 Because of a speech delivered by President Pocke and Dresden Germany, the topic of unification has been on the minds of many. This is, of course, not the first time unification has been in the news during the Cold War. Can you hear me now? Oh, wow. At other times, it was defined as the perfect integration of the two countries. At other times, still, it was defined as the imperfect operation of a one country, two systems formula. And still, at other times, it was defined as something that was to be avoided, something that was too difficult to imagine, too dangerous to contemplate, and too expensive to afford. What is different about the current iteration of the discussion of unification is President Park's view of it as an opportunity or jackpot. So what exactly does this mean? How is this concept different from previous concepts? And what are the opportunities, as well as the dangers inherent in unification for Korea, the United States, and the world? These are the questions we will try to address today here at CSIS. My name is Victor Cha. I'm your moderator today, as well as Senior Advisor and Korea Chair here at CSIS and Professor of Government at Georgetown. I want to welcome you this morning to the conference, Korean Unification in a New Era. This conference is co-hosted with our Korean friends at the National Research Council for Economics, Humanities, and Social Sciences, as well as with support from the Korea Institute for National Unification, the Korea Institute for Economic Policy, and the Korea Institute for Industrial Economics and Trade. In addition to welcoming our audience in the conference hall this morning, I would like to welcome our online audience who are watching the livestream at CSIS.org. And throughout the day, you will be able to follow this conference on Twitter and tweet questions to us at CSIS Korea Chair, hashtag CSIS Live. Let me now take the opportunity to introduce my partner at NRCS for some opening remarks. Dr. Kang is the Secretary General of NRCS, the governing institution of 23 national think tanks in Korea. Prior to joining NRCS, he worked in the Korean government for 31 years, serving as Deputy Minister for Regulatory Reform, Deputy Minister for Government Policy Analysis and Evaluation, Deputy Minister for the Jeju Province Policy of the Prime Minister's Office. He also served as Deputy Secretary for Public Relations of the Office of the President. Graduated from Seoul National University with a BA and a master's, as well as from University of California at Berkeley and a doctorate from Tonga University in Korea. So at this moment, I'd like to welcome Dr. Kang for some opening remarks from NRCS. His Excellency Ambassador Ahn Ho-young, Dr. Victor Cha, and this thingy to guess. First of all, I'd like to express my deepest appreciation to prominent policymakers and experts from Korea and the United States for attending this conference, despite your busy schedule. On behalf of the NRCS of Korea, my special thanks go to Dr. Cha, who has made great efforts to host this meaningful event. Ladies and gentlemen, North East Asia is one of the most dynamic regions in the world. The region has been increasingly contributing to the global economy. However, the most concerning factor on the security as well as economic fronts is North Korea. North Korea should make the right choice to the responsible member in the international community. In order to induce North Korea to make that choice, it is important for us to speak with one voice and the message must be clear and consistent. Under this recognition, President Park Geun-hae suggests the vision for the Korea-U.S. Alliance in an address to the joint session of the United States Congress last year. President Park emphasized that we should lay the groundwork for enduring peace and reunification on the Korean Peninsula and we need to build a mechanism of peace and cooperation in North East Asia. The trust-building process on the Korean Peninsula, as we all know, includes developing inter-Korean relations, establishing peace on the Korean Peninsula, and laying the groundwork for reunification. President Park also proposed the North East Asia peace and cooperation initiative. We witness the nations of North East Asian region fail to fulfill collectively. The region suffers from Asia's paradox, the disconnection between growing economic interdependence and backward political and security cooperation. The way we manage these paradox will determine the shape of new order in the region. We cannot afford to put off a multilateral dialogue process in North East Asia. It could also reinforce President Obama's strategy of rebalancing towards the Asia post-picture. I believe that especially the United States together with Korea should take an active part in this endeavor so that these ideas bear fruits. As President Park emphasized, Korean unification would be an immeasurable bonanza for any nation with interest in the Korean Peninsula. Unification on the Korean Peninsula will contribute not only to the prosperity of Korea, but also to the peace and prosperity of North East Asia and the rest of the world. A peaceful and unified Korea that is free from the fear of war will be a catalyst for economic development of the North East Asia. Since German unification in 1990, East Germany has emerged from a backwater into a gross engine of the European economy. That is a powerful testimony to tremendous potential of Korean unification. At this conference, policy makers and experts from the United States and Korea have joined today to discuss a way to prepare for the unification. I ask all of you to gather your wisdom, to make Korean unification come earlier for the prosperity of the world beyond North East Asia. I hope today's conference will serve as an opportunity for all of us to understand each other better and build friendships. Thank you very much. Thank you, Dr. Kang. It's now my pleasure to introduce Ambassador Ahn Ho-young, who will provide us some opening remarks for the conference. Ambassador Ahn, as you all know, is the Republic of Korea's ambassador here in Washington. He joined the foreign ministry in 1978 and has held a number of posts, distinguished posts, throughout his career most recently as first vice minister for foreign affairs and trade at the ministry. Prior to this, he was ambassador to Belgium as head of the Korean mission to the European Union and was appointed deputy minister for trade at the ministry of foreign affairs and trade from 2008 to 2011, where he was what was known as the Sherpa for G20 and G8 outreach meetings. He's held a number of important positions, but the most important thing in his bio was that he's a graduate of the Edmund A. Wall School of Foreign Service at Georgetown University. So Ambassador Ahn, thank you for joining us this morning. Good morning. There's no response? Good morning. How are you? Well, I guess maybe this is 12 in the morning, right? So in order to wake you up, I think I will start with an analogy from the world of sports. And in the world of sports, they have an expression which is dream team, right? Dream team. And I was just checking some data where it started from and I came to find that dream team started with basketball teams, basketball. Dream teams started originally with basketball. And then it moved to football. And then it moved to wrestling. And then in Korea, it moved to archery, right? So it is spreading, dream teams are spreading, which is a good thing. Why do I tell you about dream team? It's because I just went through the list of speakers for today's seminar and I said, this is a dream team. See? If you want to form a dream team of Asian experts, I said to myself, you don't have to go too far. I'm looking at you, the members of the dream team. And I said to myself, if you want a dream team of Asian experts, you can come to CSIS this morning, right? So that's the reason why I'm telling you about this sports analogy of dream team. But dream team, they have a task for today, which is to discuss about unification, unification of Korea. And when it comes to unification, then I think there is one proposition in which I strongly believe in. And then I guess in this whole, they will do it in many of you who would be sharing the same proposition with me, which is it is not