UBS: One of the biggest expected benefits of a North and South Korea peace deal could fail to materialise

Screenshot/ Reuters TVNorth Korean leader Kim Jong-Un, left, and South Korean leader Moon Jae-in signing a joint declaration.

  • After recent peace talks, the possibility of economic liberalisation and expansion in North Korea has been mooted by many pundits.
  • UBS economist Li Zeng, however, believes there is limited upside to North Korea (and wider Asia’s) economy in the near term.
  • “The potential spillover from its growth to other economies in the region will likely be quite limited in the near to medium term,” he wrote on Tuesday.

Analysts are vastly overestimating the potential economic boost to Asia from the opening up of North Korea, according to research from Swiss banking giant UBS.

UBS’ Li Zeng argues that “even in a very positive scenario,” there is only a small potential upside for the wider Asian economy in the short to medium term from the liberalisation of North Korea’s economy.

That’s because North Korea’s economy is tiny and simply does not have the framework for rapid expansion in place, he argues. Zeng delivered his verdict in a “snapshot” of the North Korean economy sent to clients on Tuesday.

There has been much talk of what could happen to North Korea’s current closed economy if recent talks of greater cooperation between the two nations come to fruition. Many view North Korea as an untapped resource for economic growth in the region. Li Zeng, however, points to numerous factors to suggest that such discussions are premature.

“Some investors wonder about the likely macroeconomic implications of the latest development. There are still a lot of uncertainties, but we think a snapshot of the North Korea economy can help to anchor certain aspects of our expectations,” he writes.

Li Zeng points to numerous data points that expose the huge uphill task faced by North Korea if and when it liberalises. Here are some of the key factors, compared to its Southern neighbour:

  • GDP in 2017 (current US$): North Korea 16.3 billion, South Korea 1.4 trillion
  • GDP per capita in 2017 (current US$): North Korea $US648, South Korea $US27,397
  • Agriculture employment (% of total): North Korea 58.9%, South Korea 5%
  • Industry employment (% of total): North Korea 19.3%, South Korea 24.7%
  • Services employment (% of total): North Korea 21.8%, South Korea 70.3%
  • Gross enrollment ratio for secondary education: North Korea 93.4%, South Korea 98.9%
  • Gross enrollment ratio for tertiary education:North Korea 27.9%, South Korea 93.4%

These statistics, Li Zeng believes, illustrate how little upside there is to be had over the coming years. Put simply, North Korea is a small, largely agrarian economy with a lower level of average education than its neighbour. It isn’t ready for the kind of large-scale, international trade that would deliver any meaningful benefit to nearby countries.

“Considering the small size of the North Korea economy at the moment – its GDP in 2017 was only some 1.2% of South Korea’s GDP – even in a very positive scenario, the potential spillover from its growth to other economies in the region will likely be quite limited in the near to medium term,” Zeng writes.

There is some upside, Li Zeng adds, noting that: “South Korea is facing demographic challenges, while North Korea has a relatively well educated population, the potential of which probably has not been fully tapped yet.”

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.