Tuesday, March 16, 2010

Forbes on the manageable cost of Korean unification

Forbes has an interesting op-ed piece that addresses the costs of Korean unification, which it paints as a prudent thing to consider given the turmoil that's been going on in the DPRK lately. In fact, the first part of the essay seems to have taken a page out of my blog and Joshua's blog regarding how far-reaching have been the effects of the Great Currency Obliteration/Confiscation of 2009:
Although the new won's value was pegged at 100-times the old won, the amounts of won that could be exchanged as well as the time period (48 hours) for the exchange were sharply restricted. It's doubtless that some of the ruling elite in the military and government apparatus were severely affected by these confiscatory measures. Their loyalty to Dear Leader Kim Jong-Il's rule may be diminishing as a result.
Indeed, I wrote last year:
In other words, movement (but not "a movement") at the local level that could contribute to a critical mass of dissent, whatever point that is. That critical mass itself may have been reset as local party cadres have seen the rug pulled out from under them. To put it another way, at what point will they become East German border guards who do not shoot at people trying to get over the wall... or into the storehouse, or out of the prison, or whatever.
In other words, those middle-level party cadres who run the show outside of Pyongyang suddenly have a lot less stake in keeping the regime going.

But the issue at hand is the costs of unification, not the prospects, and Forbes points out how inherently questionable the various estimates are:
The principal explanation for the widely varying estimates ["ranging between less than $100 billion, and more than $4 trillion"] is the economic goal specified for reunification. A secondary explanation is the relevance (or irrelevance) accorded Germany's precedent.

Most of the prior estimates assume that the goal of reunification must be equalization of per capita GDP between North and South Korea. Data for North Korea range between unreliable and apocryphal. However, a reasonable estimate of per capita GDP in the North is perhaps $700, in South Korea about $20,000. The North's population is 24 million, South Korea's 48 million, according to the latest census. Linking these disparities to a goal of raising per capita GDP in the North to that in the South, and assuming a medium capital requirement of $4 per unit increase in North Korea's GDP results in estimated reunification costs of $1.7 trillion.
That's a mighty big number, but Forbes suggests that perhaps the goal itself is too costly, and unnecessarily ambitious:
If a more modest goal is adopted focusing on dramatically increasing per capita income in the North---say, by doubling it within 5 or 6 years---instead of equalization with the South, the cost burden decreases sharply to $62 billion. The goal and the resulting reunification costs are both more modest and more feasible. Arguably, the reassuring experience of a tangible doubling of living standards in the North, combined with the forbidding uncertainties that would attach to possible emigration, are also likely to minimize southward refugee flows.
Let's hope that's the case. A large influx of displaced workers flowing into South Korean cities can lead to many of the social problems China is facing today. The op-ed piece goes on to dismiss the German example as being immaterial to the Korean case:
The costs of Germany's reunification are both frequently cited, and largely irrelevant. This is because the economic policies adopted by the West German government after the Berlin Wall fell in 1989 simply decreed for immediate political reasons that wages, pensions and other entitlements for East German citizens must equal those in West Germany. Germany committed itself to paying the bills. They continue to arrive, currently totaling $3 trillion and still counting.

To be sure, adopting the more modest but still ambitious goal of rapidly doubling per capita GDP would leave a reunified Korea with sharp disparities between North and South. How far and how quickly Korea would move toward reducing these disparities would no doubt be a top priority of the Korean state. Still, there are many instances of countries and governments that have faced large economic, political, and social disparities while functioning with tolerable stability and effectiveness. These instances include Belgium (the Flemish and Walloons), Italy (prosperous Piemonte and poorer Mezzogiorno), Indonesia (in Ambon) and the United States (California and Mississippi).
Definitely some food for thought.

As the problems faced by a unified Germany mounted in the post-Soviet era, the prospective costs of Korean unification emerged among South Korean citizens as the principal factor behind a growing pessimism about a rejoining of North and South. Some believe it became a reason for forestalling unification by the Kim Daejung and Roh Moohyun administrations, though I don't know how strong such a case can be made.

Because ultimately, in the end, unification is going to happen when it wants and how it wants, with little control or input by Seoul (or even Beijing or Washington) about the timing of the eruption. And when it happens, huge price tag or not, South Koreans are taking that item home with them. Seoul really has no choice. The best we can do is simply plan ahead and think of ways ahead of time to be prepared to provide services, treat people fairly, and work on building a better future for them, the price be damned.

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  1. FYI, that article was written by Charlie Wolf of the Rand Corporation. His specialty was developmental economics, including development in Asia.

    I interviewed him for my senior thesis on the East Asian Economic Crisis of 1997. A very smart guy. Doesn't make assertions lightly.

  2. The cost issue has always been the main concern as far as I can remember. This was always the topic in reunification discussions. However, as Kushibo pointed out, it's only a matter of time when it does happen and when it does, the other concern is the overcrowding of immigrants into the cities with jobs (mainly Seoul). That's why the Roh adminstration was working on moving the government epicenter to Daejeon and we have these new urban developments such as New Songdo and the rebirth of Inchon as a hub. As of now, Korea has such few cities to provide enough opportunities for talent. It's never too late in the game to start a long-range urban redevelopment plan to provide companies incentives to move out to different areas. And having just one big company won't do either (ie-POSCO in Pohang). Just look at Seoul during the major holidays...the streets are so empty. That's a scary thought to have one city attracting all the labor skill in the country. This will be the issue when you have NK immigrants. Where do you think they would go? I'm not so much worried that you have millions coming into the south..but a concentrated migration is the worry.

  3. I would rather SK limit movement between the two halves in the initial stage of unification. I don't know if I want to see Seoul, congested as is, be flooded with NKoreans.

  4. 7Ø7, I agree that something like that would be in order. They also need to insure that the peasants get ownership title over the land they're on so that they automatically have something of value. It will be a tremendous equalizer, but it also means that the North Koreans will have to be protected.


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