[VIEWPOINT]How to kill an economic zone

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[VIEWPOINT]How to kill an economic zone

Having lived in Singapore for about five years now, I have met Koreans visiting here for all kinds of reasons. Most of these visitors have been policy makers, politicians, scholars and journalists who are interested in Singapore’s free economic zone.
What results have come from Korea’s four-year experiment with its free economic zone? Personally, I haven’t noticed much improvement, except that American real estate developers purchased land at bargain-basement prices, British developers offered a proposal to develop a service industry complex for a high price, and foreign companies that have acquired Korean companies plan to make additional investments.
Of course, it is still too early to judge the success of the free economic zone in Korea. Usually, it takes a long time for an industrial complex to be built and to prove itself a success.
However, Korea’s free economic zone project has started off with a huge, self-created fetter, and unless we throw off this yoke, there will be little chance of the project succeeding. If we look around the world, there is no free economic zone in any semi-developed or advanced country that bans domestic companies from inclusion in it. However, the government plan for the zone, near Incheon, relies exclusively on foreign businesses.
The biggest reason why domestic companies are not allowed in the zone is to avoid controversy over giving special favor to domestic companies. As long as Korean conglomerates are still the targets of reform drives, the government does not wish to give them preferential treatment. However, there is no clear answer as to why foreign companies deserve special favors. The most common justifications are that foreign companies can transfer advanced technology and management techniques to Korea, and international confidence in the Korean economy will be boosted by foreign investment.
These reasons might have sounded convincing in the 1960’s, when the country was still underdeveloped. Today, however, many Korean companies have become ― and are competing against ― global multinational giants. We have gone far beyond the stage in which the nationality of a company is used as a metric of that company’s competency.
At this juncture, banning Korean companies from entering the free economic zone will hinder the success of the project. Let’s look at the issue from the point of foreign companies that might be considering investing in Korea. No longer are they looking to invest in Korea for the cheap labor. They are more interested in the ability to instantly trade information and material with Korean industries. If I were a foreign investor, I would prefer to set up shop in a town around the free economic zone rather than in the zone itself.
Another problem arising from complete dependence on foreign capital is that the government is bound to be lax when reviewing the economic adequacy of a given business, because any investment in the zone will be touted as a successful case of attracting foreign capital. In the case of the Haengdamdo development project, the National Highway Corporation ignited a controversy when it was revealed that the corporation had offered to compensate foreign investors for any losses. We have seen many cases in which some offers, which would have been unimaginable if the investors had been Korean, were made in the name of attracting foreign capital.
Projects planned in the private sector are thoroughly reviewed, not only for the adequacy of individual projects, but also for traveling expenses for overseas presentation sessions, even by establishing a separate organization in charge of the free economic zone.
I wonder if the government analyzed the costs and benefits of the project on a national economic level when it pursued the free economic zone policy.
If a free economic zone is to be successful, it must be decided that businesses will receive special favors according to their competency, not their nationality. While there will be political and more mundane obstacles, it is necessary to define the terms of special benefits in the draft of the policy for a “special zone.”
Problems can arise if Korean companies are allowed in the free economic zone, such as benefiting their businesses outside the zone. However, the problems can be worked out by having the Korean companies form a subsidiary, and admitting only the subsidiary to the free economic zone.
When drafting any economic policy, a foreign example should be nothing more than a reference. Always, the key task is how you prepare a strategy internally and reach a political consensus.
I hope Koreans no longer waste their money on inspection tours to Singapore’s free zone.

* The writer is an economics professor at the National University of Singapore. Translation by the JoongAng Daily staff.

by Shin Jang-sup
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