When it comes to the unification and integration of North and South Korea, discussions have been mainly focused on either radical integration or gradual integration. Coming into recent years, another direction of research is being  explored as well, suggesting that even if political integration is achieved, economic integration should proceed over time. This approach to the unification issue, which is referred to as special administrative region (SAR) type integration or temporary separate operation, is based on awareness of the problems that will result from radical economic integration should political unification be carried out irrespective of our will, such as production and employment unstability in North Korea, the burden on South Korea, pressure on the foreign exchange and capital market, and difficulties in operating the fiscal system.
  Even should political integration take place, it will be possible to reduce pressure to the social security and tensions in the labor market if the North Korean region can temporarily remain in a state of separate operation. Such an approach would enable the North to implement its own monetary policy, exchange rate scheme, fiscal policy, foreign exchange system and financial system to support rapid growth within the North Korean region. In this case, South Korea's support could be utilized more efficiently by concentrating on the goals of economic development rather than social security.
  This report examines the implications of integration and temporary separation, the necessity of temporary separation in the monetary, financial, and fiscal sectors and suggests temporary separate operation by each sector. We also illustrate the interconnected relationship between each sector and propose a process that leads to integration from a state of temporary separation. However, the economic advantage and legal validity of temporary separation are not included in the scope of this study, as they are discussed in a separate study within this series. While the separation period cannot be explicitly set in advance, it could be set as a period sufficient for economic policies of its own in the North Korean region to fully take effect but not so long that the state of segregation comes to be perceived as a permanent one. Overall, the period from separation to integration for each sector may vary.
  The integration of the monetary sector means that a single currency is used and unitary monetary policy is implemented by a single central bank. Integration of the financial sector signifies the overall integration of the financial system, which includes financial institutions, the financial market (e.g. credit, capital markets), financial infrastructure (e.g. payment infrastructure), financial supervision and deposit insurance). The integration of the fiscal sector means applying the same taxation system and principles of government expenditure to both the North and South Korean regions and sharing responsibility to maintain the sustainability of the government finance through the sound fiscal policies. Therefore, the separation of monetary, financial, and fiscal sectors refers to the stages until such integration is achieved. Based on this premise, we examine the temporary separate operation of the monetary, financial, and fiscal sectors.
  From the perspective of the monetary sector, we examine new currency, monetary policies and the foreign exchange system. It seems reasonable to introduce a new currency in the North Korean region (SAR) in order to restore confidence in the North Korean currency and implement monetary policies through its own currency. In terms of monetary policy, academic theories and the experiences of the South Korea and initial financial system of the North suggest it would be reasonable to begin by regulating the supply ceiling for money followed by monetary targeting and leading on to inflation targeting for South Korea in advance of the integration. As for the exchange rate, the official exchange rate and the market exchange rate should be unified and reflect the real values first. If the fixed exchange rate system is adopted for the stabilization of the initial price and the securing of confidence in the currency, measures should be prepared to maintain the exchange rate level. The setting of the initial exchange rate level should take into account competitiveness in exports and income levels. Should the transition be made to a floating exchange rate system, sequential development into a single floating exchange rate system, multi-currency basket system and market average exchange rate system can be considered, while the range of fluctuation can be expanded gradually. At the final stage, a monetary system similar to the ERM of the EU or a currency board system could be implemented up to the point of integration. For a market exchange rate that reflects real values well, proper formation of the foreign exchange market will be necessary. The foreign exchange system should be gradually liberalized beginning from the current account, but regulated at a pace where the liberalization of capital transactions does not lead to instability in the North Korean economy.
  In the financial sector, we propose a temporary separate operation system for the areas of financial institutions, financial markets, and financial infrastructures, while considering the current financial system of North Korea, expansion of the private finance and dollarization. The Central Bank of the North Korean region should initially establish itself as a central bank with its own monetary policy authority and gradually integrate with the Bank of Korea. The refinancing measures to the commercial financial institutions should gradually transit from rediscount system to open market operations. The commercial financial institutions should be established by separating commercial banking from the Central Bank of DPRK and utilizing the Foreign Trade Bank of the DPRK and other settlement banks, savings banks, cooperative farm credit departments, etc. At the same time, South Korean and foreign-owned banks should be actively attracted. It will be important to pay close attention to nurturing self-reliant, local-based financial institutions and consider how to absorb private money-lenders (the “donju”), and other money merchants who currently serve as the main axis of private financial system, into the system.
  In the money and credit markets, it is important that the supply of funds from South Korean and foreign-owned banks be maintained at an appropriate level. The capital market is likely to be formed from the issuance of government bonds, but we consider using the South Korean market rather than opening a separate market. The foreign exchange market is important for the transition to the floating exchange rate system and the proper formation of the North Korean currency value, so foreign exchange banks should be activated.
