China’s Economic Reckoning
The Price of Failed Reforms
When Kim Il Sung, North Korea’s founding ruler, died in 1994, many outside observers predicted that his state would die with him. That never happened, of course, and his son Kim Jong Il managed to keep the regime alive until his own death, in 2011. When his son Kim Jong Un took the reins that year, numerous Korea watchers again predicted a collapse. Once again, they were proved wrong. Despite its extreme poverty, North Korea is still very much alive and a major threat to its southern neighbor.
But cracks are appearing. Last December, Kim Jong Un took the unprecedented step of publicly executing his uncle Jang Song Thaek, the second most powerful official in the regime. Although Jang’s removal may help strengthen Kim’s rule in the short run, it could have the opposite effect in the long run, convincing North Korean elites that the 31-year-old heir to the throne is too hotheaded to be trusted. The regime’s patrons in China, meanwhile, were undoubtedly unsettled by the execution of Jang, who was Pyongyang’s chief envoy to Beijing and a proponent of Chinese-style reforms.
But Beijing is unlikely to start putting more pressure on Pyongyang, at least not anytime soon. China’s leaders may not like the current regime, but they like the alternative far less. North Korea’s collapse would likely flood China with refugees and precipitate a military intervention that would bring South Korean and U.S. forces to China’s border. So Beijing sees supporting Kim as its least bad option.
Seoul, for its part, has also traditionally avoided doing anything to destabilize Pyongyang, and for similar reasons. For South Korea’s leaders, living with the North’s occasional pinprick attacks and the ever-present threat of another war is preferable to bearing the crippling social and financial burdens that would accompany reunification.
Even the United States and Japan, which have much less to fear from North Korea’s demise, have quietly decided to live with the regime. Both the Clinton and the George W. Bush administrations struck generous aid deals with Pyongyang in exchange for limits on its nuclear program. Japan agreed to spend $1 billion as part of one of those deals, the 1994 Agreed Framework, to finance two light-water nuclear reactors in the North (a project that was formally suspended in 2002), and Tokyo has contributed generous amounts of food aid. Policymakers in Washington and Tokyo know that they have little leverage to bring down the North Korean regime. But they also fear the regional chaos that regime change would bring.
Such concerns are legitimate, and all outside parties need to take them into account when planning for the regime’s inevitable demise. Even under the best of circumstances, the reunification of North and South Korea will prove more expensive and challenging than that of East and West Germany, given how far apart the two Koreas are in terms of their economies, education levels, and ideologies.
But it is a mistake to conclude that reunification should therefore be avoided. Contrary to popular belief, a merger would not spell disaster for South Korea, nor would it pose an unacceptable risk for the United States, China, and Japan. Rather, it would produce massive economic and social benefits for the peninsula and the region. There can be only one happy ending to the long-running saga of the North: the emergence of a single, democratic Korea. Outsiders should do all they can to promote and plan for this outcome.
Reunification is likely to come about in one of three basic ways. The scenario South Koreans hope for most is a soft landing, in which Pyongyang adopts the Chinese economic model, eschews militarism, and undertakes a gradual rapprochement with Seoul. The second scenario is far less attractive: North Korea, staggering under the weight of economic and social forces, implodes and gets absorbed by South Korea. The third scenario is even worse: the peninsula could be reunified through military conflict, in which, following a major attack from the North, South Korean and U.S. forces finally destroy the regime. Of these three outcomes, a soft landing is the least likely, given how little interest Kim has shown in reform. The third scenario is also improbable; for all his pugnacity, Kim is no more suicidal than his father or his grandfather was. That leaves the second scenario, a hard landing, as the most plausible. So that’s what policymakers should plan for.
The collapse of Kim’s regime would pose many immediate problems, the most pressing of which, from the standpoint of the United States, being how to secure North Korea’s nuclear weapons. U.S. and South Korean forces would have to maintain the command structure of North Korea’s army in order to prevent factional fighting and attacks by die-hard elements. They would also need to provide security, food, and basic public services, such as water, electricity, and telecommunications, in order to avert a humanitarian crisis that would send the long-suffering North Korean population flooding across the borders into China and South Korea and across the sea to Japan.
