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One of the issues that I was asked to address by KIEP in my recent paper on US interests on unification was the possibility of a peace dividend. The magnitude (and even existence) of such a peace dividend is highly speculative and scenario-contingent. Nevertheless, as demonstrated by the past computable general equilibrium modeling that Sherman Robinson and I did, the military is a real albatross around the neck of the North Korean economy, and for North Korea, at least, the peace dividend could be quite significant. South Korea could also benefit from a unification peace dividend. The case for an American peace dividend is less obvious, however.
For third countries such as the US there are two potential channels for a unification peace dividend: the direct reduction in expenditures and the release or redeployment of military and intelligence resources associated with the North Korean threat, and an indirect channel of expanded economic exchange with North and South Korea induced by the increased level of economic activity in those countries as a result of their respective peace dividends.
The size the first effect is highly contingent on specific scenarios, most obviously whether the US would maintain a military presence in the unified Korea. Given the consensus that the US military today is overextended, it is unlikely that the elimination of the North Korean threat would lead to an actual shrinkage of the US military or a reduction in the Pentagon budget, so the issue is really how those resources are deployed. Today both public and elite opinion in the US and South Korea is split on the issue of a post-unification troop presence: many would see Korean unification as a victory making the continued presence of US troops no longer necessary. In that case, military asset redeployment to Guam or the West Coast of the United States would probably cost the US a bit of money in budgetary terms, since South Korea currently bears some of the costs of stationing US troops in South Korea (though the South Korean contribution to stationing costs is much lower than under the status of forces agreements the US maintains with Japan and Germany). If US troops remained in post-unification Korea for some broader regional mission, then the issue is moot.
Similar arguments could be made with respect to the reallocation of intelligence resources. But this would most likely take the form of hard to assess improvements in the allocation of resources rather than a direct budgetary expenditures and freeing up of resources for alternative uses per se.
So for the US, the potential peace dividend through the direct channel is elusive.
The US might experience a modest peace dividend through an indirect channel, however. This possibility arises through a second-order general equilibrium increase in US income associated with increased activity in North and South Korea through their respective peace dividends. In the case of North Korea, that increase in bilateral trade and investment is embodied in the general equilibrium model-based results discussed in a previous post since the results for North Korea include the increase in income associated with military demobilization and the redeployment of resources to more rational uses.
In the case of South Korea, there would be some increase in US trade and investment with South Korea induced by South Korea’s higher level of economic activity. The CGE modeling yielded the result that South Korea would experience a roughly $300 million peace dividend (defined as the increase in economic activity associated with reallocating resources away from the military) on its 1996 GDP base. (Note this is an estimate of the true opportunity cost in economic activity foregone due to excess military expenditure under the status quo, not the budgetary amount.) This figure would be approximately equivalent to $600 million at 2013 GDP. This is probably an underestimate insofar as South Korean per capita GDP is higher than in 1996, and as a consequence the distortion associated with devoting resources to the military is larger. If the South Korean income propensity to trade with the US is 8-9 percent, this would suggest that a South Korean reduction in military expenditures associated with the disappearance of the North Korean military threat could lead to a more than $50 million increase in bilateral trade with the US (and a smaller increase in welfare).
