 issues in coming back for the second session, but we have such a packed slate for today that our staff has really sort of timed this down to the last 30 seconds. And so thank you all. Our second panel is about continues to be on the economics of Korean unification. And here we're looking at the opening for business foreign investment after unification. Let me introduce our panelists very briefly. Again, their very distinguished bios are in your program, so I won't give a full introduction. Our first presenter is Tom Byrne, who is a senior vice president, manager, and Moody's spokesperson for the sovereign risk group in the Asia Pacific and Middle East regions for Moody's investor service. He's the lead sovereign analyst for China, Japan, and Korea, and has come a long way from Singapore via Boston. Our second presenter is Bill Brown, who is a senior advisor to the national intelligence manager for East Asia and the Korea's in the office of the director of national intelligence. And our two discussants, our first discussant is Dr. Sumi Terry, who is a senior research scholar at Columbia University's Weatherhead East Asian Institute. As many of you know, she served as deputy national intelligence officer for East Asia at the National Intelligence Council and then served as director for Asian Affairs on the National Security Council for the Obama and Bush administrations. And then our last but not least, our second discussant is Dr. Park Kyung-jung, who is a senior research fellow at the Korea Institute for National Unification, or KINU, and really has written some of the most insightful pieces about what is going on inside North Korea and the North Korean leadership. So we'll begin with Tom. Thanks again for joining us. Please. I think I'll follow up. Okay, very good. Next example, I knew he was a podium. Well, I have to thank Victor for inviting me. It's always good to be back in the U.S. And I've had, to continue with the sports metaphors, I've had a good week. I went to an Orioles game with my son on Sunday and now I'm watching the dream team perform. I don't know if you should include me in that team. But Victor also let me off a bit easy because when I was invited two or three weeks ago, he said, don't worry about writing a paper, which is good and no time to do it anyway. But just give some, quote, unquote, random comments. I'll try to put a little more structure and just some random comments. First of all, and I think my comments are not prescriptive, so I'll keep my credit rating analyst hat on. We actually never have been prescriptive in our work. And now we cannot be because we are a regulated industry. So I think the overall framework that I'm looking at is not the collapse, but really an opening of North Gray as a bridge towards unification. And looking at the speaking notes that Michael Green has, I think the scenario that I see is the most easy to grasp mentally or analytically is the delayed unification concept. And in that, I think unification can be done perhaps on Seoul's terms. I don't think unification can be done unless Beijing's terms are met as well. And perhaps this afternoon we'll get more into that. Looking at the history of the PRC on the Korean Peninsula and also how China's behaving recently in the region. That being said, of course, the way I look at it is that unification would have considerable near-term costs for the South Korean government under the delayed unification scenario, but also bring longer term economic benefits. I think the degree of the costs and benefits will be influenced by the time frame of a successful political and economic transformation of North Korea. Nonetheless, the elimination of the existential threat to South Korea removes a low probability but high severity event risk to its economy, which is actually a rating constraint for us, not so much on the sovereign rating, but when we look at structured finance deals in Korea. And I think it would have psychological effects, which positive psychological effects, of course, which are probably unquantifiable. So basically, I'm looking at a unification that is externally supported, but also internally driven, and I'll get to that later. So Seoul has considerable amount of fiscal headroom to absorb over time, I think, the cost of an opening of North Korea or unification. And this would involve direct fiscal transfers and infrastructure investment, of course. South Korea has its debt levels on the government's balance sheet. Directly on the government balance sheets are rather moderate, something like 32% of GDP. Most advanced industrial countries, particularly those who went through the severe crisis in 2008 and the recession in 2009, the debt levels are about 80% to 100% of GDP, including the US on a general government basis, including the states. And so the debt burden is not much, at least on the government's balance sheet. However, greater fiscal space can be generated if Korea's public sector companies, the non-financial public corporations, who actually act as arms of South Korean economic policy. If their debt can be reduced, because these are contingent liabilities on the balance sheet, and also on the tax payers in Korea. Now the reason I think this is important because I think, at least in the initial phases of an opening, if South Korea is involved in the economic investment in North Korea, that it's the public sector companies that will be involved, something like Korea Housing and Land, I believe they're involved in K-Sung, maybe Korea National Railway Corporation as the rail links are established from Russia through the peninsula. KEPCO as well, probably not building nuclear power plants in North Korea, as they do elsewhere, but developing a grid in North Korea, which I don't think exists. Well, according to satellite photos, it doesn't exist really. At least at night it doesn't exist. So I think these would be in the vanguard. Later on, I think the J-Bull will follow, but there's preconditions to that and I'll get to that. So also some other comments. South Korea's national savings are ample, I think, for a delayed unification process. It wouldn't completely derail South Korea's economic or fiscal fundamentals, or probably its growth trajectory during this delayed unification period. And South Korea has a fairly strong external payments position. Reserves, net international investment position is okay. I mean, not terribly strong, but still I think strong enough to avoid being buffeted by turbulent conditions in the global financial markets in the future as it undergoes a process of investment and aiding, externally supporting North Korean unification. Now, as others today have said, I think the benefits of an opening and eventual unification of North Korea would be most fully realized by a robust role of the private sector. Now, this is just not the South Korean private sector, but a North Korean private sector. South Korea's firm participation in the opening and also the development of North Korean private sector I think really hinges on the establishment of a stable and predictable investment regime in North Korea. However, experience so far in North Korea and elsewhere suggests that the transition from a capitalist, transition from a communist or a socialist system to a socialist market economy is neither smooth nor rapid. And many frontier markets, protectionism and resource nationalism, have prevented foreign investment from