These are major challenges, but with enough planning, South Korea -- backed by the United States, the UN, and other international actors -- could deal with them. In fact, South Korea’s Ministry of Unification, in cooperation with U.S. defense officials, has spent decades preparing to do just that. In the event of the North Korean regime’s collapse, South Korea’s large, well-equipped, and highly trained military should be able to rapidly assume control of North Korea and provide basic services until a civilian government takes over. The task would prove all the easier if South Korea could involve China in the planning process. So far Beijing has refused to publicly entertain the possibility that the Kim regime may not last forever. But even without Chinese participation, South Korea and its partners should be able to handle the fallout of collapse.
The real fear of South Koreans, however, is not that Seoul won’t be able to deal with the immediate effects of an implosion; it is that the financial price would ruin them. Reuniting Korea would likely cost more than reunifying Germany did: the Halle Institute for Economic Research has estimated Germany’s bill at $1.9 trillion over 20 years. According to South Korea’s finance ministry, reunification would consume seven percent of South Korea’s current GDP -- a share equal to $80 billion -- every year for a minimum of ten years. An advisory body appointed by South Korean President Lee Myung-bak in 2011 put the price tag of reunification even higher, at over $2 trillion. Whatever the final figure, there is little doubt that the endeavor will prove expensive and that the difficulties will be exacerbated by the social challenges of integrating an isolated, impoverished, and brainwashed population.
Although South Koreans tend to focus on the obvious costs, those costs would be outweighed by the benefits of reunification. Most immediate among these would be the disappearance of Northeast Asia’s primary source of instability. Assuming that the regime’s nuclear weapons and ballistic missiles could be secured and its army peacefully demobilized, its dissolution would leave not only Seoul but also Washington and Tokyo much more secure. The United States would no longer have to worry about North Korea selling nuclear weapons abroad or drawing U.S. forces into a second Korean war. Japan would no longer have to fear North Korean missile strikes or the abduction of more of its citizens. And South Korea could stop worrying about North Korea’s artillery pulverizing Seoul, its navy torpedoing South Korean ships, or its commandos targeting South Korean leaders.
Even China would have reason to rejoice. It could replace its unrequited transfers of fuel, food, and other goods to Pyongyang with capital investments that yielded income. And once it stopped propping up the most despotic regime in the world, Beijing would find it far easier to portray itself as a responsible international stakeholder.
The end of the Kim regime would also have huge humanitarian benefits, freeing 25 million people from the grip of the world’s last remaining Stalinist state and integrating them into a modern democracy. The majority of North Korea’s 80,000 to 120,000 state prisoners could leave the government’s slave-labor camps, where most have been consigned for political, rather than criminal, offenses. Average North Koreans could move from a starvation diet, both literally and intellectually, to the plentiful availability of food, information, consumer products, and all the other benefits of modern capitalism. South Koreans, an intensely nationalist people, would also finally get to celebrate the reunification of the Korean family. Korea would once again become a single state, as it was from the year 668, when the Silla dynasty unified the three Korean kingdoms, until 1945, when the Soviet Union and the United States divided it at the 38th parallel.
But the greatest benefits for the South would be economic. Reunification would be far more profitable than is commonly assumed. For starters, Seoul could sharply reduce its defense spending, which currently stands at $30 billion a year, or 2.5 percent of GDP -- a figure that excludes the $1 billion it gives every year to Washington to help cover the costs of the U.S. military’s presence on the peninsula. South Korea could end universal conscription and shrink its 680,000-man military to 500,000 personnel or fewer, freeing large numbers of young Korean men to enter the work force years earlier than they currently do. Also joining them would be the 1.1 million people, most of them young, that North Korea now employs in its military.
