This study is an introduction to research on “Temporary Separate Operation of South and North Korean Economies after Unification,” which is the third-year theme of KIEP’s on-going Medium-Term and Long-term Unification Study. The temporary separation operation plan is a newly emerging approach for the economic integration of the two Koreas. In order to gradually promote economic integration after political unification, it will be necessary to separately operate some sectors of the economy of North and South Korea for a certain period of time.
  The policy focus is to prevent large-scale migration of the North Korean labor force to the South after unification. To provide economic incentives could be an effective policy alternative since physical interception to prevent the migration is not a desirable option. However, the economic incentive in this case cannot be an artificial increase in income as seen with the German unification process. Regarding this dilemma, the KIEP Medium-Term and Long-term Unification Study seeks to provide alternatives through concrete institutional design in three sectors: labor and social welfare; monetary, financial and fiscal policy; and state property management policy. This study provides theoretical support for the studies related to the specific design of the system by identifying the economic necessity and legal validity of the temporary separation operation.
  This study consists of two independent studies. First of all, Chapter 2 deals with the legal validity of the temporal separation operation. In this paper we examine the scope and limitations of the autonomous rights of a special administrative region (SAR) in North Korea, the constitutionality of segregation of the North and South Korean labor markets, and prospective ways to confirm the people’s sovereign opinion. First, in relation to the autonomous rights of an SAR, this paper specifies in detail the scope and limit of powers that can be granted to an SAR in North Korea in terms of executive power, legislative power, and jurisdiction, in accordance with the current Constitution, laws and ordinances.
  Secondly, regarding the constitutionality of separation of the North and South Korean labor markets, measures such as the limitation of North Korean residents relocating to South Korea, an employment permit system for North Korean workers, or the setting of discriminatory minimum wages for North and South Korea are likely to violate the essential principles of fundamental rights guaranteed by the Constitution. However, such measures could be accommodated if it is recognized that the separation of the labor market is aimed at preventing 'clear and existing risks' to the national economy, and if efforts are made to ensure basic rights, such as by limiting the separation period, and supported by a national consensus.
  Finally, it is suggested that the referendum system would be preferable when it comes to confirming the sovereign intent of the people, which is a procedure that must be followed in order for the temporary operation of the two Koreas’ economy after unification. Our recommendation is based on the fact that this involves an important policy matter that can have a profound effect on all areas of politics, economy, society, and culture, which can thus cause serious restrictions on the basic rights of residents in North Korea, and how it would take a considerable amount of time to form a unified National Assembly.
  In conclusion, it is true that this plan for the temporary separate operation of the two Koreas involves many issues which could bear relation to infringement of the basic rights of the people, and thus become subject to judgments by the Constitutional Court. However, it is pointed out that unification of the two Koreas is an unprecedented event involving political, ethical, cultural, social, economic, and constitutional issues that cannot be determined in advance, meaning that unification policies are likely to be carried out under the highest degree of political commitment.
  Next, Chapters 3 and 4 address the economic need for temporary separate operation. First, Chapter 3 deals with the economic necessity of temporary separate operation. This paper shows that the gradual integration method (the 'Special Zone Model') through the temporary separate operation could be a way to maximize the economic benefits of the unified Korea. More precisely, we estimated the appropriate cost of unification and mode of economic integration to maximize the net benefit of unification.
  These unification costs are defined as the sum of the potential growth rate reduction effect (direct cost) and the social disruption cost (indirect cost), which is followed by Korea's fiscal transfer expenditure and increase in the national debt.
  Considering the financial transfer expenditure and the potential growth rate decrease, the GDP of the unified Korea is calculated by subtracting indirect costs from the GDP of North and South Korea. The benefit of unification is obtained by subtracting the sum of GDP from the two Koreas from the GDP (GDP of the unified Korea) of when South and North Korean remain divided. According to the freedom of movement of production factors, the South and North Korean economic integration system has established five integration methods that range from a fully open system in the manner of Germany to a completely closed type. In addition, each of the integration modes are defined as the composition ratio of infrastructure construction cost (I) and social security cost (S) among financial transfer expenditures.
  As a result, the unification cost that maximizes the cumulative net benefit for 20 years after unification was calculated as 1,000 trillion won. This figure presumes that 2.5% of Korea's GDP (based on 2020 figures) is invested annually for 20 years. While Korea's national debt to GDP ratio will rise to 71% by 2039, this is regarded a level that Korea can afford to bear.
  In Chapter 4, we derive implications for estimating the appropriate cost of unification. First, the economic integration method maximizing the cumulative net profit is a special zone model. In addition, the effect of mitigating the income gap between the two Koreas is also greater when proceeding with a special zone model than with the German model. However, even in the best case, the income gap between North and South Korea is not expected to be reduced any further than the income in the North rising to 34% of South Korean levels by 2039.
  Meanwhile, this study shows that the point where the cumulative net benefit becomes positive will arrive faster as we spend less than the appropriate cost of unification, and that the level of decrease in short-term benefits for Korea also shrinks in this case, but that the net benefit for after this point decreases as well. On the other hand, as the actual amount of expenditures approaches closer to the appropriate reunification cost, this point arrives later and short-term benefits fall by a larger level, but the net benefit after this point of time increases. In order to wisely overcome the valley of transition where the net benefit temporarily falls into the negative after the economic integration of the two Koreas, measures such as the establishment of effective financing plans must be taken to bring about a national consensus.