playing a strong consistent catalytic role. We look at the case of Mongolia, which has actually got off the real fast start after leaving the when the comic con broke up and went through the economic transformation in 1990. By 1997 it had joined the WTO ahead of China, of course. And however, the lack of a stable and predictable investment regime is impeding the development of its very rich natural resource base. I think this has lessons to apply to North Korea that large foreign firms will not go in and invest in North Korea unless the risk is stable and predictable investment regime so that their long-term investments are protected, either by, under a delayed unification system, some legal framework in North Korea under some modification of that by guarantees from the South Korean government. So the development of a mixed state private capital market takes time. If we look at the examples in China and Vietnam, China opened up in 1978. And 12 years later, the first stock market, a very, very early stage of the stock market was established. That took 12 years. It was a very small non-state sector at the time. Vietnam, 1986, is when the Doi Moe program started. Its stock exchange, very fledgling one in Ho Chi Minh City, was opened in the year 2000. So we're talking about 14 years there. Both systems decided to access the international capital markets a little before the opening of private markets of the domestic financial system to equity financing. And Moody's, as any rating agency, follows developments in the capital markets. And we had our first rating on China 10 years after the opening and in Vietnam 11 years after the opening. It's only in China now that really the capital markets are developing in any healthy, I think, instructive direction. Vietnam, it's still a struggle. So, but even in China, in the case of the private markets, I mean, it's more than 30 years after the reforms were announced. And China is still struggling with how to incorporate the private sector into the economy. Third plenum of the 18th Party Congress said that the private sector or market forces will be decisive allocator of resources. But how do you do this in a system where the, if not the Communist Party, the state controls so many economic leverages, levers, I mean, in policy tools. And so this is still something that has to be worked out even in the case of China. That being said, I think we're one of the, so if a delayed unification process does happen, I think an easy way to get investment into any economy looking historically is to have special economic zones. They were very successful in the case of China. Shenzhen was opened just two years, established just two years after 1978, after that transformative third plenum of the 11th Party Congress. And nowadays, Shenzhen was just a sleepy farming or fishing village back then in 1980. Now it has the highest per capita GDP and all of China. So the developments there have been really transformative. Now I think none of that would have happened if, of course, none of that would have happened if there wasn't the internal leadership that would drive this. So that raises the question. I think if you're talking about an opening, and perhaps this afternoon, or maybe one of the discussions we'll talk about this, is that where will the leadership come from that will drive the opening of North Korea? Well, does it exist now, or is it something that will come upon the scene in the future? If you look at China's example, and I think China's a good example, because China transformed itself from a totalitarian Maoist system and back in 1978, the leader was Deng Xiaoping, where they decided to take a different path instead of perfecting socialism and communism. They decided to become a socialist market economy and go down essentially the capitalist path. Now Deng Xiaoping was someone who already existed in the system. In fact, he was during the 1950s, yet he himself had a transformation. He was the enforcer for Mao's anti-rightist policies during the time of the Great Leap Forward and before that the socialist high tide, 100 flowers, and all that. He himself went on to run a transformation, probably his experiences in the Cultural Revolution probably had a lot to do with that. So you had this internal leader, so the question is, does North Korea have somebody lurking in the system? And then looking at a more recent example, in the case of Myanmar, Myanmar was a socialist economy, or was a socialist economy undergoing a transformation since 2010. Like North Korea dominated by the military, in Asia, other than North Korea, it's been, I think, the government or system that has been dominated by the military for the longest period of time. The military took over in the early 60s in Myanmar. Where did the leadership come in Myanmar? Myanmar was something different. You had generals who were chafing under the authoritarian, totalitarian leadership at the time. And the current president, probably mispronouncing his name, Thai and sign. If there were any Myanmar experts, please correct me. He was something that he was in the system and given the opportunity he broke out and took Myanmar along a different path. So my question is, none of this will happen in North Korea, delayed unification. Of course, a collapse could happen. It's independent. Unless there's a leadership in North Korea to take, to open up. And I just don't know where that will come from. Maybe it's a question that's really impossible to answer until we see what happens. So if North Korea were to take it back on what North Korea could do to attract foreign direct investment, is that is to open up the free export zones. In other countries, I talked about Shun, they worked out very well. I've had experience in traveling to a bunch of free export zones throughout throughout Southeast Asia. Philippines is a good example where they have export zones where not just foreign companies, but also domestic companies can operate. And of course, the benefit of a free export zone is that it insulates the business environment, protects investment from the inefficiencies and lack of governance or weakness of governance in the system as a whole. Tax benefits, income tax, corporate tax, that expedited customs procedures, things like that work out really well. Moreover, there are linkages even though export zones or zones or enclaves or our linkages to the domestic economy, the sense where you see in Philippines, you have many companies that the middle level management is actually Filipino. In fact, I visited one company that makes hydraulic pistons for airplanes, the airplanes that we all fly on. And I asked the expatriate manager, how many do you have in your factory, your plant here in the Philippines, it was in Baguio. And he said, well, I'm the only one in the head office in the US thinks is one too many. From the engineers to the managers are all Filipino. Now, the reason I mentioned that is that I did visit the case on some years ago, several years after the opening. And I didn't see any of these these these attributes, surely the workers were performing diligently and the supervisors were supervising seriously. But yet it seemed to be more the interaction between the North Koreans and the South Koreans was pretty absent, I think. And so case on, I think is a positive seed from the sunshine policy. But yet it hasn't germinated fully in the way that other special economic zones have