How to reunite Korea without going broke or causing chaos

If the death of Kim Jong-il hastens reunification of North and South Korea, the two long-hostile neighbors may be better served by a go-slow approach like Hong Kong’s return to China rather than Germany’s swift union.

Knowing when or if the two might be rejoined is impossible, and modeling the costs and benefits is not much easier. The paucity of data from North Korea means even the most basic assumptions on economic growth are guesstimates.

While unification still is a remote possibility, the leadership change in Pyongyang only intensifies speculation about it.

This much seems clear: reunification could lift millions of North Koreans out of poverty and boost average income by at least tenfold. But it would probably slow South Korea’s growth rate for a decade or more.

Estimates on what reunification might cost range from tens of billions of dollars to more than $1 trillion — roughly equal to South Korea’s annual output — depending on the speed and depth of integration. A relatively quick and extensive union, like Germany’s, would be far costlier than a limited re-engagement along the lines of Hong Kong’s return to China in 1997.

“Put crudely, the economics come down to the movement of Southern money north, or the movement of Northerners south,” Marcus Noland, a senior fellow at the Washington-based Peterson Institute for International Economics said in an emailed response to questions from Reuters.

A gradual, phased integration may be easier on paper than in reality. If reunification comes suddenly, like what happened after the fall of the Berlin Wall, it may be impossible to control the flow of people or money.

Swift integration is expensive
Germany is often cited and frequently studied as the obvious precedent. Like the two Koreas, East and West Germany were divided by war, political ideology and economic models. South Korean media has reported that German academics and former officials came to Seoul in November to consult on reunification.

But Germany’s model of swift integration may be prohibitively expensive for Korea. When the two Germanys reunited in 1990, East Germany’s population was about one-quarter the size of West Germany’s, while per capita income in the West was nearly four times higher than in the East.

North Korea’s population of 25 million people is believed to be about half of South Korea’s, while per capita income in the South is more than 17 times higher than in the North.

That means the cost of narrowing the gap between North and South would be enormous. Researchers at Washington State University and Sogang University found that a German-style reunification would mean that after 25 years, South Korea’s per capita GDP would be 20% lower than it would have been had the countries remained separate.

Goohoon Kwon, a Goldman Sachs economist based in Seoul, published research in 2009 arguing that a unified Korea could overtake France, Germany and possibly Japan in 30 or 40 years, and the cost could be manageable with the right policy choices.

“The least expensive option would be a China/Hong Kong-style integration, which allows two economic and political systems to coexist in a country with limited inter-Korean migration,” he wrote in the 2009 research note.

South Korean President Lee Myung-bak has promoted a form of integration that is more Hong Kong-esque than German, beginning with massive investment to upgrade North Korea’s rusting infrastructure to prepare the country for re-introduction into the global economy.

But accepting such largesse would undermine the legitimacy of the North Korean leadership, something the late Kim was loathe to do and his young son, the “Great Successor” Kim Jong-un, would most likely reject as well.

Is it worth it?
For impoverished and malnourished North Korea, any type of reunification would undoubtedly lift living standards. It is less evident how South Korea would benefit.

An influx of young workers might help ease demographic strains. South Korea is a rapidly aging society with by far the lowest birth rate among the 34 member countries in the Organisation for Economic Co-operation and Development.

But that may widen income inequality by pushing down wages for low-skilled South Korean workers while benefiting the wealthier who could employ cheaper labour.

North Korea has mandatory schooling through age 16, but it is hard to gauge how well educated its potential work force actually is.

Hyung Seok Kim of Sogang University and Seung Mo Choi at Washington State, who released a paper on reunification costs in October 2011, pointed out that East and West Germany had similar average years of schooling in 1990.

“But Western German workers had higher wages after reunification, implying that the education quality of the West was higher than the East, while the quantity may have been similar,” they wrote in an email to Reuters.

Mineral-rich North Korea could be a boon for the South, which imports nearly all of its mineral needs, according to Goldman’s Kwon. North Korea’s mineral resources, including magnesite, coal, uranium and iron ore, were valued at around 140 times its 2008 GDP, he said.

There is also the potential peace dividend. North and South Korea are technically still at war. The North Korean military absorbs an estimated 30 percent of GDP. The two countries combined have more than 1.8 million people serving in the military, out of a combined population of just 75 million.

Shrinking the military could put hundreds of thousands of people into more productive work, and might even help lift South Korea’s ultra-low birth rate.

“If you demobilize all those people, you do create the potential for a baby boomlet, along the lines of what you saw in the United States at the end of World War II,” said Robert Kelly, an assistant professor at Pusan National University in Busan, South Korea.

Stopping the rush
In an ideal scenario, a gradual and controlled integration would lift North Korea’s growth so dramatically that it more than makes up for the slowdown in the South. In other words, the whole would be greater than the sum of its parts.

If, say, 0.5% of North Korea’s population were permitted to migrate each year, they could conceivably be absorbed into the South Korean economy with little difficulty. Capping investment flows to the North would reduce the risk that South Korea is left with too little capital.

But a more rapid influx of immigrants could cause social strains. South Korean attitudes toward the North tend to vary by generation. Those who are old enough to remember life before the countries were divided tend to favour reunification and view the entire Korean peninsula as one. Those born later are likely to have less of an emotional tie, and may think the cost of supporting the North outweighs the benefit.

Pusan’s Kelly said grand ideas about controlling the flow of people and money would probably go out the window if the border were to open suddenly — if, for example, the North Korean government collapsed.

The sheer number of people who might want to leave North Korea would make it very difficult to control the movement without a massive occupying force.

“To keep 15 million people penned in, think about the police force you’d have to have,” Kelly said. “The emotional outburst when unification comes will make it very difficult to accomplish those phased, step-by-step transfers.” — Reuters

(Reporting by Emily Kaiser in Singapore; Additional reporting by Jonathan Thatcher. Editing by Dean Yates)

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