a question of if. It's a question of when. It will happen eventually. But we do not know when. And what should we be doing today? We know it is going to happen, but we do not know when. So what are we supposed to do today? That I think would be a question which is in your mind all the time. And then there is a question in my mind all the time as well. So I guess maybe I can think of at least three things that we should be doing today, in order to promote the process of unification, as well as in order to be, will we be better prepared when it eventually happens? So I guess maybe at least there will be three things we could be doing together, even today. First thing in my mind would be understanding, better understanding about what unification means. And then earlier today, Victor Cha, he was talking about it could be risky, it could be dangerous, it could be costly. And I agree with everything that Victor said. And then I always do, I agree with everything that Victor says. So when Victor told us about risky, expensive, costly, et cetera, et cetera, then I have to admit that I agree with him. But at the same time, we in fact have to think about all the benefits which will be occurring from unification. And then both Victor as well as Dr. Kang, they talked about economic benefits. And then on top of it, there will be security benefits. And on top of it, these days, we are talking more and more about humanitarian benefits. But at the same time, there is no assurance. I mean, it will be costly, it will be risky. But at the same time, they can be benefits. But at the same time, nothing is written in the concrete. As a matter of fact, it will depend upon us how costly it will be. It will depend upon us how risky it could be. But at the same time, it will depend upon us how beneficial it could be. So that's the first thing we should be doing, which is better understanding of what unification means for each and every one of us. The second action we could be taking even today would be to strengthen engagement between Korea, between South Korea and North Korea. I know, again, it is not easy. Well, it is not easy today. It has not been easy for the past 70 years. And then it has not been easy because of ideological differences, because of the Korean War, because of weapons of mass destruction, because of all those unnecessary provocations. I define it unnecessary provocations. And then all of them made it difficult for us to engage North Korea. But even then, engagement is something necessary. And then there is the reason as Victor has already stated, President Park, my president, she made a speech at Dresden. And in the Dresden speech, I think my president mentioned at least three points, which is humanitarian exchanges. And at the same time, building of some infrastructure, economic infrastructure, as well as some more cultural exchanges. And then all of them, to the extent we can do it today, and then to the extent that through the process of trust-building process, we in fact should be extending the scope and contents of exchanges between South and North Korea. So in my mind, that would be the second thing we can and we must do today. And then the third thing, which I think we can do today would be engagement, engagement with countries around the world with interest in the unification of Korea. And then why do I say that? It's because when we talk about this issue of unification, we often talk about lesson of Germany. And then Dr. Kang, he has already mentioned about lesson of Germany. And I think one lesson of Germany would be the importance of engagement with countries with deep interest in the unification process. So that, I think. These three, I think, are the things which we can do, we must do in order to promote the process of unification and at the same time, so that we'll be better prepared when the day comes, we in fact end up with a unified Korea. So better understanding, that's something we can do. And more engagement between South and North Korea, that's something we can do. And engagement with the countries with deep interest in Korea, in the unification of Korea, that's something we can do. But the one last point I should be making with respect to the third point, that is to say, engagement with the countries with interest in the unification of Korea. That is to say, again, I'm getting back to this German unification. And at the time, people were saying with German unification, it in fact was the success or outcome of something called host politic, right? But at the same time, there were far more people who were saying, it was not so much host politic, but the best politic, which in fact was at the end of the day, did so much for the German unification. So that I think is, would be another say, the lesson we could be learning out of German now president. But let me be, I think I can afford to be briefed today because as I told you, these issues, we are going to discuss all day long by whom, by the dream team of Asian experts. So thank you so much. And then look forward to our seminar today. Thank you. So if I could ask the members of the first panel to come up on the stage and we'll get started right away. Thank you. Okay, is everybody mic'd up? Okay, so our first two panels this morning are actually on the economics and business side with regard to unification. The first panel is on the economic synergy effect of unification on the Korean peninsula. Our presenters as you see in your program are Marcus Nolan, Dr. Kim Dong-soo, Dr. Chun Hyung-gun, and Matt Goodman from CSIS. Their full bios are in the packet, so I'm not going to spend a lot of time introducing them to you. Let me just say that they're all very distinguished people as Ambassador An said, they're the dream team. And the order that we're going in is first, Mark. Marcus Nolan, Executive Vice President and Director of Studies at the Peterson Institute for International Economics and a senior fellow for the East West Center. Mark? I wanna speak from here over there. From here is fine. Unless you'd like to use the podium. I would actually prefer to use the podium. Go ahead, go ahead, yeah. Thank you very much. It's an honor to be invited to address this group. I find that especially in the morning, I'm a little bit more energetic and active if I'm standing up rather than sitting down. I've always wanted to be, my secret dream is I've always wanted to be 6'9 and play power forward in the NBA. So I suppose this is the closest I'm ever going to get to being a member of the dream team. The United States has a strong economic and political interest in seeing Korea unified as a democratic capitalist state. The specifics of U.S. involvement are partly contingent on a unification scenario. Excluding the horrific possibility of war, unification scenarios basically come down to two, a protracted consensual process in which North Korea maintains sovereignty for some significant transitional period and an abrupt collapse and absorption scenario along the lines of the German experience. Earlier this year, the Ilmen Institute of International Relations surveyed 135 experts and I use the term experts advisedly in this context. The consensus coming out of this group or at least the modal response of these experts was that the life expectancy of the Kim Jong-un regime was something on the order of 10 to 20 years, a majority 64% expected the regime to fall through an internal power struggle and that unification with the South would be the final endpoint of that process. This implies that the consensus of these experts tends towards that second abrupt collapse and absorption scenario. Now with respect to that scenario, as the United States has learned quite painfully in Afghanistan and Iraq, the establishment of civil order is absolutely critical. If there were prolonged violent opposition to South Korean rule, a quarantine or something akin to the Israel West Bank Gaza situation could emerge in the Korean Peninsula which would obviously impede economic recovery. Rapid clarification of property rights will be essential under either scenario. Without clarification of property rights there won't be investment, without investment there won't be recovery. And although I don't wanna go into detail on this in the interest of time but I'm happy to discuss in