United Korea Could Dwarf Even Japan by Mid-Century

[Frodo]

Study Sees Gains in Korean Unification

SEPTEMBER 21, 2009, 9:37 P.M. ET 
By EVAN RAMSTAD

SEOUL -- A united South and North Korea could boast an economy larger than France, Germany and possibly Japan by the middle of the century, according to a Goldman Sachs Group Inc. study that challenges conventional wisdom about unification.

Since the reunification of West and East Germany 20 years ago, South Korean leaders and economists have convinced many people here that reuniting with North Korea would be costly and disruptive. In the latest gloomy forecast, a government think tank last month said the tax-burden ratio, or proportion of tax revenue to gross domestic product, would need to rise by two percentage points and stay at that level for 60 years to pay for unification.

In the study released Monday, Goldman Sachs economist Kwon Goo-hoon says the risks of unification need to be reevaluated, particularly after the rapid development of countries such as Vietnam and Mongolia that had state-run economies like North Korea's.

His study contains North Korean data that he acknowledges may not be accurate and assumptions about future behavior that may not pan out. Even so, its tone is more optimistic than previous studies that contributed to South Koreans' ambivalence about unification.

Officially, the governments in both Koreas say they want to unite but both also want to lead the united country. Despite two summits and numerous lower-level interactions, the two governments have made no serious attempt to reconcile their conflicting desires. For now, most analysts believe the only likely trigger for change is the prospective economic collapse of North Korea, one of the world's poorest countries.

Mr. Kwon said he long believed that unification would be too costly for the South. He based that view largely on what happened with newly united Germany, where the currencies were quickly equalized, the border opened and huge transfer payments made from the former West to the former East Germany.

"People always look at Germany when they discuss unification of the Koreas, but if you look at China and Hong Kong, or more properly Eastern Europe, Mongolia or Vietnam, you see there are better ways of doing this," Mr. Kwon said. "I think it's a matter of education and dialogue."

In March, a Bank of Korea report said Hong Kong's gradual integration with China and France's handling of its former colonies after World War II were better models. Both that study and Mr. Kwon's suggest the two Koreas maintain separate currencies and restrict crossings at the inter-Korean border, perhaps for decades as the North's currency appreciates and its people grow wealthier.

Mr. Kwon's study goes further by suggesting that the North's huge growth potential could help offset the slowing growth of South Korea, burdened by limited natural resources and a fast-aging population. North Korea has huge mineral deposits and a population that is younger and growing twice as quickly.

Using long-term forecasts Goldman Sachs has previously published for industrialized countries, Mr. Kwon concluded that the gross domestic product of a united Korea would be the world's eighth-largest in 2050 at $6 trillion, surpassing France around 2040 and Germany and Japan later that decade.

Today, South Korea's GDP is about $800 billion and North Korea's is believed to be around $20 billion, though no data has been collected in the North since the 1960s. Some economists say they believe its output is considerably less, while others note that most estimatesleave out the North's well-known illicit activities such as producing narcotics and counterfeing currency.

Nearly all previous economic reports on Korean unification focused on the costs that South Koreans will face, and ignore or play down investment and business opportunities that may arise.

"It has been said in South Korea that the country cannot afford nor manage unification," Mr. Kwon said. "The flip side of that equation is that with the proper policy incentives for those in the North, a win-win scenario through investments is possible."

Recent surveys show unification will be a hard sell in South Korea. In one done by the state-funded National Unification Advisory Council in March, only 45% of respondents said unification is very important.

—Jaeyeon Woo contributed to this article.
Write to Evan Ramstad at evan.ramstad@wsj.com

[ag]

The best estimates I've seen say that NK economy is far less than 5% of the SK economy. United Korea's GDP numbers would be nearly indistinguishable from South Korea's: for all practical purposes NK GDP is zero. This guy is dreaming about the hypothetical future.

[Verily]

The only "positive" for South Korea in unification would be an immediate source of extremely cheap labor that would make its exports extremely competitive on the international market. But that cheap labor would of course come at the expense of jobs for current South Koreans, and of course the former North Koreans would quickly demand equal pay.

The cost of fixing infrastructure problems in North Korea, educating the populace, etc. would be far higher than any benefit, at least in the short- and medium-term.

[phk]

North Korea would put an even bigger strain on South Korea than East Germany did to West Germany.... which basically holds to what Verily and ag already said.

[jokerman]

The best estimates I've seen say that NK economy is far less than 5% of the SK economy. United Korea's GDP numbers would be nearly indistinguishable from South Korea's: for all practical purposes NK GDP is zero. This guy is dreaming about the hypothetical future.

50 years ago North Korea had a higher GDP per capita; it was the more advanced region of Korea.  Obviously that current estimate of GDP doesn't remotely reflect upon potential output.  So what's so inconceivable about it?

[Psychic Octopus]

United Korea could be a very powerful nation. I support unification, and fear a rogue Korea.

[Ban my account ffs!]

I find this very hard to believe.

Korea has the potential to develop into a key player on the global economic scale.. but they won't overtake Japan.  Japan is lightyears ahead of even South Korea in quality of life.

Ultimately, it might be good for North Korea to institute reforms on its own and begin growing its infrastructure and educational system through international cooperation, and then unify the two nations into one when the playing field is a bit more even.

[dead0man]

East Germany in 1991 was a lot better off than N.Korea is in 2009.  W.Germany was better off in 1991 than S.Korea is in 2009.  I don't see a peaceful reunification any time soon.  A loud one maybe.

