While the end of the Cold War brought the reunification of East and West Germany, the Korean Peninsula has remained divided over the ensuing quarter century. For much of that time, Korean unification has been viewed through the lens of the economic costs of German unification, but in 2014, South Korean President Park Geun-hye in Dresden suggested that unification need not be a cost to bear but rather could be a potential economic “bonanza” for the two Koreas.
President Park is not alone in seeing a significant economic upside in Korean unification. A unified Korea would create a market of nearly 75 million people in an economy that Goldman Sachs has estimated has the potential to be larger than Germany and Japan’s by the middle of the century.
Achieving this bonanza, however, will depend upon when and how unification takes place. The crucial factor will be whether unification is a hard landing that sees a sudden event spur unification before either side is ready, or takes place after a soft landing, where the two Koreas have had an opportunity to slowly integrate the two economies and begin to lessen the economic gap.
However, merely opening North Korea’s economy would spur substantial economic growth and help foster the conditions for a soft landing. As Marcus Noland of the Peterson Institute demonstrated in a recent paper, if North Korea were to enter into a customs union with South Korea, the economy would transition from the production of capital and intermediary industrial goods with resources dedicated to the military declining, to light manufacturing, agriculture, mining, and services. Exports of light manufactured goods would increase upwards of 40-fold, and mining exports would triple. Most encouraging from Noland’s study is that with a customs union, there would be modest economic gains for South Korea as well and potentially only a minimal drag on economic growth if deeper integration were to take place.
With North Korea opening to global markets, South Korea’s artificial division from the Asian mainland would end, and new land routes to foreign markets would be opened. Long considered projects, such as natural gas pipelines from Russia and rail lines connecting to Europe, would be possible. At the same time, the younger demographic profile of North Korea would help to stem, but not reverse, what is a rapidly aging society in South Korea while bolstering a labor force that is now in decline. Unification would also give the resource-poor South access to significant mineral resources, including some of the world’s largest deposits of rare earth minerals, which could help spur domestic and foreign investment to help jumpstart economic growth in the North.
However, while unification will provide significant economic benefits in the long run, rebuilding North Korea will be an enormous undertaking in the short-term. A study by the Financial Services Commission in South Korea found that developing the North Korean economy will require $500 billion over 20 years, while other studies have estimated the costs to be over $1 trillion. Getting the economy in the North moving again will require substantial investments in infrastructure, including new roads, rail lines, telecommunications equipment, financial networks, repairing the healthcare system, and replacing the energy infrastructure. On a human level, extensive investments in human capital will be needed to transition North Koreans to a modern economy.
For the region, the impact of Korean unification could be significant. With the removal of the North Korean nuclear threat, there would likely be a small peace dividend as states adjust their military postures accordingly and trade increased. Estimates done as part of a series of studies for the Korea Institute for International Economic Policy indicate that net income for China could rise by almost $50 billion in the first year after unification, and Japan could see benefits of more than $230 billion over 10 years. The impact for the United States is likely to be significantly smaller.
In the end, unification will entail a series of economic costs but also comes with considerable economic opportunities. However, the key to unlocking Korea’s economic potential is convincing North Korea that the future is brighter together than apart.
The views expressed here are the author's alone.
