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German lesson: Go slow on uniting economies

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Oct 21,2004
The German experience can provide particularly useful lessons for Korean unification in the economic area, experts say, and to avoid encountering the same problems the Korean government would need to move cautiously in integrating the systems of the North and South. “Politically, Germany’s reunification was a success, since it was the German government’s top objective at the time,” said Yoon Deok-ryong, director at the Korean Institute for International Economic Policy. But many experts suggest that in economic terms Germany’s reunification, in October 1990, has been a failure, and they warn that the biggest obstacle in the Korean post-unification period is integrating the different economic systems that have been practiced in the two states for more than half a century. Kim Jong-yoon, a researcher at the Korea Institute for National Unification, said the Korean government must not confuse integration of the economic systems with political reunification, as was the case in Germany, adding that Germany was too quick to overturn the economic system in the East. “The biggest mistake in Germany’s reunification was that before the Berlin Wall crumbled, the political logic outweighed the economic consequences, which resulted in many economic side effects after the reunification, including massive unemployment, that have not been resolved yet,” Mr. Kim said. The effort to swiftly integrate the different economic systems resulted in a widening gap between eastern and western Germany, studies indicate. Notably, unemployment in the former East Germany has surged from 2.9 percent one year after reunification to 18 percent currently. On the other hand, unemployment in the former West Germany has stabilized around 8 percent after rising to more than 9 percent after reunification. West Germans’ burden Moreover, surveys show that West Germans feel burdened by transfer payments of more than $1 trillion that have been poured into eastern Germany since 1991. Aside from the tremendous costs of reunification, analysts say the rapid integration of the two countries’ currencies created additional problems. “Germany didn’t wait for people to get adjusted to the new economic system. Instead, they even applied the new currency system in the first few months after reunification, which later contributed to the worsening economic situation,” Mr. Kim said. Experts say the Korean government needs to be even more cautious in the post-reunification era since the gap between the two Koreas is far wider than was the case with Germany. “The South Korean government needs to know the exact market value of North Korea’s economy,” Mr. Kim said. According to the Bank of Korea, South Korea’s economy is 33 times larger than that of the North. “South Korea’s gross national income per capita is 16 times larger than that of North Korea,” said Ahn Ye-hong of the central bank. He added that “Some of the domestic companies dealing with North Korea, including Samsung, have been insisting that North Korea’s information technology sector is advanced, but our studies still show that North Korea’s economy relies on basic manufacturing industries, including agriculture.” Boosting the North’s industry Without first enhancing North Korea’s industrial base it would be dangerous to open the North to the free market system, the integration of the labor market and unification of the currency system, Mr. Kim said. By the end of 1994, Germany had privatized all East German companies, said Bae Jin-young, a professor of international affairs at Inje University. “No country in history has ever been so bold and swift in privatizing companies,” Mr. Bae said. The result was the closing of many East German firms that lacked the competitive skills to survive, including Trabant, the automobile manufacturer. Mr. Ahn of the central bank said North Korean companies would need to be protected for several years in the post- reunification period to build up their competitiveness before turning them over to the private sector, especially since a unified currency would raise the cost of North Korean products. “While an automobile made in North Korea, for example, would have the same price tag as one manufactured in the South, it would lag in quality because of the lack of competition. Consumers would likely turn their backs on North Korean products if they were subjected to market forces without any protection,” said Mr. Yoon of the Korean Institute for International Economic Policy. “Without government protection, North Korean companies would be out of business and people who lost their jobs would start migrating to [the South], seeking work, and worsening the unemployment rate in the country,” he added. “The government needs to be patient and educate North Koreans to adjust to the new economic system,” said Mr. Kim of the Korea Institute for National Unification. Other experts say the unified Korean government needs to provide a system that would guarantee jobs in the North to prevent labor migration. “After 50 years of separation [the country] cannot be united in a single day,” said Mr. Kim. by Lee Ho-jeong


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