Chat up businesspeople and policymakers in Seoul and the conversation inevitably turns to how South Korea’s economy is becoming “normal”.
The reference is to the steady rise in living standards, an impressive rebound from the 1997 Asian crisis and the nation’s huge potential. Yet, Korea’s economy is anything but normal, and it won’t be for many years.
The reason is Kim Jong Il. When Standard & Poor’s rates Singapore’s credit or comments on Canada’s fiscal situation, the words “nuclear capabilities” don’t typically come up. South Korea is constantly reminded that no matter what’s happening in its economy, North Korea’s nuclear weapons—well within firing range of Seoul—weigh among the variables. How many developed economies border a nation with which they are still technically at war? South Korea may be the world’s 12th biggest economy, yet its challenges are anything but conventional.
A pledge last week by Kim and South Korean President Roh Moo-hyun to start talks on a formal end to the Korean War is just that—a deal to begin talks that could break down any second for any number of reasons. Kim’s health is just one wild card. His appearance and absence from key events with Roh in Pyongyang had analysts buzzing about the Dear Leader’s well-being. Roh was only the second South Korean leader to visit Pyongyang and he shared more face time with the reclusive Kim than any democratic leader in recent years. Roh badly needed some positive headlines; he’s desperate to get his approval ratings up before leaving office in February. And Kim needs all the aid he can get to feed his 23 million people.
The summit was mostly useful because it offered the tantalizing possibility that a thaw in relations will lead to a reunification of the two Koreas. That’s a pipe dream to many. Indeed, the US may get its troops out of Iraq before the demilitarized zone is dismantled, as the Berlin Wall was in 1989. Imagine, though, just for a moment, how the process might play out—what it might cost and who will pay for it. While estimates are all over the place, they tend to range between $300 billion and $670 billion. At the higher end, rejoining the Koreas would cost more than the US shelled out for the Vietnam War and more than it has paid for its invasion of Iraq. The US had spent $291 billion on the war in Iraq through July of last year, a Congressional budget office report said.
“My central estimate is that it would take about $600 billion over 10 years to raise North Korean per capita income to 60% of the South’s, a target which is conventionally thought to choke off the incentives for mass migration,” says Marcus Noland of Washington’s Peterson Institute for International Economics and co-author of the 2007 book, Famine in North Korea: Markets, Aid and Reform.
Even if the costs are higher, helping North Korea come out of its shell is the right thing to do. Yet, that gets at an inconvenient truth: A huge amount of political will is required here, especially considering how great the costs will be in the short run and how long it might take to reap benefits.
How much is the US willing to spend to rid the world of the last hardline Communist regime? How much will South Korea pay for a process that could hurt its economy for years? Growth in the South may be slower for some timerelative to what it would be without reunification, Noland says. There would be major shifts in income distribution from the South to the North, with its ample cheap labour. The loss of labour-intensive jobs may worsen income inequality in the South.
Roh was in Pyongyang on 3 October, the 17th anniversary of Germany’s reunification. Observers trying to contemplate the Korean Peninsula’s future tend to point to the meshing of West and East Germany. That’s questionable. For all their challenges, East Germans were a bit more connected to the global economy than North Koreans are today. Asia lacks a common market such as the European Union (EU) for North Korea to tap once it opens up. The nation’s high poverty rate also will be a global challenge. Korea observer Sam Vaknin says it took Germany about 20 years to unite after the first East-West summit, and it’s still a work in progress. The longer Korean reunification is delayed, the more antiquated the North’s economy will become relative to the South’s and the process more expensive.
Then there’s paying the bill. One would have to expect South Korea, Japan, the EU, the US and other developed nations to join hands with the World Bank, International Monetary Fund and Asian Development Bank. China also would be expected to help. It’s tempting to conclude that North Korea is, at least financially, not too big to fail, but too big to save. World leaders are likely to agree that the Hermit Kingdom is too nuclear to fail. The nukes are still Kim’s trump card. A united Korea is in the best interest of the global economy. More than making the South’s a normal economy, it would remove one of the biggest wild cards hovering over Asia. A stable Korea really would be priceless. Bloomberg
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