(FORTUNE Magazine) – IS KOREA the next Germany? Many South Koreans hope so. They study the German reunification process with the same intensity they once devoted to reverse- engineering cars and VCRs. Delegations of South Korean economists regularly troop to Bonn and Berlin for firsthand inspection. Seminars in Seoul feature German thinkers. The phone in the German embassy in Seoul rings daily: What currency did you use in settling East-West trade transactions? How far into the East did West German TV reach? Says Michael Pulch, a German diplomat in Seoul: ''Sometimes I feel they are searching for the key word that will explain how they can make it happen here.'' Korean reunification won't be that easy. The depth of enmity between the halves of the Cold War's last divided country probably rules out any quick coming together. And yet there are hints of change. Ronald A. Morse, executive vice president of the Economic Strategy Institute in Washington, D.C., thinks that the unexpected and speedy nature of events in Germany ''could very well be repeated in Korea.'' North Korea -- impervious to most outside influences since it was formed right after World War II -- is at last cracking open its door to the world. Since September, North Korea's Prime Minister has met three times with his South Korean counterpart -- the first-ever such contacts. Though the two men agreed on nothing, it was remarkable that they met at all. During the same four-month period, musicians and soccer teams have exchanged visits. (With well-balanced results on the field: The North won the first match at home, the South the second in Seoul.) North Korean officials reportedly met with U.S. negotiators in Beijing to discuss returning the remains of American soldiers killed in the Korean war. No overture was more surprising or potentially more important than North Korea's bid last September to establish diplomatic relations with Japan, which mercilessly exploited Korea while occupying the country from 1910 to 1945. Japan has long had ties with South Korea but has never recognized the North. The North's sudden desire to reach out was almost certainly motivated by two converging realities. First, its economy is in big trouble. Some Soviet economists think gross national product may actually have shrunk by 5% last year. At best, the economy is stagnant. Second, the Soviet Union has dropped out as the North's major supporter. At the beginning of this year, Moscow began requiring North Korea (along with other trading partners in the old Communist bloc) to pay for all Soviet imports in hard currency and at world market prices -- a decision that could send the fragile North Korean economy reeling. Moscow also underscored the end of its special relationship by recognizing South Korea. KOREAN UNIFICATION would have an enormous geopolitical impact. The U.S. could quickly withdraw the 40,000 combat troops it still keeps there. With 64 million people and the world's 15th-largest GNP, a united Korea might become an even more potent economic powerhouse than South Korea is now. Peering north across the demilitarized zone (DMZ), the bleak swath of wasteland that divides the Korean peninsula along the 38th parallel, such talk is hard to take seriously. Established when the Korean war ended in an uneasy armistice in 1953, the 2 1/2-mile-wide DMZ is palpably tense. Armed North Korean sentries keep a menacing vigil, training binoculars and propaganda- blaring loudspeakers at their southern counterparts. American and South Korean soldiers patrolling their side of the line stare back, perpetually prepared for war. Not without reason: Some 1.7 million soldiers face each other across the DMZ. The South has discovered four tunnels blasted by the North far below the DMZ. The fourth one, found just last March, could have been used to move 10,000 invading troops into southern territory in less than an hour. Against that harsh backdrop, even the mildest hints of change are surprising. South Korean businessmen say they now sometimes have friendly encounters when they meet North Koreans abroad. Says one executive from Seoul: ''Five years ago they would hurry away if we approached them. Now there's no problem in having a meal together. We talk frankly -- about how we each live, about the old days.'' When the Korean peninsula was divided in 1945 between Soviet occupation in the North and Allied control in the South, the northern section had most of the industry, the South most of the farmland. After the Korean war, which killed three million people, including 54,000 American soldiers, the two sides were pretty much even: both in ruins. Though the South has stumbled through a series of military coups and authoritative regimes on its uncertain march toward democracy, it has developed a powerful economy