One of the biggest global ambitions of policy makers, economists and armchair
generals around the world is the peaceful and sustainable reunification of North and South
Korea. There are of course a lot of steps between the current situation on the Korean
Peninsula and reunification, but if this could be achieved it would lift tens of millions of
people out of poverty, hopefully bring them up to the living standards of not only one
of the most successful economies in all of Asia, but all of the world.
Of course, that's a big if. It's easy to look at case studies like the relatively
successful reunification of East and West Germany and be tempted to just copy that strategy.
But relinking North and South Korea would be a challenge on a completely different level,
and it's worth exploring why. Even ignoring the geopolitical and potentially even military
problems involved in making reunification a reality, even from a purely economic point of
view, there is a very real chance that such a situation would just drag the South down
instead of lifting the North up if it's not managed very effectively.
The sheer cost of such an economic project alone is a major issue that has led some economists,
and even an ex-South Korean president, to propose preemptive measures like a reunification tax
so that the country isn't economically crippled if the day ever comes that Korea becomes one again.
This plan to raise nearly 1 trillion US dollars as an emergency fund for a future that may never
happen was never implemented, and that was in no small part because South Korea itself has
its own economic problems to deal with. Even if this money was raised without decimating
the economy in the short term, successful reunification would still be far from guaranteed,
because roughly 1 third of the population of the new country would be without a formal education,
real skills, or even the general know-how of what it takes to survive in the modern global economy.
North and South Korea may share a common border, a common language, a common history,
and even a common name, but economically they are some of the most different countries in the world.
Put simply, it would be a significantly less daunting economic challenge to unify Mexico
and the USA, and to understand why we need to as always answer a few important questions.
How would reunification help the economy of North Korea? Would this come at the expense
of crippling South Korea? And finally, if this was to happen,
what would be the economic guidebook to making it as smooth as theoretically possible?
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A country being split apart and then brought back together after a long period of separation
is not something new. Of course, the most obvious comparison would be the reunification of East and
West Germany in 1990, which has a long list of similarities. Both of these sets of countries
were somewhat haphazardly divided by the allies following the second world war. North Korea and
East Germany both rely, or relied on a larger backer to support their domestic industries,
China and the USSR respectively, and both of them were maintained despite the economic
costs in no small part because they acted as a geographic buffer between misaligned
geopolitical interests.
Now Germany today is a highly developed economic success story. It's the fourth on track to be
the third largest economy in the world, it has a diverse industrial base, and it's a highly
respected member of the international community. So with the benefit of hindsight it's easy to see
that reunification was a success, but that was far from guaranteed. And reuniting East and West
Germany could have easily been an economic disaster that took down all of Europe. In many ways it
already kind of was. The problem was that even though East Germany was one of, if not the most
technologically and industrially advanced countries in the eastern bloc, it was still far poorer and
far less developed than the west.
When it first became apparent that reunification was happening, the government of then West
Germany, as well as most economists, were excited by the opportunity to just add on
significant manpower and industrial capacity to a western economy that was already doing quite well.
The reality was that most of the industrial capacity of the country,
from factories to transport infrastructure, was completely outdated and poorly maintained.
The workforce of the east was also not as well trained or educated as their western countrymen.
The Soviet Union, and by extension the satellite state of East Germany,
didn't collapse because their economy was doing amazingly well.
So instead of gaining a productive addition to the successful economy of the west,
the east, at least initially, was a massive burden that required significant investment
just so that it wouldn't cripple the entire country.
The new unified Germany also couldn't be slow about their efforts to lift up the east because
if left unchecked it would have caused a significant strain on unemployment and welfare services.
Even though Germany was a free-market economy, it was home to a system known as Rhine capitalism,
which in the simplest possible terms attempts to blend the best elements of free markets,
like the drive to innovate and work, with the best elements of an essentially planned economy,
like making sure that people have the resources they need to be a productive member of society
and direct control over things like industrial development.
Of course, at least that's the theory.
In practice this blended approach has actually worked quite well for Germany,
and the reason it's important as it relates to reunification,
was that it made it in some ways much easier, but in other ways a lot harder.
Harder because unless all of the new citizens of the country from the east
were specifically excluded from generous welfare support,
then a large population of suddenly unemployed workers would put a huge strain on resources.
The one redeeming aspect was that Rhine capitalism gave the new collective national
government more direct control over the economy to take the necessary drastic actions.
