Korean Unification Only Looks Tidy In Print

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The Economist applies the example of German unification to the Koreas‘ Sisyphean task. Drawing on the two courses open to it, massive handouts or immigration, the weekly recommends Seoul split the pain and the difference.

If the Koreas reunified, the government would face a stark choice. It could try to fill the gap in living standards between North and South, through handouts, public investment and subsidies. Or it could brace itself for heavy migration, as poor Northerners moved to the South in search of higher wages.

Germany leaned towards the first option. East German Ostmark wages were converted into West German D-marks at a rate of one to one, then raised by union pressure closer to Western levels. This allayed fears that migrant workers would flood into the West, or that capital would flood out. But it also deterred private investment in the East—except for heavily subsidised property speculation which ultimately failed—and priced many of its workers out of the market.

Michael Funke of Hamburg University and Holger Strulik of the Leibniz University in Hanover are two of the many economists who have studied Germany’s reunification. In 2005 they used the same framework to model the Korean case. Their calculations (which they describe as “rigorous speculation”) illustrate the scale of the problem. To equalise the standard of living in both parts of the country would initially cost over half of the South’s tax revenues. The government could reduce the fiscal burden to 30% of revenues, but only at the cost of receiving 8m migrants, the two economists estimate.

The government could, of course, spread the cost over time by borrowing abroad: there is no reason why today’s Koreans should pay the full cost of reunifying their country. And in principle, North Korea’s productivity might catch up with the South’s quite rapidly. Because capital is scarce in the North, returns should in theory be high. Investors will be drawn to its promising location, its raw materials and its workers, who are young, reasonably well educated and cheap. (Many South Korean and Chinese firms have already taken the plunge. Hyundai Asan and Korea Land Corporation, for example, run the Kaesong Industrial Complex a few miles inside the North. It hosts 116 factories, employing 40,000 North Koreans, producing over $20m-worth of textiles, chemicals, electronics and other goods a month.)

50%? 30%? Am I the only one who predicts riots in Seoul’s streets? I can foresee a future where Kaeseong figures a bit higher, if only to hide the problem form the South Korean public. And, borrowing from foreigners to finance Korea’s sacred mission? It’ll never happen.

Another ironic conclusion from the article is, that, based on refugee testimony, North Koreans already rely heavily on illicit markets to make ends meet.

Despite North Korea’s obstinate commitment to central planning, the market is growing like a vine in the cracks of the socialist edifice. In their new book, “Witness to Transformation”, Stephan Haggard and Marcus Noland document this market reform “from below”, drawing on surveys of refugees in South Korea and China. They find that 62% of the refugees in China had relied on the market as their primary source of food; only 3% relied on the state. And almost 70% of the refugees said they got more than half of their income from some form of private enterprise, such as selling crops or repairing bikes.

The shocker for a center-right newspaper is, that The Economist recommends Pyongyang keep central planning and reintroduce its public distribution system. Unification will take an ideological suspension of belief on all sides, and no one will be immune from pain. This is undoubtedly why my wife and her family vehemently oppose unification. I can’t blame them. I can foresee nothing but a hash of ad hoc policies, crises, and public outrage after a hangover caused by unrealistic expectations.

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Filed under: Business/Economy, Korea, Subscriptions Tagged: dprk, germany, rok, unification


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