National Agenda : South Korea Shaking Off Dream of Union With North : Sobered by the German example, Seoul worries it can’t absorb the problems of its Communist neighbor.

For North Korea and South Korea, ripped apart after World War II by occupation forces, the goal of reunification has become a kind of holy grail.

Although the Stalinist north and the capitalist south may vilify each other, when the prime ministers of the two nations meet for reconciliation talks, as they will today in Pyongyang, the north’s capital, they typically share a banquet during which they toast to unification and somberly croon “The Song of Unification,” a melody that reflects a deep yearning for that goal.

Sentiment aside, however, it has been a matter of faith in South Korea that a reunited nation under its leadership would become a significant economic power--in part, at least, by diverting to high-tech investment a large chunk of the $15 billion a year now spent by the two Koreas to support the 1.5 million soldiers they have facing each other across the demilitarized zone at the 38th Parallel.

A united Korea would have a population of nearly 70 million, larger than any European nation except Germany, and it would be better able to stand up to its far more powerful economic rival, Japan.

“Although the North Korean economy is not big at the moment, if the country is united under our system, there will be an opportunity for a united Korea to be much bigger than the mere addition of the two,” said Kim Chul Su, president of the Korea Overseas Trade Organization, a quasi-governmental organization.

Yet now, as the possibility of unification appears more realistic than ever--with North Korea’s economy a shambles, its former Cold War allies abandoning it and its only viable leader, President Kim Il Sung, aging--the South Korean authorities are suddenly getting cold feet.

The reason? Although they’re still confident that reunification would eventually make Korea a power to contend with, the South Korean leadership has been sobered after watching the pains of Germany’s experience. And many now openly contend that it might be better for South Korea if the north struggled on under the current regime for a while longer.

Government and private analysts estimate that should North Korea collapse economically and/or politically--the most likely scenario leading to unification--it would cost South Korea $240 billion to $400 billion over 10 years to bring the north up to its economic level. The annual cost in private and public investment would roughly equal South Korea’s current government budget. In addition, there would be a massive influx of workers that South Korea would be ill-equipped to handle.

“We are not West Germany--we are not rich enough to handle that,” said Rhee Song Woo, a specialist on North Korea who is an adviser to the south’s National Unification Board.

“We must boost the South Korean economy before we unify,” added Jo Dong Ho of the Korea Development Institute, a government think tank.

South Korea now actually shapes its policy with a eye toward extending the life of the northern regime it once sought so hard to undermine. For example, it is maintaining a trade deficit with the north that gives Pyongyang valuable foreign exchange while offering few tangible benefits to Seoul. And South Korean companies are promising to invest in planned North Korean industrial parks, provided the north drops its longstanding opposition to inspection of its nuclear facilities.

But events may overtake such slow-paced peace overtures.

Russian Deputy Prime Minister Mikhail Poltoranin reportedly told Okinawa Gov. Masahide Ota on a recent trip to Japan that “the collapse of the Kim Il Sung regime is imminent.”

Without hard currency to pay for oil, North Korean factories are running at far below capacity, farmers are short of fertilizer and even fishing boats don’t have fuel to take in their normal catches. There have been unconfirmed reports of food riots in the north, protests by military officers drafted to do apartment construction without food and materials and demonstrations against a currency plan that would wipe out many North Koreans’ savings. North Korean representatives deny the reports, but if true, they would signal that cracks are appearing in the north’s rigid totalitarian system.

Aidan Foster-Carter, a scholar on Korean affairs, predicts in a report for the Economist Intelligence Unit that North Korea will probably collapse by 1995, or by the year 2000 at the latest.

Adrian Buzo, director of the National Korean Studies Center in Melbourne, Australia, dismisses predictions of such a quick collapse, arguing that North Korea’s elite won’t give up power as easily as Eastern Europe’s did. Yet even Buzo says that eventually such a collapse is unavoidable.

Such talk has South Korean analysts busily studying the West German experience. And initial observations aren’t promising.

The former West Germany is staggering under the weight of assuring jobs and welfare services to an eastern German population just one-quarter its size. By contrast, North Korea’s population is more than half that of the south, so while western Germany has four citizens to pay for the support of each eastern German, South Korea has only two citizens for every North Korean that would have to be subsidized if South Korea were to absorb the north.

Also, West Germany had a $50-billion capital accounts surplus in 1990--money it could use to finance development in the eastern sector. South Korea, meanwhile, only recently pared down its foreign debt and still frequently has a current accounts and trade deficit.

Culturally and emotionally, the German experience is also likely to prove easier than the Korean experience.

Koreans still retain bitter memories of a civil war that wiped out more than 10% of their own people.

While East and West Germany got to know each other over 20 years through frequent exchanges and cross-border traffic, the border between North and South Korea remains closed even today. With the exception of occasional diplomatic exchanges, there are few visits across the divide. The German lesson is also influencing South Korea to adjust some of its exaggerated notions about the quality of North Korean labor. Jo Dong Ho of the Korea Development Institute notes that East German labor has proven to be far less productive, technically trained and hard-working than originally believed. He figures North Koreans will be, at best, 30% as productive as South Koreans.

Japan, too, has done the calculations and no longer seems to find the prospect of a unified Korea very threatening. “For 10 years at least, Korea will have trouble adjusting. We aren’t afraid,” said Teruo Komaki, economist at the Institute of Developing Economies in Tokyo.

For all the high costs and other problems of merging the two nations, many analysts believe the benefits of reunification may ultimately be greater to Korea than to Germany.

