Japan and Asia stand at a key turning point. As slowly but surely North Korea prepares itself to emerge from decades of isolation, an enormous potential investment boom opportunity is poised to unfold. For an economist, North Korea and Japan are a match made in heaven — Japan offers a huge capital and savings surplus but lacks people and natural resources; so, on an economist's drawing board, Japan has what North Korea needs, and North Korea has what Japan needs.
Of course, the real world is so much more complex than a clean drawing board. It's outright messy. Decades of mistrust, isolation and sometimes open confrontation may make it hard to imagine a real turning point in the relations of nations. North Korea lies at the very center of Asia's three economic superpowers, China, Japan and South Korea, and America is still both a dominant economic force and potential game-changer. So it's complicated, and it's about so much more than Japan. Yet without a doubt, the sooner negotiations shift from the threat of war to the potential "win-win" of economic modernization and shared prosperity, the more confident we can be that true peace has been won.
To assess the economic opportunities and challenges created by a potential modernization of North Korea's economy, German unification in general, and the modernization of East Germany in particular, offers some useful lessons. Although the academics are still debating the exact numbers, let me get the big numbers out right in front: Basically it looks like East Germany's modernization created approximately $2.5 to $3 trillion of private sector investment in the first decade since unification. Together with approximately $1.5 to 2 trillion of public sector support, this boosted East Germany's per capita GDP from approximately 40 percent of West Germany's levels to approximately 80 percent over the same first decade.