High-Level Expert Group Meeting
17-18 February 1993
Paris, France
Chaired by Helmut Schmidt
At its eighth session, held in May 1990 in Seoul, the
InterAction Council adopted a Final Statement which, inter
alia, contained the following proposal:
"The dramatic changes taking place in the world today
demand equally dramatic and courageous decisions by the
governments of South and North Korea, a nation which still
remains divided. The members of the InterAction Council,
concerned by this tragedy, urge the governments of the two
Koreas to take the following actions as a first step
toward peaceful unification:
(a) The leaders of South and North Korea should agree to
meet -- without preconditions -- as soon as possible.
(b) From a humanitarian view point, both governments
should permit immediate visits and unrestricted
communications between members of separated families in
South and North Korea.
(c) To enhance mutual confidence between the two Koreas,
both governments should legalize travel by the citizens of
the two Koreas to and from the South and the North. "
I. INTRODUCTION
1. With the end of the Cold War and the disappearance of
East-West confrontation, new challenges demand political
management in order that the emergence of new aggravations
and tensions be avoided. Divided countries such as Germany
and Korea were the epitome of the cold war era with its
acute ideological divisions. German unification in 1989
was one of the central events of the process sealing the
end of the cold war. Since then, Germany has undergone a
process characterised by positive, but especially also an
array of negative experiences. A series of mistakes was
committed during and after the German unification process
that caused avoidable pain and has had lasting
consequences which may not be overcome for decades. The
German experience may hold some lessons for other
countries. The Korean peninsula, for one, is still mired
in a conflict which reflects the harsh ideological divide,
uneven economic development and the built-up of menacing
military forces, including nuclear capabilities.
2. Can the Korean standoff and confrontation continue?
Will the break-up of the Soviet Union, the disappearance
of its Communist Party, the ensuing policies towards a
market economy, the economic reforms in China and new
diplomatic alignments in the region trigger Korean
unification? Can such change be managed over a certain
period of time or will it be abrupt, a sort of big bang,
and what are the consequence of such different scenarios?
In order to smoothe those difficulties and disruptions
projected to arise, what are the lessons that can be
learned from the German experience? The High-level Group
attempted to shed light on these and numerous other issues
associated with an eventual - and perceived inevitable -
unification of the Republic of Korea (commonly referred to
as South Korea) and the Democratic People's Republic of
Korea (commonly referred to as North Korea).
II. THE ROAD TO GERMAN UNIFICATION
3. The political decision of the West German government to
seize the unique opportunity for unification was both
understandable and right and corresponded to the wishes of
the East Germans. However, the way unification was managed
calls for serious criticism. The Government had brushed
aside any economic advice given by its own Council of
Economic Advisers, the Bundesbank and the leading German
economic research institutes, which ex post facto proved
to be right on target. It can be argued that the
Government should have prepared itself better by
soliciting sacrifices from the population in the East and
the West (e.g. through higher taxes) and preparing them to
cope with hardships. The opposition, entrepreneurs and
trade unions are equally to blame for their failures in
that regard. Today, Germany finds itself in a recession
which in the main is due to the way unification was
financed. In addition, a wave of disappointment has set in
as a result of the fact that the benefits of unification
promised by the government have so far been absent.
4. The window of opportunity for unification appeared to
be rather narrow in political terms, especially given the
developments in the Soviet Union. Against this background,
the last Government of the German Democratic Republic
pursued a big bang approach to unification. The border to
the West, including the Berlin Wall, was open and many
skilled workers had left the East and moved to the West.
It was impossible to check the flow of people and goods.
While the command structure in the East had tangibly
collapsed, the fear persisted that its hard core might
seek to turn back the clock. The population sensed that
the economy was in a disastrous state, but this was not
fully articulated in public presumably because of the fact
that the first all-German election campaign for the
Bundestag took place in 1990. Political considerations
were allowed to override economics, as the government
wanted to create an appreciative psychological environment
in East Germany. On the other hand, Chancellor Helmut Kohl
seemed genuinely to have believed that the healing forces
of the market would deal with the situation quickly. As a
consequence, expectations were too high and were bound to
be disappointed afterwards. Today, politicians have to
grapple with a dramatic loss of credibility and perceived
incompetence, which however has not affected the
democratic system per se.
