A Unified Korea Is Depressing

I had depressing conversations with several Korean economists about the possibility of eventual Korean unification. Unlike Germany, where the East was only 1/4 the size of the West, and where GDP/capita in the West was perhaps only double that of the East, North Korea’s population is over 1/3 that of the South, and the South has a GDP/capita over 10 times that of the North.

Even if it were ever politically possible, economic integration — difficult in Germany as it was — would be an economic mess in Korea. With a free flow of labor one could well imagine a huge Northern depopulation — as its relatively abundant low-skilled labor flows to the capital rich, high-wage South.

That’s not going to happen; but perhaps the model is already in place. The North Korean border city of Gaesung has been designated an industrial area open to Southern investment, with jobs being created for Northerners. If labor can’t flow, capital can, and that can equalize prices of labor in the two Koreas, raising living standards in the North. Assuming politics allow (always iffy here), there may be hope for economic rationalization without unification.


Karl

To poster #9.

I am a long-term resident of Korea, and I hear this argument all of the time; That Koreans only care about instilling a sense of humanity for their brothers in the North and not about the economics of it. Frankly, that's the problem. It's not cared about until it is too late and problems have already surfaced. Simply glossing over them doesn't make them disappear. It simply sets the stage so that when problems do appear the policies of the U.S. can be blamed as the cause.

On a separate note Gaesung gets a loot of good press coverage here, and I simply can't understand why. The same labor groups who decry multinationals for using cheap labor laud the work being done at Gaesung. The North Korean workers receive 25 cents an hour. I always like to imagine that the company employing those people was Nike rather than Hyundai or Samsung. Would the reaction be the same?

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kimchi2000

so what if there is an economic mess. people in north korea are dying. so what if people in south korea can't afford to buy bmw and prada anymore due to reunification. i think it's worth it even if the reunified means korea will be a 3rd country all over again.

Chuck

North's per capita income $2000? Nooo...

Gap between north and south Korea only 10 times?? Nooo...

North Korea is far poorer than even Vietnam. Statistics on North Korea are hard to come by in an isolated country such as North Korea, but try a per capita income of $200, which would be much closer to the truth. North Korea's wealth is more closely comparable to countries in Africa, rather than countries in Asia. Coupled with the fact that South Korea's per capita income of $25,000 in 2007, the spread is like 100 times - that would be more accurate.

JSL

Look, this post is reality. You can live in an idealistic world and tout humanity from a high horse in the comfy states, or in the "have's" world of Korea.

Because let's face it, if you are reading this post from Korea, most likely you are part of the "Have's" and not the "Have Not's". South Korea alone is living in an extreme economic divid.

The reality is if they unified it will absolutely be a mess. Is humanity at stake for North Koreans? Yes. There is no changing that reality unless you get rid of the ridiculous political faction that is residing over there.

Offensive? Do you want to do anything about it? Can you do anything about it? Nothing is going to happen until the political mess is taken care of so stop yappin and crying humanity and think about the ramifications of the "Have Not's" in South Korea. There are people over there being paid 25 cents an hour just trying feed their families. What will happen to them?

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D.J.

The South Korean economy is already in the crap hole. It has major structural economic issues that make it more vulnerable to regional economic volatility than its other East Asian neighbors. To name a few, there is the concentration of domestic capital among the three ch'aebols, the excessive foreign debt, regional development imbalance, and internal political instability (e.g. the absurd mad cow protests that crippled the nation and the presidential administration, which started over a grossly exaggerated TV network documentary), etc. The list goes on and on. I would imagine that once unification does occur, the unified Koreas would need at least another 15 to 20 years (and lots of foreign capital) to stabilize their economy.

From a purely economic standpoint, it seems as though it would be ideal if North Koreans fulfilled the growing need for immigrant labor in Japan. (Korean immigrants are said adapt quicker to the Japanese society than any other minority group.) However, given the current North Korean-Japanese relations and North Korea's colonial past, it is merely wishful thinking.

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European

Well, the burden for Germany was a bit larger than the estimates above, but the relative costs of a reunification for Korea would be certainly even larger.

West Germany had in the year before the reunification 62.6 million inhabitants, the East 16.5 million. Per capita income in the East was around one fourth of the West. And the reunification has cost the West until now an estimated 1.5 - 1.6 trillion euros ( $2.3 - $2.5 trillion ) over a period of 17 years. A comparable, population adjusted burden for the U.S. would be in the range of 11-12 trillion U.S. dollars or 650-700 billion per year ( a second defense budget ).

One of the major economic mistakes of the German reunification was the rapid opening of the East German economy for competitors from the West and the exaggerated, politically motivated exchange rate of 1:2 between the West Deutsche Mark and the East German DDR-Mark. Realistic would have been an exchange rate of 1:6 - 1:9. Both decisions have destroyed a lot of economic structures in the East which could have survived under other conditions. This has raised the costs of the reunification more than necessary.

Korea would be well advised if it would plan in a longer transition period of at least one or two decades until a full reunification. That would make a reunification less painful.

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Austin

Let's not forget that the North is relatively rich in natural resources whereas the South has precious few. This would almost certainly be a factor impacting economic integration after reunification, or at the very least normalized political ties.

Koreans I know (I'm an American living in Seoul) are very cognizant of the economic gap that divides the two countries. Some worry that althougth the South has a very strong economy (is it #13?) it is NOT stong enough yet to assist their comrardes north of the border.