That drastic action was to raise interest rates to attract as much foreign investment as possible,
and use that capital to make massive investments in the east to try and get
it up to speed with the rest of the country.
It worked about as well as it could have, but it did cause other issues throughout Europe.
The high interest rates that Germany offered made them a very attractive destination for
international investors, all at the expense of all of the other European countries that
saw the value of their currencies decline, so Germany wasn't particularly popular in
Europe at this time, but historically that wasn't something they cared too much about.
Despite these drastic actions, the reunification was still a monumental challenge that was close
to failing spectacularly for almost a decade. Multiple economists that worked on reunification
said that the whole thing working as well as it did was nothing short of a miracle,
and it's still not perfect.
Even today, more than 30 years later, the east is still significantly poorer and less
productive than the west. The average east German has around one third the wealth of
the average west German, and that's despite the fact that Berlin, the country's largest and
wealthiest city, is located in the east, which means that all of the other regions surrounding
this centre are significantly further behind than even these rather dire numbers would suggest.
Now, there's a reason that we've spent so long exploring east and west Germany in a video
that's supposed to be about the reunification of countries on the opposite side of the world,
and that's because all of the challenges, close calls, and persistent ongoing issues that have
been experienced in Germany would be completely insignificant compared to what would have to
be overcome in a unified Korea. Even in a future where the countries become one in a totally
peaceful process that doesn't involve conflict, the destruction of infrastructure, or the
involvement of other international powers, the new Korean economy would still be in for a
significant uphill battle. That is also a very optimistic and possibly naive assumption.
The trillions of dollars required as an upfront cost to reunify Korea doesn't include harsh
realities like the fact that the current government in the north is unlikely to give
up its power peacefully, and even if they did, there are monumental logistical challenges to
overcome first. The border itself is the most heavily militarized region in the world,
there are more than a million landmines dividing the two countries, and cleaning those up would
be a project alone that could take hundreds of years, require trillions of dollars, and inevitably
cost the lives of many workers. All of that needs to happen before the country can really become
one unified state. But let's do what all good economists do and make wild assumptions about
everything working perfectly, just so we have an easy model to work with as a case study.
Even if the heavily militarized border just magically vanished one day,
the problems would have only just begun.
For starters, the size and complexity of economies like South Korea today are significantly beyond
what even advanced economies like West Germany were before reunification.
South Korea's economy is centered around highly technical industries like technology,
advanced manufacturing, and even shipbuilding, which require extremely high skill levels,
world-leading technologies, and the cooperation of dozens of other countries around the world
as suppliers, investors, and end-consumers.
South Korea is the second-largest shipbuilding country in the world today,
only technically being beaten out by China.
Although Chinese shipyards tend to build a high number of significantly smaller,
cheaper vessels, so the value of the South Korean shipping industry is still higher,
even though they produce fewer vessels and less total capacity overall.
Shipping is just one industry that makes up a relatively diverse economy,
but it's a great demonstration of how a large economic shock like this could
undermine a unified Korean economy.
Ordering a ship involves international shipping companies investing often hundreds of millions
of dollars for a vessel that will take years to manufacture.
The millions of components in these ships also have to be sourced from thousands of different
suppliers inside and out of the country, and new trade dynamics with countries like China,
which probably won't be happy about losing their buffer country,
or restructured labour markets trying to incorporate workers from the north will
inevitably complicate all industries, but especially those as complex as shipbuilding
to the point where international buyers may be concerned about the ability of the
country to deliver their vital investment on time, and will instead look at other
shipyards in places like Japan, Germany, or China.
It's not a perfect rule, but a more sophisticated economy tends to have more moving parts,
and with more moving parts there are more things that can go wrong,
especially with a shakeup as large as absorbing another country.
West Germany was an advanced economy by 1990 standards,
but the world has moved on significantly since then, and the role of global trade,
finance, and cooperation contributes twice as much to economic activity now as it did back then.
Beyond just making foreign investors, customers, and suppliers feel slightly
uneasy about their operations in a country going through such a radical change,
reunification would also have an impact on the country's ability to borrow
right when they need it the most.
In order to attract foreign capital following reunification,
Germany had to offer extremely high interest rates on government borrowing,
because otherwise lenders wouldn't be willing to take the risk on a country
in such an unstable position.
If Korea is going to need to invest trillions of dollars over at least a decade just to get
half of the country up to speed, it's going to need foreign loans, and if it has to pay
a high interest rate on those loans, it's going to make managing the economy even harder.
