North and South Korea — The Whole Story
“I will try and make peace between North and South Korea.”
-Yi So-Yeun (first Korean in space)
On 27th April 2018, the North Korean leader Kim Jong-un met the South Korean President Moon Jae-in met at the demilitarised zone between two countries to make the aforementioned statement by Yi So-Yeun true and bring an end to the (cold) Korean war. If the peace talks go through, it could be revolutionary for both the countries.
WHY WAS KOREA DIVIDED?
For centuries before the division of Korea, the peninsula was single and unified and ruled by generations of dynastic kingdoms. Japan later occupied Korea after the Russo-Japanese War of 1905 until the end of World War 2. This was when its division into two nations began.
“The catalyzing incident is the decision that was made — really, without the Koreans involved — between the Soviet Union and the United States to divide Korea into two occupation zones,” says Michael Robinson, professor emeritus of East Asian Studies and History at Indiana University.
In August 1945, the two allies (in name only) the Soviet Union and the United States divided control over Korea. Many Koreans demanded immediate independence, however, the Korean Communist Party was in close alliance with the Soviet Communist Party and hence supported the trusteeship. The Soviet Army set up a communist regime in the area north of latitude 38° (also known as 38th parallel). South of the line, a military government was formed which was directly supported by the United States. The U.S. supported regime favoured an anti-communist government.
The ultimate objective was for both the countries to leave and let the Koreans figure out what to do but the Cold War antagonism intervened with this plan. There was difference in policy between the occupying powers and so in 1946, it was made illegal to cross the 38th parallel. In 1948 U.S. called for a United Nations sponsored vote to let the Korean people decide their future but the North refused to participate. This caused the South to form its own government in Seoul, led by the strongly anti-communist Syngman Rhee. The North responded in similar kind, by establishing its government in Pyongyang, installing the former communist guerrilla Kim Il Sung as the first premier of the Democratic People’s Republic of Korea(DPRK).
THE KOREAN WAR (1950–1953)-
The Korean War was a civil war which took place between North Korea and South Korea. From 1948 until the start of the war, the armed forces from both sides engaged in many bloody conflicts which escalated when North Korean troops invaded South Korea. At least 2.5 million people were killed in this war with many more being indirectly bearing the repercussions of the war.
In 1951, the front line stabilised near the 38th parallel, and both sides started considering armistice (an agreement made by two sides in a war to stop fighting for a certain amount of time). Syngman Rhee, however, demanded that the war continue until the whole of Korea was unified under his leadership. There was also disagreement on which border to be considered as the official periphery between North and South Korea. This led to a torturous and long drawn negotiating process.
Finally, the Korean Armistice Agreement was signed after three agonising years of a civil war which had left both sides in a state of conflict. The Korean Demilitarized Zone was established as a result of the Armistice to serve as a buffer zone between North and South Korea.
CURRENT STATE OF NORTH AND SOUTH KOREA
By the 1960s North Korea enjoyed a higher standard of living as compared to South Korea which was affected by its political instability and economic crises. But the situation reversed in 1980s, as South Korea became an economic powerhouse fuelled by investments from Japan and America. This state of affairs has continued through the decades. The standard of living in North Korea is very poor. There are frequent power outages. North Korea was riddled with famines from mid 1990s through mid-2000s and significant food aid was provided by the international community. A concurrent crackdown on markets and foreign currency use yielded severe shortages and inflation, forcing Pyongyang to ease the restrictions by February 2010. The North Korean Government has stressed its goal of improving the overall standard of living but has taken a few steps to make it a reality. In 2016, the regime used two mass mobilizations to increase production and quicken the pace of construction projects. Compared to this, South Korea has had a pretty good run. The promotion of import and export and technology proved to be quite beneficial which paved the way for the emergence of family-owned business conglomerates such as Samsung, Hyundai, and Daewoo. The Asian financial crisis hit South Korea hard but it tackled the difficult economic reforms which led to rapid economic recovery. South Korea is expected to continue this growth in the coming years.
