To End the North Korea Dispute, Abandon the Aim of Korean Reunification

This article first appeared on the Hoover Institution site.

North Korea has become an intractable problem for the United States. But there may be a way forward in the form of a grand bargain that requires fewer U.S. concessions than expected.

In fact, the resolution of the Korean conundrum may be less challenging than containing Iran. A rejection by North Korea’s Kim Jong-un of such a deal would provide evidence of his irrationality and confirm the regrettable need for non-diplomatic measures.

Any deal would require abandoning the prospect of unifying North Korea and South Korea. Also South Korea, with its powerful economy and universal conscription, should be able to defend itself.

Recognition of the North may be a bitter pill after six decades of separation, but the unification of North with South is simply not going to happen in the foreseeable future due to economic costs and political constraints.

Before looking at the specifics of a deal, let’s first consider why the prospects for Korean reunification are remote: Sixty-four years after the Korean armistice, we have a prosperous South of fifty million governed by a vibrant democracy. Just about every family owns a car, and more than half own their own home.

GettyImages-644016874 This picture taken on February 22, 2017 and released by North Korea's official Korean Central News Agency (KCNA) on February 23 shows North Korean leader Kim Jong-Un visiting the People's Theatre to mark the 70th anniversary of the founding of the State Merited Chorus in Pyongyang. STR/AFP/Getty

The North is a desperately poor country of twenty-five million with a per capita income equal to Haiti. It is run by a dynastic dictatorship that survives through domestic terror and the threat of nuclear weapons.

The historical precedent for the reunification of the two Koreas is the German Wiedervereinigung of the early 1990s. The German reunification incorporated “new” East German states into an economy that was more than twice as productive.

Conventional wisdom suggests that German reunification worked, albeit at a very high cost. With the Korean North 30 times less productive than the South, Korean reunification would constitute a task of unprecedented proportions.

Two-thirds of the South favor reunification, but as Chung Chong-Wook, the vice chair of South Korea’s reunification committee, has put it : “Perhaps no other issue has been as divisive as the issue of reunification.”

Popular support for German reunification was about 80 percent on both sides of the Wall in 1990. It all seemed rather easy: The “new” German states would be folded into the legal and political structure of the Federal Republic. The “new” states were poorer, but, as the most prosperous Soviet satellite, income and productivity were not that strikingly far below (at about half) the West.

Differences between the “new” and “old” German states persist, but the younger generation is no longer divided into Ossies and Wessies. They are just young Germans. Bridging a two-to-one gap, however, is a quite different from closing a thirty-to-one gap in the Korean case.

Beyond that, Korean scholars who have studied German reunification fear that the cost of supporting their poor Northern cousins would overwhelm public resources and threaten hard-fought prosperity. The following German figures guide Korea’s reunification skeptics to this conclusion: Budgetary t ransfers from West to East equaled four percent of GDP annually for some 15 years for a cumulated total of $1.5 trillion dollars, or one-third of a full year’s production.

The major cost of German reunification was imposed by the political decision to equalize pay in East and West, although the average West worker was more than twice as productive. At equal wages, the higher cost per unit of output of Eastern workers encouraged employers to hire elsewhere.

Indeed, unemployment soared in the East, and Germany’s generous safety net was drained. The German deficit rose embarrassingly above European Union stabilization rules. But Germany decided the costs of reunification were worth it, and the result is a unified German state.

With respect to industry, a reunified North Korea, like its East German counterpart, would have to privatize its industrial enterprises. As with East Germany, North Korea’s state enterprises pay little or no attention to market forces and market viability. In both countries, loss-making enterprises were and are simply subsidized by the budget.

East German state enterprises were turned over to a privatization agency ( Treuhandanstalt ). By the time the privatization agency ended its operations in 1994 , it had privatized over 8,000 enterprises and liquidated almost 4,000.

These figures appear impressive, but employment in privatized companies fell from four million to 1.5 million and privatization expenses ($175 billion) exceeded revenues ($45 billion) by $130 billion in a three-billion-dollar economy.

The North’s isolation has required it to produce at home the industrial and service products that it needs, a recipe for economic disaster. A Korean privatization agency might find some buyers for some small enterprises, but most industrial enterprises will likely have to close. East Germany’s industry, among the highest rated in the Soviet bloc, proved relatively worthless.

