Analysis: The cost of unification-I

By SAM VAKNIN, UPI Senior Business Correspondent

It has been an eventful month in Korea. The north and south rumps of an erstwhile unified Korea have agreed to reconvene, at North Korea's rare request, Cabinet-level talks severed nearly a year ago.

Only six weeks previously, on June 29, vessels of these two countries clashed to lethal effect in the Yellow Sea -- an incident for which the North now has expressed its regrets.


The South's indefatigable Unification Ministry will conclude the 3-day negotiations on Aug. 14, a day before both polities celebrate the end of the Japanese occupation. North Korea also consented to participate in the 14th Asian Games, to be held in September in Busan in South Korea. It will even partake in a friendly soccer match with the South.

Noble prize-winner and South Korean president, Kim Dae-Jung launched his "sunshine policy" -- a Korean Ostpolitik -- toward the famished and decrepit North in June 2000, when he met the "Dear Leader," Kim Jong-Il.


This led to precious little hitherto. A few members of families divided by the war in 1950-53 were finally allowed to reunite briefly. North Korea gorged on South Korean and Japanese grain and extorted cash from visitors to the much-adored Mount Geumgang.

United Press International was among the first to report a discernible shift to market principles in the North. This is coupled with thawing relations with the West, notably the United States.

Both the Japanese foreign minister and America's secretary of state conversed with their North Korean counterpart during the Association of Southeast Asian Nations' regional forum in Brunei last week. The North even requested talks with the U.S.-led United Command it so decries.

Otherwise, the North remains as recalcitrant and belligerent as ever. The prospects of Korean unification are best gauged in Panmunjom, scene of the armistice that ended the Korean War, where a South Korean rail line ends abruptly.

The North has yet to construct the few miles to Kaesong within its territory. North Korea's Committee for the Peaceful Reunification of the Fatherland continues its vitriolic diatribes against South and West alike.

Unification is not a straightforward matter not only geopolitically or politically -- but also, and, perhaps, mainly, economically.


In a Northeast Asia Peace and Security Network Special Report dated August 1999 and titled "Modeling Korean Unification," the authors, among them Marcus Noland, a leading authority on the subject, recommended a customs union between the two Koreas as a way to ameliorate northern famine and generate a peace dividend through military demobilization.

The authors believe that unification will affect South Korea's "composition of output, the distribution of income, and the rate of economic growth."

Should capital flow in from the rest of the world, the won is likely to appreciate and the "non-traded goods sectors could expand at the expense of the traded goods sectors," they wrote.

It would take at least a decade for Northern incomes to reach 55 percent of Southern ones.

"The amount of capital investment necessary to raise Northern per capita incomes to 60 percent those of the South would actually drive the rate of return on capital in the North below that in the South.

"However, it would be possible to attain the 60-percent target without such equalization of the rate of return in the two parts of Korea under high-end estimates of the speed of technological convergence. This suggests that either the rate of technological convergence would have to be very rapid (say, 12 percent annually), or restriction on migration from the North to the South would have to be imposed on a semi-permanent basis."


South Korea itself is likely to be as transformed by unification as the north. Cheap migrant labor from the across the erstwhile border will tilt the balance between income from capital and income from labor in favor of the former. As northerners occupy low-skill jobs, southerners are bound to monopolize the high end of the labor market. Income inequality will widen.

Noland believes the cost of unification can be limited. It is hard to see how, though. Inter-Korean trade leapt 21 percent year-over-year to a meager $130 million in the first four months of 2002, including $51 million in "non-trade" items, such as food grants.

The North maintained a trade surplus of $51 million with the South in those 120 days, excluding humanitarian assistance and Southern gifts. It exported to the South agricultural products, fish and textiles and imported from it machinery, chemicals and processed textiles.

A mere 62 companies -- out of a total of 188 -- worked on a "processing-on-commission" basis, elsewhere a very common practice in least-developed countries.

The World Bank sounds more realistic when it pegs the overall cost at five to six times South Korea's gross domestic product, or $2 trillion to $3 trillion.

Noland notes that between $300 billion and $600 billion over 10 years would be needed to raise North Korean income levels to 60 percent of the Southern average and prevent ruinous mass migration from North to South.


Young-sun Lee, another scholar, concurs with the high end of Noland's estimate.

The historical irony is that the North, until 1950, was the industrial powerhouse of the united Korea. Mining, heavy industry and science were all concentrated in the north. The south was home to agriculture and light, family-owned, industry.

Despite American carpet-bombing that pulverized its manufacturing base, the North grew faster than the South throughout the 1950s and 1960s -- albeit partly thanks to Chinese and Russian monetary infusions.

But while the South -- with double the North's population -- leapt from an average GDP per capita of $90 in the mid-60s to almost $9,000 in 1999, the north crept to one-tenth, some say one-twentieth, this figure last year.

And while North Korea's foreign trade is $2 billion, the South trades almost $300 billion in goods and services. After China and Japan, South Korea is the North's largest trading partner.

Harrowing stories of fatal famine in the North are a commonplace by now. Even by its official -- and thus false -- figures, the North admits to a quarter of a million deaths by starvation. The figure may be 10 times as high.

Energy shortages mean that factories are working at 10 percent to 15 percent capacity, reported The Economist magazine last week.


Though far more suave, the South may be pursuing a passive-aggressive tack of its own. Unification is likely to be a better avoided, prohibitively expensive and economically destabilizing affair. An apt parallel would be with Yemen, whose Marxist and destitute south united with the far more prosperous and open north only to yield a devastating civil war two years later.

But the Koreans optimistically prefer to compare their situation to pre-unification Germany. A decade and $1 trillion in subsidies later, not counting $2.6 billion in annual handouts from the European Union, East Germany is still woefully trailing the West.

According to figures published by the Frankfurter Allgemeine Zeitung, the growth rate and productivity of the east -- the German mezzogiorno -- is a mere 70 percent of the western Lander. The east contributes one-tenth of German GDP with one-fifth of the population. A quarter of a million jobs have evaporated in the past four years.

Unemployment, at 17.8 percent in June, is the highest since 1990. The tax base is shrinking as the dreary region is drained of its populace. Recently, Germany has extended federal aid to the east -- financed by a much-resented 5-percent surtax -- for another 20 years.


This massive failure is a hot topic in the election campaign. BMW has been courted, cajoled and bribed with copious tax breaks to open a new factory in Leipzig. Volkswagen's decision to launch a minor plant in Dresden was hailed as a breakthrough.

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