elsewhere in Asia. The just to summarize on the cost and benefits of all clothes here is that in terms of the cost, as I already said, but I'll give a little more detail, I think Korea has the the fiscal headroom to accommodate a gradual unification. There are demands, by the way, in the South Korean economy that prevents the South Korean government from running a larger fiscal surplus and it already has actually if you include the as we do in general IMF standard accounting, if you include the National Social Security Fund surpluses as we do in the US deficit budget calculations, South Korea is actually running a small surplus. But nevertheless, there are take out those surpluses and then you get a small deficit, you take that debt to be refinanced every year is only 2.5% of GDP. And in the case of China, it's 6.1% of GDP. These are the figures for 2014. And then in the case of Germany, it's 6.8% of GDP. So whether you're an emerging market rapidly developing emerging market or mature economy that has absorbed a unification, it would appear that South Korea has several percentage points of GDP, at least over the short to medium term to which it can can provide assistance to to North Korea, either directly or indirectly through its state owned companies. Second, I'm intrigued that President E. Myeong-bok in 2007 had his vision 3000 idea of mini Marshall plan for for North Korea. Now this would and I don't know how much this would cost South Korea and boosting North Korean per capita incomes to $3,000 to whatever they are now, I think really none of us know because there aren't any adequate national accounting done in North Korea. Maybe it's 1000 per capita, maybe it's 500 who knows. At any rate, the the cost of the Marshall plan, I mean, the original Marshall plan was was actually fairly modest and the financial transfers weren't the key transformative agent in the Marshall plan and for the reconstruction of Europe after World War II, but it was rather policy prescriptions that came along with it and that the US wanted the Europeans to follow a more capitalist system than a more socialist system in which they were headed. And so it was the the liberal economic elements of the policy prescriptions that really helped an efficient use of resources in in in Europe in the reconstruction. And I think this would also be the case of in North Korea, there could be a Marshall plan that the local leadership would buy into so that they would would go along the policy prescriptions of a Marshall plan, a liberal policy prescription of a market plan. And then, of course, all these all these costs really, as I said before, depend on expedited reform in North Korea, and that's really a function of the leadership in North Korea. If I can take the role of a comment commentator and talking about the benefits, I'll say one thing. First of all, I just want to reiterate, I think that the elimination of the existential threat, it probably a psychological benefits that we can't, we can't, we can't put our fingers on right now and quantify that would be good for South Korea. One benefit that that won't be realized, Victor brought this up the other last night in the dinner is the this notion that South Korean firms, at least those that are listed on the Korea Stock Exchange suffer from a Korea discount that's this discount that weighs on them from the uncertainty of posed by by North Korea, the security threats posed by North Korea. My understanding of the Korea discount, it's really eternal. It's internal to the corporate governance of the South Korean corporations, which have historically and it's improved recently, or is on the improving trend has been weak, particularly in management cross-share holdings and all that in general terms, weak corporate governance, and more particular terms, probably the dividend payouts are much lower in the South Korean listed firms and elsewhere. So there is that has an effect on relatively lower lower prices in Korea. So there'd be no benefit, I think from the Korean market there, from from a unification or the elimination of the existential risk from North Korea. In terms of the expansion of the factor markets and getting more labor into the South Korean economy, President Park has her 474 vision where growth will be 4% labor force participation rate will be 70 70% and the capital income will be $40,000. I think by the time she leaves the office. I think the more difficult one out of those numbers is the middle one to achieve the 70%. For South Korea to absorb North Korean labor, the rigidity in South Korean labor market will have to be greatly reduced. South Korea's labor force participation rate is actually the level somewhat similar to the current one in the US. And of course, there's a lot of a lot of concern about how the labor force participant position rate in the US has shrunk since the recession in 2009. So South Korea does have low unemployment relative to the US. But yet the labor force participation is hindered by internal rigidity. So it would have to be worked out by by the South Korean firms. And then lastly, if there is a delayed unification where other great powers can buy in, even before Samsung and Hyundai move in for their long term investments under a stable investment regime, you have three large development banks in the region that can participate in infrastructure projects in resource development. And in addition to Korea Development Bank as well as Korea XM Bank, you have the developed China Development Bank, and you have the Japan Development Bank. I think they would all look favorably towards investing in South Korea to relieve the direct burden on the taxpayers of South Korea, invest in North Korea to relieve the burden direct burden on the taxpayers of South Korea for a process of economic opening under a delayed unification scenario. Thanks. Thank you. Speaking next will be Bill Burd. Bill Brown. It's really interesting all this talk about unification that's been spawned by President Pox quote unification bonanza talks earlier this year. I for one really welcome this this discussion this conversation. Since for a long time I've thought that we in the West and certainly those in South Korea have been paralyzed in our engagement strategies, engagement policies by fears of Iraq like disaster should North and South be ever unified. My view the two economies are highly complimentary. And given the right policies, there would be no shortage of willing investors in the North. Should its economy be reformed and merged with that of the South? Economic growth in the North as we discussed earlier would be spectacular in the South. Even the region would benefit greatly. I disagree completely with President Pox on all those points. The trick, of course, though, is to convince North Koreans that they not Southern or foreign carpet baggers will be the primary beneficiaries. Perhaps one way to do this is to cast the unification issue, the unification problem as a merger of two companies with shareholders, maybe not the managers of the junior company, that is the North Korean citizens being the primary beneficiaries. It's a little bit different way to cast this unification issue. I did give a paper a few months ago that on the economics of the indication, they went through a lot of these issues, which obviously I won't go through again, have borrowed some of them in the paper that I've contributed for this. If you don't have