Our first article examined President Moon Jae-in’s startling claim, made in early August, that “Korea can catch up with Japan economically through inter-Korean cooperation.”
Probably not endearing ourselves to the Blue House, this author noted that the thrust of this was not so different from his predecessor Park Geun-hye’s view that Korean unification would be some kind of jackpot or bonanza.
Neither Moon nor Park set out their reasoning in any detail. But both drew, consciously or otherwise, on the work of an economist who had made a similar case several years ago.
Kwon Goohoon, whose CV includes a Harvard PhD and 14 years at the IMF, is a managing director at Goldman Sachs and their chief economist for Korea. These days he mostly opines on real-world issues du jour: why ROK growth is slowing, how the U.S.-China trade spat will affect Korea, what the Bank of Korea (BOK)’s next call on interest rates will be, and so forth.
Kwon’s intervention a decade ago was refreshingly contrarian at the time
A decade ago, Kwon ventured into more speculative futurology. In 2009 he published a paper in Goldman’s Global Economics series (no 188), titled: A United Korea? Reassessing North Korea Risks (Part I).
Others posting this include Choson Exchange, which also noted Kwon’s appointment last November to chair the Presidential Committee on Northern Economic Cooperation (PCNEC) set up by Moon Jae-in in June 2017, soon after taking office. (Kwon still keeps his day job, prudently.)
Importantly, ‘Northern’ here is broader than Korea alone. The remit of Bukbang – its Korean name sounds better than ‘PCNEC’ – is regional, with a particular eye to Russia and Eurasia more widely. Even so, some saw Kwon’s appointment as mainly being about North Korea.
NORTH KOREA: RISK OR OPPORTUNITY?
Hence we can be pretty sure where Moon’s bold talk of catching up with Japan comes from. Kwon’s intervention a decade ago was refreshingly contrarian at the time. His basic point was that, while the risk of North Korea is well-known, there was also an upside that was being ignored.
Namely? Kwon spoke of the DPRK’s “large untapped potential, including rich human capital, abundant mineral resources (valued at around 140 times 2008 GDP) and significant room for productivity gains.” On that basis, he wrote, “we project that the GDP of a united Korea in USD terms could exceed that of France, Germany and possibly Japan in 30-40 years, should the growth potential of North Korea, notably its rich mineral wealth, be realised.”
Space forbids a detailed critique, but several points stand out. First, this was all based on specific assumptions. In a comparison which reads ironically just now, Kwon wrote: “We expect a gradual integration between the North and South, similar to the pattern followed in China-Hong Kong (emphasis added), rather than an instant German style unification.”
One also wonders if Kwon still stands by his earlier study, for the peninsula and region have not evolved as he hoped
So one big question is whether that expectation is realistic. Frankly, it looks even less so now than a decade ago, when Lee Myung-bak retreated – a fatal mistake in my view, but that’s another story – from the bold but positive plans for North-South business cooperation that his predecessor Roh Moo-hyun had signed up to at the second Pyongyang Summit in 2007.
If the political preconditions aren’t in place, what of the economics? Skilled human capital is indeed a plus, as a factor of production. (Although ethics is quite another matter, as Marcus Noland and Joshua Stanton – but few others, especially in South Korea – have emphasized.)
Despite those concerns, I would argue that the bigger picture transcended them. Some of us hoped the Kaesong Industrial Complex would become a Korean Shenzhen: harbinger of a new win-win economic partnership between the Koreas, on the model of Hong Kong and Taiwanese investment in China.
That could have happened, and in my view the whole Korean peninsula would be in a far better place if it had. But it didn’t, and now I fear it never will.
Mineral wealth? That $6 trillion worth has aroused much excitement over the years. (It has also attracted fraudsters). North Korea’s minerals are an asset, for sure – but to whom, on what terms, and at what cost are big questions.
With some now Chinese-owned, this can’t be blithely assumed to be some large uncomplicated dowry or Korean national patrimony.
Scale and demography are further factors. Kwon cites the DPRK’s “favorable demographics”. Yet a 2013 CSIS study warned that unification “will not change the age restructuring already under way in South Korea, and to a slighter extent in North Korea.”
Even a study as optimistic as Kwon’s offers no support for what Moon Jae-in said on August 5
As for scale, this seems to loom large in President Moon’s recent thinking: “The Japanese economy holds advantages over the Korean economy in terms of the size of its economy and the domestic market,” he said.
Size does matter. With close to 80 million people, unified Korea would obviously be a larger home market than today’s South Korea. But getting there is the nub, and as Kwon shows there are many variables – including how fast Northern purchasing power can feasibly be increased.
To be fair, despite his overall upbeat tone, Kwon never denied that unification will also have costs – and how. A table (Exhibit 23) lists various estimates in the literature, all multi-billion — the highest (the Korean Development Institute’s) being a cool trillion dollars for a Geman-style process.
But he maintains that “the integration costs of South and North Korea could be reduced to an affordable level, if backed by appropriate polices” (sic). That misprint for ‘policies’ may also be all too apt.
Again, space forbids a foray into the huge literature on potential Korean unifcation processes and estimates of likely costs. Suffice it to say that Kwon remains an outlier in his bullishness. Most analysts reckon that in Korea, as in Germany, the Big U would be very expensive.
One also wonders if Kwon still stands by his earlier study, for the peninsula and region have not evolved as he hoped.
In 2009 he could write that “The political backdrop in the region is … supportive of peaceful and gradual integration, in our view.” That may have appeared true then, but history took a different path. Surely no one could be so sanguine in 2019.
In sum, even a study as optimistic as Kwon’s offers no support for what Moon Jae-in said on August 5. Let’s hear him again: “The realization of a peace economy through inter-Korean economic cooperation will allow us to immediately catch up with Japan’s advantages.” Immediately, even!
Can Moon or his advisers explain the precise economic linkages behind that preposterous postulate? If not, the only appropriate response is John McEnroe’s: You cannot be serious.
Edited by James Fretwell
Featured image: Blue House
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