The death of Kim Jong-il, the monstrous, madman dictator of hostage nation North Korea, creates tremendous uncertainty and risk for the region. Yet one scenario, however optimistic, would be that somehow this event puts North and South on the road to reunification. What might that cost? Well, Germany has paid some $2 trillion over two decades to reunify East and West. But keep in mind that East Germany was only a fourth the size of North Korea. And much richer, relatively. In 1989, East German per capita income was a third of the West’s. The situation in Korea is much different, as this analysis from the Atlantic Council sums up:

North Korea’s per capita income is less than 5 percent of the South’s. Each year the dollar value of South Korea’s GDP expansion equals the entire North Korean economy. The North’s population is half the South’s and rising thanks to a high birth rate. North and South also barely trade with each other.

And what would it cost to raise the living standards of the South?

More than a dozen reports by governments, academics and investment banks in recent years have attempted to estimate the cost of Korean unification. At the low end, the Rand Corporation estimates $50 billion. But that assumes only a doubling of Northern incomes from current levels, which would leave incomes in the North at less than 10% of the South.At the high end, Credit Suisse estimated last year that unification would cost $1.5 trillion, but with North Korean incomes rising to only 60% of those in the South. I estimate that raising Northern incomes to 80% of Southern levels—which would likely be a political necessity—would cost anywhere from $2 trillion to $5 trillion, spread out over 30 years. That would work out to at least $40,000 per capita if distributed solely among South Koreans.

And this 2004 paper makes another estimate, keeping in mind South Korea’s GDP is around $1 trillion:

Our estimate of the reconstruction cost is 10 percent of the GDP of South Korea for 20 years after reunification. In the base case, we assume that 50 percent of the reconstruction cost is paid by the government and the other half by the private sector. Therefore, government expenditure on the reconstruction of the North Korean economy amounts to 5 percent of South Korean GDP for 20 years after reunification.

Fun fact: Around the time of Mao Zedong’s death in 1976, notes AEI’s Nick Eberstadt, North Korea was more educated, more productive and (by the measure of international trade per capita) much more open than China. Around that same time, in fact, per capita output in North Korea and South Korea may have been quite similar. Today, North Korea has the awful distinction of being the only literate and urbanized society in human history to suffer mass famine in peacetime.

So why is the economy so horrible?

1. Closer inspection strongly suggests that North Korea’s long-term economic failure is directly related to the policies and practices embraced and championed by the Pyongyang government. North Korea’s current “own style of socialism” [or Urisik Sahoejuui] is a grotesquely deformed mutation of the initial DPRK command planning system, from which it fatefully and increasingly devolved over time.

2. North Korea is still in principle a planned Soviet-type economy: but for almost two decades it has in reality been engaged in “planning without facts”, and even in “planning without plans” (in the memorable phrase of Japanese economist Kimura Mitsuhiko). In and of itself, this would be enough to consign the North Korean economy to trouble. But to make matters worse, North Korean leadership has insisted on saddling the economy with a monstrous military burden under its campaign of “military-first politics” [Songun Chongchi]. Further, in contradistinction to virtually all other contemporary economies, North Korean trade policy for almost two generations has systematically throttled the import of productive and relatively inexpensive foreign machinery and equipment, thereby guaranteeing that the national economy would be saddled with a low-productivity, high-cost industrial infrastructure of its own making.

3. Add to this North Korea’s unrelenting war against its own consumers (no other modern economy has ever seen such a low ratio of consumer spending to national income, even at the height of Maoism or Stalinism) and Pyongyang’s stubborn, longstanding policy of “reverse comparative advantage” via a juche food policy that attempts to devote no more funds to overseas cereal purchases than foreigners pay for North Korean agricultural products in a country where cropland is scarce and growing seasons are short, and one begins to see how North Korean leadership engineered the country’s remarkable Great Leap Backward–and eventually, even a famine.


This post originally appeared on the online magazine of the American Enterprise Institute.