it, I'm told it will be in the conference report or I'd be glad to send it to you. If there's one word that I'd like you to remember from all of this, it's the word ownership. My thinking is we or someone needs to create an ownership system in North Korea before we can even think about investing there. So barring these preconditions, I'll go through just a couple of them, all bits are off. So the preconditions to me, and I think they kind of work either way in a gradual unification scenario or in a sudden one. The point is with the sudden one, the new occupiers or the South Korean government presumably needs to be prepared to do all these things very quickly. But it can be in this I think a transition that in North Korea could happen over a couple of years, maybe fenced off a little bit more than we've talked about from the South, even in the abrupt change scenario, which would and so I'm thinking, you know, limit the two wave population flows, gradually open the DMC if you can, you can hold it back, immediately enable market mechanisms in the North. And for that reason, don't give too much aid. I'm concerned of this Marshall plan, too much aid would flow in there, preventing reform from happening. A central first step is to require that all workers in North Korea be paid with real money, not the socialist ration system that they have now. Investments would be in creating new legal accounting and property registration systems. Legal system is imperative here. Create a new money and banking system in North Korea. Maybe something like a currency board, South was in charge. So interesting watching a lot of this is kind of happening already in North Korea is what's fun to watch the dollarization in the North Korea is is really quite phenomenal. As in post World War two East Asia, a critical thing I think is to institute massive land reform that underlies a lot of studies say land reform in South Korea in Japan and Taiwan. I won't go to China that way. They did in a much more different different way. But at least in Japan, South Korea and Taiwan land reform was essential to the development of their capitalist economies. So I would argue, privatized land and houses to current residents like Marcus was suggesting liquidate collective and state farms, push all those assets from the liquidation to farmers to an emerging private sector and to state agencies charged with education, health and pensions. Maybe establish a customs union, you know, a bunch of other things. Gradually, they'll allow capital and labor to flow across the DMC. And then finally, as the North stabilizes, create a monetary union common currency banking system. So once that's happened, let's talk a little bit about investment opportunities at that point. I can sort of divide investment into four different areas. And I'll speak a little bit about each of them. More on the last one is the foreign investment. First one is what I call central government investment in Northern Korea. So this is be souls, barely way. I suggest I think compared to a lot of people, I suggest a fairly modest amount. In fact, I'm a little concerned that the huge numbers falling around push people off. It can't be so large as to endanger the South Korean financial system. And the North, it should focus on creating institutions needed to build a private ownership system. That is all the legal accounting, tax information systems, modern capitalistic economies require. No doubt they'll have to be some short term aid. The central government can facilitate North South Korean monopoly enterprises, such as the railway telecommunications and electric power systems to connect with the North. But even there, these should be as self supporting as possible. An example, a commercializing North Korean railroad stations as has occurred in China easily can the profits from those can easily pay for rebuilding the railroads linking China and Russia with South Korea. East Coast port development also should be emphasized. So that's the central government soul kind of role. Local government investment here I'm talking about North Korean local government investment. It's easy to forget a fundamental aspect of North Korea is that the North Korean government presently owns North Korea liquidating much of this property and licensing key industry and trade functions should provide plenty of resources that the provinces and local governments can use to balance their equally maybe equally large liability, especially in health care, social security, education roads, that kind of thing. The trick, of course, is how well and how fairly it can liquidate this property. China is a great example in this and China is having trouble. But the one thing I've followed Chinese economy for what 30, almost 40 years. One thing we've kind of missed in following Chinese, we're always thinking something would go wrong. Chinese government has been able to feed itself by selling off divesting itself of state property for 30 years now. And it still seems seems to do that fairly well. So I think the same thing could happen in North Korea. Domestic private investment. Ultimately, domestic private investment will take on the bulk of investment opportunities and challenges, as in any rapidly developing country. Here South Korea of the 60s and 70s is a great model, where a newly formed money and banking system created a powerful machine for encouraging private savings and private investments. South Korea went from a negative saving country, probably the worst saver in the world in 1960, to the best saving country in the world in about 1980, all on the strength of market based reforms. North Korea should be able to do something similar. So this then brings us to outside or foreign investment. Here I'm having a difficulty sort of separating what logically be different between South Korean private investment, and any other foreign investment. I put them in the same pot. And in fact, I think North Koreans or the authorities ruling North Korea should treat South Korean companies just like Japanese Chinese or American or European companies, and should push for the best deals possible for the North Koreans. Now what would they what will we the foreigners of South Koreans end up investing in? Standard model that we tend to look at or I tend to look at is Ricardo's compared to advantage theory, or the Hexler-Earland theories of factor prices. Marcus is talking some about that. That basically says it's not quite as simple as most people think that that you produce goods and services in sectors that you're relatively better at doing, and that you discard industries that you're not relatively better doing. It's a nice way of saying in North Korea, a lot of things will no longer be made. I harp on that a bit because we in back in the 80s, again, on the China example, we did a lot of studies on comparative advantage in the Chinese economy, as it was shifting from a socialist economy to essentially a market economy. And the prices of everything's changed so radically, everything gets mixed up. And I think we were pretty good at showing that in 1980, a lot of the things that they were investing in and producing were were illogical once you had market prices. Example I like to give is a paper I did on energy demand in China. In 1980, China's energy prices were close to zero. Consumer prices were very high raw material, industrial prices were close to zero. So you're bringing on a market. What