The Cost and Benefit of North-South Korean Reunification ----Abbey and Jizhao

Imagine!

One day, North Korean regime collapses, and the South soon takes over the whole peninsula. More than 25 million Northerners are called “citizens of the Republic of Korea” now.

North Korea, or the “Northern Part of Korea”, Fact BookPopulation: 24.5 million in 2012Area: 123.138 km²Nominal GNI: 29.3 billion USD in

2011GDP Growth Rate: 0.8% in 2011GDP per capita: 1800 USD in

2010One of the world’s poorest and

least developed countries

Sources: Ministry of Unification, South Korea, and CIA World Factbook

Female Life Expectancy

Labor Force Participation

Unemployment

Even though the North’s labor force participation is higher than that of the South, the unemployment rate of South is lower because Northern firms have been struggling since 1991.

Education

99.9 percent literacy rate 12 years of primary and

secondary education are compulsory and free

Focused on communist ideology and supplying skilled labor

North Korea South Korea• 97.9 percent literacy rate

• Nine years of schooling are compulsory, private and public schooling available

• Four in five high school graduates go to higher education institutions

Scientific and Technical Journal Articles - Medicine, Mathematics, Engineering, Sciences

Current Situation GDP per capita - $1,800 in N. Korea, $33,200 in

S. Korea 1in 4 children are stunted from chronic

malnutrition Two-thirds of the population faces chronic food

shortage, exacerbated by floods, droughts and mismanagement

In 2012, South Korean firms were employing 50,000 workers in North Korea

North Korean wages are set by the government versus set by market in South Korea

South Korean firms pays North Korean government the workers wages, unclear how much of the wage workers receive

Current Integration System for North Korean Defectors

Hanowan - 12 week integration center.

◦ Medical care, physical examination, counseling, introductory courses on

Korean society, job training,

Hana Centers (29)

◦ Local centers that provide 3 weeks of intensive training on education,

health management, cultural understanding, social life and

employment, with continual monitoring for 1 year period

◦ they are provided money for transportation, food, and household

expenses during their training period, and each receives personal

career counselor

Costs approximately one billion won (about $954,016) to train and

educate one defector

Government subsidizes half of defectors wages for up to 2 years

While unemployed, monthly livelihood protection system payments of 500

thousand won (about $477), twice the amount given to unemployed South

Koreans.

Provide housing assistance $16,257 for one person and $43,638 for 7+

members

Considered citizens of South Korea

Still Many Problems.

Refugees are considered lazy, dependent, selfish, and are treated as second class citizens

Don’t understand capitalist society, and don’t want to start out with blue-collar jobs

Jan 2011 - N. Korean (defectors living in the South) unemployment is 50%

Many suffer various illnesses, including psychological, due to not receiving proper medical care in North Korea, where there are shortages of medical supplies

Struggle to stay in Universities because they didn’t receive the proper preparation

Money can’t remove sixty years of totalitarian society.

Struggles with Unification

The cost of social welfare benefits paid to South Korean citizens is nearly 1600 USD. If the number of North Korean defectors increases, it will be difficult for the South Korean government to manage this huge financial burden.

If Northern workforce goes South, Economic devastation in North, “brain drain” and increase in unemployment in South Korea will lead to further resentment of northerners.

Low productivity in Northern firms will lead to further unemployment in market economy

GDP Composition of the North

Manufacturing 47.2%, Services 29.4%, and Agriculture 23.4% (2012 est.)

Large, but outdated, industries, especially heavy industries

ManufacturingServicesAgriculture

Large Heavy Industries, Especially Military Industries Influenced by Stalinism, all the socialist states

adopted the state-sponsored industrialization approach, in which the state highly and disproportionally invests in its SOEs of heavy industries

Songun, or “Military First”, policy in North Korea stresses that the army should play a major role in its economic development, including huge investment in military industries.

After the collapse of the Soviet Union and other socialists states in the Eastern Europe, North Korea lost its access to energy and other industrial raw materials, greatly hurting the supply-side of North Korean economy.

Import-Substitution Industrialization vs. Export-Oriented Industrialization

North Korea, indeed, adopted the approach of ISI, while South Korea has been adopting the EOI model since 1960s.

In the short run, the economy in North Korea seemed promising, but it created problems in the long-run.

E.g. inferior goods, the disparity between market reality and central-planning directives, outdated management systems

Increasing the economic and social costs of North Korea

However, after the reunification… Let us listen to the personal

experience of Ms. Kim Hee-EunMy name is Kim Hee-Eun, after

serving in the army for 5 years, I started working as a worker in an arsenal.

After the reunification,the arsenal was dissolved,I found a new job in Chollima tractors factory.

North Korea Manufacturing Products vs. Foreign ProductsHowever, the revenue of our factory has

been declining since most northern farmers start purchasing tractors made in China, which are cheaper and better.

Also, it is impossible to sell our tractor either in the south or abroad, because our products cannot compete with those tractors produced in the US, Japan, or China.

After 2 months, our factory declares bankruptcy, but nobody wants to buy our factory. Our machines are really out-of-date, and our labors are not as skilled as those from the south.

I become unemployed, but what should I do?

Solutions and Structural Reforms of Northern IndustriesAbandon military industries since military

defense of the North is transferred to the RoK army, and import assembly lines of other products to these previous arsenals.

Reduce the share of inefficient and outdated heavy industries in the north, and encourage southern and foreign entrepreneurs to invest in previous heavy industries.

Using the mechanism of market to decide the future of other industries, especially light industries.

Keep Rason Special Economic Zone working, in order to maintain the access to natural resources and capital from China and Russia.

Problems and ChallengesSouthern and foreign investors may be

reluctant to invest in these outdated industries, because it takes time and money to upgrade old facilities and management systems.

After the reunification, most labors are likely to go to the south in order to get more job opportunities and higher salaries, reducing the amount of labor force in the north, negatively affecting regional growth and development.

Factories in the north tend to lay off a large number of workers for increasing the efficiency, and the large scale unemployment raises social cost. (E.g. Xiagang, or off the post, in China)

Problems in China in the1990s, as well as Problems in Northern Korea

Xiagang, or laying off workers, was prevalent in China in 1990s, when large SOEs could not feed the large number of labors who depended on the “socialist safety net”.

Film recommended: 24 City, directed by Jia Zhangke and officially selected by the 2008 Cannes Film Festival, follows three generations of people in an SOE as it gives way to a real estate complex.

Government’s Role in the Transformational PeriodOffering financial incentives to firms and

corporations which invest in the industrial facilities in the north, in order to regenerate the growth and development of the north

Offering tech-education and training programs to the labor force of the north. Also, universities and other higher institutions in the south should accept talented students from the north, increasing the number of skilled labors and managers.

Extending the road and railway systems in the north, upgrading the infrastructure, and investing in education, healthcare, and social security.

SolutionsRestructure curriculum of both North and

South Korea ◦Prevent Southern discrimination◦Give Northerners a fair shot at participating

in the economy, politics, and society, Incentivize movement as family units to

create sense of personal responsibility Increase access to childcare so older

Northerners can access education and job market

In the time before the transitional period, incentivize South Korean companies to produce extra supplies of medications and food