Korea is the site of the modern world’s most remarkable – and tragic – “natural experiment.”

The sudden and unexpected partition of Korea into a Soviet zone in the north and an American zone in the south at the end of World War II was a temporary measure ostensibly intended for managing Japanese surrender. But by a twist of fate, that decision resulted in an enduring division of the peninsula into irreconcilably hostile states with radically different development agendas.

In South Korea, a bitterly impoverished population accomplished a remarkable ascent into the elite ranks of affluent democracies, reaching a material living standard roughly equal to that of Western Europe. In North Korea, the cult-like dynasty of the Kim family has subjected three generations to immiseration and oppression while managing to amass an arsenal of nuclear-tipped missiles that threaten the South – not to mention the international community.

That nuclear capacity shields the Kim regime from outside military force and international pressures for reform, seemingly freezing the dictatorship in place. It’s worth remembering, though, that Germany’s postwar division spectacularly concluded in 1989-90 with the implosion of the Soviet empire – an event no one called in advance. And while the partition of Korea, now heading toward its 80th anniversary, looks similarly permanent, serendipities like the collapse of the German Democratic Republic are not beyond the realm of possibility.

Now for an irony: One might think that the end of the monstrous North Korean dictatorship would be a matter of collective longing in South Korea. But one would be wrong. For a generation – ever since the Asian financial crisis of 1997 – growing numbers of South Koreans have been expressing doubts about their own interest in reunification. Indeed, polls suggest that the overwhelming majority of young South Koreans would like to remove reunification from the national agenda altogether. They worry about the costs of integrating tens of millions of Northerners now managing on a living standard much closer to that of such least developed countries as Haiti or Afghanistan than that of their compatriots in South Korea.

But that seemingly daunting concern is worth a closer look. Granted, even a peaceful reunification of the peninsula would be fraught with uncertainties and would require sacrifices from many. I submit, though, that a motivated South Korea could make reunification work. In fact, the numbers suggest the potential for a decidedly manageable – and affordable – transition. Here, I offer a framework for thinking about the unthinkable.

The Longer It’s Postponed, The Greater The Gap

Having studied the North’s economy for many years, I can confidently say that North Korea-watchers have only a vague handle on demographic, social and economic conditions of life in North Korea today. That’s largely because the Democratic People’s Republic of Korea (DPRK), North Korea’s official name, has imposed a statistical blackout for six decades – for so long, in fact, that it is no longer clear whether the masters of Pyongyang themselves actually understand the workings of their economy or have an accurate estimate of the material plight of their subjects.

Even basic demographic statistics from the DPRK fail the laugh-out-loud test. For example, in the wake of the North’s horrendous famine of 1994-98 – in Pyongyang’s euphemistic parlance, its Arduous March – the government claimed the DPRK’s incidence of low birth weight babies was lower than in America. North Korea’s census counts, for their part, are riddled with so many inconsistencies that they would appear to have been subject to wholesale falsification, something neither Mao nor Stalin attempted with their own population censuses. And since outsiders cannot describe the basic conditions of the North Korean people with any confidence, we are captives instead of what economists like to call “stylized facts.”

Maybe the best available statistical indicators of the changing fortunes of the two Koreas over the long haul come from “mirror statistics” – reports by their trading partners of commercial sales to, and purchases from, the DPRK and the Republic of Korea, as South Korea is officially known. In the early 1960s, despite its smaller population, the North was exporting more merchandise than the South. That can be explained by the fact that North Korea was more industrialized than South Korea at the end of World War II, a legacy of colonial policy under Japan. But by the end of the Cold War, the South was reportedly exporting 30 times as much as the North – and things have only gotten worse for Pyongyang in subsequent decades.

As the figure at left shows, the export gap between the two countries has been growing ever greater, and there’s no reason to believe the trend will reverse. The same holds true for all the other social and economic comparisons we might want to make. Hence the longer reunification is postponed, the greater the task of meshing wildly different economies.

Why is The North So Poor?

