Analysis released over the weekend asserts that a two-government system for the Korean Peninsula, rather than a unified one, would increase North Korea’s growth rate by 1.5 times and be more successful at lowering unemployment.
Moon Sung Min, a senior researcher with the Bank of Korea, and Prof. Yoo Byung Hak of Soongsil University, made the claim yesterday, saying, “Based on the analysis of the two types of unification systems, ‘one country with two systems’ (special administrative regions) was superior in economic performance and put less of a financial burden on the government.”
The analysis tested three unification scenarios: 1) unification where South and North Korea’s markets integrate into a single state; 2) combining both product and capital markets, but with a federal system that separates labor markets; and 3) one state with two systems in which all markets are divided.
The experts predicted that if Korea were to be a unitary state with merged labor markets and similar minimum wages, it would cause a decline in productivity and would increase the unemployment rate in provincial areas of North Korea, increasing overall government spending.
Even in a federal system where goods and capital markets would merge while labor markets remained divided, North Koreans would eventually either want to go to South Korea or want an increase in wages. This would give the government no choice but to increase wages, causing spending to also increase.
If North Korea were to be run as a Special Administrative District as in the case of China and Hong Kong, then its markets could be divided from those in the South. The experts explained that if there were two labor markets with differing wages and separate tariffs on commodities, then there would be a boost in the productivity of North Korean workers.
Moon predicted the state of North Korea after twenty years under each of the three institutional situations. According to the results, a unitary state system would increase economic growth to 3.35% and the unemployment rate to 36.4% in the North Korean region after twenty years, similar to that in East Germany after unification.
In a federal system, economic growth would be 4.28% with an unemployment rate of 17.7%. However, with two systems economic growth would be 5.21% with just 1.6% unemployment rate.
The researchers pointed out, however, that “this study only took economic aspects of unification into consideration. Further research estimates that include the political and social factors should be conducted,” before adding, “If economic growth is the most important criteria in unification outcomes, then a two-system plan must be prepared in the case of sudden change.”