(Bloomberg) -- Peace on the Korean peninsula would offer far bigger economic benefits to impoverished, isolated North Korea than to the already developed South.
Expectations are rising for an end to decades of hostilities ahead of Friday’s summit meeting between South Korean President Moon Jae-in and his counterpart, Kim Jong Un. A deal would open the door for Moon’s plan to develop "three economic belts" connecting the two Koreas, and for business and investment opportunities for South Korean companies.
But with an economy only a fraction of the size of South Korea’s, North Korea stands to be the big winner, while the economic benefits for the South would be limited.
“The peace dividend would have immediate and immense benefits for North Korea, rather than South Korea, and that is why Kim Jong Un is pushing this,” said Thomas Byrne, president of the Korea Society in New York and formerly a senior vice president at Moody’s Investors Service.
Despite signs of a thaw, huge hurdles remain to a formal peace treaty and the economic opening of North Korea. Moon said last week that while the summit should lead the way, implementing any deal with Kim that included denuclearization would be challenging. U.S. President Donald Trump, who may meet Kim in the weeks after the summit, will also have something to say about the future of the peninsula.
Nonetheless, analysts at Meritz Securities in Seoul say it’s time to “imagine unification” and focus on opportunities within North Korea. If the communist regime eventually opens up, it can yield investment booms in transportation, infrastructure, and power facilities, the analysts wrote in an April report. Unification would also provide a stable supply of mineral resources from the North, they said.
Shares in some South Korean companies have soared in recent weeks due to expectations that a peace deal will bring such opportunities. Yet Zang Hyoungsoo, an economics professor at Hanyang University in Seoul, warns that it is naïve to expect them all to simply be handed to the South.
“If North Korea is acknowledged as a normal state and has diplomatic relations, South Korean firms would be competing with China and others to grab the opportunity to develop infrastructure,” Zang said. “As long as a national border remains, there will be clear limits to what the South can do with the North’s economy."
On the other hand, though the prospects of reunification in the near-to-medium term appears dim at best, the economic case for it is compelling, write Justin Jimenez and Tom Orlik of Bloomberg Economics. "Combining North Korea’s population of about 25 million with South Korea’s roughly 50 million people would create a country nearly the size of Germany," they said. "Given the north’s younger populace, that could help address the south’s demographic challenges."
One benefit for South Korea would be the lifting of the cloud over its sovereign credit rating. Ratings companies have long said geopolitical risks are negative factors for the country. Moody’s Investors Service is waiting for “tangible proof” that the current detente is enduring, Senior Credit Officer Christian de Guzman said in an email.
One reason for skepticism about any lasting benefits, particularly for the South, is that a peace treaty is no guarantee that Pyongyang will refrain from rattling nerves and financial markets.
Such a "piece of paper" probably wouldn’t have stopped previous provocations, including an attack on the Cheonan warship in 2010 that killed almost 50 South Korean sailors, said William Brown, a professor at Georgetown University and a former U.S. intelligence officer.
“I would anticipate some very tough sledding before North Korea is truly ready to reform itself to the point that Seoul can profitably engage with it,” Brown said. “And this tough sledding might very well include even tougher sanctions, rhetoric, and military posturing that would raise, not lower risks.”
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