The Korea Herald


FEZs totter with meager foreign investment

By Korea Herald

Published : June 12, 2012 - 19:09

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Government curtails areas and projects, postpones additional designation indefinitely

Free economic zones started in 2002 with a grandiose vision of fostering South Korea into a East Asian business hub, but have tottered into their 10th year.

In Korea, Incheon, Busan and Jinhae, and Gwangyang were designated as free economic zones in 2003, followed by three more in 2008, which are located in Dangjin and Pyeongtaek, Saemangeum seawall and Gunsan, and Daegu and nearby areas in North Gyeongsang Province.

Free economic zones provide various benefits including tax cuts to foreign companies in a bid to attract foreign direct investment.

Aerial views of the envisioned free economic zones show a well-planned complex of cutting-edge airports, ports, modern office high-rises, comfortable housing, schools and hospitals offering quality service, tourist and recreational facilities and other services.

But reality is far from that.

If free economic zones can be said to befit their vision of the centerpiece of international business, they are required to induce foreign direct investment, among others, as much as possible. Foreign direct investors build factories in the zones, employ local residents, produce and export goods, pay taxes to the government, thus contributing to the economic development of both the local community and the whole nation.

According to the Ministry of Knowledge Economy and the Planning Office of Free Economic Zones, foreign direct investment in six free economic zones from 2004 to the first quarter of 2012 amounted to $4.11 billion. The nation’s total foreign direct investment reached $98.41 billion over the same period, meaning the six zones took up a mere 4.47 percent of the country’s total foreign direct investment.

In the case of the Incheon Free Economic Zone, which boasts the fastest pace of development among the six, foreign direct investment as of late April 2012 amounted to $2.7 billion, or 50 percent of all the zones. The Busan-Jinhae FEZ chalked up $1.32 billion and the Gwangyang FEZ $700 million. The remaining three zones marked poor performances.

The six zones have shown little progress not only in light of the absolute investment amount, but also in inducing high tech, high value-added companies. As of 2011, they attracted just five foreign research centers.

The government sought to ease regulations by revising the related laws on many occasions and offering various incentives in a bid to activate foreign direct investment. But the global economy is still in shambles after the financial crisis in 2008.

Restructuring projects, slashing areas

As a result, the pace of inducing foreign direct investment into free economic zones slowed, prompting the government to take decisive action last year to restructure the zones drastically.

The free economic zone committee of the Ministry of Knowledge Economy decided on Nov. 24, 2011 to curtail as much as 71 percent of the Yellow Sea FEZ area. It was the highlight of its yearlong restructuring drive for the six zones. The Yellow Sea FEZ made no progress at all in development for three years after the five districts in Gyeongsang and South Chungcheong provinces on a combined 55 square-kilometer area were designated in May 2008. Its area was slashed to 15 sq. km. In March of the same year, the panel snipped large portions of the other five zones. Under the restructuring drive, the total area of the nation’s six free economic zones was reduced by one-fourth from 578.3 sq. km to 438.7 sq. km. The number of unit project districts in the six zones was cut from 93 to 85.
A water taxi cruises round Songdo Central Park in Songdo International City. (Incheon FEZ) A water taxi cruises round Songdo Central Park in Songdo International City. (Incheon FEZ)

The area of the leading FEZ in Incheon, west of Seoul, shrank from 209 sq. km to 169 sq. km, Busan-Jinhae FEZ saw its area decrease from 104 sq. km to 83 sq. km, Gwangyang FEZ from 92 sq. km to 85 sq. km, Saemangeum FEZ from 66 sq. km to 50 sq. km, and Daegu-Gyeongbuk FEZ from 39 sq. km to 34 sq. km.

Experts and local media attributed the retrenchment of the zones in the middle of their project periods to a confluence of many factors. They included too many designations made as part of election-year populist pledges, a meager performance in the attraction of foreign direct investment, the worsening of economic conditions at home and abroad, and stagnancy of the real estate business.

The weak performance was, to some extent, predicted as political reasoning intervened in increasing the number of free economic zones in a small country from three to six in 2008, apparently with voters on mind when the presidential election was held, they say.

