Assessing The Economic Potential of Korean Reunification

Via The Wall Street Journal, interesting analysis from a Goldman Sachs study that a united South and North Korea could boast an economy larger than France, Germany and possibly Japan by the middle of the century.  As the report notes:.

“…Since the reunification of West and East Germany 20 years ago, South Korean leaders and economists have convinced many people here that reuniting with North Korea will be costly and disruptive. In the latest gloomy forecast, a government think tank last month said that the tax burden ratio, or proportion of tax revenue to gross domestic product, would need to rise by two percentage points and stay that way for 60 years to pay for reunification.

In the study released Monday, Goldman Sachs economist Kwon Goo-hoon says the risks of reunification need to be re-evaluated, particularly in the wake of the rapid development of countries like Vietnam and Mongolia that also had state-run economies like North Korea’s.

His study contains North Korean data that he acknowledges may not be accurate and assumptions about future behavior that may not pan out. Even so, its tone is more optimistic than previous studies that contributed to South Koreans’ ambivalence about unification.

In an interview, Mr. Kwon said he believed for a long time that unification would be too costly for the South. He based that view largely on what happened with the newly united Germany, where the currencies were quickly equalized, the border opened and huge transfer payments made from the former West to the former East Germany.

“People always look at Germany when they discuss unification of the Koreas, but if you look at China and Hong Kong, or more properly Eastern Europe, Mongolia or Vietnam, you see there are better ways of doing this,” Mr. Kwon said. “I think it’s a matter of education and dialogue.”

In March, the Bank of Korea published a report that said Hong Kong’s gradual integration with China beginning in 1997 and France’s handling of its former colonies after World War II were better models. Both that study and Mr. Kwon’s suggest the two Koreas maintain separate currencies and restrict crossings at the inter-Korean border, perhaps for decades as North Korea’s currency appreciates and its people grow wealthier.

Mr. Kwon’s study goes several steps further by suggesting that the huge growth potential of North Korea could help offset the slowing growth of South Korea, which is burdened by limited natural resources and a fast-aging population. By contrast, North Korea has huge mineral deposits and a population that is younger and growing twice as quickly as South Korea.

Using long-term growth forecasts Goldman Sachs has previously published for industrialized countries, Mr. Kwon concluded that the gross domestic product of a united Korea would be the world’s eighth-largest in 2050 at $6 trillion, surpassing France around 2040 and Germany and Japan later that decade.

Today, South Korea’s GDP is about $800 billion and North Korea’s is believed to be around $20 billion, though no data has been collected inside the North since the 1960s. Some economists believe its economic output is considerably less, while others note that most estimates tend to leave out the North’s well-known illicit activities such as narcotics production and currency counterfeiting.

Nearly all previous economic reports on Korean unification focused on the costs that South Koreans will face and ignore or play down investment and business opportunities that may also occur. Mr. Kwon said the tone of the discussion will change as economic and demographic pressures grow in the South and he wanted to produce an analytical framework ahead of that.

“It has been said in South Korea that the country cannot afford nor manage unification,” Mr. Kwon said. “The flip side of that equation is that with the proper policy incentives for those in the North, a win-win scenario through investments is possible.”

Recent surveys suggest unification will be a hard sell in South Korea. One done by the National Unification Advisory Council, a government-funded committee, in March found 45% of respondents feel unification is very important, with the rest saying it’s somewhat or not important.”

This entry was posted on Monday, September 21st, 2009 at 9:06 am and is filed under North Korea.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

Comments are closed.

Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.