Thursday, March 18, 2004

Yonhap ("INDUSTRIAL ZONE PROJECT HITS SNAG AS N KOREA DEMANDS HIGHER RENTS," Seoul, 03/17/04) reported that the inter-Korean project to build an industrial complex in the DPRK city of Kaesong hit a snag after Pyongyang abruptly demanded higher rent for the site, officials at a state-run ROK firm engaged in the project said Wednesday. In the latest economic talks in Seoul, the Koreas agreed to start the construction of a model industrial facility on a 1-million-pyong (1 pyong equals 3.3 square meters) site in Kaesong, a town just north of the Demilitarized Zone that separates the countries, in March for completion by June. The two sides also agreed to allow ROK firms to move into the complex starting in September. "North Korea previously pledged to offer the land almost free of charge, but the North abruptly switched its position to demand a considerable amount of rent for land during last week's working-level talks on the project," one of negotiators at the Korea Land Corp. said on condition of anonymity. This was the second such working-level meeting, and also involved Hyundai Asan Co., the DPRK business arm of South Korea's Hyundai Group. He refused to tell how much the DPRK demanded, saying that the negotiations are under way. The companies planned to fix the rent for the land at 10,000 won (8.6 US dollars) per pyong through negotiations to sell a lot in the complex at about 150,000 won per pyong to ROK companies. Government officials were concerned that a higher rent will result in hiking opening prices for the facility and discouraging ROK companies from moving in. "It's unclear whether we can finish the negotiations this month, but we'll do our best to reach a compromise with the North in time," he said. To start construction, the land developer and the Hyundai subsidiary must get approval from the government after winding up the rent negotiations.
I think the DPRK had better tread lightly in the arena of attracting investment from South Korea. Right now there is virtually no chance that a foreign firm can expect to make money setting up operations in North Korea. Any comparative advantage that the DPRK might have can be found in much greater abundance in China. Thus, the only reason for investing in North Korea is political: to further the process of engagement, defuse tensions on the peninsula etc. But if the DPRK raises the price tag too high, even patriotic South Koreans are going to balk at investing in the North.

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