Unification cost

The cost of unification (통일비용/統一費用) refers to the economic cost of reunification of the two Koreas. Precisely speaking, as explained by the Ministry of Unification, the estimates, what could be an astronomical outlay, factor in "all expenses needed in the process, from unifying two different political systems to integration and stabilization."

In this context, the Ministry of Unification once encouraged ordinary citizens to participate in the unification fund raising campaign - donate to the Uni Jar (통일항아리). But the jar disappeared when its initiator Minister Yu Woo-ik left the Ministy in March 2013 with the mounting criticism from the North Korean press against it.

Key words
cost of reunification, proposed unification tax, German precedent, currency union

How to Calculate the Cost
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. For instance, it costs to provide soldiers in both parts with the same uniforms.

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.

Comparison of Estimated Unification Cost

 * Source: Sung-woo Lee, "Legal Ground of Financing Unification Cost", Ministry of Justice, Dec. 8, 2012, pp.19-20; Hyundai Research Institute, Road Map to Integration of the North & South, Feb. 2011, p. 223.

The Reality of Unification Cost
The enthusiasm and motivation for Korean unification have been significantly dampened by the realization of the enormous cost. When comparing with the German experience, there are many differences, but a few lessons have to be learned from the German experience, especially in relation to monetary union, property rights, and privatization of industries.

Estimates of the cost of Korean reunification vary widely, normally lying in the range of $25 billion to $3.5 trillion, and usually concentrate on financial costs only.

In 2009, an unpublished Credit Suisse report estimated that the price of unification would be in the vicinity of $1.5 trillion, based on the assumption that North Korea's per capita income has to be brought up to 60 percent of South Korea's current level. It was implied that even after such astronomical investment, the gap between North and South Korea would be just marginally less than the gap which divided East and West Germany in the late 1980s.

In 2010, 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 early 2011, the government-run Institute for National Security Strategy, which closely collaborates with South Korean intelligence services, estimated that unification would cost in the region of $2.1 trillion.

In 2010, the Federation of Korean Industries (FKI) conducted a survey of 20 top North Korean economic specialists. They were asked how much unification would cost, predictably the answers varied, but not as greatly as one might expect. Most of the participants spoke in terms of $1-4 trillion, with the average estimate being $3 trillion.

Such a wide range is primarily due to a combination of three factors:
 * 1) When to start assumptions over North Korea’s real situation;
 * 2) What is factored into each costing, e.g., education, environmental repair, etc.; and
 * 3) When the reunification process ends, e.g., common education standard between north and south within 30 years of reunification, or doubling of the North Korean gross domestic product (GDP) within 4 years of reunification.

Based on this criterion, reunification will cost between $50 and $67 billion. However, the estimation of critical importance does not factor in the cost of humanitarian, educational, cultural, and social programs that will be an essential part of the reunification process.

Peace Dividend or Unification Benefit
Some researchers insist that the economic benefit of a decrease in defense spending in the North and South should be considered in calculating the cost of reunification. They argue that the added value created, as mentioned below, in the process of developing North Korea will offset reunification costs as time goes by.
 * Reduction of the size and budget of the armed forces of both sides;
 * Various virtuous demands arising out of the massive-scale rehabilitation and reconstruction of infrastructures including roads, railways, harbors, electric grids, communication networks, etc. in the North;
 * Relief from the so-called 'Korean discount' owing to the vigilant confrontation between the two Koreas;
 * Increase of skillful labor forces in the North to be employed by South Korean businesses;
 * Immeasurable amount natural resources existing in the North;
 * Swelling business chances stimulated by the Economic Equalization Policy taken by the government right after the reunification.