The prospect of extra young workers should be especially tantalizing given the rapid aging of South Korea’s population. Thanks to the country’s growing wealth, life expectancy in South Korea has reached 81 years and continues to improve, whereas its birthrate, at only 1.2 children per woman, is among the lowest in the world. As a result, according to projections by the Organization for Economic Cooperation and Development, by 2050, South Korea will have the second-oldest population in the developed world, with nearly seven people over the age of 65 for every working-age adult. Absent reunification, the number of South Koreans aged 15 to 64 will start to decline in 2017; by 2030, so will the overall population.
In North Korea, by contrast, 91 percent of the population is currently younger than 65, and the fertility rate is higher than in the South, at 2.0 children per women. Following reunification, North Korea would add more than 17 million potential workers aged 15 to 64 to the nearly 36 million already in the South. South Korea could thereby avoid turning to Southeast Asia or other regions for low-wage workers, who would be hard to assimilate. South Korean firms could even move their factories from China to North Korea, where wages would be even lower initially.
Reunification would yield big gains in the mining sector. South Korea’s high-tech economy is among the most advanced in the world, but the country possesses virtually no mineral wealth and must import 97 percent of its energy and mineral needs. North Korea, by contrast, has vast deposits of coal, uranium, magnesite, and rare-earth metals -- together valued at $6 trillion -- but it cannot currently access them. With technology from the South, however, this mother lode could be unlocked at last, providing a welcome boost to the global economy.
A reunified Korea would also boast a newly expanded domestic market, experience a spike in tourism revenues -- since some of the most scenic parts of the peninsula lie in the North -- and see its sovereign risk rating improve. As the risk of war finally disappeared, credit would become cheaper and foreign capital would flow more freely into the country.
Once the landmine-fortified demilitarized zone vanished, moreover, trade would get easier and cheaper. South Korea currently functions as an island economy, paying high transportation prices for raw materials. With the border gone, a long-envisioned gas pipeline from Vladivostok to Seoul could finally be built, sending badly needed Russian oil and gas south. Energy costs, which drag down the South Korean economy, would fall dramatically. Korean companies could also begin shipping goods to China and Russia over land.
Over time, a reunified Korea, with a hard-working population of 75 million, could emerge as a consumer and industrial powerhouse -- the Germany of Asia. As two economies became one, abundant new investment opportunities would arise. According to a 2009 report by Goldman Sachs, within 30 to 40 years, the peninsula, if reunified, could overtake France, Germany, and even Japan in terms of GDP. South Korea’s current trading partners -- especially the biggest two, China and the United States -- would benefit immensely from this newfound source of economic vitality.
Despite all these benefits, selling Korea’s neighbors on the geopolitical consequences of reunification will be difficult. Leaders in China fear losing a bulwark against U.S. power, but Washington could assuage these concerns by privately assuring Beijing that following reunification, no U.S. troops would be stationed north of the current demilitarized zone -- or on any part of the peninsula, if that’s what it takes to win Chinese support. Nationalist South Koreans might insist on this anyway; relieved of the threat from the North, they could well demand that Washington withdraw its forces.
Although such a move might feel jarring in Washington, it would not be a foreign policy setback. If anything, the departure of U.S. forces would represent a happy culmination of the long U.S. commitment to the peninsula, which began in the dark days of the Korean War. The United States could still hedge against Chinese expansionism from its bases in Japan and Guam, and it would undoubtedly maintain good relations with a reunified Korea, just as it does with a reunified Germany.
As for Beijing, its ties with Seoul are already better in some ways than its vexing relations with Pyongyang -- and they should stay that way after reunification. Historically, Korea was a tributary state of China, and although that submissive relationship will never be reestablished, China need not fear reunification. The new Korea would become an even better trade partner, and given its desire to avoid a hostile relationship with its giant neighbor to the north, it would likely triangulate its foreign policy between Beijing and Washington.
