The prospect of one Korean nation may be some way off. But reports that North Korea’s hermit dictator has fallen ill should give South Korea reason to consider how it might avoid Germany’s reunification missteps, should the time come to merge with its neighbour.
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Germany’s economy was messed up for 15 years after it absorbed East Germany. Korea could avoid a similar fate. Even if Korean reunification became politically possible, it would be a daunting task. North Korea has 50% of South Korea’s population, while East Germany had only 26% of West Germany’s. Moreover, North Korea is far more economically backward.
What were Germany’s mistakes? Currency unification at a 1:1 ratio ossified East German wages at levels which were unjustified by low East German productivity. Apart from infrastructure, investment in the East was thus limited to West German companies receiving huge subsidies from the Treuhand unification agency. The enormous costs of reunification expanded German public expenditure and made Germany’s economy sluggish, while massive East German unemployment and underemployment lasted decades.
South Korea cannot afford to adopt the German approach. North Korean living standards must rise naturally—not through overnight conversion—so South Korean and foreign investors can take advantage of its cheap manufacturing labour. That would produce a surge in market-driven jobs in North Korea, absorbing the surplus workforce that would be shed by reducing the economy’s dependence on agriculture and Pyongyang’s state sector.
To prevent low-skilled North Koreans from creating massive unemployment in the South, migration from North to South Korea should be managed carefully for several years.
The two political systems can be integrated only once a successful free-market economy has taken root in the north, with democracy introduced initially through the process of local elections.
As low-wage countries in eastern Europe showed, rapid growth in a transitioning economy is possible, provided local labour is cheap enough. By working, employees acquire new skills and understanding of the requirements of free-market business, and thereby make themselves more valuable.
Korean reunification is economically possible, and need not cost too dearly. But it would need some tough decisions up-front. With Kim Jong-il, known by his people as Dear Leader, reportedly lying in a hospital bed, South Koreans would do well to consider these options sooner rather than later.