The Economic Benefits of Korean Reunification

The Democratic People’s Republic of Korea remains one of the least accessible places in the world after its split from South Korea in 1945. Korean reunification refers to the potential unification of North and South Korea into a single Korean sovereign state and is regarded as a pipe dream for many. While many in North Korea are restricted from understanding the nuances of reunification due to widespread information censorship by the Kim regime, many remain hopeful of a reunification of the peninsula. However, many scholars argue against Korean reunification due to potential political and social fallout, which they compare to that which occurred in Germany post-reunification in 1990. Nonetheless, the potential reunification of the Koreas presents numerous economic benefits due to possible synchronization of the labor market, untapped natural resources, and the potential for foreign investments by both nations and multinational development banks.

Akin to other Asian nations, South Korea faces an aging work force with birth rates too low to compensate. With fertility rates expected to fall below 1.0 in 2019, South Korea has the lowest fertility rate in the world with its elderly population larger than those in their 20s and younger (Figure 1). According to population projections by Statistics Korea, South Korea will see its population peak at 53 million in 2031 and decline to 43 million by 2065. To put this in perspective, South Korea’s population of 65 and older has reached 12% of its total population in about 20 years, a feat that took France 175 years, the United States 65 years, and Japan 40 years. In addition, the mean age of workers in the labor force has increased from 36 in 1999 to 42 in 2016.

Reunification, however, would solve many of the issues currently facing South Korea. South Korea would benefit from a younger North Korean population (Figure 1) with higher fertility levels, providing an immediate help in maintaining a large elderly population with a robust working-age population. In total, about 17 million North Korean workers, with about 10 million alone from North Korea’s standing army, would join South Korea’s 36 million strong work force. The North Korean labor force would provide a much-needed boost in agriculture, construction, and manufacturing, either to bolster South Korea’s hollowed-out manufacturing sector or as labor for infrastructure redevelopment in the north.

Besides its labor force, North Korea contains something South Korea requires: natural resources, many of which are invaluable to South Korea’s high-powered technology and manufacturing sector. According to some reports, North Korea is estimated to contain the largest deposit of untapped rare earth metals in the world, crucial elements for the high-tech electronics that South Korea exports. A 2012 estimate from the North Korea Resources Institute in Seoul values North Korea’s mineral wealth at $10 trillion, about 20 times larger than that of South Korea.

Like the rest of the world, South Korea is currently dependent on China for its import of rare earth elements, with 90% of Earth’s rare earth elements coming from China. Many nations have begun to develop their own refineries in hoping to wean their dependence off China. South Korea, whose biggest imports are oil, coal, and rare earth materials, would reap a windfall in reserves of these elements following reunification with North Korea. These mineral resources, which is largely made up of iron, gold, magnesite, zinc, copper, limestone, molybdenum, graphite, vanadium, and titanium, (Figure 2) are crucial to modern technologies such as smartphones, MRI scanners, cancer treatment drugs, engines, and more due to their magnetic and conductive properties. According to Llord R. Vasey, a senior advisor at the Center for Strategic and International Studies, North Korea is operating existing mining facilities at below 30% of its capacities due to the lack of equipment, expertise, and basic infrastructure. Simply put, Korean reunification would allow the nation to tap into these natural resources to create a necessary domestic source of resources to sustain the growth of the South Korean economy.

In addition to the combining of the labor forces and the abundance of natural resources, reunification of the Korean peninsula would also increase foreign investment from both nations and multinational development banks. Due to the aforementioned labor shortage, there have been legislations to increase quality of life for workers through minimum wage increases and working hours reductions according to Sung Tae-Yoon, a professor of economics at Yonsei University. Due to rising labor costs and unnecessary regulations, many companies, both domestic and foreign, have left South Korea despite the attractive market with global enterprises, tech-savvy consumers, free trade networks, and talented personnel. South Korea’s foreign direct investment in proportion to its gross domestic product was 0.8% in 2016, placing 16th among the G20 nations, according to a release by the Korea Economic Research Institute. In addition, according to the law firm Lee & Ko, many companies are wary of doing business in North Korea as the country’s legal system is not up to standards regarding property rights or investment guarantees. However, with reunification, these obstacles would be removed, increasing foreign investment and strengthening both economies in terms of capital inflow, job creation, and company relocation. Jim Rogers, co-founder of Quantum Fund, has stated that he believes that North Korea will be “the most exciting country in the world for the next decade or two” for investors.

In addition to foreign investments, domestic investments in infrastructure have already begun in the peninsula as South Korean President Moon Jae-In has announced the development of the “three economic belts,” which links the entirety of Korea with China and Russia, as seen in Figure 3. This plan would finally allow South Korea to tap into Russia’s cheap natural gas reservoirs instead of relying on nations such as Australia and the United States. Following reunification, the “three economic belts” would allow North Korea to lift barriers from monetizing its natural resources through improvements in their outdated and underdeveloped infrastructure.

Of course, reunification is not cheap. Conservative estimates of reunification are around $1 trillion with reconstruction costs of anywhere from 6% to 25% of South Korea’s GDP for 10 years after reunification. However, reunification would facilitate an increase in output in North Korea at 25 years following reunification of anywhere from 7 to 12-fold and a 15 to 43-fold increase in per capita GDP in North Korea. While the cost of reunification will take trillions of dollars and decades of work, it will be worth it in the long run as North Korea finally enters the global community and South Korea able to alleviate pressure on their aging labor force, necessity of natural resource exports, and lack of foreign investments.