Extra! Korea

January 5, 2010

Korean reunification could cost $5 trillion

Filed under: economics, North Korea — extrakorea @ 2:52 am

The Chosun Ilbo and KBS World both mention a recently published Wall Street Journal article that I had already seen thanks to both Kushibo and North Korean Economy Watch.

Even the best-case German model will cause South Koreans heartburn. Despite the $2 trillion West Germany has paid over two decades, Bonn had it relatively easy in the beginning. East Germany’s population was only one-quarter of West Germany’s, and in 1989 East German per capita income was one-third of the West’s. The two Germanies also had extensive trade ties.

North Korea’s per capita income is less than 5% of the South’s. Each year the dollar value of South Korea’s GDP expansion equals the entire North Korean economy. The North’s population is half the South’s and rising thanks to a high birth rate. North and South also barely trade with each other.

[ snip ]

I estimate that raising Northern incomes to 80% of Southern levels—which would likely be a political necessity—would cost anywhere from $2 trillion to $5 trillion, spread out over 30 years. That would work out to at least $40,000 per capita if distributed solely among South Koreans.

Who would foot such a bill? China is the greatest supporter of the current regime in Pyongyang, with trade, investment and economic assistance worth $3 billion a year. Even if that flow continues, it’s only a fraction of the $67 billion a year needed to equal $2 trillion over 30 years. Japan is willing to pay $10 billion in reparations for having colonized the North in the 20th century, but that too would barely make a dent.

That leaves international institutions like the World Bank as well as South Korea and the United States.

Sugar Daddy Sam and the IMF* to the rescue. Again. I wonder if South Koreans would be willing to give up their fancy cell phones and SUVs.

* who were vilified in the aftermath of the 1997 Asian Financial Crisis. To this day, South Koreans still refer to that event as the “IMF crisis.”


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