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According to reporting in the Joongang Ilbo, the Financial Services Commission (FSC) and the Ministry of Strategy and Finance have been tasked with coming up a contingency plan for the economic aspects of unification. The newspaper claims this planning began in March; my source tells me that the FSC has been analyzing unification for years. Either way, relative to what has passed for planning in the past, this analysis appears to be unusually detailed and realistic.
The paper says that the task force has concluded that post-unification, more than three million North Koreans, or roughly 30 percent of the economically active labor force will be unemployed as state-owned enterprises collapse and at least partial military demobilization occurs. The plan envisions only 200,000 people from North Korea being permitted to relocate to the South during the first three years of unification. This level would be allowed to rise gradually, to 300,000 in years four through six, to one million in years seven through ten. This would imply 4.5 million North Koreans, including students and reunited families, crossing the border in the first post-unification decade.
A policy of land-to-the-tiller is recommended in the agricultural sector and privatization of small-and-medium-sized enterprises in the industrial and services sector. One of the unfortunate outcomes of the German unification experience is that the lion’s share of East German assets ended up in West German hands. According to the Joongang Ilbo, “the report said that to prevent fraud, properties that are privatized should be first offered to North Koreans and resale should be restricted. Financial support for North Koreans including higher interest rates on deposits was also proposed. While there were no limits proposed on who could bid for large state-owned companies, small and midsize businesses should be offered to North Koreans first.” The plan envisages the South Korean government extending property rights to existing private businesses, through if and how the government might distinguish de jure private businesses from de facto private businesses operating within the protective shells of other sorts of institutions is unclear.
The report also envisions the maintenance of limited price controls as well as the continuation of subsidies to goods and services such as transportation, gasoline, and rice.
According to the paper, the plan also proposes that in the initial stages of unification, separate currencies exchangeable at a fixed rate be maintained, with the adoption of a single currency postponed. Implicitly this means that initially North Korea will have a floating rate currency via the South Korean won peg.
In terms of financing, the plan contemplates introducing an income tax in North Korea to raise revenues, while cutting the defense budget to restrain expenditure.
The bottom line? “’It takes roughly $500 billion to raise the average per capita income of North Koreans to $10,000,’ said Kim Yong-beom, director general of financial policy bureau at the FSC.”
The recommendations generally track ones I made in Avoiding the Apocalypse. One German lesson that seems missing is that West German firms often bought potential competitors in order to shut them down or turn them into sales offices. This contributed to the catastrophic collapse of output in the East. One thing the South Korean government could do in anticipation of unification would be to strengthen the Korean Fair Trade Commission precisely to deal with this sort of prospective anticompetitive behavior.