North Korea ranks among the biggest economic losers in the postwar era. That reality is nicely illustrated by comparison of merchandise export performance with other notable members of the failed-economy club – places like Argentina, which fought its way from the first world back into the third world across the 20th century, together with perennially in extremis Haiti and hapless, self-plundered Zimbabwe.

In fact, North Korea has been running a race of sorts against Zimbabwe for title of world’s preeminent economic underperformer. Ten years ago, the race still looked to be neck and neck – both had lost over 80 percent of their global share of merchandise exports during the previous half century. But under the latest phase of the North Korean nuclear drama, the DPRK’s commercial trade has basically fallen off the face of the earth. The nation now subsists on unreported barter, economic piracy, aid cadging and unreported illicit Hobbesian entrepreneurship. How did North Korea manage to become that striking dark spot on the map in those famous nighttime satellite images? How did it become what we might as well call a fourth world country that happens to possess intercontinental ballistic missiles with nuclear payloads? However one parses the blame, it is most certainly not the fault of the Kim dynasty’s 25 million enslaved citizens.

We should never forget that the population of the North are Koreans who before the Korean War were indistinguishable culturally from the South Koreans – the same South Koreans who executed the so-called Miracle on the Han, the explosive economic growth of the past six decades. Outsiders no longer have regular contact with people in North Korea, but there are still signs that Northerners share the signature traits of the Southerners – drive, enterprise and a formidable work ethic.

To be sure, these traits and talents have been harnessed in service to cybercrime, drug running and counterfeiting ($100 bills), along with nuclear weapons development on a shoestring budget. But the very success of these reprehensible initiatives should only underscore the obvious: If given the chance, the North could prosper, too.

In short, the Kims are the overseers of the most extraordinary economic failure of modern times. Not only has this dictatorship spectacularly squandered its initial lead in industrial development, it perversely managed to achieve the near impossible – to preside over the only national famine ever experienced by a literate, urbanized people in peacetime.

Forget about the role of democracy and civil liberties in economic development for a moment. A decade ago, I estimated how North Koreans might fare by simply heeding the commands of a better class of dictator. My research suggests that even under Mugabe-style misrule, North Korean incomes would have soared. Or go a step up: with kinder, gentler China-scale corruption and repression, North Korean productivity might be nearly triple what it is today.

Reunification as an Investment

A successful reunification would take a great deal of money. When considering the estimates – guesses really – about how many hundreds of billions the economic reconstruction of the North could require, some will find such orders of magnitude terrifying.

But it would be wrong to think that the bill would necessarily be paid entirely by South Korean taxpayers. The merger of North and South is not going to be a free lunch for the South, of course. But it could be a much cheaper lunch than many expect (or fear) if the strategy for reunification entails investing in projects that generate high rates of return, and then sustaining the momentum. Obviously, this is easier said than done. Yet it is the heart of the matter.

The first priority of economic reconstruction, after all, is to raise productivity sharply in civilian sectors, to bring the North within shouting range of the productivity of the South. If the return on investment exceeds
the opportunity cost of capital, development is “free” in the sense that the investment would generate a surplus after paying back the investors. Consequently, rates of return will measure whether reunification is “affordable.”

With high enough rates of return, even a mega-project like linking North and South with high-speed transportation could basically pay for itself. And though North Koreans at year zero of reunification would be relatively unhealthy and deficient in training, history has witnessed populations with analogous shortcomings flourish.

Probably the most relevant example is in front of their noses. At the start of their economic boom in the 1960s, South Koreans were no better off than North Koreans today. Their life expectancy at birth was around 56 years – markedly lower than sub-Saharan Africa’s in 2024. In 2023, South Koreans’ life expectancy averaged 83 years, the third longest in the world after Japan and Switzerland. Meanwhile, South Korea’s per capita income in real terms grew sevenfold from 1963 to 1988.

A successful reunification should not be expected to equalize living standards across the North and South anytime soon. It didn’t work that way with German reunification. For that matter, Italian unification more than a century ago did not eliminate the income gap between Lombardy and Sicily. This much is clear, though: economic integration would raise incomes in the poorer region – and would do so much faster than in the richer region.