A Korean reunification would therefore mean massive urban unemployment in a poor nation. A united Korea would have to devote huge amounts of scarce public resources to retraining and supporting its citizens, especially those in the cities.

Korea does not have the option of German-type reunification. Wage equalization simply cannot happen. A reunified Korea would combine a rich South and a poor North for the foreseeable future.

Then there’s the matter of migration. East Germans moved to the West but in modest numbers. In the Korean case, the huge wage and unemployment differentials would unleash a flood from the North.

Those who favor free emigration would clash with Korea’s unions and anti-immigration advocates. Sympathetic media would show desperate Northerners scaling fences, being turned back by the police, and housed in special camps. We do not know whether Korea’s democracy could handle the strains.

What Comprehensive Plan Is Best for the US?

The election of new U.S. and South Korean presidents, North Korea’s rising aggression, and growing concern in China and Japan provides the foundation for a comprehensive deal. Robert Gates has offered his approach to the Korean peninsula—and his plan makes a lot of sense.

Under it, the United States would offer China recognition of North Korea by signing a separate peace treaty, foreswearing regime change, and approving “changes in the structure” of American military forces in South Korea.

In return, China would assure a hard freeze of North Korea’s nuclear program guaranteed by intrusive international inspectors that include Chinese.

Under Gates, Kim gets to keep his nuclear arsenal and China would be assured that Korea will not be unified into one state allied with the West. That appears to be giving a lot and gaining little, but the Gates plan provides a foundation for an eventual settlement.

The grand settlement would include the recognition of two Korean states. In addition, it would withdraw all U.S. troops from South Korea in return for a complete dismantling (rather than freezing) of the North’s nuclear program under intrusive inspections including China.

If Kim Jong-un refuses such a deal, all options must be on the table, including regime-change, crippling sanctions, and nuclear weapons for South Korea and Japan.

The constellation of forces favoring a comprehensive deal include the following:

First, the U.S. has a new president, whose America First policy would not tolerate a North Korea armed with nuclear weapons that can reach the United States.

Assuming he’s a rational actor—which is not a given—Kim Jong-un should take seriously Trump’s claims to be different from his “kick-the-can” predecessors. Kim’s refusal would signal a lack of interest in a comprehensive settlement, despite the threat of drastic measures against him.

Second, the new South Korean president, Moon Jae-in, has unexpectedly begun negotiations with the United States to build a longer-range ballistic missile system to counter the threat from the North.

Moon campaigned on a promise of friendship overtures to the North. The North’s nuclear and missile tests apparently have caused an abrupt change in South Korea’s attitudes towards its own defense. Moon and Trump seem to be on the same page with respect to North Korea.

Third, China would welcome the recognition of North Korea. It lessens the chances of a collapse of the North, an event that would unleash a flood of refugees into China. In addition, China has counted on its national security being unaffected by Kim’s nuclear adventurism.

South Korea, Japan, and the United States are in the North’s sights, not China. But Kim’s launch of ICBMs towards Japan and the United States threatens nuclear proliferation in China’s backyard.

An angry Trump could choose to speed up the delivery of lethal defensive weapons to Taiwan making it impenetrable to Chinese invasion. Kim’s adventures are placing China in real danger, and China must think twice about further enabling its client in its own self-interest.

Fourth, the stationing of U.S. troops in the South has offered an excuse in the North for belligerence. We must ask whether American troops are still essential in South Korea, especially under the Trump policy of allies providing more of their own defense.

With universal conscription, access to U.S. weaponry, and a powerful economy, the South’s 400,000-strong army (with 4.5 million reserves) should be able to stand up to the North’s army of 1.2 million that lacks a viable air force. With a measured withdrawal of U.S. troops, the South should be able to defend itself.

Rather than resting on the excuse of intractability, the Trump administration should take advantage of this brief window for a comprehensive settlement of the Korean-peninsula problem.

The costs of such a grand bargain are less than they appear to be on the surface. Korean reunification is unlikely even if the opportunity presents itself. The Trump administration could seal its foreign policy legacy with a grand Korean bargain that actually makes sense for U.S. interests.

Paul Gregory is a visiting fellow at the Hoover Institution. He holds an endowed professorship in the Department of Economics at the University of Houston, Texas, is a research professor at the German Institute for Economic Research in Berlin, and is emeritus chair of the International Advisory Board of the Kiev School of Economics.

The author would like to thank Thomas Mayor for his suggestions and comments.