Socially Stable Path of Unification in the Korean Peninsula

Two Koreas have been apart for 70 years under very different political regimes and economic systems. A preferable approach for socially stable path of unification would be to allow both Koreas to remain independent states for about 20 years after an agreement is reached on gradual integration. During this period, the government in the North is expected to undertake ambitious economic reform and liberalization similar to that of China and Vietnam a few decades ago, and should aim to attract foreign investment and external assistance on its own account, including from international financial institutions. Labor mobility should be limited. After the initial 20 years of independent development, another 20 years should be allocated for gradual integration centered on labor mobility. Our simulation results show that, in the initial 20 years of independent development, the North's GDP will reach 17 percent of that of the South by 2035, and its GDP per capita will be close to US$13,000. Under a "no labor mobility" scenario, GDP in the North will reach just under 60% of that of the South by 2055, which is similar to the gap between the richest and the poorest provinces in South Korea today, indicating a full merge at that time would not induce a shock to threaten social stability. If North Korea would remain a closed economy without reform, its economic growth will likely trod along at the same 1-2% growth over the next few decades and remain at the bottom of Asian economies in term of GDP size. If it were to open up and implement strong reforms within an agreed integration framework with the South as suggested above, it has the potential to surpass many other Asian economies. The unification would benefit not only the Peninsula, but also all surrounding economies.