more or less along Western, market-oriented lines. The North, under dictator Kim Il-sung, 78, adopted a closed socialist program that promoted heavy industry, the military -- and Kim himself. (Production of books, songs, posters, paintings, statues, and buttons that celebrate Kim, the self-styled Great Leader, has become an industry in itself.) For two decades Kim's juche (self-reliant) ideology produced respectable economic growth. Or so it seemed, though the North shed precious little statistical light on itself. By the early 1980s, however, it was clear that the North's economy was slipping badly. Today the South's per capita GNP is no less than five times that of the North. Travelers to Pyongyang first see its outward prosperity: tree-lined avenues, landscaped parks, a clean, solidly built subway system, and a brand-new complex of sporting arenas. A monumentally sized, pyramid-shaped hotel is under construction. But the facade is thin. Few cars are on the streets, and the big projects represent an odd use of North Korea's limited resources. The sports complex, built for the 1989 World Youth Festival, cost an estimated $4.7 billion, an astounding 6% of the country's GNP. The hotel, still far from finished, has 3,000 rooms. ''Who will stay there?'' asks Teruo Komaki, a Japanese expert on North Korea at the Institute of Developing Economies in Tokyo. ''I think the hotel will be empty. It was built as a political statement.'' Shortages plague the North's economy. According to Korean residents of Japan who travel frequently to the North, the government has apparently reduced rations of rice, the dietary staple. Electricity is in short supply and transmission is so inefficient that many factories operate at half capacity. The North's bind is this: If it is to stave off eventual collapse, it must upgrade its outdated industry to become more competitive. Yet the country has few sources of the capital that such a rebuilding effort would require. After defaulting on foreign loans in the mid-1970s, it can't borrow abroad anymore. And it can't increase hard-currency-producing exports without modernizing mines and factories. Before perestroika, Kim Il-sung could bank on a bailout by Moscow. But the shift from barter trade to hard currency may prove a body blow. More than half of North Korea's foreign trade is with the Soviet Union, including nearly half of oil imports. The North may be able to switch some purchases from the Soviets to China, its second-largest trading partner and still a loyal ally. Kim has asked Beijing for more aid, but because of its own economic struggles, China is hardly in a position to become North Korea's major benefactor. ''We help them, but we can't afford to help them too much, because we have to make a profit as well,'' says a Chinese trader, adding, ''We don't like them wearing the ((Kim Il-sung)) buttons. We are businessmen and want to talk business, but the North Koreans prefer to talk about politics.'' The opening to Japan could help solve some of Kim's problems. Presumably he could get large-scale economic aid from Tokyo, including World War II reparations, development loans, and possible forgiveness of part of Korea's $600 million debt to the Japanese. Some South Koreans worry that Kim would then be under less pressure to cooperate with the South. Like many South Koreans, Han Sung-joo, a political science professor at Korea University, thinks the Japanese would prefer to keep the Koreas separate. Says he: ''I can't prove it. But I think there are many Japanese who consider South Korea a competitor, and one that would be even more formidable if it were ever unified.'' An official at Japan's Foreign Ministry replies, smiling, ''We don't like to say so publicly, but a unified Korea is not so big. It would be only half the size of Japan.'' THE SOUTH'S MISGIVINGS about Japan stem at least partly from jealousy. Says a South Korean executive: ''I worry that Japan will beat us to the North.'' South Korean firms have proposed investing in North Korea, with no success. In early 1989, Chung Ju-yung, Hyundai's honorary chairman and possibly the most outspoken promoter of North-South economic cooperation, talked publicly about his plans for building a mountain resort, a railcar plant, and a ship repair yard in North Korea. Too publicly perhaps. The North abruptly killed the projects. A South Korean executive, explaining his reluctance to be identified in this story, says of Chung: ''He talked too much about doing business with the North. Then he lost face.'' Japan, with its 700,000 resident Koreans (a legacy from the colonial period), is a major conduit for part of the trickle of trade between North and South. Since October 1988, when the South authorized indirect trade, Samsung, Ssangyong, Daewoo, and other South Korean