North Korea’s nuclear program has preoccupied foreign policy makers for years, but it’s not the only problem on the Korean Peninsula. Kim Jong Il’s regime looks increasingly unstable and could collapse.
That could lead to North Korea’s reunification with the South and could present foreign leaders with the expensive task of modernizing the North’s economy.
There are three plausible scenarios for a Korean reunification. One would be sudden and bloodless like what Germany experienced. The worst would be a reunification marked by the kind of violence Vietnam suffered. The third is somewhere between the first two and akin to the chaotic post-Communist transitions of Romania and Albania.
Any one of these outcomes would be expensive. The North’s economy is in shambles. It collapsed in the 1990s amid a famine that likely killed hundreds of thousands of people. Fixing the economy will require new infrastructure, starting with the power grid, railway lines and ports. This alone will cost tens of billions of dollars. Few of the North’s factories meet modern standards and it will take years to rehabilitate agricultural lands. The biggest expense of all will be equalizing North Koreans’ incomes with their richer cousins in the South, whether through aid transfers or investments in education and health care.
Even the best-case German model will cause South Koreans heartburn. Despite the $2 trillion West Germany has paid over two decades, Bonn had it relatively easy in the beginning. East Germany’s population was only one-quarter of West Germany’s, and in 1989 East German per capita income was one-third of the West’s. The two Germanies also had extensive trade ties.
North Korea’s per capita income is less than 5% of the South’s. Each year the dollar value of South Korea’s GDP expansion equals the entire North Korean economy. The North’s population is half the South’s and rising thanks to a high birth rate. North and South also barely trade with each other. To catch up to the South, North Korea will need more resources than East Germany required if living standards on both sides of the peninsula are to be close to each other.
More than a dozen reports by governments, academics and investment banks in recent years have attempted to estimate the cost of Korean unification. At the low end, the Rand Corporation estimates $50 billion. But that assumes only a doubling of Northern incomes from current levels, which would leave incomes in the North at less than 10% of the South.
At the high end, Credit Suisse estimated last year that unification would cost $1.5 trillion, but with North Korean incomes rising to only 60% of those in the South. 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. That would work out to at least $40,000 per capita if distributed solely among South Koreans.
Who would foot such a bill? China is the greatest supporter of the current regime in Pyongyang, with trade, investment and economic assistance worth $3 billion a year. Even if that flow continues, it’s only a fraction of the $67 billion a year needed to equal $2 trillion over 30 years. Japan is willing to pay $10 billion in reparations for having colonized the North in the 20th century, but that too would barely make a dent.
That leaves international institutions like the World Bank as well as South Korea and the United States. Building a modern economy in North Korea would be a wise investment in peace and prosperity in North Asia. Policy makers need to think about where that money will come from and how it should be spent to minimize the risk of wasting it in post-reunification confusion.