question and answers, I think that a lot, some of the most important lessons of the German case have been a miscomprehended or ignored. Specifically, that issue of clarification of property rights, the Germans pursued restitution that slowed up the process of clarifying property rights and then getting investment. And the second and the bigger thing which I think is generally misunderstood is that the monetary conversion rate at the time of unification was not the primary cause for the collapse of output in East Germany. It was the subsequent behavior of East German wages and that was very much a product of German policy. If there's interest in this I'm happy to discuss it further in question and answer. The good news is that our Korean unification would accelerate peninsula growth and lead to a dramatic reduction in poverty. The bad news is the price tag could easily exceed $1 trillion or something on the order of 100% of annual GDP. Estimates of the impact on the United States economy very widely. Key issue is the extent of reform in North Korea. Ironically from an analytical standpoint it's actually easier to do the analysis in the collapse and absorption scenario because existing sanctions legislation and things like that become moot because North Korea has disappeared as a sovereign state. The other thing about unification from the United States standpoint is the United States can't contribute to financing unification but I wanna emphasize that the role of the private sector will be absolutely crucial and that's the topic I think of the second session we're going to have. US public sector can do a fair amount but private sector involvement is really what is going to be decisive. So what are our starting points? Well, I'm going to as a good economist assume a way at mass violence. I'm gonna assume that whatever this process whether it be consensual or a collapse if it's a collapse it's more like the East German collapse where there's not violent opposition. Human capital in North Korea may be lower than expected. There is considerable evidence that the educational system has deteriorated quite substantially over the last 20 years. Environmental degradation is likely to be extensive and may be quite expensive to clean up especially if South Korean environmental standards are applied. And the implication for North Korea and this is more important under this kind of prolonged consensual unification scenario is that the growing centrality of the mining sector is associated throughout the world but specifically in transitional economies with sort of corrupt familial based autocracies that are evident in parts of Central Asia today and that's sort of the trajectory that North Korea is on. It's not a particularly good pretty picture. Now the good news is that North Korea has South Korea. One cannot imagine a better asset to have in the process of unification than South Korea as a partner. North Korea's population is a bit younger than South Korea so that should help. My survey evidence that was reported in a paper that was released earlier this year by the US Korea Institute of SICE suggests a relatively recently disciplined and productive labor force in North Korea and their pockets of excellence though sadly these tend to be in things like missiles. In terms of the economics of absorption product market integration between North and South Korea would not have a big impact on South Korea. Think about Mexico integrating with the United States in NAFTA or a small European country joining the EU. It may affect specific communities, it may affect specific firms or maybe even specific industries but from a macroeconomic standpoint North Korea is simply too small if all that integrates is product markets. The issue changes dramatically when we allow factor market integration and implicitly allow people to cross the DMZ and labor markets to start to integrate between the two countries and obviously investment going from South Korea to North Korea. My own work based on multi-sectoral computable general equilibrium model suggests that among the key issues are the rapidity of technological transfer upgrading and productivity increase. Obviously the faster productivity ramps up in North Korea the lower the ultimate price tag will be for unification. How much labor migrates from North to South? How much capital will be invested in the North? How much of that comes from South Korea? How much comes from third parties? Is it capital that is invested on a profit seeking basis or is it a grant aid? As I indicated my work suggests that over a decade the cost of unification defined as the amount of capital investment needed to raise North Korean incomes, the 60% that of those in the South would exceed a trillion dollars which is roughly in the same ballpark as the figure put out earlier this year by the South Korean Ministry of Finance. It would have distributional implications in South Korea as well. There would be a shift in the distribution of income from labor to capital and within labor from relatively low skilled labor to relatively high skilled labor. So absent compensatory policies by the South Korean government the process of economic integration would be accompanied by widening wealth and income inequality. There are possibilities that different sectors of the economy what we economists call traded goods versus non-traded goods would be affected differentially. South Korea would not be hurt in absolute terms. I wanna make this quite clear though the growth rate in South Korea would slow. The peninsula growth rate overall however would accelerate and as I mentioned there would be a dramatic reduction in poverty. It seems to me that the policy implications for South Korea are that engagement to encourage as much transformation as possible within North Korea as a precondition to reconciliation and eventual unification is desirable. South Korea ought to be running a budget surplus to basically put away money for eventual unification costs. There is a need to strengthen the Korean Fair Trade Commission to make sure that anti competitive practices are not practiced in North Korea as they were in East Germany post unification. In terms of the monetary union the Bank of Korea ought to be working very diligently to understand what the North Korean real exchange rate is and as I mentioned in the case of Germany focus on wage setting not the initial conversion rate. That's where the German case went wrong. And then possibly most critically it is essential to clarify property rights quickly in order to get investment. What you want is compensation not restitution. If people have claims on property in North Korea they can be compensated but you don't want them to get tied up in some legal process in which the ownership rights of the assets are unclear and the asset deteriorates. So compensation not restitution and owners of capital with skin in the game to restrain wages. Land to the tiller that is to say gives North Korean farmers the land that they're currently operating so they can continue to do it. It will increase productivity and reduce the incentives to migrate. And while you will ultimately want to see privatization of assets this has to be done very carefully so that it doesn't become a fire sale as happened in the case of Germany. For the United States which of these two basic scenarios obtains whether it be the prolonged consensual unification process or a more abrupt process matters. Successful rehabilitation of the North Korean economy under either scenario will lead to an expansion of trade with the United States. That will largely consist of North Korea shipping light manufacturers to the United States in return for capital goods and agricultural products. Other products that North Korea produces such as metals may well be purchased by US firms for assembly operations for example in the electronics sector elsewhere in Asia. So they might be considered indirect imports by the United States. There would be an expansion of services trade as well. Basically business services exports from the United States to North Korea and North Korea exporting tourism services to the United States. One issue that might be different under the two scenarios in the kind of protracted scenario where North Korea remains sovereign for some