Because it is currently relavant, watch out for a Korean film called "Crossing." It opened last month in Korea, and will likely show in the West later this year. As one previous commenter said, the West is pretty ignorant of the realities in the North. This movie exposes some of the harsh truths Kim Jong-il's people are dealing with.

Michael

Yes the view is bleak. Also as the time of separation continues the dying wishes (literally, as the older generation ages) of "unification at any cost" is being drowned out but the younger voices of pragmatism will lessening ties to those in the North.

Ben

Check out Doug Massey's work at Princeton on immigration policy in the U.S. He discusses the labor problem between the U.S. and Mexico and proposes solutions to it in a few of his papers.

His best example for comparison is when Spain was admitted to the E.U. Because the E.U. had implemented policies promoting capital investment in Spain, there was actually a net INFLUX of ex-pats and other workers TO Spain once the borders were opened.

Garbanzo

As Tucker alluded to, there is considerable outsourcing of low-end manufacturing to China and other lower-wage countries. The controlled way to reintegrate the Koreas may be to get that manufacturing back on to the Korean peninsula, which would help to narrow the earning gap between north and south. At the same time, immigration restrictions can be gradually loosened as not to shock the south's economy, but allow a sufficient flow of labor in their market to pick up low-skilled labors (much the same way that immigrant labor is used in the US). Would result in some pain to South Korea, but at a measured pace.

jim

This is not offensive. It's reality. There are 23 million people in North Korea. Average per capita income is around $2000 (if that). Average income in South Korea is 10 times that. There is virtually no modern industry, few people in the entire country have the basic skills needed to participate in a modern economy. Even the languages have started to diverge.

Look at all the problems the United States has with Mexican immigration. Mexico is a relatively modern country. American per capita income is around 3.75x that of Mexico (although the people most likely to immigrate are the Mexican underclass with smaller incomes... for the sake of argument, let's say their incomes are 6x smaller than the average in the US). From 1990 to 2000 there was a net inflow of about 600,000 illegal immigrants into a country with a population of 300,000,000. Now imagine 23 million poor and destitute people suddenly trying to become part of a relatively rich country with 49 million people.

The result would almost surely be chaos and tragedy. China has similar sorts of problems (rich cities, poor countryside) but they have dealt with them gradually over 30 years. And even today travel is officially restricted (people have city-based residence cards which restrict legal travel within the country).

Germany is not a good model. The East German economy while not up to western standards was relatively sound. And while the Western portion of Germany has send roughly 4% of it's GDP east year after year, and now after one trillion! euros of aid the East still lags behind the West. Importantly most East Germans stayed put after the wall came down. It would be hard to imagine that this would be true should the barrier at the 38th Parallel be erased.

If the North Korean regime should fail, the best solution for Korea will probably be to keep the countries separated for some time and integrate gradually with years of staggering amounts investment from the south into the north.

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Marie

This conversation reminded me of a question I've had for a long time. When we enter into Free Trade agreements, say with Mexico, we loosen restrictions on capital but continue to restrict the labor. That sounds similar to what is happening on the Korean border. In my intro econ class, I think I remember something about labor and capital BOTH being components of a market. How does restricting one and not the other create a free market? Doesn't it just create market power?

RR

Even politically, reunification cannot happen without solving the economic problem. South Koreans would not stand for it. The border would have to be enforced until income disparity can be reduced to 2-to-1 or thereabouts.

Lee

Don't forget that there is another country that was unified by force which is Vietnam. In this case it was the communist north that won and imposed its will on the other side. The social and economic costs were enormous and reached far beyond its shores. There are lessons to be learned even from the Chinese take-over of Hong Kong in 1997 and a "possible integration" of Taiwan. Unification based on shared or common culture is attainable and economic or political boundaries are of second importance.

Tucker

I'm a little disappointed in the cursory glance given to employment by a labor economist. Germany has such embedded parties in labor and capital markets in that (a) unions are very strong and raise the cost of hiring, (b) the industry is and has long been capital, rather than labor intensive, and (c) there is no political push for full employment. South Korea was built much more recently on labor intensive industry, doesn't have the same barriers to increasing the number of jobs, and so I hope the result would be that things made in China for the Korean market would instead be made in North Korea. It would almost certainly hurt the wages of South Korean workers in the bottom half of the income distribution. But then I don't actually know much about Korean labor/management dynamics, and if it is as well balanced a situation as West Germany was none of that would happen. It just doesn't seem to me that they have similar political economies.

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amitav

why can't a unification treaty include phased integration that limits the flow of labor for some period? Then capital would flow north first creating less pressure for mass migration when restrictions phase out.

m. lee

@1

I don't think Hamermesh is advocating for or against unification. He's just describing what will happen if/when Korea unifies.

In many respects, it seems similar to the maquiladoras along the US-Mexico border.

Jeff S.

I don't think this blog is about whether it should be done poster #1, but more like what would be the least destructive way to unify Korea without a large amount of damage to the South's economy.

chance

I'm not convinced that the DPRK regime will collapse anytime soon. I'll be very surprised if it happens in the next 15-20 years, and I suspect it will be at least 30 years. And when it does collapse, north and south will have been seperated for anywhere from 60-100 years. By then Reunification may be impossible for all practical purposes. It would be like trying to give West Virginia back to Virginia or something.

Will

A messy economic integration ... or a starving nation with a massive nuclear-armed military run by a man who has killed millions of his own people. It's not a hard choice, even for South Korea.