South Korean President Lee Myung-bak proposed introduction of "reunification tax" on the country's independence day, although the republic and its separated northern counterpart is technically still at war: its relation based on a ceasefire signed in 1953, "with about 1 million soldiers facing off across the Cold War's last great divide" (Cole, 2010). With no clear indication that North and South Korea are close to reconciliation, and no peace treaty replacing the ceasefire, the president noted that "reunification will definitely come" and that "the time has come to start discussing realistic policies", to prepare for a process which some claim could cost over $1 trillion (Cole, 2010). The state-run Korea Institute of Public Finance, in its 2008 report, said the nation needed to set aside at least 12 percent of its gross domestic product annually, with a $931 billion economy, for the first 10 years of reunification (Lim & Kang, 2010).
Polls show above 60 percent of South Koreans wanting unification, sometime in the future, with concerns that
North Korea, with less than 3% of the South's economy, based on annual gross national income of about $24 billion, in 2009 (Cole, 2010), or per capita income of the South at 18 times that of the North’s in 2009, according to the Bank of Korea in Seoul (Lim & Kang, 2010).
"It is imperative that the two sides choose coexistence instead of confrontation, progress instead of stagnation", although recent developments on the Korean Peninsula has been extremely hostile. North Korea warned that U.S.-South Korea military drill, which it described "all-out war maneuvers" may be met with "the severest punishment", according to the official news agency (Lim & Kang, 2010). In March, South Korea concluded that North was responsible for the sinking of the corvette Cheonan - a claim which was aggressively denied by the North Korean government - and cut off most trade ties with North Korea
The proposal for a reunification tax, first to be made by a South Korean leader, would add "a dose of reality rather than as a far- fetched goal" to the reunification debate, claimed a senior fellow at the Seoul-based Samsung Economic Research Institute, who also noted, "estimates vary on how much reunification will cost, but there is no question that it will cost a lot". Some estimate the cost to be "at between $322 billion to $2.1 trillion over 30 years (Lim & Kang, 2010).
A study reported in 2009 shows that some 1.3 trillion euros ($1.9 trillion) have been transferred from the west to rebuild the east (Graham, 2009). The IWH research institute claimed the net transfers from west to east had, "equivalent to over half Germany's total economic output" in the previous year, increased sharply in the past decade.
"The Cologne-based IW economic research institute said this week eastern output per capita would rise to around 80 percent of western levels from 70 percent now over the next decade. Eastern output was around 33 percent of the west in 1991." (Graham, 2009)
It is not simple, however, to compare the two situations, and the German experience is " is not an appropriate benchmark for Korea", claims Gregory (2010). Some of his argument is that:
1) the German constitution calls "for equal treatment in transfers among the states" and trade unions' demands for East-West wage equality "despite huge productivity differentials at the time of reunification" and "East Germans were required to be paid wages well in excess of their productivity", resulting in "persistent and exceptionally high unemployment in the East". He suggests that Koreans "avoid the mistake of requiring wage equality between North and South". He also claims that social welfare transfers in the South are a small percentage of total government, compare to Germany.
2) East Germany had a large industrial sector, compared to North Korea which has largely an agricultural economy. "Former Eastern state enterprises required large subsidies to keep in business", whereas "agriculture recovers quickly once freed of collective and state farms".
3) Gregory suggests " the desperate welfare situation of the North could be immediately remedied... at relatively low cost" and the borders "to be opened gradually in light of the huge living standard differentials".
Cole, B. (2010) South Korea President Calls for Reunification Tax. [Online] http://www.reuters.com/article/idUSTRE67E08K20100815 [05/09/2010]
Graham, D. (2009) (ed. Pizzey, C.) Study Shows High Cost of German Reunification: Report. [Online] http://www.reuters.com/article/idUSTRE5A613B20091107 [05/09/2010]
Gregory, P. (2010) The Low Cost of Korean Unification. [Online] http://whatpaulgregoryisthinkingabout.blogspot.com/2010/08/low-cost-of-korean-unification.html [05/09/2010]
Lim, B. & Kang, S. (2010) South Korea Calls for Unity Tax as North Slams Drills. [Online] http://www.bloomberg.com/news/2010-08-15/lee-says-south-korea-may-need-extra-tax-to-pay-for-eventual-reunification.html [05/09/2010]
Choe, S. (2010) South Korean Leader Proposes a Tax to Finance Reunification. [Online] http://www.nytimes.com/2010/08/16/world/asia/16korea.html [05/09/2010]
D.T. (2010) Invitation to a Reunion. [Online] http://www.economist.com/blogs/asiaview/2010/08/south_koreas_reunification_tax [05/09/2010]
Oliver, C. (2010) Seoul Proposes Korean Unification Tax. [Online] http://www.ft.com/cms/s/0/7c2afef8-a855-11df-86dd-00144feabdc0.html [05/09/2010]