5. The choice of the right exchange rate proved to be
critical to the unification process and future economic
development. From a political point of view, however, the
generous conversion terms of one to one and the formation
of a currency union helped to pacify the population and
making them feel accepted. There was a feeling among
politicians that since Germany had accumulated large
external surpluses amounting to some DM 500 billion, with
the highest annual surplus of DM 108 billion registered in
1989, one could afford to tap these huge assets by
printing the money and transferring it to East Germans,
which would lead it was thought to a demand push for goods
from the West. Within two years, there was a swing of DM
150 billion in Germany's current account and the surpluses
turned into a deficit. Tensions built up not only on the
balance of payments but also on the capital markets and
short- and long-term interest rates. Hence, the German
Bundesbank - largely motivated by the high inflation rate
- felt obliged to pursue a policy of high interest rates
which had serious international implications.
6. The exchange rate of one to one proved to be far too
excessive, triggering economic and political problems
later on. In effect, the East German currency was
over-valued by about 300% which added to the
non-competitiveness of East German products. As the
difference in productivity between East and West amounted
to a ratio of one to three, East German products could no
longer be sold in any market of the world. In particular,
as a result of the complete collapse of the economies of
the former Soviet bloc, the traditional foreign markets
for East German products withered away. Overall, this
caused massive unemployment.
7. At the time of unification, East Germany automatically
became a member of the European Community. While losing
markets in the countries of the former Council for Mutual
Economic Assistance (CMA), it also lost much of its ground
domestically, due to superior competition from EC
industries. Altogether this caused massive unemployment.
Right now, the annual transfer of government funds towards
East Germany is in the order of about US$ 100 billion.
8. In the third year after German reunification, economic
development is much more uneven than expected. Industrial
production is slower than prior to 1989 and the service
industry is slacking. There are centres with impressive
development as well as areas registering slow or even
retrogressive trends. Two-thirds of public spending and
development in the Laender of former East Germany is
financed by massive public transfers from the West. As a
result of such transfers, the per capita spending of the
East Germans has almost doubled. There is very little
internal growth and the negative impact of the decline in
the industrial sector exceeds by far any growth in other
sectors. It may take some 10 to 15 years in order to
overcome the present low productivity levels. In the
housing sector it may well require half a century.
9. In transferring to a market economy, it is not possible
to leave everything to market forces. The deficiencies of
the infrastructure in the former GDR were grossly
underestimated as was the environmental contamination, the
lack of modern technology. The political, legal, economic,
educational, and social security systems changed,
including traffic rules. It is an enormous achievement for
the East German population to have coped with the stress
created by this veritable revolution. But it also created
distrust, lack of initiative, confusion, and fear all of
which should have been more effectively addressed.
10. Post-unification economic progress was also hampered
by the law and regulations governing the privatisation of
state-owned industries and assets. The unification treaty
stipulated that only state-owned enterprises, firms, and
houses in East Germany were to be privatised and that, in
principle, should be accomplished through a restitution to
the former owners of properties or their heirs (1.8
million claims were registered). This has lead to fairly
difficult legal situations as it could take some 10 to 15
years before each individual case is solved. Pending a
settlement, nothing can be done with the property in
dispute. This has impeded economic development further, as
most foreign investors are horrified by the idea that they
acquire a piece of property and may find at some later
stage that because of restitution claims there ownership
may be contested. This situation depresses the flow of
foreign investment.
11. As the top-down command system was deemed incompatible
with the horizontal system of the West, the laws and
regulations of the former GDR were not retained. Instead,
the West German legal system, its administrative laws and
regulations and procedures - one of the most complicated
systems in the world - were introduced virtually overnight
to an area where the rule of law had hitherto little
meaning. West German administrators and experts had to be
assigned to East Germany, giving rise to a feeling of
colonization among East Germans. The West German legal
system with its formality and great number of appeal
possibilities represents a barrier to speedy economic
development and restructuring.
