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Thinking the unthinkable: Economics of Korean Wars

It is certain, especially in terms of lives lost and ruined, that war is a human tragedy. The economic impact of wars is much less clear.

In the 1950-53 Korean War, 1.2m South Koreans died and a much larger number of North Koreans [Note 1]. North Korea, and in reality Russia and China, were fighting a UN Coalition of 16 nations including the UK and US. South Korean economic output declined by about four-fifths during the War but the War was probably the backdrop to the start of the structural change in the South Korean economy which transformed it into a prosperous industrialised country over the course of the next four decades. Similarly, the Korean War probably stimulated the Japanese  economy and helped make its miracle growth in the 1960s possible. In the case of Britain, however, the increase in expenditure on armaments probably diverted resources away from investment  in industry and so helped shape two decades when the UK economy was outgrown by much of the rest of the Western  world [Note 2].

Turning to 2017, what if the threats and counter-threats, missile launches and aircraft carrier exercises escalate a very cold war into a hot war [Note 3]. There are a number of reasons why the global economic impact of a Second Korean War could be considerable:

  1. The size of the South Korean economy

    South Korea is now the world’s thirteenth largest economy; roughly two-thirds the size of the UK

    economy in terms of GDP [Note to Editors 4], South Korea’s population of 50m is almost as large as England’s.

    Dr Esmond Birnie of the Ulster University Economic Policy Centre said,

    “South Korea represents 2% of world economic output so, if a war destroyed one-quarter of that GDP that would reduce global economic output by 0.5% points- a considerable loss when global growth is about 3% every year.”

  2. Knock-on effects to the other East Asian and Pacific economies

    Given the high degree of inter-dependence between the South Korean and Chinese and Japanese economies, any disruption in the former would damage the great economies of  East Asia. Japan has had about two decades of very low growth and China appears to be experiencing a credit bubble.

    According to Dr Esmond Birnie,

    “A war in South Korea could trigger a loss of business confidence and reduce trade and so tip both the Japanese and Chinese economies towards recession”. [Note 5.]

  3. Trade routes and supply chains

A war could dislocate the considerable trade flows and supply chains which pass around the Pacific Rim. Dr Birnie commented,

“Here in the West we might expect more expensive Iphones, IT products, electronic and white goods. Indeed, especially given pre-existing weakness- China’s slowdown, abnormally low interest rates, bad bank debt in the Eurozone and Brexit uncertainties- war in Korea could tip us into recession”.

In so far as the initiative does lie with the Western powers and China, the possible economic costs are one factor which should be factored in when considered what, if anything, can be done about the North Korean regime.  They are not the only factor because it could be that the negative consequences of not dealing with that regime will escalate over time.

In terms of the longer term, a more optimistic way of looking at things is to conclude that the existing North Korea regime will probably collapse. The question is “when” and “how”? The most benign scenario is the model provided by East and West Germany in 1989-90, a bloodless folding of the North into the South. From the point of view of the world economy the experience of German unification suggests that this process would pose several challenges- migration from North Korea to the South and the rest of the world and the requirement for huge amounts of capital to invest in developing the Northern economy. If anything, the challenges of absorbing North Korea into the South would dwarf those which faced Germany since 1989 [Note 6].

Notes 

  1. Of the 100,000 British servicemen and women who served in the War, over 1,000 were killed. US casualties were almost 40,000.
  2. The impact on the US economy was ambiguous. Increased government spending during 1950-53 helped lift growth above its trend but this was followed by a recession once the war ended.
  3. For the sake of considering the economic impact, I am assuming that the three nuclear powers with interests in this area- US, Russia and China- “manage” the situation so that they avoid any conflict between the three of them.
  4. In 2014, as measured in common price or purchasing power parity terms, the South Korean GDP was $1,700bn (1.7 Trillion dollars) and the UK  GDP $2,600bn.
  5. The impact on Australia, for example, could be considerable. South Korea, China and Japan  are its three largest markets.
  6. There are several reasons for this. North Korea is “larger” than the former East Germany; a population of 25m compared to 16m. North Korea also starts from a much, much lower base- in 1989 average incomes per head in East Germany were about one-third those in the West. In 2014, in so far as they could be measured at all, average living standards in North Korea were less than one-twentieth of those in the South.