[ARI Conference] Prospects of Korean Reunification and Its Global Economic Effects

An international conference on Korean unification, organized by the Asiatic Research Institute (ARI), Korea University on March 6, 2015, has attracted the attention of a large number of unification specialists, Seoul-based diplomatic corps, journalists, and interested citizens. The event, held at Westin Chosun in downtown Seoul with the title of“Prospects of Korean Reunification and Its Global Economic Effects,”was co-organized by the Korea Institute for International Economic Policy (KIEP), the Centre for Applied Macroeconomic Analysis (CAMA) at the Australian National University (ANU), and the Brookings Institution. During the conference, renowned Korean and international specialists in government, academia and research institutes presented their academic and policy-oriented research related to the prospects of Korean reunification and its economic consequences for the Korean peninsula and neighboring countries. They also shared their insights through in-depth discussions on economic and security benefits and costs of unification and provided a direction for Korea’s policy towards reunification.

 

Conference Program

Title: Prospects of Korean Reunification and Its Global Economic Effects

Date: March 6, 2015 (Friday) 9:00am-5:30pm

Venue: Orchid Room, The Westin Chosun Seoul, Korea

Organizers: Asiatic Research Institute (ARI) at Korea University, Centre for Applied Macroeconomic Analysis (CAMA) at the Australian National University (ANU), The Brookings Institution, and Korea Institute for International Economic Policy (KIEP)

Sponsors: Korea Research Foundation, Australian National University

 

Opening Ceremony (9:00-9:30am)

Opening Remarks: Jong-Wha Lee (Director, Asiatic Research Institute at Korea University)

Welcoming Remarks: Warwick McKibbin (Crawford School of Public Policy, ANU and The Brookings Institution)

Keynote Speaker I: Myung-Chul Cho (Member of the National Assembly, Republic of Korea)

Keynote Speaker II: Il Houng Lee (President, KIEP)

 

Session 1: Prospects of Integration and Reunification in Korean Peninsula (9:30-10:50am)

Moderator: Byung Kook Kim (Dean, College of Political Science and Economics, Korea University)

Presenters:

Marcus Noland (Executive Vice President and Director of Studies, Peterson Institute for International Economics)

Sung-wook Nam, (Professor, Department of North Korean Studies, Korea University)

Discussants:

Moonsung Kang (Professor, Division of International Studies, Korea University)

Rolf T. Schuster (Deputy Head of Mission from Germany)

 

Session 2: Korean Reunification: Lessons from History and International Experiences (11:10-12:30pm)

Moderator: Hyung-Gon Jeong (Vice President, KIEP)

Presenters:

Michael C. Burda (Professor, Humboldt-Universitätzu Berlin)

Warwick McKibbin (Crawford School of Public Policy, ANU, and The Brookings Institution)

Discussants:

Byungyeon Kim (Professor, Seoul National University)

Hankyoung Sung (Professor, University of Seoul)

 

Session 3: Global Impacts of Korean Re-Unification (1:50-3:40 pm)

Moderator: Katharine Moon(Senior Fellow, Center for East Asian Policy Studies at the Brookings Institution)

Presenters:

Ju Hyun Pyun (Professor, Department of Business Administration, Korea University)

Jiyong Zheng (Director, Center for Korean Studies, Fudan University)

Discussants:

Tomohiko Inui (Professor, Preparatory Office for the Faculty of International Social Studies, Gakushuin University)

Young-Rok Cheong (Professor, Graduate School of International Studies, Seoul National University)

 

Panel Discussion Session: Korean Reunification: Challenges and South Korea's Policy Options (4:00-5:20pm)

Moderator: Jong-Wha Lee (Director, Asiatic Research Institute at Korea University)

Panelists

Michael C. Burda (Professor, Humboldt-Universitätzu Berlin)

Warwick McKibbin (Crawford School of Public Policy, ANU, and The Brookings Institution)

Katharine Moon (Senior Fellow, Center for East Asian Policy Studies at the Brookings Institution)

Marcus Noland (Executive Vice President and Director of Studies, Peterson Institute for International Economics)

Woon Gyu Choi (Deputy Governor and Director General, Economic Research Institute, The Bank of Korea)

 

Presentation Summary

Economics of Korean Unification (Marcus Noland)

The main two unification scenarios come down to a protracted, consensual process in which North Korea maintains sovereignty for a significant transitional period, and an abrupt collapse and absorption scenario along the lines of the German experience. A 2014 Ilmin International Relations Institute survey of 135 experts found that the predicted life expectancy of the Kim Jong-un regime was between 10-20 years; a majority (64%) expected the regime to fall due to an internal power struggle; morever, unification with the South would the final endpoint.

