Modeling Korean unification

DANDONG, China Looking across the Yalu River from shiny new Chinese buildings at the secret, dour world of poverty and oppression on the other side in North Korea, I am reminded of what it was like to look across the Shenzhen River from open, prosperous Hong Kong to Maoist China 30 years ago. So with the latest small step forward in the six-party Korean talks, it is worth speculating on whether and how Sinuiju, on the North Korean side of the river, may be transformed over the next two decades in the same way as Shenzhen, now a city of four million people, of high-rise buildings and vast shopping malls. This is not to suggest any rapid progress in negotiations that at best are one inch forward, three-quarters back. But the talks, combined with Pyongyang's slightly more pragmatic economic policies and the shift in South Korean sentiment toward the North from fear to pity for their blood brethren, make this the best time since Mikhail Gorbachev visited Seoul in 1990 to think beyond nukes and food aid to the possibility of dramatic change and, perhaps, peaceful reunification. The received wisdom in the outside world, and among many South Koreans, is that reunification would impose impossible demands on the South, with millions flooding southward to enjoy a standard of living inconceivable in the North. It would require Seoul to pump untold billions to bring the North up toward equality of income and lifestyle, in the process causing sharp cuts in income levels or employment in the South. Germany is the usual example given for what would be likely to happen. Its economy is still suffering from the manner of its reunification, with the one-for-one currency exchange and the expectation of income equality of East and West. In Korea, the population ratio (2 to 1) and income ratios (20 to 1) are vastly greater. But maybe Shenzhen is a more appropriate comparison for Korea than Germany. It shows how quickly investment and trade can combine with a large, disciplined work force to achieve a remarkable transformation in a surprisingly short time. There are several reasons to believe that reunification would not be as difficult for the South as is often assumed. North Korean workers are literate and highly disciplined and would respond instantly to cash motivations. South Korean firms employ huge numbers of Chinese in low-income, labor-intensive garment-, shoe- and toy-making enterprises, particularly in nearby Shandong. It would be relatively easy to kick start the North by transferring many of these industries to Korea. Even assuming that there were no controls on movement of people after reunification, there are reasons to believe that there would be no flood of millions to the South. Expectations in the North are so low that easily achieved improvements like better food, the availability of fuel and power, and access to such novelties as condoms would keep most Northerners from migrating. Giving them ownership of the property they occupy would also be a major incentive to staying put. The North has a road and rail infrastructure linking its main cities that is badly decayed but is capable of rapid rehabilitation. Heavy industry may need billions of dollars worth of new investment, but infrastructure support for light industry could be achieved speedily and at relatively low cost. Agriculture in the North will always face climatic challenges, but access to fertilizer, fuel and machinery to replace draught animals would bring quick gains. In the immediate aftermath of reunification, the capacity of the North to absorb investment would anyway be limited, and, say, $30 billion a year - not a huge amount for a South with an almost balanced budget and $200 billion in foreign reserves - would go a very long way. Looking a decade or so ahead, Korea also needs the North's demographics - a replacement fertility rate that contrasts with the abnormally low rate in the South. As China shows, fast-growing states can tolerate huge regional income inequalities. And Italy continues to demonstrate, 150 years after its unification, that big income differentials can persist almost indefinitely even in liberal democracies prone to redistributive policies. Korea has a history of fierce regional rivalries and North/South fissures that predate 1945. But even stronger is the ethnic identity that burns furiously on both sides of the demilitarized zone and that ultimately will make reunification inevitable. It will be driven by a sense of common identity, not by an expectation of income equality. That is not to suggest that it is imminent, or that there will not be huge social and political problems, given that two generations have grown up under such completely different systems. But by avoiding Germany's mistakes, the North is a business opportunity more than an economic threat for the South. By 2020 Sinuiju may look just like Dandong, or better.