Prying Open Pyongyang

For two decades, South Korean entrepreneur Kim Cheul Young has struggled to keep his manufacturing business from unraveling. Kim's company, Sunghwa Trading, makes socks for familiar Western brands including Calvin Klein and Gap. His is a business that competes on cost and not much else, which is why the majority of the world's sock supply comes from countries such as China and Vietnam where labor costs are low. Five years ago Kim opened a factory in Qingdao in northeast China to combat intensifying competition from Chinese garmentmakers, but that move wasn't enough to keep his profit margins from eroding. In 2005, he grabbed for an economic lifeline: he became one of the first investors in the Kaesong Industrial Complex, a special economic zone in North Korea that lies just across the Demilitarized Zone (DMZ), 50 km north of Seoul. Kaesong is a symbol of South Korea's so-called "Sunshine Policy,'' the effort of the country's past two Presidents to draw the North and South closer through greater economic ties. For low-tech companies such as Sunghwa, that policy seems to be paying off. "If you ask me where I think 100% of my company's production will be 10 years from now," says Kim, "I'd say North Korea."

Kim's prediction would have once been laughable. After all, North and South Korea are still technically at war, and in the autumn of 2006 Pyongyang's insular regime defied the world by testing a nuclear bomb. But since February 2007, when North Korean dictator Kim Jong Il struck a deal with the U.S., Japan, Russia, China and South Korea to begin dismantling his nuclear program in exchange for aid and normalized relations with Washington, there has been a burst of cooperation between the two Koreas. In mid-December, a direct rail link opened between Seoul and the Kaesong Industrial Complex across the DMZ in the North, and work continues on a variety of other infrastructure projects, including extending the rail line all the way to the North's border with China. Not even South Korea's newly elected President Lee Myung Bak, a political hard-liner when it comes to dealing with Pyongyang, seems willing to break the increasingly warm embrace. "If North Korea opens up, and proceeds to dismantle its nuclear program, the South Korean government can increase and deepen its economic cooperation with the North,'' says Kim Tae Hyo, a professor at Sungkyunkwan University and one of the President-elect's chief advisers on North Korea. According to Kim, Lee wants to "pave the way'' toward eventual reunification of the two countries, in part by pouring an additional $10 billion in investment into its destitute neighbor over the coming 10 years.

Indeed, when Lee is inaugurated next month, he will assume office at a crucial time for the Korean peninsula. In October, outgoing South Korean President Roh Moo Hyun met in Pyongyang with Kim Jong Il, marking just the second inter-Korean summit ever. The North may also be on the brink of a historic peace agreement with the U.S. — one that President George W. Bush, in his last year in office, appears to want desperately in order to shore up his controversial foreign-policy legacy. A deal between Washington and Pyongyang — predicated on the North verifiably giving up its nuclear-weapons program — would open diplomatic relations between the two countries for the first time since the Korean War, and prompt Washington to remove North Korea from its list of states that support terrorism.

Should North Korea shed its pariah status, many South Korean businessmen believe Lee, a former CEO of Hyundai Engineering and Construction, one of South Korea's largest companies, will push aggressively for closer commercial ties, for the simple reason that it makes economic sense. The North is seen by executives as a potential bulwark against Chinese competition because it offers cheap labor, access to relatively untapped natural resources, lower transportation costs, and shared culture and language. "For the South Korean economy, it's a win-win situation," says outgoing Minister of Unification Lee Jae Joung.