Legal Reforms and Foreign Investment in the Inter-Korean Project: The Kaesong Industrial Complex

Abstract

IntroductionThe KIC is emerging as a matter of interest both domestically and internationally-displaying characteristics of being North Korea's national development project to resolve its economic troubles after the Rajin-Sunbong and Sinuiju special economic zone projects fell through. North Korea can use the KIC as a testing ground for possible economic reform that could eventually lead to the complete liberalization of North Korea's economy, and also as a strategic means of easing military tensions between the two Koreas.It is essential for North Korea to open up its doors for its long-term survival. Leaders in Pyongyang deem that a limited opening of the North Korean economy through the establishment of special economic zones is the best plan of action for regime preservation and economic rehabilitation. However, the KIC's potential for success has to be assessed in a more prudent manner. First, North Korea is unable to procure enough funds to autonomously establish the infrastructure necessary to maintain foreign capital in the special economic zone. Second, the country's limited domestic market provides very few incentives to attract foreign investors. Third, the related industries are underdeveloped, making production costs relatively high for potential investors. Fourth, there is a lack of skilled workers who understand the market economy and who are equipped with the latest technology. Finally, there is not enough confidence that North Korea will be able to make the wholesale changes needed or to establish the legal and institutional infrastructure that conforms to international standards. This paper focuses on the issues of attracting foreign investment to the KIC and building a legal and systematic infrastructure that will help maintain this investment. These key indicators can predict the stability and sustainability of the KIC's development henceforth.The North Korean authorities' attitude toward the KIC is very favorable, regardless of how slowly they have met various demands made by South Korea. Most transitional states have been able to experiment with flexible institutional incentives in SEZs, where possible political and economic side effects could be contained within the zones. For example, China's experimentation with liberal market reform was too politically dangerous on a national level, but was possible in SEZs. Based on experience, China began to reform its laws and institutions, creating more diverse SEZs nationwide, such as the Shanghai-Podong Development District, the Weihai Torch High-Tech Industries Development Zone, and free trade zones (Ministry of Justice, 2005).North Korea has also shown deep interest in learning market economics and capitalism from China's model of SEZs. Frequent visits to China's most successful SEZs by North Korean leader Kim Jong Il and the North Korean elite are a good indication that North Korea is benchmarking China. The KIC is a melting pot of capitalism and socialism.The Current State of DevelopmentLaunched full-scale in 2004, the KIC consists of 6,535 acres of land in Kaesong, Panmun-gun, and Jangdan-gun, and 9,803 acres of land in nearby areas. Currently in the first stage, 817 acres of land are being developed for small- to medium-sized labor-intensive businesses. Despite a variety of unfavorable conditions, such as the North Korean nuclear test in 2006 and the subsequent rise of negative public opinion within South Korea, the KIC has been developing steadily as an economic enterprise for the co-prosperity of the two Koreas, grounded on the principle of keeping politics and economics separate. The KIC is expected to gain all the more momentum from two major events. On October 4, 2007, South Korean leader Roh Moo-hyun and North Korean leader Kim Jong Il signed the eight-point Joint Declaration for Advancing Inter-Korean Relations and Peace and Prosperity, after a three-day summit from October 2 to October 4, 2007. The Second Session of the Sixth Round of the Six-Party Talks was held in Beijing, amongst China, Japan, North Korea, Russia, South Korea, and the United States, from September 27 to September 30, 2007. …