considerable period of time labor standards issues may become quite important at least from the standpoint of United States investors. US interaction with North Korea today is constrained by a dense web of sanctions and other measures in the consensual scenario. Those may require both executive and or congressional action for their removal. And I think this is important for South Korean audience to understand even if there is improvement in relations between Seoul and Pyongyang it doesn't automatically follow that the United States is going to start changing its laws with respect to North Korea. That would not be such a big deal in the collapse of absorption scenario because those measures would effectively become moot. In either event the annex in the chorus agreement could be used to jump start American interaction with North Korea. In if you have for example in the case of Germany the brief period where the German social Democrats ran the East German government under the final prime minister Lothar de Maziar. In terms of finance as I indicated unification is likely to be expensive. There's a role for the U.S. to play both bilaterally and through the international financial institutions. The capacity of the United States government to contribute to this process is going to partly be a function of U.S. fiscal position and U.S. fiscal position over the next 20 10 to 20 years is highly uncertain. But I want to emphasize that unification finance should not be thought of strictly as a public sector activity. Indeed the private sector will have a critical role to play as well. Probably the most important U.S. economic contribution to the process is likely to come through the private sector. Foreign direct investment which is the topic of our next session constitutes the institutional mechanism for both technology transfer and the links to the marketing and distribution networks globally that North Korea currently lacks. The basic problem with the North Korean economy is you have a certain amount of latent potential but they literally do not have the nerve synapses to connect that latent potential to the global market and that's where foreign direct investment will be so critical and that's where U.S. involvement really will have an impact. In that context aid should seek to complement not substitute for those private sector activities and indeed should try to be oriented in a way to in fact encourage additional private sector financial inflows. I thank you for your attention and I look forward to our subsequent discussion. Thank you. Thank you Marcus. Speaking next is Dr. Kim Dong Soo. Dr. Kim Dong Soo is the director of the research planning and coordination division at the Korean Institute for Industrial Economics and Trade. He received his PhD in economics just down the street here at George Washington University. Can I go to the podium too? Please, please. Good morning. Actually I'm more than happy to join the dream team. This morning. It is a really honor to present my paper here and actually I prepared the slide. You can see. This morning I'm going to talk about the economic synergy effect of unification but before I do that actually I'm going to talk about the premises of the economic integration first and then I will go over the synergy effects by industrial sectors and I will try to conclude. Especially before I start I'm going to introduce myself a little bit because I'm from the Korean Institute of Industrial Economics and Trade. That's one of the 23 economic research institutes under the Prime Minister's Office under the provision of NRCS. KIA actually mainly focus on the industrial policies to the Ministry of Industry, Energy and Trade in Korea. In order to discuss the economic impact of unification actually we need to think about the economic integration. Sometimes I'm quite not sure about which, I mean conceptually I'm a little bit confused. Economic integration seems like a bigger concept than unification. Probably this morning I'm going to mess up the terminology in between economic integration and unification please forgive me. The pass of unification is really determined the initial condition of North Korean economy and that's why the speed and course of economic integration or unification is really important. Not only for two Koreas but also the neighbor countries such as China and Japan. There are so many literatures think about the process of unification. Maybe two processes possible, gradual unification and radical unification. As you can see gradual unification that might be the ideal case. Right after significant economic growth of North Korea and in the overall in North Korean economy then we may have unification but it is hard to achieve that I believe. When we think about the economic integration probably that might be more realistic. I mean the case of radical unification maybe still there are two possible situations and one is intermediate and complete economic integration and the other one is gradual and partial economic integration. In order to talk about the economic synergy effect I need some kind of a premises of economic integration. The first one after the economic integration North Korea supposed to immediately adopt a market economy. The second one after the unification still there's supposed to be wage disparity between two Koreas otherwise really difficult to think about the integration. Let me move on to the synergy effect. I believe I'm more oriented in economics rather than international relations or politics this morning I believe. Right before the synergy effect I'm going to talk about the South Korean economic situation first we do we face this in challenges as you can see we do have a strong neighborhood. Probably you may hold that sanity theories maybe mentioned by the CEO of Samsung Egon he initiated that term the sandwiches in 1992 I believe because Korea looks South Korea looks like a sanity right in between China and Japan. We believe that technology disparity technology gap between South Korea and China has been lessening while the technology gap between South Korea and Japan is widening. That's what we face right now. A lot of the industrial experts my colleagues in my institutes they really worry about that. And the other one is we are one of the fastest aging society. As you can see on the right hand side there is a population distribution by ages 40s and 50s. I'm right in the middle of the 40. I was born in 1969 40s and 50s almost double compared to the teenagers and under 10s in South Korea. Right hand side that's the population distribution in 2010 the shape of the pyramid looks very, very unbalanced. We are going to be problematic in the next 20, 30 years back over the production labor production labor forces. As I told you like we are facing we are sort of a deadlock in the industry side. Comparing to the 1995, 2012 the structure, industrial structure still doesn't change much. As you can see still sectors automobile, petrol refineries and chemicals and machineries are the main key manufacturing industries in Korea. We didn't move much to the IT sectors even though we are famous for that. Potentiality of North Korea is pretty rosy to us. Actually they have abundant resources not only for the natural resources but also the human capitals. As you can see with the first table the Bank of Korea according to the Bank of Korea the cores and ions are abundant and the infrastructure of railroads, the transportation infrastructure. I know the quality is pretty poor but still the lengths of railroads are pretty abundant a lot bigger than South Korea. The second table actually showing the labor cost in Kaesong which is about $1,500 of annual income comparing to the Beijing or Qingdao or Jakarta that's a lot lower. So we may use that lower labor force if we have unification with wage differences. Overall the effect of unification is pretty prosperous not only for the Korea but also the Northeast region. There might be a mutual benefits in neighborhoods. I believe the political stability in Han Peninsula will bring the some synergy effects in manufacturing logistics and energies. Also we could think about the energy and transportations in Northeast Asia probably we could think about the transcontinental railroad from Tokyo to London. Also there might be some