How Reunification Cost Is Calculated

      August 17, 2010 11:38

      The Unification Ministry on Monday explained how the government estimates the cost of reunification, saying the estimates factor in "all expenses needed in the process, from unifying two different political systems to integration and stabilization." The announcement follows President Lee Myung-bak's proposal of a "unification tax" on Sunday to prepare for what could be an astronomical outlay.

      The total includes the estimated cost of crisis management in the initial stage of reunification for emergency food and medical supplies for North Korea. For example, if all North Koreans are to be provided with grain for two months, that would require 13,000 tons of grain per day for 23 million people to take in at least 1,600 calories a day. The cost would be about US$500 million, including transportation and incidental expenses, to supply North Koreans with 700,000 tons of corn at $420 per ton for two months. An additional $250 million would be needed supposing that medical expenses and costs for daily necessities account for 50 percent of the minimum food expenses.

      The cost of integrating the political, military, economic and social systems of the two Koreas after reunification would also be huge. A government official said money will be needed, for instance, to provide soldiers in both parts with the same uniforms. But the biggest issue would be the currency union.

      After German reunification, West Germany allowed East Germans to exchange their money for Deutschmarks at a rate of 1:1. In fact East German marks were officially valued at a mere one-third of the West German currency, with the black-market exchange rate at 1:8. The total cost of German reunification was estimated at 2 trillion euros between 1990 and 2009.

      Then there would be the enormous cost of closing the income gap between South and North. Money will be needed to raise the North's per capita income of $1,000 to 70 to 80 percent of South Korea's $20,000. Infrastructure spending is also included in this segment.

      German reunification prompted South Korea to start researching reunification costs in the 1990, but unsurprisingly researchers have produced wildly different estimates.

      This year, the RAND Corporation predicted that it would cost $62 billion to double North Korea's GDP in five to six years, but $1.7 trillion to raise it to the South Korean level -- a 27-fold difference depending on what the target is presumed to be.

      In 2000, Goldman Sachs predicted that it would cost W1.7 trillion (US$1=W1,188) to raise North Korea's labor productivity to 50 percent of the South's in 10 years after reunification, and W3.55 trillion to increase it to South Korea's level. It was based on an assumption that Korea would be reunified in 2005.

      Researchers have different approaches to gauging the cost of reunification using different categories. Kim Suk-woo, a vice unification minister during the Kim Young-sam administration, has seen a number of estimates. "There was a large gap in those estimates based on different assumptions of timing and conditions of the reunification. But really we shouldn't worry so much,  because the added value created in the process of developing North Korea will offset reunification costs as time goes by," he said.

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