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June 30, 2000 VOL. 29 NO. 25 | SEARCH ASIAWEEK

Investing in the Unknown
The North lacks the basics for doing business
By JONATHAN SPRAGUE and LAXMI NAKARMI Seoul

Wanted: investors in a country where the economy has shrunk for a de-cade to half of its former size, electricity supply can be sporadic even in top hotels in the capital, transportation links are minimal, legal protections for businesses hardly exist, and the population is more concerned about avoiding starvation than buying consumer goods. It may not sound like a land of opportunity, but to South Korean businessmen, that is what North Korea seems to be. "It is like South Korea back in the early 1960s," says Kim Sung Boo, chief executive of the South-ern industrial wiring company Jaewoo Elec-tric. That may be an overstatement, but businesses in the South can barely contain their excitement in the wake of the historic Kim-Kim summit.

To South Korean companies, the North represents a large pool of cheap, untapped labor that shares their heritage, work ethic and language. Average monthly wages in the South are approaching $2,000, but are below $200 in the North even after including fringe benefits like family, food and medical allowances, says Cho Dong Ho of Seoul's Korea Development Institute. That may not be very low compared to workers in China or Southeast Asia, but Yang Moon Soo of the LG Economic Research Institute in Seoul says that the labor quality and productivity of North Korean workers is generally better. "We had initial problems in terms of low productivity and a high defects ratio, but we have overcome that," says Yoo Wan Young, chief executive of IMRI Corp., which assembles electronic cards for computer monitors in the North. "The productivity [in North Korea] is comparable to that of South Korea."

In fact, South Korean companies like IMRI have been venturing north of the Demilitarized Zone for several years, producing clothing, cigarettes and electronics for export back to the South. "Business is not bad," says Kim Tae Ho, head of North Korean business at Samsung Group, which days after the summit put televisions assembled in the North on sale in Seoul. Unfortunately, not bad does not mean profitable. "We do not invest in North Korea to make a profit," says Kim. What is driving Southern businesses is partly a desire to lay a foundation for the future, but mostly nationalism and sentiment. Many Southern tycoons were born in the North, like Hyundai Group founder Chung Ju Yung who is absorbing massive losses from his $1-billion Diamond Mountain tourism project. Most other investments so far are modest -- Samsung only put $430,000 into its TV venture. But the stakes are set to rise with Samsung, Hyundai and others planning multimillion-dollar investments in the wake of the summit.

However, before the money flows and ground is broken, Southern business leaders say the North has to make some changes. The Stalinist economy is simply not set up for private enterprise to operate. "First, we must have internationally accepted institutional frameworks [which include] guarantees to protect foreign investments, avoidance of double taxation, dispute arbitration, protection of intellectual property, and an acceptable international payment and settlement system," says Sohn Byung Doo, vice chairman of the Federation of Korean Industries (FKI), who accompanied President Kim Dae Jung to Pyongyang and explained these needs to Northern officials. Foreign companies at present cannot even hire workers freely.

Then there are the physical limitations. With no direct communication links, phone calls must go through third countries. There is no land transport between the neighbors and only two shipping links, but port and support services are so inadequate that rates are 2.5 times that of shipping goods an equal distance to China. The entire nation only has the electrical generation capacity of a single South Korean city. "The key obstacle is the supply of energy," says Samsung's Kim. And financing the needed infrastructure. Washing-ton, Tokyo and Seoul are jointly building two nuclear power plants in North Korea in return for Pyongyang curbing its weapons plans, which should ameliorate energy shortages when they come on line in 2005. Other than that, since South Korean companies are heavily indebted and North Korea's credit rating is zilch, no one knows where the $10-to-$20 billion needed will come from.

In fact the only way for North Korea to attract the investment it needs is to really open up the economy. "I told them that the market economy is the key, and that without the existence of a market economy in the North, large investments will not be feasible," says Sohn. Which means Pyong-yang must loosen its grip, at least in economic affairs. That is not likely to happen quickly since North Korean leader Kim Jong Il's top priority is the stability of his political power and his government's control over the country, says LG's Yang. Pyongyang is sure to have its ear bent not only by South Korean firms but by West-ern ones as well now that Washington has eased sanctions imposed 50 years ago. But until it bends its rigid ideology, the land of opportunity may remain only that.

Write to Asiaweek at mail@web.asiaweek.com

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