Potential impact of North Korea on South Korean economy

Bhaskar Chakravorti, Senior Associate Dean at The Fletcher School of Law and Diplomacy at Tufts University, shares this opinion on the Korean crisis:

We are at risk of losing sight of the deeper, longer-term danger to the region. The crisis that has receded to the background is an economic one — and we should not ignore it.

Now we all know that South Korea has been quite the rock star of emerging markets. It is one of the rare examples of countries that emerged from war, poverty and the inevitable “middle-income trap.” It multiplied its GDP three-fold in just 20 years. It was the first nation that went from being an OECD aid recipient to joining the OECD donor committee.

But, South Korea’s charmed decades may end soon. It is possible that its future may resemble that of its neighbor, Japan, and its “lost decades.”  As it stands, South Korea’s economy is too heavily reliant on manufacturing.

Of course, the crisis with North Korea creates its own drag in three major ways. One is that the uncertainty spooks investors away from South Korea and scares away companies as well (General Motors is already considering hedging their bets and establishing manufacturing elsewhere in Asia). Second, a geopolitical crisis, can take the Korea’s new president Park Geun-hye’s focus away from fixing the economy and instituting a process for reform of the South Korean conglomerates (chaebols) and helping re-build the middle class – her “economic democracy” agenda. Third, getting drawn into a conflict with North Korea, puts South Korea on the wrong side of a political alliance vis-a-vis its most important market: China.

Over the longer term, a continuation of the conflict has a fourth negative impact: one of the most powerful economic arguments for unification of the Koreas would be a solution to the forthcoming demographic crisis; North Korea would add to the labor force when the inevitable demographic constraint becomes a real bind.

There is, indeed, a bomb waiting to go off on the Korean Peninsula, but it is not of the Kim Jong-un’s making.

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