12. Despite all the television programme exchanges and
postal exchanges and visits, the two Germanys knew very
little about one another. As a consequence, there is a
widespread disenchantment particularly in East Germany
now. According to a recent survey, 48% of East Germans
feel they are worse off now than before unification, 11%
say they are not better off and only 41% indicate their
lives had improved. The East Germans thought the Western
world was much more secure, more beautiful and wealthier
than it actually is. Neither the West knew the East nor
did the East know the West. Most Germans in the East and
West have still not realized what it means to unify a
country. The West Germans still think it can be done quite
easily, disregarding the considerable cost which has not
yet sunk into the West German population at large. Germany
made the mistake of telling West Germans that sacrifices
were not needed at all. Something very similar is true for
the East German population. The East Germans still believe
they can go through this process without fundamental
changes. They somehow still cling to old ideas and
structures, and their willingness to change fundamentally
is limited. The mental changes are excruciatingly slow in
both parts of the country. Under present conditions, it
will take East Germany up to 25 years to catch up with the
West. The process of equalizing the standard of living
between East and West may stretch over two generations.
13. While the unification of Germany was treated as a
national issue, it actually has and will continue to have
considerable international implications. Germany grew
overnight from a country of some sixty million people to a
nation of eighty million. Germany today is one and a half
times the size of Britain, France or Italy. It is twice
the size of Poland and more than five times the size of
the Netherlands and twenty times the size of Finland. This
creates naturally suspicion in the minds of almost all its
neighbours. Although today Germany has enormous economic
problems which will remain for at least the next 10 years,
all of Germany's neighbours believe that in the end
Germany will come out on top economically. In this
context, the continued membership of a unified Germany in
the European Community and NATO was a necessary
reassurance to all of Germany's neighbours, including
Russia.
III. SIMILARITIES AND DISSIMILARITIES BETWEEN THE
GERMAN AND THE KOREAN SITUATION
14. German unification has demonstrated that the
re-establishment of the unity of a country even after a
long period of division and difficulties is possible and
that unification can be achieved in a democratic, peaceful
way. But despite similarities between the two cases, there
may also be many differences regarding internal and
external aspects.
15. Germany and Korea were both divided in the wake of
World War II against the background of rivalry between the
capitalist West and the communist East. In both countries,
the hope for reunification was slim during the Cold War
period. Unlike Germany, North and South Korea had fought a
ferocious war. The two Germanys, unlike the two Koreas,
concluded a system of treaties to regularise relations at
the official level and to secure a modicum of civil
contacts and communications among the people. On the
Korean peninsula, North Korea remains to this very day a
hermetically closed society. No information flows
uncontrolled into the country, access to foreign radio and
television broadcasts is non-existent and no contact is
permitted with the outside world, not even the exchange of
letters. Travel both inside the country and abroad is
subject to approval and regulation. Kim Il Sung has ruled
the country for nearly half a century and stamped it with
his brand of Marxism and "chuche" nationalism. Apart from
the country's leaders and nomenklatura, all other North
Koreans are unaware of developments in the world in
general and the social and economic conditions in South
Korea in particular. This constellation is likely to make
any unification process in Korea fraught with the risks of
political and social instability.
16. There are also significant differences in the economic
constellation between Germany and Korea. The population
ratio between East and West Germany was 1:4, while for
North and South Korea this ratio stands at 1:2. In 1990,
North Korea is believed to have experienced an economic
decline of 3.7% and in 1991 of 5.2%. South Korea has
continued to achieve rapid economic growth in the past
decades. This has brought about an ever-widening income
gap. Today, the per capita income of the South is at least
five times that of the North. This alone will make
economic integration between North and South an
exceedingly tough and complex task. North Korean GDP per
capita corresponds to some 16% of that of South Korean,
while East German GDP per capita stood at 25 % of West
Germany's at the time of unification. North Korea's trade
volume stood at US$4.7 billion in 1990 and US$ 2.7 billion
in 1991. The decrease resulted from a slump in imports.
South Korea's trade volume reached US$153 billion dollars
in 1991. China and the former Soviet Union accounted for
some 70% of North Korea's trade. Instead of barter or
compensation trade arrangements of the past, they now
demand payment in hard currencies which North Korea lacks.
