Peace worries some Korea watchers more than war

The eventual collapse of Kim's regime is widely regarded as inevitable. The only questions are when, and how. And for most analysts, the risk that South Korea's economy is hammered by the costs of reuniting with the impoverished North is a far greater concern than the remote chance of a devastating war.

War is regarded as highly unlikely. Reunification is almost inevitable. And the costs are widely expected to be enormous.

"In assessing catastrophic risk potential, we would rate an internal leadership vacuum and social breakdown in North Korea as a likelier credit threat in the medium term than a serious outbreak of military hostilities," Credit Suisse said in a report this year on the key risks for South Korea.

North Korea's GDP per capita is only around 5 percent of the South's. Its population is nearly half the size of the South.

Given the economic pain produced by German reunification, where the income gap was far narrower and the population absorbed relatively smaller, most analysts have assumed South Korea will face a painful fiscal burden that will weigh on it for years.

Credit Suisse estimates the cost of reunification will be around US$1.5 trillion, roughly one-and-a-half times South Korea's GDP, based on the assumption that North Korea's per capita GDP was raised to about 60 percent of the South's over 10 years.

Other estimates of the cost have put it as high as 3 or 4 times South Korea's GDP. Most analysts expect a period of severe hardship for the South, likely to persist for years.

Yet some analysts have challenged this negative view.

A report last month by Goldman Sachs economist Goohoon Kwon argued that the costs of reunification need not be prohibitive and said North Korea had huge growth potential.

Kwon was strikingly bullish on the prospects for a united Korea. "We project that a united Korea could overtake France, Germany and possibly Japan in 30-40 years in terms of GDP should the growth potential of North Korea be realized," he said.

If credible, the analysis could overturn risk assessments of South Korea, with reunification being viewed wholly differently.

The Goldman report argues that North Korea has strong untapped growth potential, partly due to mineral wealth estimated to be worth around 140 times its 2008 GDP.

But Kwon's forecasts are also based on a key political assumption — economic integration will be peaceful and gradual. As he noted, other scenarios may have "diametrically different implications for the economy and markets".

Kwon said the German model would be prohibitively expensive for North Korea. The least expensive option would be Hong Kong-style integration in which two economic and political systems coexisted with limited migration between the two.