do people do? First of all, they export the oil. China was biggest income earner, foreign exchange earner in 1980 was oil exports. So in my little paper that I wrote, I said, this is probably not going to last one prediction that I made it was right by by 1990. And now China is the world's biggest oil importer. But it was easy to see how you change the price. Given market incentives, everything changes. So I'm very cautious in looking at North Korean industry now, where the prices, it's such a mixed up system right now, the prices, some of it is state set prices. Some of it is market prices. If you're not careful, you'll get very misleading ideas of what they're good at and what they're relatively not so good. Even so, I think, looking at looking at data, looking at what's happening closely, the country is changing really, really in interesting ways. With this mixed price system, I think gradually starting to dominate state prices. It's a very good thing. It creates a lot more productivity. So I was looking at the trade data the other day. And through most of the data we get, it's their trade with China, China reports most of it pretty well. We'll worry about oil data. The biggest jump in North Korean exports, January through July of this year is textiles, up 46%. It's not small. It's like $400, $500 million. It's your second leading export item. Five, 10 years ago, textiles would not have been on the list. Other things that you sort of think of for North Korea, which I do still think we would invest in are the metals and minerals industries. Those are actually down a little bit this year. I'm thinking what's happening in the textiles business can't prove it, but I think more and more Chinese textile company managers are getting into North Korea, paying market wages, hiring North Korean women and pumping out the textiles, rapidly increasing the production. The productivity is growing enormously because they're paid a market wage. Instead of the old set wage, which is essentially nothing in the set wage system, you're not paid, you're given everything you're given your fashion, you're given your lunch, you're given your house, and the market system you're paid according to what you make. So in this, in this, I think the transformation is beginning to happen. And we're seeing it in textiles and we're seeing it in textile exports to China. So that's, that's one area I would, I'm for sure want to invest in textile footwear industry. Now, a couple other examples of things would likely to invest in go back to history before the Socialist Communist took over. In Japanese days, Japan, of course, made large investments in Northern Korea, taking advantage of the minerals and metals and the coal resources there. One of the most interesting, one of their most interesting investments was the, what's now called the Kimchex Iron and Steel Mill up in Chongjin. It's by far North Korea's largest industrial facility, over 100,000 workers. The plant is a derelict, it's completely, it's a complete disaster right now. The workers are still all kind of hanging around. The Japanese built that plant because one of Asia's largest iron ore mines, the Musan Mine, is just right up there on the North Korean border and they developed a slurry system and the rail system to get the iron ore down to Chongjin. That to me represents a really interesting case study for a very major foreign investment opportunity. But here again, I would say well, Pasco probably has its eyes on it. I would say, well, you know, Mitsubishi, Chinese steel mills, Americans, everybody should have been looking at that. And there should be a bidding war. Who's going to take over that plant? It would bring in probably several billion dollars. That money could then go to the workers, go to reinvest in Chongjin area. It's a very rust belt kind of part of Korea, North Korea needs a lot of help. But selling, privatizing those kind of resources would be wonderful. Other kind of issues, other products, of course, nonferrous metals, North Korea seems to be still quite rich in lead and zinc, some gold. Interestingly, your first US investment in North Korea back in 1920, I think, was in a gold mine up in North Korea. And US also invested heavily in the rail system. It wasn't just Japanese who built the rail system. Americans were there, too. So nonferrous metals, certainly, there's some interesting developments in the rare earths. I'm a little caution on all these minerals and metals, though, I've seen there, I guess it's a key new paper, you list all the what a trillion dollars worth of metals in North Korea that you think you're going to pull out. That's, that's just not the right way to think. Mining anything, the cost is getting it out of the ground. Yeah, it might be there. It might be worth trillion dollars if you can get it out of the ground. But the costs are getting it out of the ground, refining it, and moving it. So it's not really the appropriate way to cost those or price those assets. Lastly, we tend to make, at least in our office, we make fun about Kim Jong-un's ski resort. I think, though, his idea to promote foreign tourism, ultimately, probably makes a lot of sense. Tourism can employ a lot of workers, bring in foreign exchange and take advantage of the unique characteristics North Korean geography and history. And of course, North Korea is only a day trip for hundreds of millions of wealthy Chinese, Japanese and South Koreans, who I think will flood the country given, given a chance. Many more opportunities are likely to present themselves. My guess is that in the right circumstances, authorities will be in a position of having to make sure there's not too much foreign investment, displacing the savings and investment that should develop within the domestic economy. The main issue for foreign investments, of course, will be to trust, how can they trust the new legal system? And to ensure that property rights, both for those selling the property and for those buying the property are protected. Thanks, Bill. See you, Terry. Good morning. Good morning. First, I'd like to thank Victor, obviously, CSIS and NRCS for inviting me here today to participate and be part of this dream team. Although in my case, Victor truly made a mistake because I'm the only non-economist to comment on a bunch of economist papers. But at least I get to comment on Bill's paper and Bill and I go way back four years back in my former life. When I was in the government, we shared an office together for several years. I'm used to commenting on each other's papers, although we didn't talk about this particular subject, but I feel at home. First, let me just kind of make one general comment that's beyond the specific issue if I could. Overall, I feel fairly reaffirmed as someone who has been pushing this unification thing, unification of the Korean Peninsula, as a good thing, a net benefit unbalanced for South Korea, the United States and the region. So to hear these two respected economists and earlier panel sort of always saying that there are real economic benefits in the long term with unification, it's good to hear that. Of course, I was always convinced that unification would be a positive thing in terms of security, in terms of human rights issues, humanitarian concerns, particularly from humanitarian concerns. But really, it's good to hear about economic arguments as well. And to hear that there are serious investment