2018 INTER KOREAN SUMMIT
The 2018 Inter Korean Summit took place on 27th April, 2018 on the South Korean side of the DMZ. It was the third inter-Korean summit and the first one in eleven years. It was also the first time since the end of the Korean War that a leader of North Korea entered South Korea. The Panmunjom Declaration was signed as a result of the summit. According to the declaration, the leaders of North and South Korea agree to work on ending the Korean War (it is currently an armistice) which has been going on since 65 years, and thus ushering both the countries in a new era of peace and prosperity. The declaration also includes the denuclearization of the Korean peninsula (although Kim Jong-un did not explicitly agree to give up the North’s nuclear weapons). There was also talk on the unification of North and South Korea and signing of a peace treaty. This meeting also set the stage for meeting between Kim Jong-un and the President of the United States, Mr. Donald Trump.
The leaders also pledged to end hostile activities between their nations, for the resumption of reunion meetings for divided families, to improve connections along their border, and for the cessation of propaganda broadcasts across it.
IMPACT OF 2018 INTER KOREAN SUMMIT ON NORTH KOREAN ECONOMY
1] One of the discussions which took place between the leaders of the two countries was about the possible reunification of the Korean peninsula. A reunification may have many economic benefits but may also present a few problems.
The North Korean economy is a centrally planned economy (economic system in which the state or government makes economic decisions) as opposed to South Korea’s market economy. North Korea has one of the most internationally isolated economies in the world. South Korean trade was about 150 times more than North Korean trade in 2015. North Korea experienced a decline in trade after the collapse of Soviet Union in the 1990s. But they recovered in 2000s with their primary trading partner being China (China accounts for about 80% of trades with North Korea).
If there is a reunification, there is a high probability that a market economy will be followed. This will reduce the inefficiency in the North Korean economy. Expansion of private market will take place. During the economic crisis of the 1990s, North Korea suffered from severe budget deficits and reduced fiscal expenditure. Also, it is estimated that the military expenditure of North Korea was 22% of its GDP as opposed to only 2.7% in South Korea in 2012. These problems may be eliminated if there is a reunification.
There are many different reunification scenarios with different outcomes. Some of them are-
a) Reform and Gradual Convergence-
This is the case where North Korea starts to gradually open up to the world economies through market-oriented economic reforms. Gradual unification accompanies this process. The convergence theory indicates that when other conditions are controlled, a country with a low level of initial per-capita output will have a higher growth rate than a country that has a higher level of per-capita output, and North Korea is a perfect fit for this theory. South Korea can also provide the North with fiscal transfers. A gradual reform will allow faster catch up of productivity plus transfers from the South will raise the economic growth by around 10–15%. The key part of this catch up will be due to increase in private investment. With more capital and higher productivity, the average real wage rises in North Korea and the North Korean Won will appreciate in value.
b) Managed chaos in North Korea-
This will lead to a collapse in productivity which shows up as an immediate fall in the North Korean GDP. As the economy collapses, 20% of all physical capital stock in all North Korean sectors will become obsolete. Labour productivity will also fall by 20%. Although arbitrary in size, this generates approximately the collapse in the value of capital in East Germany once the Berlin wall had fallen.
There are larger fiscal transfers from the South to the North compared to the convergence scenario. Economic reforms are slowly implemented, and the convergence process begins gradually for the first few years and then accelerates.
2] The Korean War ended in an armistice, which means that technically, it is still going on. One of the agendas discussed between Kim Jong-un and Moon Jae-in was the ending of the Korean War by signing a peace treaty by the end of this year. The replacement of the armistice with a peace treaty will prove tremendous for both the North and South Korean economy. North Korea’s repeated provocations have always rattled the stock market. With South and North Korea in a state of war, local stocks have been undervalued due to geopolitical risks. This phenomenon is referred to as the “Korea discount.” But a formal end to the Korean War and a peace regime on the Korean Peninsula will influence the local financial markets positively.
