Buy­ers pass up $5 tril­lion North Korean bar­gain of fu­ture

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 Pak Banker - - Editorial5 - Wil­liam Pe­sek

Frus­tra­tion reigns as North Korea acts like a 2year-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. Ja­panese be­lieve they are a tar­get. 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 to $2.1 tril­lion, but come on. The costs 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. The thornier is­sue is who pays. Pick­ing up the check seemed eas­ier be­fore the col­lapse of Lehman Broth­ers Hold­ings Inc. 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," says 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 Myung Bak 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 mil­lion-plus 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 high-end 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 Feb. 22 diplo­matic cable pro­vided to the Guardian news­pa­per by Wik­iLeaks.org 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.

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