[Viewpoint] Unifi cation costs will be huge

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[Viewpoint] Unifi cation costs will be huge

Frustration reigns as North Korea acts like a 2-year-old having an epic tantrum. South Koreans are perturbed by their government’s impotence in the face of deadly attacks. Americans are bitter that one option to curb Kim Jong-il’s nuclear program is worse than the next. The Japanese believe they are a target. And the Chinese are losing patience with their erratic and bellicose ally.

We haven’t seen anything yet. Irritation will rise once world leaders discuss money. Recent tensions brought the issue of Korean reunification to the fore as rarely before. The real questions are: How much will it cost and who will pay? They are big ones and they aren’t getting enough attention.

The price tag will be $2 trillion to $5 trillion over 30 years, says Peter Beck, a senior fellow with the Atlantic Council in Washington. A South Korean presidential committee puts it between $322 billion and $2.1 trillion. But come on, the cost of German reunification — about $2 trillion and counting — suggest even $5 trillion is optimistic.

It’s not a matter of whether the world is willing to bear the cost. It must. North Korea is too nuclear to fail, and a stable peninsula is absolutely in the best interest of the global economy. It’s among the biggest risks hanging over markets. In a sense, peace would be, well, priceless.

In practical terms, though, meshing the two Koreas together could cost more than Japan’s current annual economic output. It could cost more than double China’s currency reserves, six times U.S. President Barack Obama’s $787 billion stimulus package and 45 times Ireland’s bailout.

We’re talking serious money here — far beyond anything the International Monetary Fund and World Bank could cough up.

But the thornier issue is who pays. Picking up the check seemed easier before the collapse of Lehman Brothers in 2008. Since then, governments borrowed massively, U.S. unemployment skyrocketed, Europe’s debt crisis mushroomed and Japan’s deflation worsened.

In a more perfect world, we would look to Asia’s most developed economy. Yet Japan faces daunting limitations — namely, a debt that is 200 percent of gross domestic product. The U.S. has similar constraints and the trajectory of its policies augurs ill for increased spending abroad.

China? It faces huge challenges in the years ahead and committing hundreds of billions of dollars to Korea would be unpopular in Beijing. Like Japan, China’s aging population will strain government coffers. China isn’t a big fan of a unified Korea anyway, as it would remove a key buffer between it and the U.S.

South Korea’s $833 billion economy, meanwhile, can only afford so much.

“Reunification is something hardly anyone in South Korea wants right now,” said Bradley Martin, author of “Under the Loving Care of the Fatherly Leader.”

“That’s not only because of the enormous expense, but also because Southerners’ experience receiving some 20,000 North Korean defectors shows that putting the two divergent streams of Korean culture back together is going to be a huge challenge as well.”

The idea that reunification will go smoothly is fanciful. Will the South’s nouveau riche accept lower living standards to absorb the North’s huddled masses? President Lee Myungbak has proposed a unification tax. South Korean GDP also will take a sizeable, and still unknowable, hit.

Social cohesion is a big imponderable. Once Internet connections sweep the North, won’t folks there bristle at the South’s wealth? And then there’s what to do with the North’s 1 millionplus soldiers. Given how disastrous dissolving Iraq’s military turned out to be, this will have to be handled wisely. This, too, won’t be cheap.

Many look to Europe for clues on what lies ahead. It’s a dubious comparison. East Germans were far more connected to the global economy than North Koreans. Poverty is much worse in North Korea. And it won’t enjoy a common market of the kind East Germans were able to tap into after 1990.

The challenges run far beyond those faced by Germany. Even highend estimates for reunification only get the North’s per capita income to 80 percent of the South’s. Really, we could be talking about $6 trillion or $8 trillion to finish the job.

Perhaps Kim’s regime is banking on a sticker-shock dynamic. It may be betting that once the true costs are tallied, world leaders will balk and try to put it off.

That would suit China just fine, even if there are indications it’s getting fed up. A leaked diplomatic cable from Feb. 22, provided to the Guardian newspaper by WikiLeaks, said young Chinese Communist party leaders don’t see North Korea as a reliable ally and some officials think Korea should be unified under the South.

Getting there will require big money. The longer the process is delayed, the more antiquated North Korea’s economy becomes relative to the South’s and the more expensive the process will be.

A unified Korea is a wise investment, yet we need to think long and hard about how to finance it. The time to start planning is now.

*The writer is a Bloomberg News columnist.

By William Pesek
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