German Unification: Lessons for Korea?

Abstract

Summary We analyze the similarities and differences in terms of the demographic, social, political and economic situation of the two Germanies and the two Koreas before unification. Based on the German experience, we inquire whether there is room for economic policy unification strategies. An important issue is the degree of international openness which, under “stone-age” type conditions, is much lower in North Korea than it ever was in East Germany. This may create additional adjustment costs, especially if institutions change. We go on by showing how transition and integration interact in a potential unification process based on the World Bank Revised Minimum Standard Model (RMSM) and the Salter-Swan-Meade model. In doing so, we relate the macro and external impacts on an open economy to its micro-sectoral structural dynamics. Theoretical findings and evidence from Germany suggest that limits to accelerating unification from an economic perspective are important factors to take into account. We then consider unification as an “investment” and track down the (by-and-large immediate to medium-term) costs and the (by-and-large long-term) benefits of retooling a retarded communist economy. We conclude that, from a South-Korean perspective, Korean unification will become much more expensive than German unification. This may pose severe political and strategic problems.