The costs of unification involved in Korean unification can be categorized as follows: ① crisis management costs for alleviating economic and social shocks from unification (including costs of institutional integration), ② reconstruction costs for the North Korean economy, and ③ fiscal transfers from the South to the North in the form of income subsidies. We deal with how to secure finances externally for costs of reconstruction for the North Korean economy, which would be financed by the international private sector or through PPP (public-private partnership).
We present three pre-conditions for Korean unification after carefully re-examining the German unification process: ① The North Korean people should want unification with the South, ② the North Korean authorities actually representing the wishes of the North Korean people should be present in North Korea, and ③ the international community, including the US and China, needs to be cooperative (or at least, not get in each others’ way). The main implication of these pre-conditions are that political unification of the two Koreas will not be accomplished within a short period of time. Thus, in suggesting realistic policy recommendations for external financing, we need to look at the entire picture regarding the unification process. After political unification, the Government of a unified Korea will become the subject of external financing, whereas before the unification, North Korean authorities will have the primary role in the northern part of the Korean Peninsula.
As a matter of fact, there likely will not be any major issues left for external financing following a successful political unification of Korea. For the successful achievement of Korean unification, there should be an interim period of negotiation between the two Korean authorities for addressing major concerns after political unification of the two Koreas - a period to be referred to as “the imminent unification period.” During this period, the international investors would be uneasy about what would happen after the Korean unification and associated uncertainties.
How to maintain the soundness of financial markets in the imminent unification period will be the most important issue in the course of Korean unification. We present policy recommendations for it. Extending the analysis to the entire period of Korean unification, the most viable method of financing the reconstruction of the North Korean economy would be private-public partnership (PPP). As time goes by, the financing ability of the international public sector would decline and thus, would warrant an increased role of the international private sector. Especially the period after political unification, greater utilization of public-private partnership (PPP) would be feasible. We also present policy recommendations for the period prior to political unification. After our repeated search for ways to finance unification costs from abroad, we have come unexpectedly to conclude that maintaining the fiscal soundness should be the best way to counter the potential costs of Korean unification.
South Korea ratio of national debt to GDP is already over 30 percent and is expected to exceed 35 percent in the next two years. The ratio for West Germany before the German unification was less than 40 percent. Thus, the most effective way in terms of preparing for Korean unification is to build up South Korea’s economic power to be as powerful as possible, and return the fiscal conditions of the Government of South Korea to soundness, setting a limit on the ratio of the national debt to the GDP.