Re-examining FEZs

Korea’s ambitious initiative to emerge as an economic hub in Northeast Asia by bolstering the number and scope of so-called free economic zones over the past seven years is turning into a major mess.

Foreign direct investment in these areas - which was pitched as a major benefit of the plan - has been scarce. And major parts of the initiative have stalled, sending many of these areas to the brink of bankruptcy.

So far, total foreign direct investment in the free economic zones in Incheon, Busan, Jinhae, Gwangyang, Hwanghae, Daegu/North Gyeongsang Province and Saemangeum/Gunsan is $2.588 billion. While at first glance that seems high, the figure amounts to just 3.6 percent of the country’s total foreign direct investment.

These areas exist as “special districts” and “economic zones” largely in name.

The Roh Moo-hyun administration pursued free economic zones with zeal.

But licenses to create these zones were handed out to provinces liberally, and the government didn’t set any economic and infrastructure criteria for receiving them. As a result, the zones are all similar to one another, and few offer the type of radical tax benefits or incentives needed to attract foreign investors. Many of them don’t even have necessities for employees.

What foreign company would want to open an outlet or branch in a region that doesn’t even offer a decent school or hospital?

In the Incheon Free Economic Zone, construction of a 68-story skyscraper has been put on hold after investors pulled out, citing uncertain business prospects.

The situations in other regions are even worse. In Daegu, for instance, development has been stifled because of environmental restrictions. Developers are now looking to simply build residential apartments in the economic zone to sell to local residents.

Despite all of this, other areas are applying for licenses to create economic zones. They are not motivated by the lure of foreign investment or hopes that the zones will boost the economy. Rather, officials in these areas want to inflate land prices.

The time has come for authorities to re-examine policies surrounding free economic zones.

The government must first alter regulations in order to allow local governments to provide tax benefits and infrastructure. It should then select several competitive free economic districts and focus on them while folding others that aren’t as promising. If the government doesn’t take action, then we can safely say that the headaches have only just begun.