The Koreas must learn from Germany
By Bob McKee
LONDON: As the special U.S. envoy for North Korea, Charles Cartman, meets North Korean Vice Foreign Minister Kim Gye Gwan in Berlin on Wednesday to forge closer links between the two nations, the pair would do well to reflect on the significance of their host country.
There was much rejoicing after last month's historic reconciliation summit between South Korea's President, Kim Dae- jung, and North Korea's Kim Jong-il, aimed at unifying the two Koreas after 55 years of hostilities. But, as German reunification illustrated, the cost to the richer party could well be crippling.
Since North Korea has signaled its intent to come in from the cold, the world stage has beckoned. Russian President Vladimir Putin on Wednesday began a two-day visit to North Korea -- the first of any Russian or Soviet leader -- to mend strained relations between the once- staunch ideological allies. And next week U.S. Secretary of State Madeleine Albright is due to meet North Korean Foreign Minister Paek Nam Sun in Bangkok.
But any sense that the transition from two Koreas to one will be steady and smooth is ill-judged. There is a cosy idea, prevalent in South Korean circles, that the Northern regime under its eccentric leader can be shored up for a few more decades while the North's living standards are raised somewhere close to the South's.
However, when totalitarian regimes start to talk, it's usually a signal that they are on the verge of collapse. History has taught us that once rotten regimes start to totter, they fall fast. The lesson of the collapse of East Germany after reunification should be imprinted on the collective memory.
And South Korea is far less wealthy country than former West Germany, with a per capita income less than half that of West Germany at the time of its reunification with the East. Also, North Korea's population is nearly half that of the South's, while East Germany's was only one-quarter of the West's.
To ensure some social stability, North Korea's living standards probably need to reach at least one-third of South Korea's within 10 years. The accumulated cost of that would be around US$700 billion.
That works out at 10 percent of South Korea's average annual GDP every year over the next decade, or nearly double the highest estimates of the eventual cost to Germany of its reunification.
And these figures assume that South Korea avoids two mistakes that nearly proved fatal to the super-rich West German economy: first, not unifying the two currencies at a ridiculously overvalued exchange rate; and second, not agreeing to make huge social security payments to those losing their state sector jobs in the weaker economy.
That is precisely what the West German government did. And it is still costing the unified German government 4-5 percent of GDP each year in social payments. It is no wonder that, despite very tight limits on federal government spending throughout the 1990s and a pick-up in economic growth in the last year, a unified Germany still runs a budget deficit and has public sector debt near 60 percent of GDP. If South Korea makes similar payments, the fiscal transfers could add another $150 billion to costs.
These costs would inevitably feed through to South Korea's financial system. And South Korea is still trying to recover from the huge debt hangover created by the crisis of 1998. The unpaid debts of the banking system have been compounded by the collapse of Daewoo, one of the five top chaebol, Korea's business conglomerates.
Hyundai, another chaebol, has been forced to divest huge chunks of its empire to survive, and Koreans who have put their savings in investment trusts (similar to U.S. mutual funds) have had to be bailed out by the government, when the trusts took huge hits to their assets with the collapse of Daewoo. The result has been a massive increase in public sector debt.
In a rich country like South Korea, this level of public sector debt is financeable. And President Kim Dae-jung is going to drive reform forward. This is a man determined to go down in history, and quite possibly in the annals of Nobel Peace Prize winners, as the person who reformed Korea and started unification down the road. And he will continue sorting out the ailing investment trusts, the banks and the chaebol as well.
But fast-tracking Korean unification could ruin this optimistic scenario. Apart from the overall cost, the problem is that the resources needed to do so could only come from the South's corporate sector. Indeed, given the Seoul government's heavy debt structure, the call on the private sector could come sooner and be bigger. The high fiscal cost would raise real interest rates, just as happened in Germany after the fall of the Berlin Wall.
The bottom line is that the world might be a safer place with a united Korea, but will the South Korean economy be crippled in the process?
-- Observer News Service