiwan to go nuclear, a nightmare for China and the continent.

‘Our way’

The war is technically still on, just on a truce. South Korean men still serve an 18-month compulsory military service, usually just before entering university. A quarter of northern men serve Pyongyang’s military.

Roads outside the DMZ have man-made rock ridges to slow down advancing enemy forces. It takes three minutes to penetrate each rock barrier. There are 10 between the DMZ and the first populated center, a 30-minute window. With missiles and nukes hogging disarmament talks, the rock ramparts seem a quaint concept.

South Koreans know the horrifying effects of nuclear warfare. Tens of thousands of their brethren, forced into service by Japan, perished in Hiroshima and Nagasaki. But economic reporter Shin Chi Young points out that economic muscle has made citizens more confident about the North. There is also plenty of nationalist fervor even in the capitalist South where 90 percent of vehicles are locally made.

The current northern Kim exasperates southerners with his antics and there is real concern about the rights and welfare of northerners.

“But there is this niggling respect,” says Shin. “Many believe the North’s defiant stand prevents incursions of the larger powers.”

Paik notes that both sides have already spelled out a “distinctly Korean way out of the dilemma.” The two Kims’ 2000 joint declaration underscored similarities between the low-level federation proposed by the North and the Southern commonwealth vision.

Both allow each side to retain the functions of central government. An extended, many-staged process, Paik says, would allow civic participation that South Koreans, especially the business sector, are ready to undertake. This, in turn, would help define when and how both governments proclaim a union or confederation, the scholar notes.

Paik calls this post-facto ratification of what people on the ground have worked out through political, economic, social, cultural contacts and exchanges.

To cynics, it may sound like a pipe dream. For South Koreans, it is “a process that has never stopped even in the darkest days of the nuclear crisis.”

Labor’s force

GAESEONG Industrial Complex—In this slice of North Korea, just 60 kilometers from Seoul, management offers many sweeteners for investors. At $46 per square meter, a locator gets 50-year exclusive rights to land use, including the privilege to sell, rent, gift or pass on as inheritance.