Go to contents

Failed Free Economic Zones

Posted August. 07, 2010 11:53,   


The government has begun to restructure free economic zones that have been slow in attracting foreign capital. The Knowledge Economy Ministry announced that it will overhaul 35 of 93 units in six major zones across the country and discuss follow-up measures with regional governments. It is inevitable, albeit belated, to reform zones that are sluggish in attracting foreign capital and that have turned into provincial development projects such as construction of apartment complexes.

In 2003, the Roh Moo-hyun administration designated Incheon, Busan-Jinhae and Gwangyang as free economic zones. It added three more to the list in 2008, namely one in the Yellow Sea, another in the Daegu-North Gyeongsang Province region, and the third in the Saemangeum-Gunsan area. Under a plan for balanced national development, the Roh government doled out the designations excessively to each region in an evenly distributed manner. Moreover, the administration came up with a variety of other development projects such as the construction of an administrative town and innovative and corporate cities, none of which went anywhere. The free economic zones showcase the typical failure caused by a rash policy of balanced development.

Despite more free economic zones, the central government failed to provide tax breaks, deregulation, infrastructure and other incentives to attract foreign investment. It plans to complete the development of the first three zones by 2020 and the second three by 2030. The plans are a mere daydream, however, given the marginal amount of foreign investment attracted to these zones. Since 2004, foreign investors have plunked down 2.7 billion U.S. dollars into the zones, or just 3.7 percent of foreign direct investment in the country.

The government should revoke the zone designations of areas with inferior geographical conditions or investment infrastructure, while concentrating resources on promising zones that remain competitive. Other Asian economies such as China and Singapore are luring foreign investors with bold incentives. Korean free economic zones need to offer better conditions to succeed yet many of them suffer from excessive regulations. This is a stumbling block for building hospitals or schools exclusively for foreigners.

Success of the free economic zones requires a daring shift in ideas. Even if a zone is meant for foreign corporations, domestic companies should not be discriminated against. Certain foreign companies seek to invest in Korea not just because of the business environment or the domestic market, but also because of their business ties with Korean corporations. China, Singapore and Taiwan do not discriminate between foreign or domestic businesses. Korea should conduct a thorough survey and consultations with municipal and provincial governments to sort out promising zones while minimizing friction over the revocation of other zones` designation.