To make matters worse, Incheon in fiscal woes

Incheon, which hosts the nation’s No. 1 FEZ envied by the other five zones with some benchmarking it, is in severe financial trouble. Fiscal difficulties stemming from lavish projects have stopped Incheon from pushing ahead with large construction and international events.

Incheon is working on painful self-help measures including the sales of assets in its possession.

Some time ago, Incheon was very lively with large development projects in and around three Incheon FEZ districts ― Songdo, Cheongna and Yeongjong. But nowadays, real estate sales and leases in the zones are in a business setback. This is especially the case in the Yeongjong and Cheongna districts, where quite a few apartment complexes reportedly suffer from a shortage of convenience facilities.

Presently, Incheon Metropolitan Government is mired in debt, with its amount marking 2.7 trillion won and the ratio 40 percent.

At last, the city unveiled a package of measures to overcome financial difficulties late last month, which call for the disposal of city-owned properties, a two-year postponement of a city train project and appeal for the central government to give aid to the preparation for the 2014 Asian Games to be hosted by the city.

Additional designation issue

In the midst of this, the government still seeks to designate more free economic zones by the end of this year. Four provinces ― Gangwon, Gyeonggi, South Jeolla and North Chungcheong ― have made offers.

Critics say it is impractical to push for additional designations at this juncture when the existing zones saw their areas cut down due to low performance and a stagnant business. But as the matter of designating new zones takes on the nature of a regional policy issue ahead of the presidential election late this year, pressure to name additional zones is piling up from political circles and provincial governments.

All four provincial governments that seek additional FEZ designations this time failed to pass the qualification evaluation last year, and later resubmitted proposals.

The government originally scheduled an FEZ committee meeting on additional designation for May 22, then put it off to June 8 and again postponed it indefinitely. And speculation mounted that the plan itself for additional designations may have been scrapped, prodding the four provincial governments into calling for immediate deliberation and designation as scheduled.

Gangwon and North Chung­cheong, among others, strongly protested the postponement.

“The designation of the East Sea FEZ is a crucial project directly related to the living of Gangwon residents. It cannot be delayed any longer,” Gangwon Gov. Choi Moon-soon said. “Gangwon residents will never endure if they are ignored and denied a chance merely because the existing zones are in a slump, even though the province is qualified to be designated.”

Some news media say that Gangwon may worry about other provinces being designated after a long delay due to a political consideration in the election year. The province seeks to create a 14.67 sq. km FEZ out of five districts in three coastal cities ― Gangneung, Donghae and Samcheok. According to Gangwon officials, it has concluded a memorandum of understanding worth 41 trillion won with 32 companies for the province including the planned FEZ.

“I cannot hide my disappointment at the indefinite postponement of the FEZ committee meeting,” North Chungcheong Gov. Lee Si-jong said. “I will try hard together with Gangwon for the meeting to be held this month.”

Gangwon and North Chung­cheong have high expectations for additional designation, as they topped 60 points, the quantitative evaluation criterion.

Experts say that it will be difficult to argue against additional designations when the provinces make a point of the need for balanced or fair regional development. Regional residents have no reason to oppose FEZ designation, which is certain to boost the prices of their land.

However, they point out that the issue of free economic zones should be approached from a macroeconomic perspective with focus on the national economy, rather than from the logic for a balanced regional development.

“Free economic zones are like a window between Korea and the world. Current problems regarding the zones do not stem from slack of incentives or policies, but from general recession at home and abroad,” Jang Yoon-jong, director of Center for Growth Engine of Korea Institute for Industrial Economics, said.

“The government should decide first if it will develop additional FEZs as a kind of global business hub or as a regional policy.”

The designation problem should be closely studied in light of the possibility of large investments and the feasibility of projects, and especially difficulties in domestic and global economies should be taken into account, he added.

“Regulations should be drastically eased for FEZs and the government should strengthen a selection and concentration policy by canceling the inappropriate designation of districts,” Jeong Hyung-gon, head of the East Asia cooperation team of the Korea Institute for International Economic Policy, said at a recent hearing.

By Chun Sung-woo (