These assessments imply that the consensus is towards the abrupt scenario. With respect to this scenario, the establishment of civil order is critical as the US learned in post-Saddam Iraq. If there is prolonged violent opposition to South Korean rule, a quarantine or something akin to the Israel-WBG situation could emerge which would dampen all predicted economic benefits. Rapid clarification of property rights is essential: without clear property rights, there will be no investment, and without investment there will be no economic rehabilitation. The good news is that unification would accelerate peninsular economic growth and dramatically reduce poverty. The bad news: the price tag could easily exceed $1 trillion, or about 100% of the annual South Korean GDP.

Critical issues in assessing unification costs and benefits: property rights, cross-border factor integration, and the rapidity of technological convergence. The key issue is the extent of reform in North Korea and preventing foreign powers from should exaggerating their influence over North Korean decision-making. In the event of unification, the public sector will be deeply involved, but private sector participation crucial as it possesses the capital, technology, and worldwide marketing and distribution networks necessary to rehabilitate the North Korean economy.

Economics of German Unification, Twenty-Five Years Later (Michael C. Burda)

In comparison with many of the political upheavals in the past quarter century, German unification was a remarkably peaceful episode. Nevertheless, a quarter-century of hindsight shows it to be have been a very expensive economic operation. According to estimates at the time, Western Germany entered the marriage with a GDP per capita of roughly 25,000 US dollars per person, while estimates of East German GDP were – after its output had been priced by world markets – at about a quarter of that figure. German unification was a prototypical episode of economic integration between two regions of starkly different levels of economic development, involving trade, labor mobility, capital mobility, and transfers of institutions and technology as well as resources. Whereas the integration process between the US and Mexico, or the US and Canada has been regulated over decades, the context of German unification involved an irrevocable commitment to unleashing all of these powerful forces at once. In addition, households in the former German Democratic Republic (GDR) understood the political commitment implicit from the wealthier West German side, implying that wages in the East would be bounded from below by Western levels. Wages rose sharply during the period between 1990-1993, which made the privatization of Eastern German industries all the more difficult.

By all reasonable estimates of cumulative public and private transfers since 1991, German unification has cost more than 2 trillion Euros, and governmental transfers remain significant between the richer West and the poorer East. Yet the process has been a success: consumption per capita has converged to about 85% of Western levels. East and West German women now have identical life expectancies; men in the East can anticipate living one year less than those in the West. A Pew Foundation survey shows that East and West Germans are now indistinguishable in terms of life satisfaction measures. On the other hand, wages and productivity have converged less rapidly. Per capita GDP is just over two-thirds of the West, labor productivity at three-quarters, while East Germans work about 7% more hours per week than their western counterparts. Why these productivity differences remain is an open research question.

Striking differences with the Korean case are noteworthy. First, the East German population was smaller both absolutely and relative to the richer West Germany (25% in 1991, as opposed to 50% for North Korea relative to South Korea). East German productivity per capita was significantly lower than originally estimated (some had pegged it in 1980 at 70% of Western levels), but it appears much higher than in North Korea; the absolute level of economic underdevelopment of North Korea is by all current estimates much greater. East Germany had a robust industrial past prior to World War II which played an important role in recovery from the post-unification regional depression. Political differences, while important, may not be as insurmountable as the economic issues.

What can be learnt from Modeling Korean Re-Unification? (Warwick J. McKibbin)

Among the key features of German unification are a capital flow from the West to the East rather than a westward labor flow; large fiscal transfers in addition to private capital; a large change in the current deficit of Germany to enable capital to flow from global markets; a large real exchange rate appreciation; and the rise in unemployment resulting from the 1-for-1 exchange rate and near wage parity. What Korea could learn from the German experiences are the necessity of large fiscal transfers from the South to the North to build physical and human capital, as well as the Bank of Korea raising interest rates, as both real interest rates and inflation will rise in the South.