[ag]

The best estimates I've seen say that NK economy is far less than 5% of the SK economy. United Korea's GDP numbers would be nearly indistinguishable from South Korea's: for all practical purposes NK GDP is zero. This guy is dreaming about the hypothetical future.

50 years ago North Korea had a higher GDP per capita; it was the more advanced region of Korea.  Obviously that current estimate of GDP doesn't remotely reflect upon potential output.  So what's so inconceivable about it?

Joint population of both Koreas is barely over half of that of Japan. But that's just the start. The 20+ mln. of North Koreans are, for all practical purposes, almost unemployable in the South Korean society (a staggering proportion of the Northern refugees in the South is, in fact, unemployed). South Korean economy dominates its Northern counterpart so completely, that very little of whatever activity is there in the North now is likely to survive. The bulk of the educated NK class (with some natural exceptions) will be immediately demoted into economic marginality upon unification: it is hard to imagine almost any Norhtern soldier/doctor/bureaucrat/teacher/manager etc., etc. who is over 25 or 30 years of age at unifcation attaining a social status anywhere near that of his/her Southern colleague.  Cheap - and very poorly qualified for the modern world - labor, some mineral resources, wood, a few natural wonders for tourists - I can't see much more than that in NK in the nearest decades. The South would be paying humongous subsidied to the North - and the north would be continuously resenting the rich South - for eons to come.

Perhaps, once the unification generation gets old and the post-unification generation dominates the labor force some degree of equalisation would be achieved. But even then Korea would remain a smaller country compared w/ Japan.

[2952-0-0]

The best estimates I've seen say that NK economy is far less than 5% of the SK economy.
Joint population of both Koreas is barely over half of that of Japan. But that's just the start. The 20+ mln. of North Koreans are, for all practical purposes, almost unemployable in the South Korean society (a staggering proportion of the Northern refugees in the South is, in fact, unemployed).

Just 30 years ago China was where North Korea is today. Then this man named Deng Xiaoping decided to set aside a couple of Special Economic Zones where foreign investment (mostly Hong Kong and Taiwan) would be permitted. The rest is history.

Perhaps Korea could unite on paper (unified UN seat, unified military) while having two autonomous halves: a rich, capitalist south and a poor and opening-up north. The north will set aside border areas where South Korean and Chinese investment will be easily allowed. Over 30 years North Korea will be where China is today. It's a bigger version of "One Country, Two Systems". And once the two halves are ready to abolish "One Country, Two Systems", they do so.

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They said Deng Xiaoping's experiments would go nowhere far. But I agree with the other part: I've heard of plenty of stories of professional researchers/doctors abandoning their jobs to work as a lowly secretary in Shenzhen for three times the pay back in the 1980s.

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Maybe "One Country, Two Systems" will resolve this. Hong Kong is much smaller and much richer (and much freer) than China itself, yet HK taxpayers are not burdened with paying massive aid to the north. Once upon a time, HKers were resented in the North for being infinitely wealthy and contaminated by western ideals. Now, that is not such a problem thanks to the billions of investment at stake.

[I spent the winter writing songs about getting better]

North Korea has a GDP of about $40 billion, South Korea has around $937 billion, together that's almost a trillion. Japan's is over $4 trillion. Not happening, especially since the North will be just a drag.

[GMantis]

United Korea could be a very powerful nation. I support unification, and fear a rogue Korea.

How could be an United Korea a threat, when they're smaller and millitary weaker than their immediate neighbours?

[ag]

Perhaps Korea could unite on paper (unified UN seat, unified military) while having two autonomous halves: a rich, capitalist south and a poor and opening-up north.

Perhaps. And, perhaps, I will fly one day to Mars.

How do you imagine this? The country has "united on paper" means there is some contact between the halves and the Northerners realize that they are dirt poor: poorer than the South's poorest. What will be that force that keeps them North of the present-day DMZ and content with their "autonomous" leadership? I give this set-up, once it is attempted, at most 6 months, after which there is a revolution in the North with "autonomous" leaders hanging from some of the conifers NK is so rich in and the revolutionary government requiring immediate 'true" unification, while the "unified" military in the DMZ faces the refugee mob streaming South.

[ag]

Maybe "One Country, Two Systems" will resolve this. Hong Kong is much smaller and much richer (and much freer) than China itself, yet HK taxpayers are not burdened with paying massive aid to the north. Once upon a time, HKers were resented in the North for being infinitely wealthy and contaminated by western ideals. Now, that is not such a problem thanks to the billions of investment at stake.

Because China is dominated by the poor, but militarily powerful and dictatorial mainland. HK political system decides nothing here, and Mainland's political system is ruthless enough. Anyway, HK is tiny: realistically, dissolving it in China wouldn't much affect the day-to-day life of the Chinese.

Korea, hopefully, would be dominated by the rich and democratic South, which, in your scenario, would have to take a conscious decision to keep the Northerners (roughly a third of the combined population) desperate and unrepresented in the political and economic system. Any elected  NK gov't would request immediate "true" union. Any unelected such gov't that doesn't would have to be a strong, very ruthless and bloody military dictatorship to stay in power. Mind it, even if you could explain the Northerners that "in the distant future" your plan is meaning smell of roses, in their actual lifespan they'd have to sacrifice enormously: being poorest of the poor in united Korea would, for most North Koreans, mean a much better life than what they'd be having in the delay scenario.

[ag]

United Korea could be a very powerful nation. I support unification, and fear a rogue Korea.

I think I can find about a 1000 things that would worry me before this one shows up on the horizon.