opportunities in North Korea post unification, and that it would be a robust opportunity. And I would like to thank Bill for that investment tip. I would like to save up money now to invest in the Pyongyang Railroad Station and make some big bucks for change. Now, a quick comment on the near term cost of unification since I feel like that has come up already throughout the morning. All Korea watchers out there, I think, we all understand that there are serious costs and challenges to unification in the near term. In fact, for many years now, Korea watchers have focused, I would say, in our studies of potential high costs, and all the things that could go wrong, you know, North Korean regime collapse or unification scenario. And personally in the decade plus that I spent in the government, I have to admit that I spend majority of my time thinking about all the potential problems that might confront the United States and the region. And I spend no time actually thinking about potential opportunities of unification. And you know, all the problems that in my case, it was more security related problems, right? Like securing nuclear weapons in North Korea, and then preventing the kind of chaos that really gripped post-Kadhafi Libya and post-Saddam Hussein Iraq. Although I do think that just kind of constant analogy that I'm hearing about post-Saddam Hussein Iraq with Korean case is a misleading analogy in some ways, because in Iraq, there was no South Iraq to absorb this newly liberated state like in that South Korea can absorb the North Iraq. Obviously, you guys know it's highly also fragmented along the sectarian and ethnic lines and the Korean peninsula is one of the most homogeneous place on earth. So the point is, though, I don't think there's any serious Korea watcher out there that is underestimating the potential costs and challenges that's involving unification. So I just wanted to state that almost everyone, I think, agrees that even under the best circumstances, reunification of South and North Korea, let's face it, will be very expensive and challenging the unification of East and West Germany, because the two careers are farther apart in terms of economies, in terms of education, in terms of technology, ideology, you name it, they're just farther apart. It's hard to get an exact figure in terms of what it would cost. I think a lot of economists have different bill like in terms of tap for rebuilding North Korea and integrating it into South Korean economy. Marcus talked about $1 trillion. I've seen numbers go higher up to even $2 trillion. Of course, we don't have an exact figure. German unification I think costs what $1.9 trillion over course of 20 years. I don't know the cost. All I know is that Nolan is the man. If you tell me it's $1 trillion, I'll go with that figure. The point is it's going to be expensive. But I do think that it's about time that we have more balanced look at various challenges and opportunities when talking about unification. So I really welcome today's sessions and this panel. Now regarding Bill's paper, which I will briefly comment on first because it's fresh in my mind. You just spoke last. It's quite detailed as you just heard. And he really lays out concrete steps toward economic unification, which to even a non economist like myself makes sense to me. Like the importance of protecting the South Korean financial system at all costs, allowing the private capital to flow to the North and focusing on helping to create institutions that are needed to build up. I think you said you emphasize this private ownership. And I know that I think both Bill and Tom have emphasized in their presentations, one thing that they had in common is that the benefits of unification will be fully realized by a robust role of the private sector. Not necessarily by this huge investment by the central government or aid. I also think that Bill's long list of sort of the foreign investment opportunities are spot on beginning with mining sector, even though you kind of pointed out the cost of the actual mining, but with this plentiful natural resources North Korea that we already also talked about in the earlier panel, they are really worth developing for export. I particularly think that synergistic effect of unification will be powerful if it really makes it possible the sort of the combination of South Korea's technology, which we all know is the most advanced in the world with North Korea's which no resources. Unlike South Korea, which virtually has I believe no natural resources and import 97% of its energy needs, as Dr. Kim was on your panel and Bill discussed North Korea has this large deposits of coal, uranium, mega site, the earth metals and all that. I think I'm reiterating this point because it's important. I think the value of minerals is estimated to, I know you talked about some trillion dollars, I think it's six trillion dollars is the number that people are quoting, which is 140 times the size of North Korea's current GDP. But you cannot be tapped today because of the primitive state of North Korea's mining industry. So obviously this mother load of wealth can be, you know, it's on the in the ground and it can be beneficial if you could, you know, get that and we can accelerate the unified North, unified Korea's economy and attract foreign investment. Similarly, I think also Dr. Kim earlier in the panel and Bill's point about the potential of taking advantage of North Korea's iron ore mine, it makes sense as well as Bill's points about the textile industry, I haven't thought about that at all. But that makes sense to me. And your last point about the tourism industry, with all the jokes aside about the ski, fancy resort and all the state of art water parks and amusement parks and all that, I think it does when you think about it, I mean, North Korea does have more scenic areas in the peninsula, and which could attract their many visitors with a kind of infrastructure that South Korea and foreign companies can provide. So I think that is a serious industry. Now, Tom mentioned an important point about soul having ample amount of fiscal headroom in a way to absorb over time the cost of opening or unification, at least the initial cost of unification from direct fiscal transfers to infrastructure investment. I think that assessment is right. I think South Korea has substantial, I don't know you call it substantial, but some monetary reserves. And I think it was some over $300 billion, which is not counting gold hoardings and so on. And so it at least has some current accounts or plus, and it has savings and resources to respond. I guess that's the point, as Tom said, with some fiscal headroom to absorb initial cost of unification. But over the longer term, I am, I do think that South Korea has to maintain financial stability, as Bill emphasized. And South Korea would need to find solutions to at least some of their deep structural, longer term domestic witnesses ranging from widening income inequality to a high household debt, and perhaps more serious threat to its future, which is, which we also discussed in the first panel, rapidly aging population. And I think developing this sort of, we talk about this often, relatively younger labor pool in North Korea to address South Korea's aging population is sort of an interesting discussion point. I think it was mentioned in the first panel that, and it's true, South Korea absolutely