But maybe it's not all bad news.
Before addressing the most serious challenges that reunification could cause,
it's only fair to balance out this overview with some genuinely
surprising opportunities that this could present.
The disclaimer that nobody can predict the future, least of all economists,
is long overdue in this video, especially since we are exploring a completely hypothetical future.
But in the long run, a reunified Korea could present some very real advantages
to both halves of the country.
Of course, the north would benefit the most from the opportunity to live and work in a stable,
industrialized economy, and pretty much no matter how bad the economic fallout gets from what could
be a very slow and expensive reunification process, their living standards would improve significantly.
Now even though the brunt of that uplift would be funded directly or indirectly by the south,
it wouldn't be a complete charity case.
South Korea has its own economic issues that once the initial challenges are sorted out,
could be significantly helped by becoming a single country with the north again.
For starters, there are simply resources.
The huge relative economic success of the south compared to the north is even more stark when
it's considered that the south of the korean peninsula is almost entirely devoid of natural
resources.
The north on the other hand is rich in fossil fuels, metals, and rare earths,
which all have massive export value or could be used in domestic industries.
At the moment, North Korea struggles to utilize its natural resources to build
national wealth because its woefully out-of-date machinery and infrastructure
just can't extract them as efficiently as advanced economies with modern mining equipment.
Even though labor is extremely cheap, or of course often free in North Korea,
the end cost of most mine commodities is only marginally impacted by the cost of labor.
The other two factors of production, land and capital, are far more important.
Land because, well, they can't extract natural resources where there aren't any,
and capital because most modern mining just can't be done with pickaxes and shovels anymore.
Modern industrial mines in advanced economies like Australia, Canada, or even Brazil
do not really employ that many workers.
Massive sites producing billions of dollars worth of resources every year are often manned by less
than a thousand on-site workers. Even when those workers are paid extremely well,
which in these advanced economies they often are,
they will still be able to extract resources more cost-efficiently overall by utilizing capital.
A large bucket-wheel excavator can move more material in one rotation than a
worker with hand tools can move in a year.
And all workers, even ones kept in terrible conditions,
still require some resources to be kept alive and working.
So the Australian fly-in fly-out miner getting paid 200 grand a year is still going to produce
more resource output for every resource input than a North Korean worker using
leftover Soviet and Mao-era machinery.
If these countries do unify, then not only would the South be able to invest
in the necessary infrastructure to efficiently harvest these valuable resources,
they would also have the global standings to be able to sell them around the world,
or just use them in their own existing resource-intensive industries.
They probably wouldn't need to move them that far either, because another advantage of
reunification would be that the world's largest resource-consuming economy would
be right on the doorstep of the new unified Korea.
At the moment, the industrial centres of South Korea, for all intents and purposes,
operate on an island.
The only way into and out of the country is on a boat or a plane,
because nothing is going through the north onto the rest of the continent.
Now, for long journeys, shipping is the most efficient way of transporting goods.
But if materials or products have to be loaded onto a truck or a train,
then unloaded and loaded onto a ship, and then unloaded back onto a truck or
a train again at the other end, the cost per mile stays in the benefit of
just a truck exclusively for quite a long range, and using a train for a longer range still.
Every loading and unloading adds cost to the journey,
which need to be made up for with the lower cost per mile of the ship.
Of course, to move stuff across the pacific to the US,
a cargo ship would still win because of the sheer distance travelled,
and well, that's not like a truck would work anyway.
But to access the market of China, cargo rail could be incredibly competitive,
and that would work to advantage the country both ways as well.
More competitive exports to China, and cheaper imports from China.
Now of course, all the geopolitical experts that we spoke to through our
team at context matters said the same thing,
which is that despite these advantages, China doesn't want this to happen,
because it puts a major potential adversary right on their border.
But the purely economic benefits would be undeniable for both countries.
Accessing more resources would be great,
but arguably the bigger win would be the resources that are not wasted.
South Korea has one of the largest and best-funded militaries in the world.
Every year it spends close to 2.7% of its GDP on military expenses,
and that's on top of the forced conscription of all South Korean men,
which takes productive labor out of the economy for 18 to 21 months.
As a somewhat humorous side note to a rather grim issue,
members of the Korean boy band BTS were also forced to do this service
at the absolute height of their popularity.
Given the huge domestic and growing international demand for Korean entertainment,
this enlistment was estimated to cost the South Korean economy
as much as the equivalent of 5 billion US dollars.
