Strategies for Inter-Korean Economic Cooperation: A Managerial Approach

IntroductionSince the South Korean government dramatically departed in October i988 from its conventional policy of prohibiting trade or economic cooperation with North Korea, a low level of economic cooperation began on a small scale and con - tingent basis by private firms. However, it accelerated more rapidly during the early 1990s, under the Agreement on Reconciliation, Non-aggression, and Exchanges and Cooperation between South and North Korea, which was enforced on February 1992 after their joint entry into the United Nations.Unfortunately, during the mid-1990s, economic cooperation between these two parties has been hampered primarily because of structural di∂erences in their economic and political systems. Another reason for lack of progress is that North Korea's policies limited its role in economic cooperation to private companies and avoided government-level communication with South Korea, which is indispensable for easing tensions and finding the solution for identifiable problems.However, the "sunshine policy" introduced by the Kim Dae Jung government created a more propitious environment for mutual cooperation between the two parties and successfully induced a new breakthrough in South-North relations. Since the South-North Joint Declaration on June i5, 2000, during the historic inter-Korean summit and the follow-up agreement on a variety of inter-Korean economic issues, the level of economic cooperation reached a new turning point, thereby resulting in a drastic change in South-North Korean relations since then (Table i).Special Economic Zones: The Major Playground for Economic CooperationMore recently, North Korea added three Special Economic Zones (SEZ) to the established Rajin-Sonbong area to accelerate the economic cooperation between the two parties and to spur more foreign investment in North Korea. In particular, the newly promulgated law for Kae-sung Industrial District explicitly allowed investment from the South for the first time. The prospects of the Kae-sung Zone are particularly more promising than any other Zones for a number of reasons. First, both parties have been working diligently for the last couple of years to develop a clear and detailed road map for this special district. Second, more than i00 firms from South Korea have displayed their clear intention to make some kind of investment in this district. Third, the close proximity of this district to Seoul will ease various logistical problems and take advantage of a high quality infrastructure, something not always present in the rest of North Korea.The establishment of four special economic zones has been considered one of the most significant signs of the North Korean's willingness to experiment with a new open-door policy. The prime motivation for this experiment is to promote the inflow of foreign investment, technology, and management know-how. However, this experiment, long-term, is to obtain the indirect experience of a market-oriented economy in a controlled environment and to pass these experiences gradually on to the rest of the country, thus avoiding major political repercussions.Special Economic Zones is a term describing designated legal and geographic areas in which commercial activities, including manufacturing, exporting, processing, banking, and assembly, take place between local and foreign companies under the special conditions that provide a variety of incentives that are not available in other parts of the country. More importantly, an investment environment has to be developed that is considerably more liberal than elsewhere in the North. Additionally, foreign firms would be given high level of autonomy in managing operations, face minimal controls in capital and goods movement, and be allowed to export and import freely whenever it is needed. Two policy considerations seemed to motivate the North Korean decision to establish the SEZs. First, the opening of these SEZs is understood to be the first major step in the North Korean overall open-door policy and practices. …