How North Korea could be an economic powerhouse if planners look beyond its natural resources

Wonsik Choi and Jonathan Woetzel say efforts to kick-start the North Korean economy that focus on human capital, connectivity and the adoption of market mechanisms could reinvigorate South Korea, too

PUBLISHED : Friday, 12 October, 2018, 12:03pm
UPDATED : Friday, 12 October, 2018, 6:56pm

Could the Korean peninsula be the world’s next epicentre of change? Today North Korea has an estimated gross domestic product of US$28 billion, similar in size to Cameroon. And yet, by 2050, it is possible that a more economically integrated Korean peninsula could range in size from US$4 to US$6.4 trillion, with the North accounting for around a quarter of that total.

That would put the Korean peninsula, if measured as a single economy, roughly on par with Japan, Germany and the UK – and trailing only China, the US and India.

To achieve a prize this size, huge unanswered political and security questions would need to be resolved and pretty much everything would have to go right. By 2050, the Korean peninsula would need to experience a 10-percentage-point increase in urbanisation rates and see research and development investment hit up to 6 per cent of GDP.

These outcomes would need to be spurred by an annual growth rate in a more integrated economy of 5 per cent, sustained over three decades. Daunting? Absolutely. Impossible? No. Other countries such as China, Vietnam, India, Ethiopia and Uganda have sustained 6 to 10 per cent annual average growth over the past three decades.

But reaching those stretch goals also requires a bold vision that goes well beyond what many currently suggest is the right path: simply, better exploiting North Korea’s abundant, untapped mineral and hydrocarbon resources and replicating the classic industrialisation journey – from cheap, labour-intensive light industry to state-of-the-art heavy industry that the South followed from the early 1960s to the mid-1990s.

Instead, North Korea needs to take a “future back” development approach, which envisions the future and then works backwards from that. The approach in North Korea should leverage digital technologies to better equip large pools of young talent, and take advantage of proximity to some of the world’s most advanced companies in China, Japan and South Korea. Helping the North achieve such a radical reset could, in turn, provide the South, which has been on a sluggish trajectory since 2012, with its own welcome productivity and growth jolt.

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To be clear, properly reimagining the future of the Korean peninsula requires the adoption of market mechanisms in the North – simply throwing money at the problem will not help. In addition, there are four key drivers: first, putting as much or more emphasis on nurturing human capital as on developing natural resources. Second, speeding up the building of physical and digital connectivity to help overcome the constraints of the North’s isolated systems and poor infrastructure.

North Koreans … have already moved quickly to embrace whatever limited opportunities they have been given to take advantage of a market economy

Third, treating the largely undeveloped state of the North’s economy as an opportunity to “experiment” and test next-generation approaches to manufacturing and urban services. Fourth, assuming this were consistent with the goals of each country’s leadership, seeking to leverage the potential scale advantages that might arise from greater integration in the peninsula and the wider region.

North Koreans, like the Chinese before them, have already moved quickly to embrace whatever limited opportunities they have been given to take advantage of a market economy. The Jangmadang or open black markets, which first sprouted up during the great famine in the 1990s, have become a major source of trade and livelihood, accounting by some estimates for roughly two-thirds of all food and consumer goods purchases and employing 1.1 million people.

Building on this modest start will require, in addition to rapid technology adoption and more market mechanisms, one other foundation: improving education. Despite fairly high educational attainment compared to other developing countries, North Korea’s primary and vocational education systems will need a major upgrade to equip the workforce of the next 50 years.

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Finally, for all its huge challenges and complex history, the Korean peninsula benefits from a propitious location. Over 60 cities with populations of more than 1 million are within a three-hour flight. Korea’s full potential will only be realised as a part of integrating more fully into a region that will soon account for more than a third of the global economy and boast purchasing power far greater than the US today.

So, reflect on that potential, as you contemplate the seemingly insurmountable problems captured in today’s headlines. Can a more economically collaborative, market-driven Korean peninsula eventually become another hub for this dynamic region? If the enormous geopolitical hurdles can be overcome, the answer is, yes, it can.

Wonsik Choi is managing partner of McKinsey & Company’s Korea office. Jonathan Woetzel is a senior partner and director of the McKinsey Global Institute