The ‘bonanza’ chimera
The author is an economics professor at Seoul National University.
Former President Park Geun-hye once said that reunification would represent a “jackpot” for South Korea. Her successor, President Moon Jae-in, seems to consider inter-Korean economic cooperation the real bonanza for the country. While chairing an economy-related meeting on Aug. 5 shortly after Japan dropped South Korea from a so-called white list of countries eligible for preferential treatment in trade, Moon said, “If a ‘peace economy’ could be achieved through inter-Korean economic cooperation, we can easily overtake Japan.”
Moon reasoned that South Korea — lagging behind Japan in the size of its economy and domestic market — would be able to counter Japan’s trade restrictions through inter-Korean economic cooperation. His line of thought did not come out of the blue. In his Liberation Day address last year, Moon projected that the economic effect from inter-Korean ventures over the next 30 years would reach at least 170 trillion won ($141 billion).
But economic cooperation cannot translate into a “jackpot.” Moon’s 170 trillion won sum seems to have come from a 2017 report by the Korea Institute for International Economic Policy (KIEP), which estimated the value added from the Kaesong Industrial Complex and six other possible economic ventures with North Korea. The total value was based on the presumption that the North’s productivity would grow 5 percent annually in the regions affected by inter-Korean economic projects if the size of those projects was doubled. But such productivity improvement is not possible without changes in the North Korean system — in other words, market opening and reforms. For instance, North Korea must turn into a market-oriented economy where someone who worked at the Kaesong industrial park should be able to start his own company through the skills, technology and management he learned in Kaesong. That is why the title of the study used the terms “economic integration,” and not “economic cooperation.”
A policymaker should know the difference. Economic cooperation refers to a joint pursuit of individual projects without changes in the North’s economic system. Economic integration means a single market under a uniform set of rules. Without opening and reform in North Korea, the effects of economic cooperation will be limited. Even if 10 joint-ventures like the Kaesong complex were established, their contribution to the South Korean national income growth would stop at 0.5 percent at best. Instead, economic cooperation will require a large amount of South Korea’s taxpayers’ money if it involves improving North Korea’s infrastructure. What Moon referred to was the results of economic integration, not economic cooperation.
Economic cooperation in theory cannot bring about an immediate gain because profits are made when cooperation leads up to integration. It would take a long time before South Korea sees any benefits. A bonanza is possible only when North Korea’s political and security risks are removed and progress is made towards opening the market. And not all economic cooperation will succeed. A beneficial venture should provide traction to economic integration, accelerate opening and reforms in North Korea, and improve the livelihoods of North Koreans. If the goal of economic ventures is not clear, cooperation can hardly develop into integration and eventually unification.
Moon seems to regard a “peace economy” as the core of his idea of catching up with Japan’s economic superiority. If peace can be achieved on the Korean Peninsula, that may be possible. But peace cannot arrive as long as North Korea continues to develop nuclear weapons and test ballistic missiles. As a flower cannot sprout in sand, an economy cannot grow in an unreliable situation, a wished-for peace.
A “peace economy” would help ease the ideological divide in the South, but bolstering the domestic market is a different matter. If the two Korean economies are integrated, the cost of conflict in the South over North Korean issues would be lessened. I believe South Korea’s annual economic growth would be added 0.8 percent through economic unification with North Korea, with 80 percent of the contribution coming from eased internal conflict in the South. Meanwhile, even if economic integration is achieved, its contribution to domestic market growth would stop at a mere 10 percent. The size of the domestic market will not grow for a long time even after integration of their economies, as the North Korean economy is only half the size of the city of Gwangju in the South.
“Peace” should not be made to serve as a political slogan for one political group alone. It must be a shared value for all. Genuine and permanent peace can be achieved when peace is a universal value for the people and when it is backed by balanced policies for the good of the people. Politicians’ top responsibility should not lie only in making friends with North Korea. The country must first become united and harmonious before achieving peace with North Korea. Few would agree that our society has become closer or united under the Moon Jae-in administration. The government and ruling party played a part in worsening conflict in our society.
On Aug. 5, Moon should have said, “If denuclearization can be achieved and the two Korean economies are integrated, our economy could become as strong as Japan. Peace is South Korea’s highest value. We will endeavor to defend peaceful relationships with all nations. We will work harder to build a better future with Japan. I will also strive harder to achieve peace amongst us so that our people can become united to push the country forward.” These are the words of hope and peace we would like to hear from the president in his Liberation Day address today.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, Aug. 14, Page 31