faces a serious demographic crunch, because life expectancy, which is around 81 years old right now is increasing, which is a good thing because I want Koreans to live a very long time. But the fertility rate is very low. I think it's per woman is about 1.2 children per woman, which is among the lowest in the world. I don't know why Korean women are not having babies anymore. But so as a result, the OECD predicts that South Korea will have the second oldest population by 2050, I think it's by 2050, with seven people over age 65 for every 10 working age adults, being by 2050, over seven out of 10 working age adults with over 65, right, so by 2050. And the working age population from 15 to 64 will start to decline in 2015, which is next year. So the population as a whole will be then shrinking in, will begin to shrink in 2030. But apparently North Korea's demographic is different. I mean, you know much better than I do, and you said slightly different, but from the research I've done, some 91% of its population is estimated to be under 65. And the fertility rate is higher to children and poor women. And right now, so right away, I think North Korea would therefore add, if my calculation is right, and my math is not my strong suit. And this came from the CIA fact book. Some 17 million potential workers age between 15 to 64 would be added to the nearly 36 million that's in South Korea. So it's a gain of some 47% for a total workforce of close to 53 million. The certification could introduce a new source of what I think badly needed Korean speaking labor to unify Korea without having to resort to immigration from Southeast Asia, or other low wage areas. South Korean firms could also move some factories out of China, where they have been located to take advantage of relatively cheap labor, and relocate them into North Korea, where the labor would even be cheaper, at least initially. But I'm wondering if I am actually, you know, right on this or what your thoughts are on this because Bill and Tom particularly because an argument could also be made that as people goods and services suddenly flow, right, freely in a unification scenario, that the so the North and South wage gap would close, assuming I brought presumably and perhaps labor costs will not fall as low as we might think. Although I think Dr. Kim also made a point in the previous panel that the wage gap between South and North Korea will be still considerable for a period of time. So I guess the question is how appropriate or important would wage control the then unification scenario. Also there are some other questions and considerations that I wanted to throw it out there for discussion. Once the North is joined by the South, would it enter OECD and thus sort of then forfeit any foreign aid from its members? As well, that was the case with East Germany when East Germany joined West Germany. Similarly, would North Korea no longer enjoy the benefits of the World Trade Organization system of preferential tariffs for developing countries? There are other concerns as well. What about, you know, then this came up and Bill mentioned it, and I think Marcus mentioned it, which is this very complex litigation over property rights. I think that's a very important point that came up several times now that are likely to arise. And then what about the Chinese investors? Would they demand that their existing contracts be, you know, with Northern firms be recognized, adding to then already very high costs to Southern firms or foreign firms that they would be facing when trying to enter the Northern market? Okay, so you don't have to obviously have to answer all these questions. I think there's some of these are some of the questions that I sort of concerns that I thought about as I was sort of hearing two really excellent presentations. I think my time is up. So I'll just wrap it up there. Thank you. Thank you, Sue. And then our last discussant is Dr. Park. First, I thank the organizers for inviting me as a discussant in this session. And I'm also not economist in the economic session. But one of my main areas of analysis is North Korea's political economy. I suppose my role may be to bring some social political aspects of the North Korean economy for the discussion on economic integration of the two couriers. presumption presumptions on the current North Korean economy at the time point of unification exerts influence on thinking about how to manage the economic unification process. The thesis for economic unification and investment possibilities by the two presenters can be regarded as basic model for the unification and post unification economic process. Building upon this basic model, I want to add some new points and some complementary dust to figure out a more complex and concrete model of economic integration of the unified Korea. I would like to bring six points. The first point is current status of an evolution of North Korea's official economic system. Kim Jong-un formalized important institutional changes in the economy with the so-called June 28th measures in 2012 and other follow-ups in 2013 and 2014. As a result, the official facade of the current North Korean economic system can be compared to those of Chinese between 1984 and 1992 and of Vietnamese between 1986 and 1991. Theoretically, this is a social economy without planned directives to state firms and collective funds. Or in other words, this politically managed market economy composed of commercially operating state firms. The institutional and operating operational facade of North Korean economy would evolve increasingly similar to other stagnant market economies of developing authoritarian countries in the near future. Before not too long, North Korea would initiate a package of policies to privatize even state firms as China has in 1992 and Vietnam has in 1991. Whether North Korea's such economic reform measures would kick off meaningful economic growth is another question. My second point is unification as a merger between democratic and political capitalism. The Korean unification would not be a merger between market democracy and communist economy as in the case between East and West Germany, but one between democratic and political capitalism. Here, political capitalism is defined as market economy in which profit opportunities are determined not by economic competition, but by political decision. The redesigning of East German communist economy into a West German type democratic market economy was relatively simple because after the political collapse of the party state, there were no complex net of strong established interest groups in the society. The political capitalism which has been evolving in North Korea would not show a complex set of established interest structures outside the party state bureaucracy because they are located in the society based on private private wealth and connections. They would survive even after the political collapse of North Korean party state as in other stagnant reformist reform resistance and political economies of post-communist authoritarianism. My third point is plunder of state property through introduction of market institutions. One of the main drivers of introducing politically controlled market mechanism in North Korea has been the fact that under current conditions, they contribute better than the command economy to private enrichment of the individual communist political elites, especially