network gas pipeline in Northeast Asia, et cetera. So that may bring the multilateral cooperation in economic blocks in those in the country. I believe it will bring more business opportunities in I guess at least 50 years. Absolutely we need to rebuild North Korea that will cause the backward induction backward industrial linkages. That investment demand will bring the more opportunities in Northeast Asia I believe. Let me go just over sector by sector briefly. I believe unification will trigger the industrial restructuring in Korea. There might be a really enhancement in the labor intensive industries such as machineries and inter machineries and textiles and electrics and chemicals et cetera. Also there is some potentiality in IT sectors because I don't know how they educate people but their IT software skills and technologies are pretty outstanding. The North Korean hacking skills are one of the top as you know. So we may use that kind of technology in the reunified Korea. South Korea is losing the competitiveness in steel industries. That's sort of traditional manufacturing sectors because of the higher labor cost. For example, the average labor versus AG in steel industry is over 45 years old. We lose the productivity. Actually China already passed South Korea but if we can use the labor force in North Korea with relatively lower labor cost then we could still have the competitiveness. Also we could use a lot of natural resources in North Korea too. Chemicals. We could think about, we could imagine the vertical integration in chemicals. In Korea refineries and petrochemicals are very prospective but again the same thing happened in these sectors with higher labor cost. Also we could think about the transportation machineries and transportation equipment such as automobile facilities, production facilities. We could make North Korea as a hub for the Chinese market. I believe there might be a huge benefit rather than going abroad. Probably you may know that Hyundai had seven production factories all over the world except for South Korea. So we could just build up one for Chinese market in North Korea too. Machineries, high-techs, maybe you can see the slide. Let me go to the environment issues. Probably there might be a serious environment deterioration in North Korea. This brings I believe more opportunity to invest. Also aerospace and defense industry sector. That's also one rosy sector. The technology in that sector in North Korea is also worldwide very high level. And the last one services sector that's the most underdeveloped in North Korea but we could think about the business opportunity also. Probably we need to build up the financial systems and commercial logistics and a lot of business services and manufacturing services should be established in North Korea that will give us more opportunity. Let me conclude. It is really difficult to think about the synergy effect of unification without real data. If there is real data but still we cannot trust that data. Official data of North Korea is very limited. Bank of Korea just provide a small number of statistics but that's not that reliable. Even census data of North Korea is not outdated and we cannot trust that. Many expectations of scenarios are quite limited I believe but there is still potentiality of industrial cooperation between North Korea is quite massive because North Korea is a total complement in terms of the factor endowment so there might be a huge benefit if we can unify. Again Samsung moved their mobile production to the Vietnam and they moved the semiconductor production to Xi'an in China. If we can use North Korea as a broad production site that will give us a lot of opportunity chance. In South Korea right now because of the higher labor costs we opened the 14 workers. Actually they could work in South Korea in three years and there are a lot of also illegal workers supporting workers in Korea. If we can use North Korean labor force that will be pretty beneficial I guess. This is my personal expectation. The synergy effect of unification is not a matter of how but the matter of possibility. Absolutely the cost of unification at the first stage will be huge while the benefits are going to be increasing but I believe a generation over two, in a generation over two then the cost will be all gone but the benefits will be perpetual I believe. Unification is going to give us very good opportunity. I believe but that's not feasible in the long run. I was born in 1969. A lot of people asked me do you really want to unification? Yes I do. Are you ready to pay for that? Well I don't know. Probably my daughter she will never pay that cost so we need to really prepare for the unification pretty soon. Unified Korea will have 75 million of a population. That's pretty good numbers. Actually slightly bigger than UK and France but slightly lower than, smaller than German. I think 75 million of unified Korea has really a potentiality. But there is a lot of obstacles against unification. Again generation gaps exist. Probably next generation they don't care much about the unification. Plus there are a lot of stakeholders for the unification in the neighbor country, Japan, China. I don't think they really want unified Korea in terms of the industrial competitiveness. And the most ideal way to unify I believe that will be the economic exchange first with the industrial cooperation. We hope that North Korea just becomes like China in 1970s and 80s. We hope that North Korea open their economy. Then we could just exchange our industrial cooperation then unified and then we hope to achieve a full-fledged economic integration. Thank you for listening. Thanks. Thank you Dr. Kim. So we have two discussions for the panel. We'll offer some brief remarks. First is Dr. Jeong Hyun-gun who is vice president of the Korea Institute for International Economic Policy. He also formally served as director general at the Office of Strategy Planning at the National Security Council Blue House from June 2003 to December 2005. Dr. Jeong, please. Thank you very much for your kind introduction, Mr. Chairman. Good morning, ladies and gentlemen. Let me first express my sincere appreciation to CSIS for the effort in making this joint seminar possible. It was very interesting for me to hear the two presentations on the economic synergy effect of Korean unification from different point of view, and I would like to first thank the two presenters for the insightful presentations. Instead of addressing the each presenter, I would first like to make a general comment after that I would like to raise some questions. So recently, there has been a wide-ranging and active analysis of the economic effect of the Korean unification following the recent statement by President Park Geun-hae who described the Korean unification as a ponenza. Despite the diversity, recent publications and analysis point to a common conclusion that the unified Korea would experience rapid economic growth and would provide a full-up effect with respect to global demand, the result of which would be beneficial not only for the South Korean neighboring countries such as the United States, Japan, China and Russia, but for the global economy as a whole. It appears that both Dr. Nolan and Dr. Kim have reached a similar conclusion in that although there is a whole range of benefits that could be expected from Korean unification, the most significant would be the two Koreans forming an effective regime in terms of division of labor and cooperation thus achieving an economy of scale. Especially, North Korea can improve its total factor productivity by taking advantage of the capital goods from the South Korea and foreign countries that possess advanced technologies. Additionally, this would bring North Korea closer to South Korea's cost-input structure and raise North Korea's input-out coefficient to the level similar to that of the South Korea leading to the resolution of inefficiencies associated with the cost-input in North Korea. So Dr. Nolan described and outlined this process very clearly by utilizing the factor market integration. The positive effects and benefits generated from the Korean unification would no doubt benefit North Korea's. However, the people of North Korea received the greatest share of those