South Korea Could Afford to Spread The Wealth

It is imperative that we recognize how the world economy and the South Korean economy have changed since the Korean War, and how those changes bear on financing a prospective Korean reunification. When they discuss the outlook for reunification, South Koreans often talk as if theirs is a poor country. That was true two generations ago, but hardly today. The fantastic success of modern South Korea has created a rich society on the banks of the Han.

The South’s pervasive pessimism about the costs of a peninsular reunification largely traces back to the trauma of the 1997 Asia financial crisis, when Seoul was obliged to go hat in hand to the IMF for a sizeable bailout to stabilize its external finances. The irony here is that the very crisis responsible for raising doubts about the viability of a Seoul-led reunification was the catalyst for reforms that have massively increased South Korea’s wealth – and its capacity to undertake an ambitious undertaking like reunification – over the past quarter-century.

National wealth estimation, unlike GDP estimation, is still in its infancy. That said, pioneering work by UBS Wealth Management puts South Korea’s private wealth holdings in 2023 at nearly $10 trillion. That would situate the South in the world’s top-10 countries for total private wealth – and would mean that wealth per adult is now actually higher in South Korea than in Japan.

Most relevant here, if reunification occurred overnight, the Korean peninsula would still count as a fairly rich country even if no one from the North entered the union with a penny in their pocket. Since the population of the South is roughly twice that of the North, overall wealth per adult for this newly reunified entity would be about $150,000 – about the same as Portugal and far more than Greece. Moreover, surprising as this may sound, an overnight unification of the two Koreas would leave the peninsula a richer place today (in terms of wealth per adult adjusted for inflation) than Germany was a full decade after its reunification.

Consider the implications. South Koreans have rather more economic and financial options in the face of a reunification than they are accustomed to imagining. For one thing, the ROK has one of the lowest ratios of public debt to GDP of any country in the OECD, a tribute to the nation’s admirable discipline in public finance. So borrowing for an emergency or for prudent infrastructure development – reunification would qualify on both counts – would pass muster with global capital markets. Indeed, international comparisons suggest the ROK might well be able to borrow an extra trillion dollars without undermining its fiscal credibility.

By the same token, there’s no shortage of private capital sloshing around the world looking for investments with an attractive risk-to-expected-return profile. Global private markets fund over $35 trillion in foreign direct investment. Private portfolio investments – liquid and easily negotiable cross-border commitments in debt, credits and securities – amount to another $70 trillion.

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The thrust of my argument:

• North Koreans could be expected to thrive in a liberal market economy.

• Investment in North Korea would likely generate a rate of return higher than the opportunity cost of capital.

• The South Korean economy is so large and productive that the short-term sacrifices needed to integrate the North would have only transitory impact on living standards.

But there is another consideration here, an unexpected bonus of sorts: the prospect of eventual reunification could create incentives to stimulate further productive reforms in the South. For while the economy of South Korea is, by any reckoning, very successful, there is still plenty of room for improvement.

According to the Heritage/WSJ Index of Economic Freedom, the gap between the score for the world’s top performer (Singapore) and for South Korea is about as wide as the very large gap between China and Zimbabwe. And the relative weakness of South Korea is easy to spot in the World Bank’s own Ease of Doing Business Index. While South Korea shines in categories ranging from access to electricity to contract enforcement to managing insolvencies, it is not up to snuff in a number of others, notably, access to credit, starting a business and plowing through red tape in international trade. The corporate chaebol structure with giant conglomerates towering over the economy – think Samsung, Hyundai, LG – probably slows innovation, and the overpromise in welfare state commitments in a rapidly aging society undercut by the lowest fertility rate in the world could squeeze South Korea’s capacity to take on the burden of reunification.

We cannot know how or when the opportunity for a Korean reunification will present itself, whether the peaceful scenario will come to pass or whether decidedly less pleasant variants we can imagine may be thrust on us instead. But I hope this exposition has helped explain why Korean reunification is unthinkable only if we fail to think about it and to have contingency plans in hand.