Regional Outlook : Korean Economists Dreaming of Unity : The north and south together could become a powerhouse--perhaps the world’s fifth largest.

Until recently, South Korean policy-makers and economists appeared to be looking through binoculars backward--seeing only burdens, and no benefits, from possible unification with Communist North Korea.

One report after another contained still higher estimates of what it would cost to raise living and production standards in the north to the level of the south--the latest put the total at nearly $1 trillion over a 10-year period.

Now, two new reports have come out that turn the binoculars around, offering a view of a unified Korea as the world’s 10th-largest economy. Or, perhaps, seventh largest. Or even fifth largest.

(South Korea alone, with a GNP of slightly less than $300 billion, now ranks as the world’s 15th-largest economy.)

Granted, the major question remains if and when unification might come.

Indeed, hopes faded again earlier this month when North Korea put itself on a “semi-war” footing to protest an annual U.S.-South Korea military exercise and announced that it will withdraw from the Nuclear Non-Proliferation Treaty it belatedly signed in 1985.

The north subsequently announced last week that it was ending the alert but gave no indication that it is reconsidering its nuclear decision.

At a minimum, the latest events throw into grave doubt any possibility that the north would soon receive the kind of South Korean or foreign investment it has been seeking to modernize its economy.

There are other scenarios for an eventual reunification of the Koreas, however, including the possibility of an East German-style collapse in the north. By implication, South Korean President Kim Young Sam predicted just such a development by the year 2000 in his inaugural address.

In a joint report, the Korea Development Institute and the Korea Institute of Economic Policy now say that however it happens, a Korea unified in 2000 could 10 years later have a $1.125-trillion GNP in constant 1991 dollars.

Using data compiled in another report from the presidential “Korea 21st Century Commission,” Jung Ku Hyun, a business administration professor and director of the Institute of East and West Studies at Yonsei University, calculated the possibility of a $1.524-trillion GNP--also at 1991 prices--in the same year. Jung is a member of the commission.

Those estimates--which other analysts consider unrealistic--would give Korea a larger economy than Canada and one in the same league as Britain, Brazil and Spain. Japan’s economy, now 13 times larger than South Korea’s, would be only six times larger by 2010.

The presidential commission said a unified Korea could become the world’s seventh-largest economy.

North Korea’s economy is now only 8%-10% the size of the south’s. But if unified, the proverbial whole would be greater than the sum of the parts. The unified economy would be 59% larger in 2010 than would be the economies of two, still-independent Koreas, according to Jung’s calculations. By 2020, the added economic boost would be 62%.

Even those possibilities may have been understated.

Head from Bonn across the former East Germany and you arrive in Eastern Europe, where economies are still struggling along the path to free-market principles. Cross the Yalu River boundary that a unified Korea would have with China, and you enter a booming region with a bright future.

Interaction with a China vying with France for the world’s fourth-largest GNP in 2010 would provide an immense spur to a unified Korean economy.

“China is developing light industries in its southern provinces of Guangdong and Fujian. Its strategy in its northeast provinces (adjacent to the Korean Peninsula) is to develop heavy industry,” in which South Korea increasingly is finding its strength, Jung said.

The combination of China’s three northeast provinces with a unified Korea, he added, would yield an “economic zone” of 220 million people--only slightly fewer than the United States.

“That’s what I see as a ‘Korean economic zone.’ Korea could serve as an engine to lead all of Northeast Asia,” Jung said.

Kim Do Kyoung, a fellow at the Lucky-Gold Star Economic Research Institute, was even more bullish. Even without unification, he predicted, China will eventually surpass the United States to become South Korea’s No. 1 export market. With unification and a direct cross-flow of exchange with China, Korea could eventually become the fifth-largest economy in the world, after the United States, Japan, Germany and China, he said.

Unification would bring a population of 78 million (in 2010)--11th largest in the world and big enough to create a major domestic market. It would combine the north’s natural resources and the south’s agricultural strength and open the door to trains from Pusan to Paris, direct air flights to Europe and highways extending into the heart of the Asian continent. As the core of a new “economic zone,” the potential to serve as a new financial center and transportation hub would emerge.

And overnight, South Korea’s two big shortages--land and labor--would be solved, Jung said.

Unification would “prolong the life of South Korea’s declining industries,” such as textiles, toys and shoes, at least while wages remain lower in the north, Jung said. Meanwhile, the south’s highly educated population provides a base to expand services while upgrading its mainstay industries--autos, steel, chemicals, machinery and electronics--supported by a bigger domestic market.

Yet both of the new reports omitted estimates of such multiplying effects as impossible to quantify, said Chun Hong Tack, a Korea Development Institute fellow, who contributed to the joint think-tank study. “Economists don’t put intuition into (calculations),” he said.

Nor was any estimate made of unification’s “peace dividend.” Recently, the South Korean Defense Ministry released a study that called for a 70% post-unification slash--to no more than 460,000 troops--in the 1.6-million strong armed forces now maintained on the peninsula.

Although the report called for beefing up a unified Korean navy and maintaining an air force roughly the size of present-day Japan’s, it made no mention of post-unified defense spending.

Holding South Korea’s defense spending constant at about 4% of the GNP and eliminating the north’s 975,000-strong armed forces, however, would save the equivalent of 2.2% of South Korea’s present GNP, Jung pointed out.

The calculations also omitted the likelihood that the won currency will strengthen in value in the future, raising the dollar value of the GNP estimates. At present, the won stands only 11% above its record low.

Even omitting such intangibles, bringing the North Korea economy up to the level of the south’s would add roughly $500 billion to a unified nation’s GNP in 2010. (Estimates of the present economy of the secretive North Korea range from $27.1 billion to $47 billion.)

The catch is how long it would take to equalize the north and the south, Jung cautioned. The joint think-tank report calculated that the job could take anywhere from 14 to 115 years.

“Human unification” could prove most difficult of all.

Unlike Germany, which experienced two decades of interchange between East and West before unification, no day-to-day contacts exist at all between North and South Korea. And 48 years of separation after a post-World War II Soviet-American occupation of what had been a Japanese colony have left the people ideological strangers to each other.

By comparison, financing unification would be a manageable--though burdensome--undertaking, Jung said.

Although South Korea would have to spend annually 7% to 8% of its GNP--an amount equal to all of North Korea’s current GNP--only 2% of the south’s GNP would really be a “cost,” Jung said. That would be the amount needed for welfare and relief in the north, he said.

Another 2% of the south’s GNP would be spent on building infrastructure--roads, bridges, airports, sewers, water systems and the like. That kind of spending, he noted, is an investment that would add to the total GNP, not subtract from it. The other 2% to 3% would come from private corporations building factories, office buildings and other facilities in the north.

At the most, government spending would rise by 20%, he said.

Meanwhile, the most difficult problem may be assessing the north’s true attitude.

“There’s a complete generation change in North Korea’s economic leadership,” said Kim Duk Choong, a Yonsei University professor of economics who has visited the north several times, at a seminar last November. “If we discuss a vision of a unified Korea with them, we reach 100% agreement. But when you turn on the TV, there’s no change at all.”

Looking Ahead

The economy of a unified Korea could be in the same category as Britain and Brazil by the year 2010. Some projected GNPs for selected countries:

United States: $8,672 billion

Japan: 6,526

Germany: 2,832

France: 2,050

China: 1,952

Italy: 1,853

Britain: 1,551

Unified Korea: 1,125

Brazil: 1,063

Spain: 1,007

Canada: 955

Source: Joint report by the Korea Development Institute and the Korea Institute for Economics and Politics