South Korea’s interventionist government is well-tooled in undertaking rapid industrial development. “We had the benefit of experience from other countries in our (economic) takeoff. I don’t see why that experience wouldn’t apply in North Korea,” said Kim of the overseas trade organization.

The nation also has giant conglomerates capable of making the necessary investments.

“It will be a difficult transition, but it’s a pleasant and happy job to do,” said Chung Hoon Mok, president of Hyundai Engineering and Construction. He notes that there are just 1,250 miles of paved road in the north compared to the south’s 54,000 miles. Yet Chung is confident that South Korean business can build up the north’s infrastructure at a fraction of the cost estimated by government officials.

This newly enlarged nation would have something the south has never had: access to rich deposits of coal, gold, iron ore, magnesium and zinc from the mountains of the north.

South Korea is now virtually an island, cut off from mainland Asia by North Korea and the demilitarized zone that divides them. A united Korea would allow railroads to be connected. And Korea would be geographically best positioned to help exploit a resource-rich but sparsely populated Siberia and Manchuria.

South Korea has already developed plans with Russia to exploit the rich gas fields of Yakutia, including construction of a new pipeline to carry the gas through North Korean territory to the south. It is still unclear whether North Korea will agree to the proposal, however.

While North Korean workers may be unproductive now, it is believed they will work harder with a better incentive system. And Nicholas Eberstadt, researcher at the Harvard University Center for Population and Development Studies, cites U.N. statistics showing that North Koreans currently work the same, long 50-hour weeks as their South Korean brethren. Germans, by contrast--from either east or west--work shorter hours.

Just as South Korea once sent thousands of laborers to the Middle East to earn money to fuel its domestic economic development, a united Korea could send thousands of North Korean workers to help cut trees, mine minerals and drill oil in Siberia.

Unification would create a huge, immediate market in the north for steel, trucks, cement, machinery and textiles. While the large new market created by German unification was exploited by European, American and Japanese businesses alike, the new market in North Korea would probably be reserved for South Korean business in the same way the South Korean market is currently protected from outside competition.

Eventually, a larger, unified Korean domestic market would provide a crucial base from which to develop industries before pushing overseas.

Makoto Sakurai, chief economist at the Mitsui Kaijo Research Institute in Tokyo, notes that South Korea has followed Japan’s policy of manufacturing products domestically wherever possible rather than importing them. Korea makes its own ships, steel, semiconductors, automobiles and communications equipment, for example. But while Japan could count on its domestic market to gain experience in new industries before building exports, South Korea’s market has been too small, sharply raising the cost of developing new technology and forcing new industry to depend heavily on overseas markets from the first.

With a large, protected domestic market, as Japan had 20 years ago, said Sakurai, Korean industries will be able to move to economical scales of production more quickly and be less vulnerable to the uncertainties of export markets.

Meanwhile, South Korea’s new concerns about unification have inspired a search for ways to ease the burden that will eventually fall on the country.

“Rather than unify abruptly and absorb huge costs, it is better to allow private business to advance and gradually boost its standard of living,” said Chang Soo Han, senior economist at Daewoo Research Institute.

To ease tension and promote better ties, the two nations are already holding a series of reconciliation talks to help reunite families, connect roads and reduce military incidents on the border.

To promote economic development, the two sides are looking to the “Chinese model” of developing free-enterprise zones in the north. Factories would be built in enclaves that are insulated from the rest of the country and are therefore less likely to disrupt North Korean efforts to control life above the 38th Parallel.

South Korea will send a delegation to the port of Nampo on North Korea’s west coast this fall to examine the feasibility of establishing one such enclave. North Korea would build the necessary infrastructure while South Korean companies would build factories. Daewoo, the South Korean conglomerate, has plans to produce 2 million white shirts a year at Nampo. The company also wants to produce shoes, tableware and tote bags there.

South Korean conglomerates hope to use the enclave system to resuscitate their ailing low-technology industries with the north’s $70-a-month labor. For industry, this solution may even be preferable to total unification. If the two countries were unified and the border opened, North Korean laborers would flood into the south and would have to be offered South Korean wages, which are five times the level of those in the north.

“Now we are relocating our factories to Southeast Asia, but once political tension has eased, we will move our facilities north,” said Chang of Daewoo. Chang says the ability of managers to use the same language, the geographic proximity of the factories and the common Confucian culture makes North Korea a more attractive place for investment than Southeast Asia.

The proposal is also attractive to North Korea, which believes it can isolate such regions from the rest of the nation and avoid making it appear as if the country is departing from its long held policy of juche --self-sufficiency. North Korea hopes foreign exchange from such ventures will enable it to buy the energy and food it needs to prop up its regime.

If North Korea’s totalitarian regime does hold together for another decade or so, that would give South Korea time to boost its economic strength and prepare for the rigors of unification. But South Korea must walk a thin line. In the unlikely event that North Korea manages a smooth transition to a new generation of leadership, perhaps under Kim’s son, Kim Jong Il, economic help from the south might not only avert an immediate collapse but could enable the northern regime to remain in power indefinitely.

Worlds Apart Korean unification would bring together two very different economies.

N. Korea S.Korea Population 22 million 43 million GNP $23 billion $281 billion Percapita GNP $1,038 $6,498 GNP growth1990 -3.7% 9.3% GNP growth1991 -5.2% 8.4% Exports $1 billion $71.87billion Imports $1.71billion $81.53 billion

Source: 1991 numbers from Bank of Korea/Korea Herald