A Case Study on Globalization's Reach into North Korea
The rationale for targeting the Kaesong site for developing an ideal economic zone within North Korea relied on the following factors, some of which were mentioned in Part III:
- increased goodwill due to the June 15 Joint Declaration of 2000
- an assertive investment drive by Hyundai Corporation
- geographic proximity to the Seoul Metropolitan Area (includes Incheon)
Hyundai`s Investment Drive
Hyundai has a well-connected yet suspicious past in regards to North Korean relations. Exchanges of large sums of money as an investment in a set of North Korean mega-projects, including Kaesong, have been questioned in regards to their timing. Whether or not these funds were partially intended to initiate the Joint Summit of June 15 2000, the fact that Hyundai's founder escaped from the North to the South in the 1950's ties Hyundai to the North in blood and spirit. According to a good friend working currently for Hyundai Oil Bank, it is this connection that provides it leverage with and drives it to lead projects with the North. In fact, Hyundai Oil Bank even has a couple gas stations in Kaesong, which I will post more on later.
On August 10, less than two months after the Joint Declaration, Hyundai finalized an agreement with North Korea choosing Kaesong for development. The business rationale established by Hyundai seems sound on the surface. Examining the key aspects of the Kaesong development, we can see a McDonald's-type strategy is in play--"location, location, location:"
- It is in the center of the Korean peninsula, and with the Kyongui railway passing through it, it would be a natural transportation hub. Kaesong is a large city, 70km from the Seoul Metropolitan Area (SMA) and 160km from Pyongyang. When Kyongui railway (Seoul-Shinuiju) restored, it will be connected to Sariwon, Pyongyang and to Shinuiju, and even to the Trans-China Railways. If land transportation can be facilitated through the Kaesong district, it would considerably reduce the high logistics costs that have been a heavy burden on inter-Korean economic cooperation (Nam, pg 82).
- Located near the SMA and other industrial areas, the Kaesong industrial complex will have easy access to raw materials, as well as semi-processed goods, components and information (Nam, pg 82).
- Kaesong is an ideal city, in terms of location, where the South and the North can link their electricity, railways, roads, and water for use by an industrial park (Nam, pg 82).
- The population of Kaesong and neighboring areas is around 350,000––a large workforce (Nam, pg 82).
- Finally, vast plains lie to the west and the south of Kaesong, providing ample sites for establishing an industrial complex (Nam, pg 82-83).
In the PowerPoint file below, I have tried to illustrate the positioning rationale:
Hyundae's Vision--Pie in the Sky?
Hyundai aimed to develop the Kaesong area and wanted it to be designated as a special economic region for international business, turning it into a North Korean version of the Chinese special economic district of Shenzhen. This would transform Kaesong into an international economic free zone with global competitiveness in manufacturing, finance, commerce, and tourism (Nam, pg 82).
The company expected that its development of Kaesong would have spillover effects: restoration of severed South-North railways and roads, and contribution to the development of neighboring communities, job creation, and promotion of exchanges of technology and foreign currency earnings through export (Nam, pg 82).
The primary details of Hyundai's business plan as of 2001 were as follows (I will provide the current status later) (Nam, pg 79):
- Complex Dimensions: 6.05 million square meters
- Phase I Industry Target: Light industry--textiles, apparel, shoes, leather, bags, toys, socks, food (processed ginseng), beverages, electrical/electronic goods, metals and machinery, etc.
- Phase II/III Industry Target: high-tech industries dealing with industrial equipment, information and communications, computers, and software
- Development Period: 2001-2008
- Lease land rights over 50 year span
As of late November 2000, 450 South Korean companies had expressed their interest in establishing themselves at the Kaesong Industrial Complex (Nam, pg 83). The labor-intensive light industries mentioned above are on the decline in the South due to high labor costs (Nam, pg 83). Ideally, North Korea would become a low cost country (LCC) for South Korea that is closer and more familiar in terms of base culture and language, especially relative to China.
North Korea's Rationale
Like China's "free market with Chinese characteristics" concept, North Korea adopted an earlier China strategy from 1984 in facing encroaching globalization--the "one center and two basic points" strategy. Understanding this strategy clarifies the constraints the Kim regime has placed on itself in its development process. The strategy's general intended effect is to open up to globalization's flows in only limited areas, while blocking any unwanted outside influence on the regime. Basically, North Korea hopes to have its own little zoo of globalization's animals, contained and controlled in cages for everyone to see but which the majority of its own people would never experience. In this way, Pyongyang has set four basic requirements:
- Developed areas must be far away from Pyongyang and must not be located close to any military bases.
- Any developed area must be a coastal city with a port nearby which can serve as a gateway for international trade.
- The developed area must be equipped with industrial infrastructure.
- The developed area must have an easy access to a labor force.
In the below PowerPoint file, Table 2 describes the five districts that could potentially fit within these criteria, in addition to each district's assessment. Table 1 describes Kaesong benefits and Table 3 illustrates Kaesong's construction costs.
The division is based on the status of the respective cities’social overhead capital (SOC), access to the outside and the possibility of the North Korean authorities’ support (Nam, pg 80). Other factors may shape some of these results, such as geography, but this provides a sense of investment potential (Nam, pg 80).
- How does the leading investment firm, Hyundai, reconcile its romantic vision of North Korea's development and the realities of doing business on the ground?
- Can the desired level of economic flows into and from Kaesong survive the isolation from political flows demanded by the North Korean regime?
- Once established inside North Korea, will globalization's animals be too unruly for the North Korean regime to manage?