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The issue of the “costs” of unification is a hardy perennial that never goes out of style. The topic has attracted more attention lately with concerns over North Korea’s growing internal and external stresses and its looming succession, all of which might contribute to political instability, and in the extreme, regime collapse and disappearance of the state.
BOK data suggest that the North Korean economy has essentially stagnated for the last 20 years, while South Korea has continued to grow.
The costs of unification are often calculated as the amount of investment needed to raise per capita incomes in North Korea to a particular benchmark. One conventional target is 60 percent of South Korean per capita income, a figure derived from sub-national variation in per capita incomes within South Korea, the US, and across the EU, a level of variation believed to attenuate incentives for mass migration inter-jurisdictionally. In work done with Sherman Robinson and Tao Wang, we estimated that a plausible set of parameters for things like the rapidity of technological upgrading, that in 1996 North Korean incomes (which we estimated were considerably higher than reported in South Korean statistics) could have been raised to 60 percent those in the South with about $600 billion in investment over the course of a decade.
The model is roughly log-linear. As a first approximation, if the difference between per capita incomes in the two countries has easily more than doubled since 1996, then the estimated costs of unification will have risen to well over $1 trillion (roughly equal to South Korea’s annual national income) and would be growing by the day.
Of course, unification would have benefits as well as costs. Given the extreme militarization of North Korea, there would be a peace dividend associated with the reduction of military tensions on the Korean peninsula and the concomitant reduction in military expenditure that this development would permit. And our model suggests that while economic growth in South Korea would slow relative to a no-unification baseline, North Korean growth would increase dramatically, and overall peninsular growth would accelerate. But these figures serve as yet another illustration of the tremendous cost borne by the North Korean people of the failure of the country’s leadership and associated economic stagnation for more than two decades.
