Fri, Dec 23, 2011 - Page 9 News List

Reunifying the two Koreas threatens either financial ruin or chaos

The German model of swift integration is one precedent, but it could prove expensive, while a Hong Kong-style gradual assimilation would require tough migration controls on people heading south and investment flowing north

By Emily Kaiser  /  Reuters

Illustration: Mountain People

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 US$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 e-mailed response to questions.

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.

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 last month to consult on reunification.

However, 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 percent 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.

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