The economics of the two Koreas

by on September 11, 2008 at 10:03 pm in Political Science | Permalink

The official told FOX News there are no signs of
instability in North Korea now, but the likelihood of a smooth
transition of power in that country is not high.

Here is the story, fully speculative throughout.  Many people think Kim is in very bad shape.  Apparently the U.S. and China are drawing up contingency plans for what comes next, financed in part by those interest payments on the agency debt.

One topic at today’s lunch was to guess the chance that the North Korean communist regime might collapse forever in the next few years.  I said p = 0.3, which others found to be a high estimate.  A second topic was, if reunification of the Koreas occurred (itself an open question), how long it would take for the South to grow again, given the amount of reconstruction it would have to finance in the North.  I said twenty years, though upon reflection I’ll revise that downwards a bit.

It’s hard to say much about these topics with any grounding, but since no one else in the econ blogosphere is talking about them, I will.  It’s by far the most important drama going on in the world right now.

1 Jim September 11, 2008 at 10:09 pm

What? Are you saying it’s more important than “Purported Prejudices Pertaining to Porcine Pucker Paint Perplex People Planet-wide”? (


2 The other Eric September 11, 2008 at 11:34 pm

If reunification could be negotiated peacefully my utterly uninformed guess would be a 6-8 year trough for South Korea to push through before integrating what is essentially an undeveloped North.

Samsung Electronics, SK Telecom and Posco above its rating for South Korean government debt.

Samsung is Asia’s largest technology company, Posco is the world’s fifth-largest steel maker, SK Telecom– the massive mobile phone system, LG (Lucky Goldstar), Hyundai Motor, Hyundai Heavy Industries and Hyundai corn flakes and everything else Inc., and Korea Electric Power are actually in a position to “flip this country” in a rapid and massive way.

This isn’t a West Germany-East Germany situation. (If North Korea became one big medical waste dumping ground it would still raise their standard of living appreciably.) The only effective state infrastructure in the North is the military. There really isn’t much to ‘rebuild’ and the population is very young and sadly sparse compared to what it should be.

Unification would put a massive burden on the South’s social service and educational systems needed build a modicum of normal society in the North. But I would not bet against South Korea on this.

3 forty degrees south September 12, 2008 at 12:21 am


The Berlin Wall came down in ’89, and cash is still going eastwards by the bucketload. At the time the Berlin Wall came down West Germany was the richest large country in Western Europe, and was substantially richer (in relative terms) than South Korea is today. The gap in living standards, agricultural output, life expectancy and every other measure between the two halves of Korea is vastly greater (as far as anyone can tell) than the equivalent gap between West and East Germany.

While I have enormous respect for the ability of the South Koreans to run an economy, the Germans were quite good at that too. And Germany had the advantage of a far more mature political culture.

I think your estimate of 6-8 years for 48 million South Koreans to raise 24 million North Koreans from Africa-like levels of destitution to a moderate level of prosperity is wildly optimistic. But I sincerely hope you are right and I am wrong.

South Korea does have one advantage – it can assess what worked and what didn’t work for Germany. That in itself may count for something.

4 Hopefully Anonymous September 12, 2008 at 1:57 am

I’m not as economically literate as some of the commentators here, but I’m curious why the model isn’t developed china vs. rest of china. If developed china can grow while hitched to rest of china, why can’t south korea grow while hitched to north korea? I’m also more unfamiliar with the Germany situation as some commentators, so it’s also mysterious to me why Germany wouldn’t follow the developed china/rest of china model.

5 Zamfir September 12, 2008 at 6:19 am

A Korean reunification is a lot less obvious then the German one was ( which in turn was not as obvious as it seems afterwards) Some points:

1. N- and S- Korean fought a bloody war, and technically still are. From the little experience I have with them, South-Koreans have complicated opinions on their neighbours. The North-Korean’s opinions are anyone’s guess.

2. Eastern Germany was literally occupied by the Russians. The very moment the Gorbachev announced he wouldn’t interfere with affairs in Eastern Europe, the debate about reunification started even in the top of the DDR.

3. It’s a lot longer ago that Korea was a single country, and even then it was not an independent state. The leaders and a large part of the population of Germany still had clear memories of a unified Germany.

4.South Koreans are a lot less confident about their ability to absorb a poor country then the WDR was. They still remember their recent poverty, and their political system is only young and fragile. They have seen the troubles in Germany, and the DPRK is relatively speaking larger and poorer than the DDR was.

6 Greg September 12, 2008 at 8:47 am

Perhaps the Germans have made a mistake by trying to subsidize former East Germany? My hypothesis is that, like development aid to poor countries, subsidies often can’t effectively stimulate growth where there wouldn’t be internally-driven growth. So in an ideal Korean unification, maybe SK would focus primarily on its own growth while providing just enough aid to NK to avoid excessive hardship. It’s probably not a politically feasible solution, of course. But I think the German example was optimized for politics and assuaging liberal guilt, for lack of a better term, than for growth.

