The recent sinking of a South Korean naval vessel off the North Korean coast has once again brought the division of Korea, and North Korea's apparent unpredictability, to the minds of many. Sublime Oblivion's Anatoly Karlin makes the point that, in a second Korean War, North Korea would be so outclassed by South Korea and United States forces that the latter could decide the fate of North Korea almost at will, Chinese opinion aside.
This growing military superiority is the consequence of South Korea's growing economic superiority over the North. Whereas before the Korean War the North was the more industrialized region of the Korean peninsula, in 2010 the South is effectively a First World country that, with its population of fifty million and strong exports, is a global economic power that more than deserves its membership in the G-20 (and arguably more claims than Canada to G-8 membership). The North, in contrast, is a country with a collapsing planned economy, barely recovered from catastrophic famines in the 1990s that killed 10-15% of the DPRK's population, that has become dependent on remittances--both official ones from North Korean guest workers in Russia and from North Koreans living illegally in China--and on industrial cooperation with the South in special economic areas. Both Koreas are officially committed to reunification, but in practice, even if it comes about peacefully, it's going to be tremendously difficult.
Goohoon Kwon's September 2008 Goldman Sachs report hasn't passed without notice. Perhaps optimistically, Kwon concludes that a post-Communist North Korea could prosper, income rapidly converging with the North and by 2050 helping Korea achieved a GDP similar in size or somewhat greater to those of the United Kingdom, Japan, and Germany. At present, true, the North's GDP per capita is similar to those of India and Vietnam, and a mere 6% of South Korea's, but the North's abundant and competitive labour force, the potential for synergies between South Korean capital and technology, and "the potentially large gains from productivity and currency appreciation typical in transition economies" could result in a boom. After all, Kwon points out, the rural-urban distribution of the North Korea population and the sectoral development of its economy is similar to South Korea's in the late 1970s.
Isn't a repetition of the miracle possible? It might be well be possible, but likely is quite another matter. Kwon's projection depends not only on an orderly reunification, but a reunification that proceeds well. The problems of East Germany after its absorption into the Federal Republic come to mind. Perhaps the most obviously unrealistic elements of projection comes with the distribution of the Korean peninsula's population. With the South having 50 million people and the North some 24, the North Korean population is a bit under half of the South's. In 2050, in marked contrast, the North Korean population of 28 million--four million larger than in 2010, note--is two-thirds the size of the South Korean population of 2050.
How could this possibly be? Leaving aside the certainty of a sharp drop in fertility, the sort experienced not only be all post-Communist economies but by South Korea from the 1980s to the present, the expanded North's population seems completely unrealistic given the massive differences in living standards between the two halves of the peninsula. Tens of thousands of North Koreans have settled in China despite the risks brought by an illegal status that would lead to their deportation to China. In a reunified Korea, assuming a completely free labour market, why would North Koreans stay in a devastated landscape when a crossing of the DMZ would bring them into a vastly more developed country? Two million East Germans left their own moderately developed territory for the West after reunification. Can anyone seriously suggest that fewer North Koreans would be attracted to a South that's already the destination of a very significant and growing number of immigrants?
This analysis suggests to me that, even after reunification, the two states will remain somewhat separate, and that South Korea will going do its very best to limit migration from the North, allowing the skilled and the 3-D worker and perhaps the pretty people in but limiting the number of other North Koreans. It's not very surprising, really; the overnight entry of millions, possibly more than ten million, of North Koreans into South Korea and its labour markets would have a catastrophic effect on the South, to say nothing of blighting whatever chances the North has for rapid growth and some convergence. I suspect that the South Koreans planning for reunification already expect that the post-reunification North will slowly empty out, as the demographic transition accelerates and migration to the South--and, perhaps, China and overseas destinations--takes off. Their major problems will be in managing the flow.
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The best thing to North Korea, that could ever happen is that the successor of the present dictator would be a second Deng Xiaoping. Open the economy, but still impose some sort of migration restriction to the south. When North Korea is booming it will quickly approach South Korean levels. South Korean companies would be happy to invest in North Korea, and others will follow. North Korea could easily grow much faster than China today does, because many would support catch-up-growth with the South. The second thing is that North Korea still has a high birthrate. The government must do all to keep that high birth rate. The South did the mistake to go into the low fertility trap, a mistake the North shouldn't repeat.
There's no plausible way a de-Communizing North Korea won't shift towards lowest-low fertility, given Korean cultural predispositions and the drop in fertility common to all post-Communist countries, even the ones that--like Poland--saw rapid growth soon after the collapse of Communism.
My analysis assumes that North Korean statistics are accurate, mind; to a certain extent, who knows what the demographic dynamics are?
I would note that North Korea has a very large number of "violence-specialists" and a lot of mineral resources. Left to itself, this system will probably mutate into a chaotic, rent-seeking economic structure, that may make broad-based economic development rather difficult. To converge quickly North Korea need to acquire a strong, developmental state, and that can only be assured with South Korea's direct intervention.
I don't think demographics will matter much at all. I agree with Randy that fertility will likely collapse to lowest-low, but there will still be a gap of twenty years before it will make itself felt on the labor force. Meanwhile, you'll have North Koreans joining the labor force from the military / security services. I very much doubt North Korea would suffer from labor shortages, unemployment is far more likely. To take the East German example, unemployment there remained stubbornly high despite the emigration.
The BEST blog(s) I have read to date... thanks for the dedication you obviously have on the subject of Economics. I love the perspective you have (and force from others) on global and national trends. Thanks again!
@ Sublime Oblivion: I was thinking particularly of labour shortages in the mining sector that's offered up as North Korea's particular contribution to a reunified Korea.
The shortages I was thinking of would be in relation to North Korea's particular advantages of mineral resources and cheap labour. Will the mining sector necessarily work? Any number have been speaking of Trepca's value in Kosovo, but that hasn't taken off despite an abundance of potential labourers, and the consequences of Trepca for the larger Kosovar economy aren't likely to be that great.
As for the cheap labour factor, how viable will this be if border controls slump at all? Large-scale emigration's inevitable, IMHO, not only to the South but to destinations like China: there's a large ethnic Korean community there, no matter how assimilated, and living standards across the Yalu are rather higher.
A transition via militarized feudalism to a more functioning model might be the most plausible good-case outcome for North Korea, but I don't know. Communist regimes were fragile, at least in Europe; liberalization in any of the satellite states, or even some of the Soviet republics, had the effect of rapidly destabilizing the entire power structure. Romania's the closest equivalent to North Korea that I can think of.
Thoughts?
@ Shawn: Thanks! We try.
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