through misuse or theft of state property and shadow privatization. The introduction of apparent free market institutions and former privatization of state property would be accelerated in the future and especially with the advent of prospect for economic unification of the two Koreas because before too late the North Korea's political elites would like to seize the last opportunity for shadow privatization and private enrichment. My fourth point would be how to promote poor growth. North Korea has been transformed from one of the most egalitarian society to one of the most unequal in the past 20 years. And one of the most important challenge is to promote poor growth in the unified Korea. My fifth point is how to promote North Korea entrepreneurship. At the time of unification, no matter when it would be, we'll find a host of businessmen with various sizes of private wealth in Pyongyang and other local cities. The unified Korea should not only attract foreign investment and technology but also nurture a new type of innovative market entrepreneurship among North Koreans. The economic policy must be taken of promoting small and medium private businesses by North Koreans in North Korea. My last point is there are strategic competitions for economic predominance in the north of unified Korea. North Korea is located in the center of North East Asia and surrounded by smiling countries. The collapse of autarchy and opening of the small and weak North Korea would provide neighboring countries with drastically increased chances for establishing influential positions in North Korea. The process of unification might not guarantee South Korea's dominant economic position in North Korea. China might have already positioned itself as the dominant player in the North Korean economy and might try to take advantage of its strong economic position in North Korea to influence the course of economic process, economic unification process, and the foreign policy of the unified Korea. Thanks. Okay, so I think our, unfortunately given that time constraints and the time constraints of our lunch speaker, we really don't have time to go to the floor for questions. But I think our discussants have put forward a number of good questions for our two presenters. So what I would like to do is ask each of you to give us maybe two points based on what you've heard from the discussants and from each other. And maybe, should we, Tom, should we start with you? Sort of two responses to what you've heard. Yeah. Well, I think my first point is that when you talk about unification, the only way I could see this is happening in any looking at historical examples how other socialist systems opened up is through this delayed unification process, where there's an internally driven desire to reform in North Korea. Now that element I don't see on the scene yet. But if that were the case, then my point is that given it probably be not enormous costs for South Korea, some of the costs can be shared by others if they're shared interest in this. However, there would be costs for South Korea. And I don't see a bonanza at least in the opening years and by opening years, I would see the bonanza only comes when North Korea fully reforms. Two examples I gave were the development of local markets, say equity markets, and that took between 12 and 14 years in the case of Vietnam and China. And China's made a lot more progress in Vietnam since then. So we're talking about probably a decade of transition, unless things accelerate in ways I can't see right now. Thank you, Tom. And Bill. Yes, I would echo what Tom said, except one thing I fall back on is former boss of mine in the chief economist office. His favorite quote was always, it's kind of an economist quote, unsustainable trends are not sustained. But North Korea to me is on an unsustainable track. No one on earth I don't think and we try to forecast all the time but danger can forecast what's going to happen there. It is changing and it is reflecting those unsustainable things that are happening. So my thinking is that they're not reforming. I don't see reform going on. But I do see the command economy falling apart, gradually, gradually falling. They can't command the economy. So you have dollars running around. It's a bizarre situation. So my mind is unsustainable. That means for our side from the South Korean side, we need to plan for what's going to happen. And we can't. We don't know what's going to happen. I think the approach that I've laid out on my other paper sort of does the right thing and that it tries to give the right incentives to North Korea to push them in the right direction. That's about all we can hope for. And then if it does collapse, be ready to move in. And as I say, bring property rights, bring ownership rights to the North Koreans. That's the way to prevent a war. I think people will fight if you're coming in to take their property. If you're giving them the property, they're not going to fight. They're going to like you. So that's my point on that. On Sue's many comments, one I would like to harp on is the wage factor. And it's one that it's hard to understand in North Korea right now because of the medical problems, the health problems over what, 10, 15 years now of poor nutrition. It's hard to know how much that has affected the population. But generally speaking, we do look and see a North Korean worker population that's, for its wage level, extremely well educated. These people are mostly literate, for example. A literate population can earn, can learn much faster than an illiterate population. North Koreans are mostly literate. They're inculcated with a strong work ethic. They're organized. They know how to be a place at on time. Given their wage level, they should be able to be extremely productive people. So the rule we have to work with is not the wage level. It's the wage level relative to the productivity level. This is what Marcus was talking about with the Germans. They got it out of whack. As long as that doesn't get out of whack, there should be no employment problems in North Korea. South Korea I'm a little bit more worried about because there's a lot of, South Korea used to have a very flexible wage system that no longer is so flexible. And that could cause some some problems in South Korea. That's my last question. My last thought is one that I was not able to work out. It's still something I haven't worked out is agriculture. South Korea, of course, was that comparative vantage was hugely in agriculture. 50 years ago, the north was in industry. 50 years later, I'm not sure that that hasn't reversed. So that a unified Korea, I'm just not sure what's going to happen to North Korean in South Korean agriculture. That's something that all of y'all can think about. Great. I think between the two panels this morning, we really do have a very good road map of what are the priorities and what are the preconditions to achieve so-called synergy and the sort of investment in a unified Korea. So I want to thank, apologize to the floor that we didn't have a chance to questions in this particular panel. I want to thank our participants very much for a stimulating panel. Thank you. Now, ladies and gentlemen, it's now time to feed you all. So I think we have set up food out there on the Esplanade. Please help yourself and please come right back to your table so that we can enjoy some comments from our lunch speakers.