North Korea used to import millions of barrels of oil
yearly from the former Soviet Union against coal and other
raw materials, but currently it receives only 40,000
barrels producing an energy crunch with serious
repercussions for industrial production and living
standards. The utilisation of industrial capacities has
actually fallen 40%. North Korean leaders seem to be
beginning to open up their country to Western capital and
technology. Most investments so far have come in the form
of joint venture projects with pro-North Korean residents
living in Japan (about 200,000 among one million Korean
residents).
17. Unlike East Germany, a unification of the two Koreas
will not entail ready-made access to new foreign markets
for either of the two given the absence of an Asian common
market. Protectionism in the United States and Europe -
Korea's main export markets -threatens to erode Korea's
export base and places South Korea in a vulnerable
economic position. To assist any unification process in
the future, the international community ideally would have
to be more accommodating to Korea in the future. But given
the present climate in global trade negotiations, it is
unlikely that a unified Korea would be granted assured
access to the European Common Market or the United
States.
18. The differences between North and South Korea with
respect to their industrial base are much different from
those between East and West Germany. Unlike East Germany,
North Korea relies essentially on large supplies of
various raw materials most of which were traded on a
barter basis with the Soviet Union before its demise.
Korean unification may mean that additional markets could
be tapped for their export. Given North Korea's limited
trade exposure, any reduction in demand for its products
following unification would therefore not pose a problem
comparable to that experienced by East Germany. Currently,
North and South Korea engage only in some indirect trade
through Hong Kong, Singapore and Japan. Between 1988 and
1992, there were only some US$450 million worth of exports
and imports between the two countries. In the German case,
trade had steadily been growing between the two countries
prior to unification, facilitated by a generous financial
facility (the "swing") extended by the West German
government.
19. North Korea is suffering from severe shortages of
goods. In 1991, it produced 4.4 million tons of grains but
consumed 6.5 million tons. Part of the shortfall was made
up by a donation from South Korea. Following unification,
South Korea as the stronger economy will have to take care
of 22 million North Koreans, requiring substantial
funds.
20. The North Korean economy is far more distorted than
the East Germany economy was at the time of unification.
It is also much more geared towards meeting military
requirements than East Germany ever was. This may also
complicate the eventual demobilisation of military
personnel following unification.
21. Regarding labour costs, the gap between East and West
Germany was probably higher than is the case for Korea. In
Germany, gross labour cost increased following unification
due both to the assimilation of wage levels towards levels
prevailing in the West and to the introduction of the
costlier social security system of the West. The Korean
social security system is not very costly compared to the
German.
22. In general, South Korea has not the capacity to bear
the full cost of unification and might need to resort to
higher domestic taxation and external borrowing on a large
scale. Furthermore, South Korea is not in a position to
offer generous aid programmes to other countries in
exchange for their support for reunification.
IV. POSSIBLE RE-UNIFICATION SCENARIOS FOR KOREA
23. Several possible developments should be considered in
any discussion of Korean reunification. In particular,
there is a need to study the internal developments in
North Korea. For one, Kim Il Sung's successor may change
policies drastically or he may not do so. Either way, this
could prolong the process of reunification, but could also
yield benefits for the economic and social situation.
Another scenario might be that of a revolt against the
system and leadership by a part of the North Korean party
elites. The consequences of such an event are entirely
unpredictable. Another scenario would be the collapse of
the North Korean economy leading to the absorption by the
South. It is hoped that such an option can be averted in
favour of a step-by-step approach to reunification. A
further possibility would be a Chinese-style reform by
opening up the country. The absence of any private
ownership would complicate such an option, although the
recent promotion of joint ventures might be a signal in
the direction of such a reform. South Korea appears to be
prepared to extend economic and social cooperation should
such a course materialise.
24. Ultimately, both Koreas must have some kind of vision
on the kind of country they would like to have after
reunification. Gradualism has to be balanced against the
risk of reversal. A gradual approach should only be
pursued if it is certain that the process cannot be
reversed. If there is a risk of reversal in political
terms, a big bang approach would be preferable. If there
is too much gradualism, the process may equally falter
unless there is a critical mass of institutional change,
which by itself is difficult to determine. The main task
would be to prevent military complications during a
transitional period that would precede unification.
Thereafter would come a period during which both countries
would be integrated. Above all, care should be taken that
the international competitiveness of the South Korean
economy be preserved.