benefits. The extent of those benefits might vary depending on the form of unification, but any form of unification, not involving war, will lead to exponential growth of North Korea's GDP and growth in wages and real consumption among the North Korean population. Traded by North Korea with other countries would also grow by lips and bounds, and its industry structure would undergo rapid transformation. Another added benefit for North Korea is in the event of unification with South Korea is that North Korea also becomes a beneficiary of the FTAs. North Korea has concluded with many countries. Countries currently trading with South Korea also stand to reap economic gains from the unification of the Korean Peninsula. By diversifying the scenarios for the unification and conducting the CG analysis of them, just Dr. Nolan did in his previous studies, we can determine the potential GDP changes for South and North Korea in each scenario. And if we expand the range of our analysis and include the United States, Japan, China and Russia, and we can calculate the GDP for those major countries as well. This is exactly what it did at our institution recently, and we have found that the level of gain for each country differs depending on the pace and direction of the given scenarios. As a whole, however, it has discovered that all four of our neighboring countries eventually benefit from the Korean unification. Then again, the biggest winner perhaps from the unification is inarguably the people of North Korea. And it is urgent and very important that we let them know. It is exactly to emphasize this urgency that President Bakkenhead described the unification as a bonanza, and he reiterated and added to her point when she visited Dresden this past May stating that Korean unification is a bonanza not just for Korea but all countries in the North East Asian countries. The next logical step for President Bakkenhead is to make a strong push for the argument that the unification represents the biggest bonanza for the people of North Korea. At this point, I would like to remind everyone that the unification cannot happen through the effort of South Korea alone. It is something that is only possible when the people of North Korea respond positively and only then will the unification become a bonanza for everyone in a Korean peninsula. So it is crucial that we impress upon the North Korean people the benefit of unification into the North, and this is a point that cannot be understated. There's one more point that I would like to raise concerning the unification issue. So I would like to point out that there has been a lot of discussions on the cost and benefit of unification, but in relative terms, there has not been much debate on which scenario perhaps represent the most effective policy for the unification. So my question for our President to actually roll around this point, Dr. Nolan and Kim have analyzed the economic effect of different scenarios for the Korean unification. So my question is, which of those scenarios represent the most effective form of unification economically? Which one is the best when considering the existing political and social limitations in the South and North Korea? And what are some of the policies that the South Korean government would need to implement in order to bring about unification in accordance with those scenarios? So ladies and gentlemen, that was my comment and question. Thank you for your attention. And our fourth discussant for the panel today this morning is Matthew Goodman. Matt Goodman holds the William E. Simon Chair in Political Economy at CSIS. He's formerly the White House coordinator for APEC and the East Asia Summit and served as Director of Asian Affairs, Asian Economic Affairs on the National Security Council. So Matt. Thank you, Dr. And I'm really honored to be up here to extend the sports metaphors. I'm a big baseball fan and as you can probably tell from my rather anxious and flurry eyed look, I'm a Washington Nationals fan, so it's a very anxious time. But I feel a little like a rookie up here coming to bat after some hall of fame sluggers have just gone up. I have not done the same kind of deep analysis of this subject as these gentlemen. And so I think my comments will be largely as a sort of layman looking at this from a sort of common sense point of view and trying to reinforce probably some of the points they're making and maybe ask a couple of questions. And I guess I would start by just asking the audience for a little empathy for everybody up here because this is an incredibly hard subject to try to analyze. Economic analysis is always in prognostication, prognostication is always very difficult. But I think here you've got a lot of known and unknown unknowns including what's going on in North Korea which is truly unknown to all of us and I think we have to admit that certainly from an economic perspective. You know, we don't know what the nature of this transition might be and when it's going to start and how it's going to proceed. So it's very hard to do any sort of economic analysis with that kind of moving target. And of course we don't know what the dynamic effects might be positive or negative in that transition. So I just, you know, start by prefaceing all this by saying this is a really difficult task for all of us. But broadly speaking I think, you know, I would say that it's, I think, right to think that there will be economics energy if there's a transition to ultimate reunification of the peninsula or at least I'd say yes, but yes, certainly the complementarity of the two economies and their resource endowments with the North having minerals and cheap labor and starting from such a low base. The South, you know, having capital technology, sophisticated efficient markets, you know, suggests that there is an opportunity here for real long-term synergy and people smarter than me at, you know, Goldman Sachs said that there's a possibility this could be ultimately an economy that is more competitive, larger and more competitive than, you know, Germany. And certainly so as a theoretical and a longer-term proposition I think clearly there is synergy. But again there are a lot of unknowns here as has been alluded to by the previous speakers. You know, we don't know the real condition of North Korean capital stock, capital stock could be much weaker than we think. Again, dynamic effects of a sudden collapse and absorption, if that is the principal scenario here, in particular with that scenario, including migration effects and everything that are very uncertain. And then, you know, the UN has noted that these two economies have the largest gap and income in two countries sharing a border anywhere in the world. So there's no precedent for bringing together two such widely divergent economies in terms of income. So I think we have to be honest that we don't know exactly how that synergy is going to be created and even whether it will in some specific respects. So I think, you know, the other piece that of course everybody's touched on is the German example and how much that's relevant. And I just thought I'd offer a few thoughts on that. I mean, I think clearly it's instructive but clearly also there are limits to the German example as a model. And frankly the experience of Germany is not entirely comforting either from a Korean perspective. You know, similarities obviously to economies that are, I mean, two populations really similar size, 75 million. You know, both cases you have a socialist economy on one side supported by a large neighbor versus a dynamic market-based economy allied to the U.S. So there are obvious similarities in kind of the political economy in both places. But the differences are also quite striking. You know, West Germany had a population three to four times as large as East Germany's population whereas in Korea I think the ratio is about two to one. So I think that by itself raises questions about, you know, how this absorption will be similar or different. You know, Korea obviously has been divided for nearly 70 years whereas the Germanies were divided more like 40 plus years. And it feels like things were converging in Germany on a lot of levels and synapses were being connected even before the wall fell in a way that doesn't