Wednesday, January 22, 2014

Jackpot or Crackpot? Park on Korean Reunification

Dr. Foster is providing the conventional wisdom.  But his fundamental assumption must be examined:

Common sense says that the two massive initial outlays required – raising Northern incomes and rebuilding infrastructure – will constitute a prolonged and crushing fiscal burden, even if both are ultimately in part also investments: in human and physical capital respectively.

We should consider how the ROK plans to achieve reunification.   A more realistic assumption is that it is going to take a generation or more to undo the extreme damage that has been done to the north Korean people and to the physical infrastructure.  Yes it is going to be expensive and yes it is going to be hard and more importantly it is going to be necessary and the right thing to do.  The key is really the ROK plans for unification and an understanding of the realistic timelines for changing the conditions in the north.  Most importantly the plans should not assume immediate absorption but a gradual transition from two systems, to a confederal system to a unified country while working to change the economic system and developing the infrastructure.  I do agree with President Park that reunification could be a jackpot.  Think about the planned cities that the ROK has built (e.g.,New Sango city near Incheon airport).  Think of being able to conduct deliberate planning for the north to develop the right industries in the right places while exploiting (in a positive way) the natural resources of the north.  I am willing to bet that the Korean people can make reunification work.
  • January 22, 2014, 6:10 PM

Jackpot or Crackpot? Park on Korean Reunification

By Aidan Foster-Carter

Getty Images
South Korean President Park Geun-hye speaks during a press conference at the Presidential Office on January 6, 2014 in Seoul. Ms. Park outlined her policy plans for the new year.
The demure Park Geun-hye rarely startles. Yet South Korea’s president did just that on Jan. 6.
In her first press conference after almost a year as president, Ms. Park raised eyebrows by calling Korean unification a “jackpot”. The usual fear of vast costs has it wrong, she argued. Rather, this will be “a chance for the economy to make a huge leap.”
She didn’t elaborate, but cited Jim Rogers in support. The US.. investment guru reiterated his own bullishness on a joint Korean future on Jan. 14: “… South Korea’s capital and technical skills, and North Korea’s labor and natural resources, [can] make Korea grow exponentially.”
Park’s jackpot talk gained her rare praise from the South Korean liberal opposition. Democratic Party leader Kim Han-gil said he was “glad [she] helped break the common misconception that reunification is a cost.” But Kim added a crucial condition: “Only a gradual and peaceful reunification is a blessing. Reunification by absorption [after] a sudden change in North Korea could be a catastrophe.” Or to be more technical, reunification will be path-dependent.
All this taps into a long-running debate. Conventional wisdom views Korean reunification by whatsoever means as hugely expensive. A year ago Seoul’s Ministry of Strategy and Finance  put the cost at 7% of GDP for a decade, or $80 billion annually. Other estimates run much higher. Four years ago in The Wall Street Journal, Peter Beck reckoned $2 to $5 trillion, over 30 years.
Common sense says that the two massive initial outlays required – raising Northern incomes and rebuilding infrastructure – will constitute a prolonged and crushing fiscal burden, even if both are ultimately in part also investments: in human and physical capital respectively.
The obvious real-life precedent supports this. By 2009 German reunification had cost $1.9 trillion, even though the initial West-East GDP gap was far less than in Korea. South Korea’s central bank puts South Korea’s GDP in 2012 as 38 times the North’s, or 19:1 per capita.
Yet Park can cite Goldman Sachs on her side. A 2009 research paper predicted that by 2050 a unified Korea could have the world’s eighth largest GDP, overtaking Germany and Japan. Its author, Kwon Goo-hoon, posits China and Hong Kong as a better model than Germany.
Contrarianism is always welcome, but two big questions arise. Kwon’s premise “assume(s) a peaceful and gradual economic integration between North and South Korea”. That’s like the one about the scientists stranded on a desert island with only an old-style can of baked beans. The physicist can’t open it, but the economist has the answer: “Let us assume a can-opener.”
(Continued at the link below)

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