The “German Comparison”, Part II (Economics)

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The vigilant reader will have noticed that this series, contrary to popular claims, aims at highlighting the differences between the German case and the current situation on the Korean peninsula, thereby arguing that a unique solution is needed if Korean unification is to be achieved. While the first article looked at historic differences, this one aims to look into the economic aspect.

To start with, consider the economic differences between former East Germany and North Korea. The former had, just before the fall of the Berlin Wall, the highest income on a per capita basis among the socialist economies. As such, it was the most affluent nation in the Eastern bloc and was often regarded as the “West of the East”. This stands in stark contrast to North Korea which today, according to the United Nations,[2] ranks 179th with respect to (nominal) GDP per capita, just behind Uganda and just ahead of Afghanistan.

Albeit not nearly as pronounced, a similar picture can be observed when comparing former West Germany and South Korea. At the time of German reunification, West German GDP per capita exceeded that of South Korea by a factor of 3.4. Given the rapid development of Korea, this gap has been continuously closing and is now down to 1.9.

The combined picture highlights the scale of economic disparity between the German and Korean case. Before the fall of the Wall, East German GDP per capita stood at approximately $10,000 while its Western neighbor was about three times richer. However, South Korean GDP per capita currently exceeds that of North Korea by about forty-two times. The West/East German and South/North Korean per capita difference is therefore fourteen times as large (3:42). And as previously mentioned, Germany’s then per capita GDP exceeds that of South Korea by 1.9. The total current per capita difference therefore amounts to a staggering factor of 26.6 (1.9 × 14).[3] In other words, South Korean per capita unification costs exceed those borne by the Germans by almost twenty-seven times. Economically speaking, this would lead to a collapse and is a burden that cannot be shouldered.

This argument can be extended in order to come up with a very rough estimate of the total cost of Korean unification. Since 1990, about €1.3 trillion (~ $1.7trn) have flown from West to East in Germany[4] (this scheme is officially expected to be discontinued in 2019). This amounts to approximately €20,600 (~ $26,700) per capita which equals €900 (~ $1,150) per person per year. Given a factor of 26.6, this implies a total cost of around €23,900 (~ $31,000) per capita per year. In other words, each South Korean would have to spend roughly the same amount each year that West Germans have so far spent in total for 23 years.

To finish, I would like to stress again that this does not mean that Korean unification should not be undertaken – quite the contrary, actually. It is a desire shared by everyone and this desire should come true regardless of economic aspects. However, I hope to have shown that the situation on the Korean peninsula is indeed unique, not only from a historic but also from an economic perspective. As such, a unique solution is needed. The last article of this series will be dedicated to discussing a few of those possible alternative solution concepts.

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