  The payment system of the financial infrastructure should be integrated into the South Korean system as soon as possible. In the beginning, the financial supervisory system can apply a somewhat relaxed form of regulation in consideration of various conditions in the North Korean region, such as the lack of an accounting system and its inexperience dealing with such regulations. The deposit insurance system must be designed while keeping in mind the eventual integration into the South Korean system, but can apply different policies in terms of the insurance mechanism and protection limit during the transition period.
  For temporary separate operation in the fiscal sector, we consider strengthening autonomy in the North Korean region and discuss the principles of fiscal policy and the structure of the tax system to be applied after integration. The principles of fiscal policy are as follows: fiscal soundness must be maintained; it would be economically efficient for the central government to monitor budget performances and intervene if necessary to prevent a default; the central government or the South Korean government should be cautious about joint guarantees for government’s liabilities; and the fiscal transfer to the government in the North Korean region must be planned in advance. The application of ‘Local Finance Equalization System“ to the SAR shall be postponed.
  Under these principles, the SAR government will be granted autonomy for taxation and government expenditure. In addition to fiscal support from the central government, the government in the North Korean region can set its own tax rate and establish government expenditure plans. Currently in South Korea the share of national tax is much greater than local taxes, and the central government provides fiscal transfer to the local authorities. As for the SAR, the proportion of national tax could be lowered and that of local tax increased, thereby improving the autonomy of the region. By reducing the tax burden, an environment for growth-friendly tax and fiscal policies could be provided. The government uses grants from the central government for the welfare of its residents, and taxes collected from within the SAR are used for investment promotion.
  The tax system of the SAR should be based on the South Korean tax system while keeping in mind the future integration, but it could reduce tax burdens on its own discretion if this is deemed necessary for growth. If the government adopts an economic growth strategy that fosters competitive enterprises through government-led industrial policies and wage restraints, a tax system should be established to support this. The tax burden imposed on individuals should also be kept low too. Therefore, the major tax sources will inevitably become the business sectors growing within the support of government policies. In order to prevent the tax burden of these enterprises from becoming too heavy, the government of the SAR should maintain a small government at the beginning and make efficient use of funds received from the central government. Meanwhile, indirect taxation will be important not only as a stable tax source but also to create conditions for lowering the tax burden on enterprises. To ensure smooth integration in the future, we should also consider applying the same value-added tax rate as South Korea to the SAR from the outset.
  In the last section, we describe the interconnected relationship between the monetary, financial, and fiscal sectors, and summarize the process of integrating these sectors in the later stages following initial separate operations. In the early stages, a new currency should be introduced into the SAR, while monetary targeting is adopted under an independent monetary policy system, and the interest rate level is set differently from that of South Korea. If a fixed exchange rate regime is adopted, capital transactions are restricted in the foreign exchange system. Together with a switch to a two-tier banking system, the central bank of the SAR should be granted its own authority for monetary policies. The issuance of government bonds will raise the need for capital markets and the initial shape of the foreign exchange market will be established. The payment system of the South Korean system should be transplanted quickly, while the financial supervision system can be introduced in a somewhat relaxed form. The deposit insurance scheme takes into account the lack of fund accumulation and considers measures to provide deposit incentives by the government. As for fiscal policy, the government should actively support funds for economic development, and consider special tax exemptions in the SAR to attract investment.
  In the intermediate stages of integration, together with a transition toward a floating exchange rate system, the government will gradually liberalize the foreign exchange control along with the gradual liberalization of interest rates. The number of financial institutions may increase and listed stocks may emerge. The Stock Exchange of South Korea can be used as a capital market platform. The financial infrastructure, such as the financial supervision system and the deposit insurance fund, should gradually converge into the South Korean system. As for fiscal policies, it will be important to maintain the fiscal soundness of the government in the North Korean region, and assist it to gradually expand its own tax sources.
  The final stage will be to prepare for integration. Preparations should be made for the conversion of the SAR’s currency to the Korean Won, while monetary policies converge to the inflation targeting regime of the Bank of Korea, and the liberalization of interest rates is expanded. The SAR exchange rate should be based on the exchange rate formed in the market, and follow a strict fixed exchange rate regime pegged to the South Korean won before eventually being integrated. In addition to the task of integrating the central bank of the SAR into the Bank of Korea, refinancing through the open market operation should be generalized. The capital markets should increase the existing degree of integration and the deposit insurance scheme should be launched as a single system while integrating funds of both South and North Korea. In the fiscal sector, the tax system should converge into the existing South Korean system by incorporating national taxes, local taxes, and local grants.  

서언

국문요약

제1장 서론

1. 연구의 배경 및 목적
2. 선행연구
3. 연구의 구성

제2장 통화·금융·재정 부문 한시적 분리의 의의

1. 개요
2. 부문별 통합 및 한시적 분리의 의미
3. 한시적 분리의 필요성과 협상
4. 소결

제3장 통화·금융·재정 부문의 한시적 분리운영 방안

1. 개요
2. 통화부문 분리운영
3. 금융부문 분리운영
4. 재정부문 분리운영

제4장 결론 및 시사점

참고문헌

Executive Summary