According to Bloomberg, the price-earnings ratio of the Korea Composite Stock Price Index or KOSPI reached 11 times as of mid-April this year. It was almost half of that of the global average at 19 times. The ratio is to measure the overall valuation of the stock market compared to earnings. The lower the ratio, the more undervalued the stocks are.
(the graph shows data till 2017, and hence KOSPI is less than half of the global average)
“The Korean market has historically suffered a discount due to perceived poor corporate governance but also political risk,” said William Palmer, co-head of emerging market equities at Baring Asset Management.
The declaration to end the war will also highlight the potential benefit of investing in South Korea and increase private investment in North Korea. It will also prevent Korea Discount.
3] In 2017, North Korea conducted a series of missile and nuclear tests which demonstrated its ability to launch ballistic missiles beyond the immediate region and suggested that North Korea’s nuclear programme was developing at a faster rate than previously anticipated by U.S. intelligence services. This testing lead to political tension and instability between North Korea and the United States and South Korea.
But in the recent inter-Korean Summit, the prospect of denuclearisation was the central aspect of discussion between Kim Jong-un and Moon Jae-in. North Korea would be happy to denuclearise if the following conditions are met –
1. The U.S. and South Korea should allow international verification that all nuclear weapons previously stationed in South Korea have indeed been removed and remove any weapons that still remain.
2. Guarantee that the U.S. would never again deploy nuclear strike weapons on the Korean Peninsula and its surrounding region.
3. Promise that no nuclear weapons will be used to threaten or attack North Korea.
4. Declare an evacuation of the U.S. army that owns the nuclear usage right in South Korea.
The conditions outlined above for achieving this, however, are unlikely to be deemed attractive or acceptable to the United States, which gains huge strategic advantages from having troops and military hardware deployed in South Korea.
But recently Pyongyang announced its decision to focus more on the economy in the latest meeting of the ruling Workers’ Party. North Korea seems to have concluded that an economic achievement, even without nuclear weapons, will guarantee security and maintenance of the Kim Jong-un regime. To rebuild the economy, North Korea is expected to speed up economic reforms and openness down the road.
The expected meeting of Kim Jong-un and Donald Trump on June 12th in Singapore is also expected to yield positive results and chart a course towards the denuclearisation of North Korea. In a recent interview, Trump said,” South Korea, China and Japan — and I’ve spoken to all three — they will be willing to help, and I believe invest very, very large sums of money into making North Korea great. North Korea will be rich.”
North Korea currently follows a policy of simultaneously pursuing both economic and nuclear development, but the leaders have realised that this isn’t feasible. Yonsei University professor Lee Doowon projects that North Korea’s trade volume would grow by 5.6 to 8.3 times from that of 2008 levels if North Korea were to become a normal economy. Lee also calculates that a normal inter-Korean trade relationship would increase the relative importance of inter-Korean trade as a contributor to North Korean Gross National Income from around 7 percent in 2008 to over 40 percent, which would contribute to much faster overall growth for the North Korean economy. Using these figures, it can be projected that if North Korea were to move toward reform and denuclearisation, inter-Korean trade would grow rapidly from the present amount of roughly $2 billion per year to approximately $11 to $16 billion per year by 2020. In contrast to this, North Korea’s refusal to denuclearise will cost them almost $10 billion per year which would put a strain on their economy.
Therefore, the act of denuclearisation is sure to boost the economy of North Korea.
Recently, Mr.Donald Trump announced that he would be cancelling the United States-North Korea summit which was scheduled to take place on June 12 at Singapore due to tremendous anger and open hostility. But according to recent developments, the President is adamant on reinstating the Summit and even extending it if the need arises.
In conclusion, if the Panmunjom Declaration is followed to the T, and the United States-North Korea summit yields positive results, it is very plausible that North Korea may emerge as an economic powerhouse in the distant future.
