Time for fresh look at unification economics
Nicholas Eberstadt
Ever since the collapse of the Soviet empire and the end of the Cold War, South Koreans have been worrying about the economic costs of an eventual unification with the North.
The scale of social outlays and debt accumulation in Germany’s reunification in the early 1990s frightened observers in the South. Seoul’s emergency IMF bailout loan during the Asian financial crisis of 1997-98 reinforced the notion that South Korea’s economic success was too fragile to bear the burden of their impoverished Northern cousins.
But a lot has changed over the generations since South Koreans stopped thinking seriously about the economics of reunification.
For one thing: we now know, without a doubt, that the longer unification is postponed, the bigger the gap between North and South will be — and the greater the ultimate task of making the two Koreas one.
Trade patterns based on reports from partners — the only reliable data we have on Pyongyang’s economy — illustrate the diverging fortunes of the two Koreas. South Korean exports have been soaring since the 1960s, while North Korea’s share of global exports continues to shrink.
That growing North-South export gap speaks to striking differences in competitiveness and economic capability. It is a proxy for all the other widening inter-Korean socioeconomic gaps.
Nobody still believes the Kim family regime will somehow, someday, reform its system. Consequently, continued division of Korea promises an even greater chasm between the two Koreas in the future.
Second: it is by now obvious that North Korea’s poverty is the predictable consequence of three generations of extraordinary misrule by a worst-in-class dictatorship — rather than defects of the Koreans trapped under their control.
The Kim family regime is the architect of the most extraordinary economic failure of modern times. It managed to “achieve” the near impossible — to mastermind the only mass famine ever experienced in recorded history for a literate, urban population in peacetime.
According to the widely cited Index of Economic Freedom, North Korea’s “business climate” is dead last globally — and has been since 1995, when the index commenced. Is anyone surprised that the government with the world’s worst practices and policies also has the world’s worst economic record?
Don’t blame Pyongyang’s miserable performance on the North Korean people. They are the regime’s main victims: and with a slightly different roll of the historical dice, many in today’s affluent South might have ended up as impoverished Northern cousins themselves.
Third: unification will clearly be a huge undertaking — but if the returns on that investment are high, the project can basically pay for itself over the long run.
Outlays for unification won’t be “helicopter money.” Rather, they will be investments in a vast and complex long-term project. Rates of return will make the difference between whether or not unification is “affordable.”
The trick is generating high rates of return — and keeping them high. Obviously, this is easier said than done. But it is the heart of the matter. With high enough rates of return, even a mega-project can basically pay for itself.
Finally: thanks to decades of market-led development, South Korea and the international community are richer and more productive than ever before — better poised to mobilize and deploy the immense amounts of capital and know-how a successful Korean unification will surely require.
When they discuss unification, South Koreans often talk as if theirs is a poor country. That was true — once upon a time. Not today.
UBS Bank estimates South Korea’s private wealth-holdings in 2022 at nearly $10 trillion. That would put the South in the world’s top 10 countries for total private wealth — and would mean that wealth per adult is now higher in South Korea than in Japan.
Surprising as this may sound, a sudden “big bang” unification of the Korean Peninsula would leave the peninsula a richer place today, in terms of inflation-adjusted wealth per adult, than was Germany a decade after its reunification.
South Koreans have far more economic and financial resources for unification than they are accustomed to imagining. And don’t forget all that private capital sloshing around the world, looking for attractive projects to invest in.
Markets around the world fund over $35 trillion in foreign direct investment — and another $70 trillion in portfolio investment.
There is plenty of private money out there — for attractive investments. Making the economic reconstruction of the North an attractive proposition for all involved, consequently, looks to be absolutely central to the success of the venture.
Even a peaceful reunification of the peninsula promises to be a daunting proposition, fraught with uncertainties. We cannot know how or when the opportunity for Korean unification will present itself, whether the free and peaceful scenario will come to pass, or decidedly less pleasant variants instead. But Korean unification is “unthinkable” only so long as people fail to think about making it work.
Nicholas Eberstadt holds the Henry Wendt Chair in Political Economy at the American Enterprise Institute (AEI) in Washington DC. He is a founding director of the US Committtee for Human Rights in North Korea (HRNK) and a senior advisor for the National Bureau of Asian Research (NBR). His many books and studies on Korean affairs include "North Korea's Epic Economic Fail in International Perspective" and "National Strategy for Countering North Korea".