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Underperforming Free Economic Zones

Posted July. 21, 2010 11:42,   


A year ago, John Infantino, CEO of the U.S. real estate development company Federal Development, signed a memorandum of understanding with North Jeolla Province to build a maritime leisure resort at the Gogunsan archipelago in the Saemangeum/Gunsan Free Economic Zone. The company was planning to invest 370 billion won (306 million U.S. dollars) by 2012 and 550 billion won (455 million dollars) by 2015. After just two months, however, Federal Development canceled its plan over low economic feasibility and failed to pay two million dollars in security deposits.

Since its inception in 2008, the free economic zone has attracted only four foreign investments worth a combined 360 million dollars. Similar zones in Daegu, Gumi and Pohang have signed memorandums of understanding with nine foreign companies but have attracted just one case of foreign investment. Worse, not a single investment has come in the Yellow Sea Free Economic Zone encompassing Pyeongtaek of Gyeonggi Province and Dangjin, Asan and Seosan of South Chungcheong Province. Civic groups in South Chungcheong say the free trade zone designation should be canceled to save budget and for the lifting of restrictions on residential property rights.

In 1980, China designated Shenzhen as a free trade zone. A small fishing village with a population of only 30,000 and adjacent to Hong Kong, Shenzhen is now the most affluent and advanced city in China thanks to vigorous efforts to attract foreign capital. To turn Korea into a global hub, the Korean government also designated Incheon, Busan-Jinhae and Gwangyang as free economic zones in 2003, and added three more in 2008. But Korea has long way to go before catching up with China. Korea has six zones compared to China’s five, but Korea’s are the byproducts of political considerations and do not offer incentives such as tax breaks, financial support and financial deregulation.

Seoul should either scale back or shut down underperforming free economic zones and provide drastic benefits to zones with high growth potential. The Incheon Free Economic Zone, once heralded for its good geographic location, has attracted just 900 million dollars in foreign investment since its inception seven years ago. It has not built hospitals and schools for foreigners due to few incentives and excessive regulations. Failure to attract domestic companies that can help foreign capital inflow is another cause for the zone’s sluggish performance.

The country’s six free economic zones account for a meager 2.5 percent of foreign direct investment, indicating little investment attractiveness. The problem is that the government is not implementing the necessary measures despite recognizing these problems. While the previous Roh Moo-hyun government promoted free economic zones and innovative and corporate cities for balanced national development, the incumbent government is neither continuing such a policy nor presenting an alternative. If nothing is done, Korea inevitably faces the risk of losing foreign capital and investment to neighboring countries.