Economic Consequences of Korean Reunification

Until recently, the prospect of a united North and South Korea seemed far off. Through the heavily-armed military fencing that divides the two Koreas, few signs of reunification are apparent. The bellicose nuclear ambitions of the North, United Nations sanctions against their economy, and repeated human rights violations on the part of the government have all made unification less and less likely. But recent changes in global politics—including the summit between U.S. President, Donald Trump and the Supreme Leader Kim Jong-Un, recent elections in South Korea, and efforts of the global community to normalize relations between the hermit nation and its neighbors—have changed the reunification conversation. What would reunification mean for the global economy? Massive changes.

To understand what a united Korea might look like, we have to first look at how the two countries diverged after the 1953 armistice that divided the peninsula at the end of the Korean War.

North Korea’s $28.5 billion economy is unique…to say the least. The communist country is led by a dynastic supreme leader, Kim Jong-Un, who exerts power over all aspects of life in North Korea from the economy to the way people dress and is seen as something of a god to his citizens. Designed after the Soviet system, the North Korean economy is centrally planned. Under the leadership of three generations of totalitarian rulers —Kim Il-Sung, Kim Jong-Il, and Kim Jong-Un— North Korea has become one of the world’s most isolated economies, prioritizing self-reliance and militarism over all else.

Central to the country’s military and political goals is the development of nuclear weapons. North Korea’s relentless pursuit of a nuclear program has brought them back into conflict with the United States and the European Union, who have imposed severe economic sanctions targeting their ruling class, as well as other sectors of their economy. Since 2016, North Korea has faced sanctions on the exporting of copper, nickel, zinc, silver, coal, iron, lead, seafood, textiles, and natural gas—all major aspects of their economy. As a result of these sanctions and severe isolation, the country has suffered from food shortages, mass starvation, underdevelopment, and mass unemployment.

China is North Korea’s largest trading partner, receiving 82.7% of its exports and making up 85% of its imports. The isolated country’s main industries are military products, coal and iron mining, metallurgy and textiles. Overall, economic growth in North Korea has been slow or nonexistent. According to a Bank of Korea estimate, from 2000-2005, the yearly GDP growth has averaged about 2% compared to South Korea’s 6%. From 2006-2010, the country experienced negative growth. Recently, as relations with both China and South Korea have strengthened, their economy has been growing very slowly but steadily.

However, while North Korea may not be economically advanced, it does have plenty of unexplored and untapped natural resources, estimated to be worth trillions of dollars (most estimates give a figure of $6-$9 trillion). This is one reason why countries like China and Russia are enthusiastic about investing in DPRK.

South Korea’s economy is equally unique, for different reasons. It’s safe to say that after the 1953 split when North Korea emphasized isolation, South Korea did the exact opposite. Now, it’s considered the 4th largest economy in Asia and the 11th largest in the world. South Korea’s miraculous economic growth which brought the country out of poverty into the “trillion dollar club” is popularly referred to as, “the miracle of the Han River.” In the span of a single generation, the country rapidly developed and modernized, earning it a spot in the Organization for Economic Cooperation and Development (OECD) in 1996 along with the world’s richest industrialized nations. Many attribute South Korea’s economic success to its rigorous education system, which has historically produced a well-educated and highly motivated workforce.

The economy of South Korea is 36.7 times larger than that of North Korea’s in terms of GDP. According to 2017 figures, South Korea’s GDP is estimated to be $1.4 trillion. Because the country has almost no natural resources, South Korea shifted to an export-oriented strategy and became the world’s seventh largest exporter. While North Korea consistently runs a trade deficit, South Korea has emphasized exporting goods and services in the electronics, telecommunications, automobile, and chemical sectors. In the United States, we see South Korean brands everywhere—like Samsung, HK Hynix, LG Chem, Hyundai Motors, Kia Motors, and POSCO.

North and South Korea were separated in 1953 and went down drastically different paths. The North, under a centrally planned economy, focussed on isolation and the mining of its natural resources and became one of Asia’s poorest economies. The South, embracing a free market economy, worked towards global market integration and the expansion of its high-tech sectors making it the 4th biggest Asian economy. But it is actually these differences that could make Korean reunification such a profound shift in the global economy.

According to a report by Goldman Sachs, a united Korean economy could surpass that of Germany or Japan in size and influence. Here’s their thought process: while the North Korean economic system appears to be in a constant state of chaos, it offers a wealth of minerals and a large and cheap workforce. Pair that with a mineral-poor South Korea that relies heavily on imports to feed its massive industry, and you’ve got growth. The report concluded that “a united Korea could overtake France, Germany and possibly Japan in 30-40 years in terms of GDP in U.S. dollar terms.” Basically, taking a country with an already well-established and productive free market economy, and providing it with cheap labor and raw materials is a recipe for long-term growth and success.

While you shouldn't hold your breath, the reunification of the Koreas appears to be more likely now than at any time in recent memory. There have been a few major changes that may be cause for a little hope. The first is U.S. President Donald Trump’s summit with North Korean leader, Kim Jong-Un. While the world is yet to see the results of these talks, normalized relations between the two nations and talks of denuclearization point towards discussions of reunification. In his 2018 New Years address, Un repeatedly mentioned reunification throughout his speech. Three months later, in a summit in Panmunjom, the leaders of North and South Korea signed a deal committing to peace between both Koreas by the end of the year.

One of the most important changes, though, that may have gone unnoticed by many, was the recent elections in South Korea. On June 13th, the left-leaning Minjoo Party won all but three of the country’s 17 races for mayor or governor and won 11 out of 12 open seats in the National Assembly. This means that President Moon Jae-in's party, which has been fighting for better relations with the North, has a stronger grip on policy decisions. A consensus among South Korea will be instrumental if reunification talks begin. Here, we see a legislative and political basis for that consensus.

While reunification is still uncertain and far-off at best, economists are urging major economies to prepare for what could be a massive shake-up of world economic power.