25. The proposals made by the InterAction Council at its
1990 session in Seoul remain very relevant, calling as
they did for contacts between North and South Korea,
contacts between the North Korean elites and those of the
South.
26. The German reunification had a specific, favorable
external environment: the Soviet leadership pursued
perestroika, dramatic changes took place in Poland,
Czechoslovakia and Hungary, the Berlin Wall fell and
relations between the Soviet Union and the West improved
dramatically. In Korea, such conditions are non-existent.
It will be important for Korea to develop good diplomatic
relations with its neighbours, especially China and Japan.
All countries having political and other interests in the
region must be involved in the process - China, Japan, the
United States, the ASEAN countries. It is incumbent upon
Korea to foster an international climate conducive to its
reunification process, for which it needs the assistance
and consent of the world community. One particular issue
of concern to the world community at large is the nuclear
status of North Korea and how it will affect the status of
a reunified Korea.
V. POLICY RECOMMENDATIONS
27. Generally, Korea should avoid rushing or getting
pressurized into unification. It should preferably be a
gradual process under controlled conditions. To that end,
it is of utmost importance to prepare and to be prepared
in case a political opportunity arises to unite in
whatever steps and phases. Once the process has started,
political decisions must be thoroughly interfaced and
coordinated with economic policies and requirements. The
transformation of a command economy calls for a most
detailed planning in all areas. One factor of resistance
to a transition may be the huge North Korean army, certain
to be demobilised and fearful of large-scale
unemployment.
28. It is estimated that in a big bang context, South
Korea will have to transfer annually 8% of its GDP to the
North for a 10-year period. Under more gradual conditions,
some 3% of GDP may be required. To achieve parity in
living standards might take more than 30 years. The
unification of a country cannot be accomplished in the
short and medium term without weakening the growth base of
the economy - irrespective of the approach chosen. South
Korean savings will need to be utilised as will be resort
to foreign capital. Care should be taken that savings will
not be diverted for consumption as this would undermine
the economic base of the country. South Koreans must be
aware that during the transition period their general
economic conditions will change. As a result of
unification, there will be an excess demand for capital
and an excess supply of labour. In response, Government
expenditures need to be reallocated and switched from the
South to the North.
29. Irrespective of which approach will be chosen, the
choice of a right exchange rate will be of paramount
importance for the success of the transition. If possible,
one should proceed on the basis of two currencies in order
to have the exchange rate as a shock absorber. Too
favourable an exchange rate would not only determine the
actual exchange rate of wages, but it would also be the
basis for the wage formation process in the future and
shape the expectations of people in general. Wages should
not be equalised too quickly as otherwise the rate of
unemployment would increase inducing unwarranted migratory
pressures. Free wage bargaining should also be restricted,
since given the absence of capital owners in North Korea
it would lead in a wrong direction.
30. Land reform in North Korea will be one of the first
tasks during a transition. The experience gained by Korea
in the post-world war II period may serve as a guide in
this endeavour. Property rights issues will therefore play
a prominent role after Korean reunification. There could
be restitution of property rights to original owners if
still alive, the sale of state-owned properties through
public auction, a distribution of property rights to the
general public through a voucher system, distribution of
properties to actual users or a compensation in state
bonds. The restitution approach might not be appropriate
if early and effective incentives are to be given to
foreign investors.
31. Privatisation is a means. Its objective is to
introduce some elements of a market economy. In the
process of privatisation of hitherto publicly owned
enterprises, priority should be given to service and
tourism establishments, such as hotels, as many visitors
may be expected from the South. In the shift from a
collective to a private agricultural system, serious
problems are bound to arise. After 30-40 years of
collectivism, there will be no more farmers, but only
agricultural workers. In addition, the absence of
fertilizers, tools, implements, equipment and vehicles
such as tractors will complicate the task.
32. Industrial policies ought to be devised to respond to
a variety of problems and challenges: the contamination of
the environment, unemployment, social justice,
concentration of economic power. Market forces are
unlikely to create a productive economic structure in the
North that will match that of the South. State
interference, planning, and deliberate transfer of
resources will be inevitable.
