Comments by Fung Kwan, on Economic Impacts of Reunifications in Germany and in Korea

Abstract

Fung Kwan: This paper examines the hypothetical reunification of South Korea and North Korea, which is a highly political issue. Although the research question is far beyond total factor productivity (TFP), the authors’ aspiring work on such a complicated undertaking is appreciated.The authors’ analysis uses calibrations based on TFP growth values, per capita GDP, population, and capital stock under different scenarios and economic development in East and West Germany. The theoretical framework is standard with the CRS C-D production function, having physical capital and labor being the conventional factor inputs. The TFP growth equation in equation (3) tries to capture the speed of convergence of a particular economy. To measure the impacts of reunification, the paper examines: •Migration with workers moving from the economy with relatively low pay to that of high pay•Physical capital moving to the poorer economy via the government's effort•TFP convergence, which is expected to occur through ideas and technology transferThe calibration exercise on Germany indicates that per capita GDP growth was 1.9 percent after reunification versus 2.2 percent under the counterfactual no reunification. In terms of GDP, reunification generates US$ 2.65 trillion against US$ 2.81 trillion under no reunification (US$ 2.51 trillion for West Germany and US$ 0.29 trillion for East Germany).For Korea, the projection shows that GDP will be US$ 3.53 trillion under benchmark reunification, but US$ 3.47 trillion under no reunification. Per capita GDP growth will be 4.3 percent under both situations, with much higher growth of 15.6 percent against only −0.2 percent under no reunification in North Korea. The size of per capita GDP in North Korea is expected to increase by almost 40 times under the “with” and “without” reunification scenarios.The authors argue that macroeconomic variables should not be used as arguments against reunification because their results show no significant differences in these variables under the various reunification possibilities. Although the results could be affected by many economic and non-economic variables, the huge variations between the southern and northern economies are the most difficult to predict. More time is needed for growth convergence to be feasible under both the benchmark and pessimistic reunification scenarios.The paper mentions the integration of Hong Kong with mainland China as an example-although it appears that the cross-strait economy between mainland China and Taiwan is perhaps a more comparable case for the Korean economies. While reunification in the Korean peninsula is politically unlikely in the near future, research could be focused on the possible impact of some forms of economic cooperation.For instance, Hong Kong and Macao have developed different platforms for economic interaction between mainland China and Taiwan. There is also the Closer Economic Partnership Arrangement between mainland China and Hong Kong/Macao to enhance a closer economic relationship by lowering exchange barriers. The Economic Cooperation Framework Agreement between the cross-strait regimes is another measure to promote economic benefits for each side.It is worth investigating similar arrangements for North and South Korea, despite the current lack of cooperation. Therefore, economic impacts under different forms of greater economic cooperation on selected sectors could be modeled to check the likely outcome instead of calibrations on full unification between North and South Korea.The current results are based on aggregation production, which studies all elements together and at the same time. The calibration results might be different if selected sectors based on favorable resource endowment and institutional arrangements in both Koreas are used. Politically, greater economic cooperation on identified industries might generate a relatively larger impact to both Koreas before any form of reunification.In conclusion, this study provides interesting results for policymakers. The long-term impact of some forms of economic cooperation between North and South Korea require more research work in the future.