7 Anonymous September 12, 2008 at 9:44 am

Apart from emotional and historical reasons, why would reunification be the optimal solution? Consider America/Canada, Germany/Austria, Russia/Belarus, Romania/Moldova…

Among other things, sharing a common currency and interest rates between prospering and struggling regions makes setting economic policies much harder, as Germany found out and as the Eurozone is now finding out.

8 grace moon September 12, 2008 at 11:00 am

I humbly pray that N&S. Korea have a peaceful unification through the Gospel in Christ Jesus.

9 Charlie September 12, 2008 at 12:20 pm

I don’t understand why it would stop South Korea’s growth for 20 years. Even if the government has to build a lot of infrastructure, they can borrow – it is investment in future tax dollars, if it’s the right thing to do. As long as they don’t repeat the same mistakes from the other communists states that fell: overvalued currency exchange, heavy restrictions on new businesses, poor legal institutions… Shouldn’t South Korea get an influx of poorly skilled, low-wage workers? And the North get the opportunity to work at higher wages even for their few skills. I guess you are arguing the transition costs are large. Could you expand on it?

10 deo September 12, 2008 at 2:32 pm

There is an excellent article by russian specialist on North Korea — Andrei Lankov (unfortunately, it’s available only in russian He has pretty pessimistic views about unification consequenses. Exerpt: “… and the second question — what will happen. It’s going to be a nightmare. First couple of years everybody’s going to be filling their stomachs, they will know that it’s possible to eat meat every day, and in three years somebody in the quarter will buy a used car. But then they will have a lot of problems, and serious ones. First of all, korean society is maddingly hierarchical. These people will not only find themselves at the very bottom of society, but others will despise them, they turn out to be some kind of collective korean loser. There’s some experience about people who run from North to South — they fail to settle, feel themselves discriminated, bitter about south korean realities. Moreover, there’re serious reasons to think that those who can be driving force of unification from north side, engineers, technical stuff, etc., will suffer most of all.

11 Christina September 12, 2008 at 3:59 pm

Remember, N. Korea has peace and literacy… all it needs is an infusion of property rights and capital.

This is precisely wrong. Not only have the people of DPRK been starved for food, they have been starved of any real information. They only learn communist propaganda in schools, nothing real. Stories of North Korean refugees in South Korea confirm that.

In addition, the DPRK’s efforts to enforce juche have included the creation and use of a North Korean “newspeak,” so modern North Koreans don’t even speak the same exact language as their cousins in the South, making eventual integration even more difficult.

But as the popularity of the Sunshine policy shows, South Koreans are generally so anxious to reunite, they will eagerly overlook these and other hurdles to reunification. Even if it costs them their economic powerhouse status for 50 years (yes, I think it will take that long). They won’t be starting from scratch. They will be starting from a severe deficit.

12 Barkley Rosserr September 12, 2008 at 4:49 pm

Two points regarding the comparison with Germany.
On the one hand Korean nationalism is very strong and
rising, possibly stronger even than German nationalism.
There is much more underlying ethnic/cultural unity among
the Koreans than there is among the Germans, who are still
very much members of their original tribes (Saxons, Thuringians,
Bavarians, and so forth), although most outsiders are unaware
of this.

OTOH, North Korea is much further behind South Korea economically
than East Germany was behind West Germany. There will be no
avoiding massive subsidies. The last figure I saw, some time
ago, was on the order of a trillion dollars.

13 Anonymous September 12, 2008 at 8:10 pm

If Korea needs to go massively into debt to finance the costs of reunification, what is the most likely source of capital? China, that’s who. Not merely for investment purposes… mitigating any potential chaos and disorder in a nuclear-capable neighbor is very much in their self-interest.

If China diverts a significant fraction of its massive foreign reserves out of Treasuries and GSE debt, one inevitable consequence would be a sharp rise in US interest rates. “Borrower of last resort”, meet “unintended consequences”.

14 Florian September 14, 2008 at 8:50 am

Well german reunifacation has been a success, higher unemployment numbers are really nothing dramatic when you look at it seriously.

@barkley rosser: who are still very much members of their original tribes (Saxons, Thuringians, Bavarians, and so forth), although most outsiders are unaware of this.

Who told you that, that’s the most stupid thing I read all week. And is concerning the economy, the political culture and the media total bullshit

@ Karl only if you count elections after reunification and ignore changing state governments and define democracy solely on a federal level… which would be a bit odd.

15 tom May 14, 2009 at 12:57 am

It seems we will be in economy ression for quite a long time. We can see the economy crisis effect everywhere.

16 jane May 14, 2009 at 12:58 am

Is it realistic?

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