33. Public infrastructure - roads, energy, transportation,
telecommunication, hospitals, schools and so on - are a
precondition to make an economy function. Institutions
administering a more market-oriented economy must be built
and it must be decided what they will do and how they will
be financed, where and in which time span. There will also
be the need for massive human capital investment in terms
of on-the-job and vocational training and retraining as
well as the temporary transfer of managers, entrepreneurs
and skilled administrators. Special adjustments will be
required in the educational field, including new education
curricula. At universities, the qualifications of
university teachers and administrators should be reviewed.
Present social welfare programs must be expanded to
accommodate North Koreans.
34. Rules and regulations, licensing and permit procedures
of South Korea should not be applied without modification
to the North. Rather, new institutional arrangement should
be devised for the North during the transition. There
might also be merit in imposing some limit on relocations
and movement by people from the North to the South. One
proposal that deserves thorough study is the creation of a
special administrative zone for North Korea with its own
regulations, laws and currency. Even though it will be
part of a unified Korea, it could be treated as a
different part of the country for a certain period of
time. In such a zone, special incentives could be offered
for investors, employers and employees.
VI. HOW TO ORGANISE KOREAN TRANSITION
35. A wise management of the divided situation of the
Korean nation is of utmost importance. Mismanagement could
bring calamity to all Koreans and another Korean war must
be avoided at all cost. The division of the country should
be managed so as not to discourage the will of the people
and national consensus for unification. Abrupt political
integration between two societies whose diametrically
opposed ideologies and economic systems would cause
political chaos, confusion and frustration. The most
desirable process would be a gradual integration through a
network of reinforcing cooperative mechanisms and
interactions so that the people of both societies can
develop mutual trust and confidence.
36. In 1991, North and South Korea signed one overall
treaty including the provision that it would absorb the
armistice agreement of 1953. This treaty - which is more
elaborate than the Basic Treaty of 1972 between East and
West Germany - remains unimplemented. The major task is to
deal with 10 million divided families; this should not
necessarily lead to a massive movement of people. Rather,
people should initially be allowed to meet each other at
any place, time and condition.
37. National reunification between North and South Korea
is on the face of it an intra-national issue. Yet, to
create conditions conducive for unification and for
stability on the Korean peninsula and in North-East Asia
entails international implications. A sudden collapse of
the North Korean regime may open the border on the Korean
peninsula overnight just as the flood triggered by the
collapse of the Berlin Wall in 1989. In the German case,
the influence of the four powers - especially the Soviet
Union - was very important. In the case of Korea, the
relations with the neighbouring powers are quite
different. Korea is a very small country compared to its
neighbors and has never threatened the security of the
surrounding nations. Korea does not need to grab a window
of political opportunity as Germany did. It might
therefore prepare for a more deliberate pace to manage the
process of reunification.
38. Korea should woo the three major powers it counts as
neighbours - Russia, China and Japan. The future of North
Korea is closely linked to developments in China. The way
in which the Chinese look at the Korean peninsula will be
of great importance in the future. The United States of
America and the South-East Asian states can also be
considered as neighbours vis-a-vis the seas. The four
major powers and the group of medium-sized powers in
South-East Asia should be considered as future economic
partners and approached accordingly. Korea should also
address itself to the capacity for fierce competition
between a future united Korea and advanced Japan
corporations and industries. Korea right now is a country
of 43 million people, after reunification it will be
around 60 million. Sixty million Koreans are not an order
of magnitude to match either the 150 million Russians or
the 1 billion Chinese or the 120 million Japanese. Yet, a
united Korea must be considered a major factor in the Far
East and in the world economy as a whole.
39. A solution of the nuclear armament issue will be a
precondition for the resumption of the dialogue and
economic cooperation between the two Koreas. The
international community is concerned at the specter of
North Korea acquiring nuclear arms and thus violating the
nuclear non-proliferation treaty (NPT). Beyond that, there
must be assurances about the future military set-up of a
united Korea. The adherence to the NPT is but one aspect.
A Korea of 60 million will be quite a force to reckon
with. To assure all neighboring countries of Korea's
peaceful intentions in the future, there must be
unequivocal commitments that Korea does not intend to
change any borders - as was done by the German Parliament
with respect to the Polish border.