 

North Korea’s Economic Integration and Growth Potentials (Jong-Wha Lee and Ju Hyun Pyun)

An economic gap between South Korea and North Korea has been widened since the 1970s, with incessant military conflicts and political tensions. As reunification is one of the most important social agendas, economic cooperation between South and North needs to be discussed as a preparation process of reunification. Many previous studies showed that economic integration between South and North Koreas would benefit the two Koreas. However, there are limited studies that measure the benefits quantitatively.

In this paper, we analyze possible benefits from economic integration between South and North Korea quantitatively with a special focus on North Korea. Using an empirical gravity model of trade and FDI, we estimate trade and FDI dependence of North Korea on South Korea as well as China and Japan based on the following possible scenarios: i) Geographical, historical and cultural similarities are fully reflected in South and North economic relations, ii) No political and military conflicts between South and North, iii) Economic cooperation is active between South and North. We also evaluate the impacts of economic integration on North Korea’s economic growth.

We found that North Korea’s trade and FDI dependence on South Korea would increase significantly when preventing military conflicts and pursuing economic cooperation between the two Koreas: Our in-sample forecast estimates show that North trade dependence on South would increase to 28.1% of North Korea’s GDP (from 4.1%, 2000-2007 avg.) and FDI dependence increase to 1.8% of GDP (from 0.6%, 2000-2007 avg.). Our results further reveal that if North Korea opened up its economy to trade and direct investment and integrated with South Korea, it could achieve high growth, and the North Korean economy would benefit more from joining a region-wide economic cooperation framework involving China and Japan. The projection shows that the total effect on growth for North Korea through trade and FDI integration is up to 1.88%p. Therefore, we suggest that South Korea should support North Korea in building a more open, market-based economy through expanded trade.

 

China’s Perspective on Korean Peninsula Unification (Jiyong Zheng)

China’s foreign policy is based on two directions: to forge “a new type of major country relationship” and to build a stable strategic base for the development of China and periphery states. In Northeast Asia, China’s target is to stabilize the situation rapidly, and to forge NEA to the motivation and starting point of China’s major power diplomacy and periphery diplomacy.

The DPRK’s political structure, system, economy system and ideology are undergoing a change. If there is no external intervention, the DPRK will have a soft landing. The DPRK is looking to solve the dilemma of waiting for and courting death. So, reunification must be a progressive, long but steady evolution, instead of a flash reunification.

There are four different stages to China’s Korean policy: (1)to bind China with East Asia more closely, fostering more integration, producing many economical circles, and create a stateless economic community; (2) to make an integrated logistical system, trade market, to solve longstanding bottlenecks, and optimize circumstances to the future “flying geese” model; (3) to solve China’s resource strategy, and ease China’s resource dilemma, break China’s internal resource “ceiling,” eliminate the black-hole effects made by the division, and end the dilemma of DPRK and ROK’s isolated island situation; (4) to be the growth axis of trade and labor throughlower trade barriers, and fight new market depression to create a period of strategic opportunities in the region - a decade of “demographic dividends.”

Because of these benefits of the reunification of Korea, China must prepare the vision of Korea’s reunification in advance, and is now adjusting its DPRK policy so that it can lead to the direction of desirable reunification.

 

Prospects of Integration and Reunification in the Korean Peninsula (Sung-wook Nam)

Unification is a process that could be achieved not by mere luck or wishful thinking but by pragmatic planning and operations. For instance, Germany’s Freikauf (Ransom for Freedom), which took place for 27 years from 1963 to 1989, required approximately $18 billion and resulted in the release of 33,755 political prisoners. For the successful implementation of the program, many actors, including the government, the media, and the public, were required to exercise discretion.

Korean unification will also contribute to a balanced development of the entire peninsula from a small ‘u’ to a big ‘U’ in which the distribution circuit linking coastal cities, such as Sinuiju, Mokpo, Busan, and Rason, can emerge as a new base for balanced economic growth.