Extra! Korea

March 19, 2010

Cost Of Korean Reunification: $62 billion or $5 trillion?

Filed under: economics, North Korea — extrakorea @ 1:58 pm

In a previous post, I discussed a Wall Street Journal article that stated that the cost of reunifying Korea could be from 2 to 5 trillion dollars.

Now there’s a Forbes article (page two here) that seems to contradict that by estimating the cost to be 62 billion dollars.

Despite the seeming contradiction, they actually agree on the numbers. They state different goals, and thus come to different costs.

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.

Right now, the North Koreans are starving, literally. Doubling their income and living standards will have them jumping for joy … for a while.

However, a reasonable estimate of per capita GDP in the North is perhaps $700, in South Korea about $20,000.

Once the North Koreans get used to the idea that they can count on a full belly three times a day, for how long will they be satisfied to have a per capita GDP of $1,400 while their southern brethren enjoy one of $20,000? While they nourish themselves on barley and rice porridge, they’ll look southward to Koreans enjoying kalbi, whiskey, fried chicken, pizza, and pasta. Even though they will be geographically far away, thanks to the Internet, South Korea’s wealth will be in their face. How long will it be before gratitude erodes away into resentment? How long will it be before they start saying things like, “Hey, we could have nuked you when we had the chance, so why don’t you give us some sugar?” For this reason, I would like to re-quote something from my previous post:

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.

(emphasis mine)

So I agree with the estimate given in the Wall Street Journal article.

And who, according to the Forbes article, will foot the bill?

If and when Korean reunification occurs, the costs will most heavily impact South Korea. But the burden can and should be shared with Korea’s American ally, as well as with the other principals engaged in the Six Party talks, including China and Japan.

Japan. After having its citizens kidnapped and being threatened by North Korea for years, they’ll be asked to pay money to them. They’ll like that.

China. You don’t think they’ll exploit that leverage someday?

U.S.A. Sugar Daddy Sam. The bailout king.

5 Comments »

  1. Ultimately, it’s all a moot point. A lot of South Koreans worry about the cost, and some say Roh Moohyun was trying to stave off the inevitable, but, as I wrote here about the same Forbes article, it’s going to happen when it happens and how it happens regardless of what anybody — with the possible exception of China — tries to do. And it will cost what it costs; the price tag can’t be a reason for forestalling anything.

    Comment by kushibo — March 19, 2010 @ 8:47 pm

    • … it’s going to happen when it happens and how it happens regardless …

      You make it sound like it’s going to be an act of God. It won’t. It will be an act of Man. Do you really think that reluctance on both sides of the DMZ has no effect? South Koreans don’t really want it to happen because that will mean the end of having SUVs, a new cell phone every few months, and kalbi and whiskey on every block. Kim Jong-il and his inner circle don’t want it to happen because that will be either the end of them (Mussolini/Ceausescu-style) or they will have to live in exile so as to escape the “love and gratitude” of their people. China, as you alluded to, has certainly seems to be prolonging things since the regime is, at present, useful to them.

      Actually, they don’t need to reunify at all. They could be like Germany and Austria, two countries with the same language, a shared culture, and an intertwined history. I think this option should be seriously considered.

      … it will cost what it costs …

      Not sure what this is supposed to mean. You seem to agree with the smaller price tag, whereas I agree with the bigger one, for reasons that I will reprint because you didn’t seem to read it the first time, despite my emphasis:

      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.

      Doubling North Koreans’ incomes will have them jumping for joy at first, but it amounts to giving them one-fourteenth the incomes of South Koreans. Do you really think that they will be satisfied with that for thirty years? If you think so, then I think you need to become reacquainted with human nature. Look at how obsessed South Koreans are with comparing themselves with other countries (“Oh no! Our ‘nation brand’ is only twentieth in the world!”). North Koreans aren’t that different from South Koreans, as evidenced by the ajumma revolt and their own obsession with education.

      Comment by extrakorea — March 28, 2010 @ 12:39 pm

  2. Oh, and your cynicism aside, American and Japanese companies providing loans (and the ROK paid back its IMF loans very promptly, and it’s something one can reasonable expect from Seoul) and other aid will, if North Koreans rise to a reasonable level of material comfort, lead to long-term economic gain by Japanese and American companies who end up with another affluent market.

    Comment by kushibo — March 19, 2010 @ 8:50 pm

    • … the ROK paid back its IMF loans very promptly …

      Yes, they paid them back in full in record time, and it was an impressive feat. It doesn’t invalidate the fact that they needed a loan in the first place.

      loans

      Are you sure that loans are all that they will ask for? Are you certain that they won’t say something like, “Hey, Outside world, it’s your fault that we were divided against our will. Since it’s your fault, you should pay for at least part of the cost. You have to understand our unique situation!” And how much do you want to bet that any hesitation won’t be met with the stamping of feet, pouting, chest thumping, and temper tantrums?

      … lead to long-term economic gain by Japanese and American companies who end up with another affluent market.

      North Korea only has about 24 million people. China and India are years if not decades away from becoming fully developed markets. Malaysia and Vietnam are industrializing. The rest of Southeast Asia (Indonesia, the Philippines, Thailand, etc.) are waiting their turn. I haven’t even mentioned Latin America.

      The Japanese hardly need to go begging to a country that’s kidnapped its citizens and fired missiles over its airspace.

      Comment by extrakorea — March 28, 2010 @ 12:53 pm

  3. I’ll reply to your posts later, as I should be getting to bed. Please watch this space.

    Comment by extrakorea — March 21, 2010 @ 1:18 pm


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