What North Korea’s economy might look like if it ever reunited with the South

January 17, 2013
January 17, 2013

In his New Year’s speech, North Korea’s dictator Kim Jong Un called for eventual reunification with South Korea and said he wanted to develop his nation’s backward economy.

Because North Korea has an estimated $6 trillion worth of untapped mineral wealth, when the Disney-loving strongman says such things, private equity and commodities investors get seriously excited.

Kim is acting tantilizingly modern in other ways. He just allowed Google’s Eric Schmidt to visit, despite most North Koreans being denied internet access. Pyongyang wants to reopen its embassy in Australia. In contrast with his late father Kim Jong-il’s air of stuffy paranoia, the young Kim allows his wife to wear trouser suits and Dior handbags and likes girl bands who sing Western tunes.

As the prospect of a united Korea is so uncertain, not much has been written on what economic development might look like. This paper from Hawaii University, authored in 1994, imagines a scenario where North Korea would experience an “inflow of money and businesses from the South,” and would start producing goods the South Koreans wanted to buy.

South Korea would definitely want to get its hands on North Korea’s vast resources of rare earths, says Andray Abrahamian, who visits the North regularly as part of his job as executive director of academic exchange non-profit the Chosun Exchange. Rare earths are used in the manufacturing of high-tech goods from iPads to hybrid cars. And South Korea is best known for high-tech manufacturing.

“As long as there are not a series of provocations on either side, I think we are going to see the South exploring options for getting involved in mining in North Korea,” Abrahamian adds.

North Korea could also become a low cost factory center to compete with China. While South Korea’s tech giants such as Samsung currently have their goods made in China, they could shift such work to the North.

The two Koreas split in 1945 and were at war between 1950-53. They are still technically at war, but have talked about reuniting since at least the early 1970s. South Koreans generally seem ambivalent about reunification and concerned about the high costs involved. It has been estimated it would cost the South $1 trillion dollars to absorb its neighbor.

Germany is often touted as a model for how Korea should be reunited, though the authors of this paper (pdf p.154) from Northeastern Illinois University point out that the differences between the two Koreas today are much wider than the contrasts between the two Germanys when that nation was divided. As authors Sangmin Bae and Martyn de Bruyn write:

“Unlike the Germans, the Koreans fought a bloody civil war. There are well-documented lists of atrocities committed by both sides. This has created greater feelings of fear and ill will than ever existed between the Germans.”

There is an outside chance that North Korea could end up reunited with the South because the authoritarian regime collapses. But pundits have been wrong about such predictions for years, and overall it is hard to be too bullish about Korean unification occurring. Pyongyang has paid lip service to this idea before, usually when it wants financial aid from Seoul. Discussions generally break down when Pyongyang decides to lob missiles at the South or strengthen its military arsenal.

And behind his heartening words and deeds, Kim is aggressive, as last month’s highly condemned satellite launch showed. North Korea’s dominant political ideology is self-reliance (known as “juche”) and he is torn between a need to show the North Korean people the nation has the strength to defend itself (video) while it also must pull its economy up by the bootstraps.

Kim needs to reinforce the status quo to stay in power, the International Crisis Group writes, which is why: “the barriers to change are tremendous.” It is much easier for Kim to continue North Korea’s slow passage of economic development aided by China, his main political ally. North Korea attracted almost $100 million of Chinese investment between 2003-2009, often via Chinese-funded joint ventures, according to this study (pdf p.3).

Pyongyang is also courting Chinese investment in so-called special economic zones, areas it has earmarked for inbound investment modelled on China’s major experiment with capitalism in the Hong Kong border city of Shenzhen in the 1980s.

Chinese cash is not enriching most North Koreans yet. But the capital, Pyongyang, has started to seem wealthier, Chosun’s Abrahamian says. Around two years ago, he reports, Pyongyang got a hypermarket that is “about the size of a mid-sized Walmart” and “sells relatively modern processed foods such as crackers, fish cakes and long-life bread.” He has also noticed an increase in cars on the roads of the capital, where three years ago it was rare to see a car. “I’ve seen Toyotas,” he says. “And even a couple of traffic jams.”

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