President Lee Myung-bak’s mentioning of a “unification tax” in his national day address Sunday prompted related officials to study creating funds in preparation for unification with the economically retarded North Korea. But few citizens of the Republic of Korea at this moment are willing to open their purses to pay a new tax aimed at narrowing the huge economic gap between the two halves of Korea.
Despite his understandable intent to ease the supposedly devastating impact of an eventual unification, the presidential suggestion came at the wrong time. With the shock of the Cheonan sinking still vivid in the hearts of South Koreans, there could be a little more support for a defense tax instead of a unification tax.
The defense tax had actually been collected for over a decade since the fall of South Vietnam as the nation felt increased security threats from the North. It was discontinued in 1990 when inter-Korean economic disparity became overwhelming while military apprehensions dwindled.
Two decades later, the security situation on the Korean Peninsula is far more complex. The economic imbalance is even more severe, with a GDP ratio estimated at 50-to-1, and the gap is growing wider year after year. In the intervening years, the North has added a significant arsenal of the weapons of mass destruction to its mighty array of conventional arms. On top of all these, international observers detect the fragility of the regime with an infirm ruler preparing for his succession by his 28-year-old son.
President Lee must have been considering all these factors when he declared at the Gwanghwamun ceremony: “Unification will come definitely. Time has come to prepare realistic measures in anticipation of the day (of unification), such as a unification tax.”
All South Korea has now in its treasury for use in its relations with the North is about 1 trillion won (less than $1 billion) labeled as the Inter-Korean Cooperation Fund. When unification comes like a thief in the night, this amount of money will be just a drop in the bucket.
The Presidential Council for Future and Vision predicted that $2,140 billion (2,525 trillion won) will be required for the next 30 years to raise the living standards of the 24 million Northerners to the Southern level after an abrupt unification. However, the figures could go down to $322 billion if the nation is unified after the Northern economy is normalized through gradual opening.
Estimates of the unification cost vary wildly among Korea watchers. One at the Rand Corporation calculated that the 48 million South Koreans would have to pour $1.7 trillion into the North in the case of a sudden collapse of the Pyongyang regime. In Germany, the East-West economic disparity was not quite as wide as the North-South gap in Korea. Still, West Germany spent 400 billion Deutschmarks ($226 billion as of 1989) before the Berlin Wall fell in 1989 and poured 2 trillion euro ($2.55 trillion) between 1990 and 2009 to cover unification costs.
East Germany had its version of repressive rule under Erich Honecker but it was not as bad as Kim Jong-il’s -- the communist state did not try to build atomic bombs, and the East-West border had openings for mail exchanges and steady family reunions. So, West Germany was able to build national consensus that allowed it to amass such unification expenses before and after 1989. Korea in 2010 has a near national consensus against any unification tax or other payments of that kind, even if the purpose is to mitigate the costs in the event of unification.