seem to be happening in Korea, in fact, if anything it seems to be in the last few years moving the other direction. And then importantly, you know, East Germany's GDP per capita was about one-third of West Germany's at the start of the process whereas North Korea's is something like five or six percent of South Korea's today. You know, South Korea's, what, 15 to 20 times as large per capita income. So there's, you know, all of this suggests that as compared with Germany this very well could be a much more challenging process. It could take a lot longer and be a lot more expensive. And as I alluded to, you know, even the endpoint the German experience is not yet totally finished. It's taken 25 years so far. Nearly double, I think, what it is in the East in the East to what it is in the West. Wages are only 70 to 80 percent of the West. Western states are still paying, richer Western states are still paying solidarity taxes to the Eastern states. And it's been estimated that the, you know, the total cost of the German process has been north of $2 trillion today and still accumulating. So I think there are reasons to be not necessarily comforted by the German experience, even if it is, even if it is, there are lessons there. But of course the good news is that most Germans are much better off today than in 1989. It was only 15 years before an East German was elected chancellor of unified Germany you know, Germany's become the political and economic center of gravity in the European Union. So I mean there are a lot of reasons for thinking that that example, if it were analogous on a model would be ultimately positive for Korea. Okay, final thing to say is that, you know, it is possible on the other hand that this transition could be not quite as painful as people think in practice. I think it depends a lot on whether we're looking at the situation today where there's this huge gap that has to be closed over a certain period of time or whether you know, this, the process starts after a point of some convergence and so it really depends on what the starting point is, although I must say this does remind me of the old joke about the driver who's out in the countryside lost and stops and asks the farmer how to get to the town he's going to and the farmer says well I wouldn't start from here so you know, so I admit we're in the world we're in, but I do think it's possible that you know, and these are more questions than predictions or analysis of what's going on for all of you who are experts about what may be going on in North Korea. You know, it's possible that even short of some real reform and opening in North Korea that leads to the more consensual consensual unification that you could have an improvement in living conditions in North Korea that would sort of raise that base and create a better precondition for unification and so whether some of the market based reforms that may or may not be underway in SCZs or you know, through these reports of rising prices and construction boom and Pyongyang and everything, I mean all that stuff feels like Potemkin Village stuff and not really real, but I wonder whether there are any improvements going on within which could sort of close the gap even before the unification process and then of course there's what we can all do to help close that gap and so President Park's trust politic and the economic dimensions of that are interesting and whether the aid packages are possibly new cooperative infrastructure projects or even the people to people exchanges will in some way help close that gap in advance. I think those things are definitely interesting and would change I think the calculation about the cost of the transition anyway you know, but all that said, I think there's good reason for caution about what sort of internal reforms are going on in South Korea and about the ability of outsiders to really influence what's going on inside, so I don't mean to say that these things are going to dramatically change the situation. I guess the only other point of comfort for obviously for our South Korean friends is that South Korea is not going to be alone in this the US, Japan, other countries bilaterally are going to support the process of transition international financial institutions I think it's as Marcus alluded to are inevitably going to be involved and importantly I will also very strongly endorse the point about the private sector that the private sector is going to be a critical player here and in fact policy today should be focused on trying to figure out how to incentivize how to support guarantee business and private sector as it moves in into a new situation if that happens so economic synergy clearly there is a long term proposition but a lot of unknowns and if unification started today I'd say it's going to be it's going to be bumpier and take longer and be more costly than I think we think though again if there were change in the preconditions it might be not so so painful and again policy should be focused on helping to ease this transition so I will stop there I may have a couple questions afterwards for the two previous speakers but I know we're behind schedule so Thanks Matt that was fantastic thanks very much so we have about 15 minutes for discussion question and answer one question I would actually like to ask both of our speakers is and it kind of follows from where Matt left off Matt said that sometimes this thing may not be as painful as people think it does but a lot of that will depend on the degree of economic reform that takes place in North Korea prior to whenever this happens and so I guess the question to both of you is do you think right now there is anything that you could call I mean if you had to try to point to something positive on the North Korean side in terms of economic policy is there anything that you could point to as a sign of economic reform is there any peace that you would pick up is and if we tried to take what Matt said it may not be as bad as we think it is if there is something positive happening on the economic side inside the North so is there anything positive happening on the economic side inside of the North so please add that to your list of questions that you receive from the discussants as well and then if there will maybe we will take a couple from the floor before we go back to our speakers yes sir please identify yourself my name is Jay who I am a retired professor of law university for the sake of time I try to be very brief thank you for a very illustrious and informative presentation Dr. Nolan's points many points I'm in full agreement that the land ownership after unification must be dealt with with utmost care and any property rights should be claimed on the basis of compensation rather than restitution and so on but there are two other points I want Dr. Nolan's comments on one is strongly proposed by my friend who coined the word unification was bonanza about a year and a half before President Park mentioned it in January 6 this year in 2012 unification is taboo roughly translated but not exactly conveyed by words like jackpot or bonanza he argues two additional points for the unification to be going in that desirable direction is that the investment in North Korean infrastructure building must be done through a policy of by Korea policy most of the buildings of infrastructure, transportation and whatever electric power and so on the South Korean capital should be responsible for 80 or 90 percent of it to have the opposition have you thought about such a proposal and if you have or have not what are your comments the other is military expense that South Koreans spend about 3 percent of the GNP on military and my friends believe and I strongly also agree that upon unification that it should be reduced to 1 percent the rate that Japan is spending on their military expenditure and also one question for Dr. Kim is you mentioned talked about the various synergistic effect from unification and I very much in favor of all of it and also talked about the difficulties of getting there but what would be the conditions that would make it possible for such synergistic effects to take place I'm sure you cannot get too much into details but some of conditions that will enable it to be interested and I'd like to support