Economic Consequences of Korean Reunification

For many, the prospect of a united North and South Korea may seem remote. Through the heavily armed military fences that separate the two Koreas, few signs of reunification are apparent. The North’s belligerent nuclear ambitions, United Nations sanctions against their economy, and repeated human rights abuses by the government made unification increasingly unlikely.

But changes in global politics – including the 2019 summit between US President Donald Trump and Supreme Leader Kim Jong Un, the April 2020 parliamentary elections in South Korea, and efforts by the global community to normalize relations between the hermit nation and its neighbors – changed the conversation about reunification. What would reunification mean for the global economy? Massive changes.

To understand what a united Korea might look like, we must first consider how the two countries diverged after the 1953 armistice that divided the peninsula at the end of the Korean War.

North Korea

North Korea’s GDP of $40 billion is unique, to say the least. The communist country is ruled by a dynastic supreme leader, Kim Jong Un, who wields power over every aspect of life in North Korea, from the economy to how people dress.

Designed after the Soviet system, North Korea’s economy is centrally planned. Under three generations of totalitarian rulers – Kim Il Sung, Kim Jong Il and Kim Jong Un – North Korea has become one of the most isolated economies in the world, prioritizing self-reliance and militarism over everything else. .

The development of nuclear weapons is at the heart of the country’s military and political objectives. North Korea’s relentless pursuit of a nuclear program has brought them into conflict with the United States and the European Union, which in 2013 imposed harsh economic sanctions targeting their ruling class, as well as other sectors of the their economy.

Since 2016, North Korea has been facing punishments on the export of copper, nickel, zinc, silver, coal, iron, lead, seafood, textiles and natural gas, all major aspects of their economy. Due to these sanctions and severe isolation, the country suffered from food shortages, mass starvation, underdevelopment and mass unemployment.

As of September 2019, China was North Korea’s largest trading partner, receiving 91% of its exports and accounting for 94% of its imports.The main industries of the isolated country are military products, coal and iron mining, metallurgy and textiles. Overall, economic growth in North Korea has been slow or non-existent. From 2000 to 2005, annual GDP growth averaged around 2% compared to South Korea’s 6%. From 2006 to 2010, the country experienced negative growth.The country’s GDP growth for 2020 is estimated at -4.1% with a 5-year compound annual growth of -0.8%.

However, although North Korea is not economically advanced, it has many unexplored and untapped natural resources, estimated at trillions of dollars (most estimates put the figure at $6-9 trillion).This is one of the reasons why countries like China and Russia are keen to invest in the DPRK.

South Korea

South Korea’s economy is also unique for different reasons. It is safe to say that after the 1953 split, when North Korea emphasized isolation, South Korea did the exact opposite. Today, it is considered the 4th largest economy in Asia and the 14th in the world. 

South Korea’s miraculous economic growth, which lifted the country out of poverty into the “trillion dollar club”, is commonly referred to as “the miracle on the Han River”. In the space of a single generation, the country has rapidly developed and modernized, earning it a place in the Organisation for Economic Co-operation and Development (OECD) in 1996 with the richest industrialized countries in the world. Many attribute South Korea’s economic success to its rigorous education system, which has historically produced a well-educated and highly motivated workforce.

South Korea’s economy is 40 times larger than North Korea’s in terms of GDP. According to 2019 figures, South Korea’s GDP is estimated at $1.64 trillion.Because the country has almost no natural resources, South Korea adopted an export-oriented strategy and became the world’s fifth-largest exporter. While North Korea consistently runs a trade deficit, South Korea has focused on exporting goods and services in the electronics, telecommunications, automotive and chemical sectors.In the US, we see South Korean brands everywhere, like Samsung, SK Hynix, LG Chem, Hyundai Motors, Kia Corporation, and POSCO.

reunification

North Korea and South Korea were separated in 1953 and followed radically different paths. The North, under a planned economy, focused on isolation and exploitation of its natural resources and became one of the poorest economies in Asia. The South, embracing a free market economy, has worked to integrate the global market and expand its high-tech sectors, making it the 4th largest Asian economy. But it is these differences that could make Korean reunification such a profound change in the global economy.

According to a report by Goldman Sachs, a united Korean economy could surpass that of Germany or Japan in size and influence. Here’s their mindset: While North Korea’s economic system seems to be in a constant state of chaos, it offers a mine of minerals and plentiful, cheap labor. Couple that with a mineral-poor South Korea that relies heavily on imports to fuel its massive industry, and you have growth. The report concludes that “a united Korea could overtake France, Germany and perhaps Japan in 30 to 40 years in terms of GDP in US dollars”. 

Taking a country with an already well-established and productive free-market economy and supplying it with cheap labor and raw materials is a recipe for long-term growth and success.

What is the probability of reunification?

In 2018, US President Donald Trump held a summit with North Korean leader Kim Jong Un. The two leaders discussed the possibility of normalized relations between their respective nations. Discussions on denuclearization pointed to potential future discussions on reunification. In the 2018 New Year’s speech, Un repeatedly mentioned reunification.Three months later, at a summit in Panmunjom, the leaders of North Korea and South Korea signed an agreement committing to peace between the two Koreas by the end of the year .

One of the most significant changes, however, which may have gone unnoticed by many, was the elections in South Korea. On June 13, 2018, the left-wing Minjoo party won all but three of the country’s 17 races for mayor or governor and won 11 of the 12 open seats in the National Assembly. This means that President Moon Jae-in’s party, which has been fighting for better relations with the North, has increased its influence over political decisions.A consensus among South Korea will be key if reunification talks begin. Here we see a legislative and political basis for this consensus.

With reunification still uncertain and distant at best, economists are urging major economies to prepare for what could be a massive shake-up in global economic power.

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