Now that may be very impressive,
and honestly good on them for not thinking they're above their fellow countrymen,
but every year hundreds of thousands of Korean men are made to do this service,
and they could be producing value for the economy,
getting an education, or starting a family.
Collectively that will be costing far more
than even the almost comical loss sustained from losing a boy band for a year and a half.
Of course the reason they don't do away with this practice despite its huge economic costs
is because the country is still technically at war with its nuclear-armed neighbor to the north.
Heightened military readiness also costs the comparatively
far smaller North Korean economy a much larger relative share of their total output.
The small disclaimer here is that reliable sources are much harder to come by for
North Korean economic and military figures,
but their defense force conservatively accounts for 33% of their total economic output,
similar to the expenditure of Ukraine,
which is currently involved in an all-out war with a much larger military power.
If these countries were unified, things like forced conscription and crippling defense spending
could be reduced to rates in line with their international peers,
leaving a lot left over to improve the everyday lives of the country's citizens.
Again this is assuming that these current military
tensions wouldn't just be traded for tensions along a slightly more northern border.
Now another advantage is simply manpower, which in a way would be the biggest opportunity
and the biggest threat to the potential future where North and South Korea come together.
South Korea has a rapidly aging population and the lowest birth rate in the world.
The country also hasn't been very attractive to migration,
because not many migrants looking for a new place to live and work know Korean,
the opportunities there are not as attractive as other major advanced economies,
and historically the government has been quite resistant to migration anyway.
North Korea could offer a boost to the south in this area because their population is a lot younger.
Unfortunately of course the reason their population skews younger is in no small
part due to malnutrition, poor sanitation, lack of access to healthcare,
and of course the role of the state.
As tragic as the reasons are, bringing the two countries together could potentially
solve two of the most existential problems in the north and the south,
extreme poverty and an aging population respectively.
The average age of a North Korean is nearly a decade younger than the south,
which means that they could take over a lot of jobs as people in the south get
too old to work or look after themselves.
The necessary investment needed to get North Korea up to a point where it wouldn't be a
drain on the south would be massive, but from this perspective it could almost be
seen as a retirement plan for the rapidly aging population.
Birth rates in both halves of the country would also likely improve as people in the
north have to worry less about where their next meal is coming from, they'll have more time and
resources to safely start a family, and people in the south will be helped along by the new
opportunities that will come with an economic project this vast.
But unfortunately that positive note reveals the biggest issue of all.
East and West Germany struggled to equalize a population that was already
far more equal than North and South Korea.
The population in the north may be significantly younger than the south,
but they're more than a decade behind on average in education levels.
East and West Germany had that gap as well, but the east was still an industrial economy
thanks to a strong focus on heavy industry,
perhaps at the expense of everything else that the soviet economies had.
Workers in the east could be given updated tools and some basic training and pretty
much get straight to work doing what they were doing before.
Of course that's massively oversimplifying things,
but at the time they were both basically just manufacturing economies in different
stages of development.
South Korea by contrast currently has hundreds of thousands of young workers with advanced
degrees in educational levels that put most people in the world to shame,
that are struggling to get even basic jobs.
North Korean education is surprisingly decent,
but it's not at the standards that would be expected in most major industries in the south.
Should a doctor with a degree from Kim Il-sung University Medical School be
allowed to operate in a country famous for its medical prowess?
If they are, what happens to one of the largest export industries in
the country if they badly hurt or kill a patient?
If they are not, then the new country will have a third of its population
unemployed while they retrain, which is a process that could take decades
and completely undo any of the demographic advantages of bringing the countries together.
Now of course economics is an important consideration for this issue,
but it must be remembered that economics at its core is not about employment,
budgets, debts, trade deals, or even productive output.
Those are all very important, but ultimately just a means to an end.
Economics is really about how people interact with things of value,
and hopefully the world sees the opportunity to end one of the fiercest global tensions
fueling an unimaginable human suffering as a worthwhile endeavour,
even if it does come at a financial cost.
But unfortunately it's unlikely to be a reality that's useful for
anything other than an economic case study anytime soon.
While putting this video together we worked with geopolitical experts from our new sister
channel context matters in conjunction with a video that they had been working on for a while,
which tragically explains in great detail why the north can maintain the current division
almost indefinitely and you should be able to click to that video on your screen now.
Thanks for watching mate, bye.