Japan, for its part, would no doubt look askance at the emergence of a stronger, single Korean state. Nearly 70 years after World War II, the Japanese–South Korean relationship remains fraught thanks to Japan’s dark colonial legacy. But the emergence of a democratic, capitalist Korea would not truly threaten the region’s other big democracy. In fact, reunification would give Tokyo a golden opportunity to dispel anti-Japanese sentiment among Koreans by donating food and medicine and sending aid workers and medical personnel. Japan already ranks as one of the top foreign aid donors in the world, and it could win considerable goodwill by helping rebuild the North.
Given all these advantages, the international community should promote reunification, not postpone it. There may be little that any outsider can do to make Pyongyang change course. But regional powers, notably South Korea and the United States, should stop propping up the Kim dynasty in return for fleeting assurances of better behavior, as they have in the past; Kim Jong Un is no more likely to keep these promises than his father or his grandfather was.
Nor should the West resist the urge to tighten sanctions or retaliate proportionately in response to North Korea’s provocations for fear of destabilizing the country. Even if the North were to implode now, that would be preferable to allowing the state to limp along for decades and waiting for reforms that will never come. South Korea has the most to gain from reunification, so it should confront the prospect with confidence, not trepidation. South Korean President Park Geun-hye caused a stir earlier this year when she called reunification a possible “bonanza,” and she gave a major pro-unification speech in Germany (a symbolic choice) at the end of March. Her government should continue with its public relations campaign to get South Koreans educated and excited about the benefits of reunification -- a task that is particularly important as the younger generation in South Korea grows increasingly wary of it. And Park should make good on her pledge to stay resolute in the face of the North’s threats and provocations, even as she attempts to establish a renewed dialogue with the Kim regime and pursue initiatives such as holding cross-border family reunions. Seoul should not shy away from retaliating -- which it has never really done -- the next time Pyongyang torpedoes a South Korean vessel or shells a South Korean island for fear that doing so could destabilize or aggravate North Korea. Even China would be well advised to stop pouring resources into Pyongyang, unless a new cadre of reform-minded rulers takes power.
To get China and Japan on board, the United States and South Korea should launch a diplomatic initiative aimed at preparing for the contingency of an unexpected collapse. Washington and Seoul should augment their joint military planning by crafting a comprehensive political, diplomatic, economic, and legal strategy for reunification. Both governments should designate diplomatic and political representatives to come up with a civilian counterpart to the joint military plans that would be activated in the event of a conflict with or instability in the North. Both states have much to offer: South Korea’s Ministry of Unification and other agencies could contribute years of expertise on precisely this scenario, and the United States could contribute the lessons learned from its experiences, good and bad, with nation building in Germany, Japan, Kosovo, Iraq, and Afghanistan.
Once the United States and South Korea develop a common vision, they should encourage Japan to join the planning. Tokyo has legitimate interests in the future of the peninsula and would benefit from preparations designed to address its concerns, such as the prospect of a massive influx of refugees by sea. Japan’s logistical support and economic assistance would prove crucial during reunification.
As a final step in this process, the trilateral dialogue among the United States, South Korea, and Japan should expand to include China and possibly Russia. All these key players should be asked to bear some of the costs of reunification in return for a say in how the new Korea behaves in the region. For example, China and Japan could be asked to contribute to the North’s reconstruction -- the former could help develop the North by providing discounted electricity and assistance in rebuilding infrastructure, and the latter could provide humanitarian and financial aid, investment, and expertise -- in return for a guarantee that Seoul will not keep North Korea’s nuclear arsenal. Striking such a deal would solve two big problems: South Korea’s fears about the costs of integrating North Korea and the rest of the region’s fears about an unleashed Korea as a military and economic competitor.
The Kim regime will probably not come to a neat end; the collapse of a state is always messy, and it will be particularly so for a regime so militarized and desperate. But that reality should not blind outside powers to the many upsides of what will come after, nor should it cause them to put off planning for the inevitable. In fact, the best way to cope with future instability in the North and reduce the costs of reunification is for the principal powers to start cooperating now. North Korea has the worst government on the planet. Despite all the challenges a transition will entail, everyone will benefit immeasurably from the rise of a new Korea, whole and free.