conglomerates have bought roughly $35 million worth of such commodities as zinc, iron ore, fish, and cement from the North -- plus an occasional bottle of beer or ginseng wine, which Southern consumers buy as conversation pieces. Sales of products going the other way are hardly worth mentioning: $162,000. It may not be much, says Chung Hoon- mok, an executive of Hyundai, but ''psychologically the fact that there is some indirect trade is very important.'' The trouble is, the North isn't willing to import any product that might be identified as having come from the South, lest the product suggest to Northerners how much more advanced the South has become. Buying from the North, meanwhile, is still too risky and inconvenient for most South Korean firms, which are not able to travel there to inspect a supplier's plant, to test product samples before taking delivery, or even to send a fax. If North and South Korea were to clear away these impediments and permit more economic interaction, much as East and West Germany did years before their political union, trade would undoubtedly blossom. The Korea Institute for Economics and Technology conservatively estimates that direct bilateral trade could top $1 billion in the first year or so after becoming unfettered, rising to $10 billion a year by the latter half of the 1990s. The initial exchanges would probably mainly involve natural resources going from North to South -- including chrome, copper, and tungsten, of which the North has sizable reserves. Its supposedly huge deposits of other raw materials, however, are deceiving. North Korean coal, for example, has such a low energy content that it would not be suitable for South Korean industry. The North's most precious resource? Its 21 million people, five million more than East Germany contributed to the new German republic. ''Cheap-wage labor,'' says a South Korean executive who closely monitors the North. Anecdotal reports from Europeans and Korean residents of Japan who have been based in the North suggest that workers are relatively well educated, but poorly trained and distinctly unmotivated. A European in Pyongyang, an employee of a big textile-buying firm, told a recent visitor that women workers at his company often sleep on the job -- so tired are they from the long walk from home to factory. On the other hand, a Belgian who supervises a Pyongyang diamond-cutting factory told the same visitor that buyers in Europe are pleased with both the quality and cost of his workers' output. The North's cheap labor has South Korean managers salivating. According to Kiyohiko Tanaka of the Japan-Korea Trade Association, the typical textile worker at a foreign joint venture in Pyongyang makes about $45 a month. That's a bit more than a laborer might earn for similar work in Indonesia and Sri Lanka, but a twelfth of the wages that Korean companies south of the border must pay. MELDING the two Koreas would also bring enormous, possibly intolerable, costs. As in East Germany, huge investments in infrastructure would be required. Compared with Germany, however, a unified Korea might reap a far larger peace dividend. Halving current defense expenditures to 3% of combined GNP would save $7 billion a year. Even so, economists who've fiddled with the numbers say South Korea's burden as a portion of GNP could be higher than that facing West Germany. In the most simplistic analysis, the North's population is half that of the South's, while Eastern Germany's is about a fourth of West Germany's. The task of lifting poorer countrymen would therefore take relatively more of the South's strength than West Germany will have to expend. A back-of-the-envelope estimate by Kee Woo-sik, a former World Bank economist who is now senior adviser to Lucky Goldstar Research Institute, suggests that the cost of unification could total $170 billion over ten years. If the Korean government were to finance one-third of the cost, paying for unification would soak up 18% of South Korea's national budget. Says Kee: ''That would simply be insurmountable.'' ''Unification will require us to divert a large amount of our resources,'' says Chung Hoon-mok of Hyundai. ''But you must understand that the yearning for reunification is not economic in nature. It's not because we think there's a big market there or lots of raw material. It's because they are our brothers. We are the same people.'' As he speaks, however, a siren's poignant warning reverberates across Seoul. The sound signals the start of the civil defense drill that is held each month to maintain the city's readiness for war with the North. It is another reminder that the Cold War in Asia is not over.

CHART: NOT AVAILABLE CREDIT: SOURCES: CENTRAL INTELLIGENCE AGENCY; SOUTH KOREAN GOVERNMENT CAPTION: HOW THE KOREAS COMPARE