the discussion Dr. Chung's comment that whatever we do it will be somehow directed by one very strong principle a parameter that is whatever we do for unification the question is we need to contribute to the changing of public opinion of North Korean people so that they will want to live like South Koreans and they will want a one Korea so I'd like to support that statement without a question thank you very much great thank you professor I hardly endorse that last comment that yes I mean we think about synergy we often think about what it will mean for South Koreans but the clearest biggest winner I think is as was said on the panel would be the North Korean people so I think that was four questions in one so I'm going to now go back to our two speakers to pick and choose address the questions that you'd like to address maybe we start with with Marcus okay well let me start with your question first since it's sort of the broadest one if I was asked to characterize North Korean attitudes towards the economy I would say that North Korean attitude towards the economy is one we want to be modern we want cell phones we want automobiles we want intercontinental ballistic missiles all the trappings of modern life two we want to be prosperous and three we want it on our own terms and this is the fundamental contradiction at the heart of North Korean economic policy now that is not to say that North Korea is not changing there has been an enormous expansion of trade with China largely driven by mineral trade as someone mentioned there has been this proliferation of special economic zones so there are aspects of change but I would not say that one at least to my eyes I do not see any coherent reform strategy I see a bunch of ad hoc measures and indeed I would say the trajectory that North Korea is on is towards a as I mentioned in my remarks an increasingly resource extraction centric economy highly opaque highly corrupt generating benefits for a small group of politically connected insiders and not generating much benefit for the bulk of the population and you already see this now in the widening gap between lifestyles in Pyongyang and the rest of the country where some segment of the population is actually doing okay whereas much of the population is being left behind if not actually going backwards now to Dr. Jong's question about what scenario represents the the best outcome let me be slightly provocative here if I were a South Korean I would go to bed every night praying for an East German style collapse of North Korea I think German unification gets a really bad rap and the reason is this nobody got hurt there was no mass violence East Germany disappeared as smoothly as one can possibly imagine and if you think about the nature of that East German regime the police state of Stasi and the fact that that just basically disappeared without any mass violence without anyone getting hurt yeah it cost some money and it's continued to cost some money some of that was unavoidable some of it was avoidable if you hadn't made policy mistakes I think German unification now when you ask which is the preferable scenario the problem is if I say collapse and absorption I can't guarantee that you're going to get a smooth disappearance of North Korea given the militarization of that society given that virtually every adult male has military training given nuclear weapons an abrupt collapse of that regime could be messy in the extreme so I can't pick the issues among scenarios what I can say is do what you can to establish the necessary precursors for eventual unification while being prepared for the worst possible outcomes recognizing that ultimately what happens on the Korean Peninsula is largely going to be a function of the preferences of the North Korean leadership as outsiders we have a certain amount of ability to frame this environment but ultimately it is going to be the North Korean leadership's ability to manage the multiple stresses that that regime is under which is going to determine what that final outcome is going to be so what are the policy recommendations for South Korea as I said run a fiscal surplus you need to put money away for the rainy day of the North Korean Commission one of the problems in East Germany was West German corporations moved in bought up East German assets and literally shut them down because they were potential competitors or simply turned them into sales offices the chaebol are going to be the natural instrument for rehabilitating the North Korean economy but you have to make sure the chaebol behave responsibly money politics nexus has always been a problem in South Korea South Korea has made enormous strides in improving business government relations over the last couple of decades the integration with North Korea is by its very nature going to be a highly politicized process and could send that into reverse so you have to guard against that as well as I mentioned in my remarks establish a principle of compensation for South Korean claimants on North Korean assets but not restitution focus on wage setting not the initial conversion rate but restitution we haven't even talked about the politics of this when are the North Koreans going to get voting rights are we going to maintain the DMZ as a method of population control if North Koreans start heading south is the South Korean army really going to go out and shoot those people as they start coming across the border we haven't even discussed these issues these are going to be absolutely key so encourage North Korean reform to try to as I think it was Matt said some of the growth in North Korea as a precursor to policy then finally on the question about the whether investment should be by Korean and a possible peace dividend there will be a huge peace dividend for North Korea once you get the yoke of that million man army off the economy there will be huge potential peace dividend for North Korea there will be a noticeable peace dividend for South Korea though I'm not necessarily endorsing reducing defense expenditure to 1% there's possibly a modest peace dividend for the United States that depends on the ultimate disposition of US forces which I assume we'll discuss in the afternoon and in terms of the investment by South Koreans in rehabilitating North Korean infrastructure that would be a very natural outcome but there may be issues with the government procurement agreement so I wouldn't necessarily endorse a by Korean policy I think you'll get by Korean as a natural outcome okay thank you Dr. Kim Dr. Chung talk about the most efficient scenario what is that Mr. Kuhnman introduced the German notification model yes I agree with that and also professor on the floor asked about the conditions what kind of conditions for the economic synergy effect I would like to answer all these three issues in one personally I am pretty optimistic about the unification especially I don't need a unification as long as we could exchange economic activities I believe if we could exchange the economic activities the unification will be come true by itself if North American can work in the South Korea or South Korean investor can really invest their capital in the North Korea then absolutely both people will automatically want to unify in some day later but is there any possibility that we can lessen that period how can we just realize soon I do not really want to force the unification I hope if we can South Korea facilitate North Korea to open their economy first then automatically unification will come true I believe absolutely we need to prepare for that rainy day we need to have trade surplus and budget surplus and etc etc but as long as we could exchange even though I said in my presentation at the end I said maybe it's not feasible in the long run but as long as we could exchange our economic activities even 50 years later or 100 years later doesn't matter unification will come true by itself that's my answer thank you Dr. Kim so a lot of issues on the table I'm sure we'll come back to some of these in the course of the day let me take the opportunity to thank everyone on this panel for their excellent remarks we will take a short break so that we can mic up the next panel ladies and gentlemen let's give our group here a hand this morning thank you