Special economic zones -- whatever they are called -- are supposed to offer incentives unmatched by other areas, thus inducing enterprises -- especially foreign ones -- to make investments there.
There are about 200 such zones in Korea, under various names like free economic zones, free trade areas, foreign investment zones, corporate cities, innovation cities and R&D special zones. Sadly, none of them perform the roles they were entrusted to do, having only become a byword for inefficiency and waste.
The dismal situation was verified by a report recently released by the Korea Economic Research Institute, which surveyed firms doing business in the nation’s eight FEZs.
The report found that the Korean FEZs ranked sixth among nine Asian countries in terms of overall business environment. Moreover, the Korean zones were rock bottom in key areas that determine the competitiveness of such institutions -- government regulation, administrative services, employment conditions, labor relations and tax incentives.
The government statistics throw up another troubling fact. Foreign direct investment in the eight FEZs from 2003 to 2014 stood at $5.15 billion. This accounts for only 14.4 percent of the total investment the whole country attracted in the same period.
From a broader perspective, the number of foreign-invested firms that settled in the FEZs, free trade areas and foreign investment zones from 2004 to 2014 was 749, which is 6.9 percent of the total 10,914 firms that invested in the country. In terms of investment volume, only $20.3 billion or 21.2 percent of the total $95.7 billion went to the special zones.
Simply put, the special economic zones are not doing the job they were created to do. The reason is obvious: First, the successive administrations competed to designate special zones out of populism and under the pretext of regionally balanced development. As a result, one zone after another popped up in recent years.
Many of their functions overlap, with few of them providing distinctive incentives, production factors and administrative services to lure investors. Lax and bureaucratic management of the zones scattered across the country worsen the waste of taxpayers’ money and administrative resources.
Growing criticism forced government officials to draw up measures to address the problems. Related government ministries have enlisted five think tanks, including the Korea Institute for International Economic Policy and the Korea Institute for Industrial Economics and Trade, to find a solution to the problems of the economic zones.
The reform proposals should provide effective measures for streamlining the economic zones, such as bold mergers and shutdowns. Then the government should be ready to brace for a backlash from local residents and politicians.
One cannot but be skeptical, however, about the government’s determination. We say this because while announcing its plans to overhaul the existing zones, the government unveiled plans to designate a new group of zones. The latest plan calls for establishing two “regulation-free zones” in each of the 14 major metropolises and provinces.
It would have been more sensible and persuasive if the government streamlined the existing ones first before adding a new set of zones to the already packed field.
