Thursday, January 25, 2007

Excellent Account of a Trip to the DMZ

There is an excellent account by Michael Jennings at Samizdata of his trip to the DMZ. It is a thoughtful and illuminating description of a place where a big military showdown, in the twentieth century style, is still going on.

It also contains a very sensible point about the possible costs of Korean unification:

"But that was it. As we drove back into and through South Korea, the English speaking guide had an informal chat with us, asking why we were in Korea and suggesting things that we might do in Seoul. We asked her about the South Korean attitude to possible reunification, and she told us that South Koreans generally did not want it. "Germany tried it, and they almost sent themselves bankrupt. We do not want that, although obviously we would prefer to have a normal, peaceful country to our north".

Personally, I am not sure that is the right interpretation of the German situation. Certainly, the implementation of German reunification has been disastrous, but I do not believe that this is a problem with reunification per se, as much as the way in which the Germans actually went about it. The advantage that East Germany should have had post-reunification was a cheaper and more flexible labour market than the west, although with lower productivity. By forcing western wages and the western welfare system on the east (and by spending lots of public money on infrastructure, which generally flowed back west because that was where the expertise to built it lay), the Germans created a system that looked generous in the short term (and which was horribly expensive for the west) but which in the long term only led to high unemployment and a business environment that no sane private sector company would choose to invest in. There is no reason whatsoever why Korean reunification would have to make the same mistakes. It would be a shame if the reaction to German mistakes was to swing so far in the opposite direction that entirely different mistakes were made."

The problem wasn't just the welfare state and wages but treating East German currency as of equal value to West German currency when the market exchange rate was massively different. This introduced an artificial Dutch disease in the East and meant, along with the factors Jennings points to, that the region had to be a burden. A better comparison to point the Koreans towards might be the reintegration of Eastern Europe into the European economy where liberal policy arrangements allowed the region to become an enormous success. One country, two systems, perhaps?

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