The nation’s top financial regulatory body this week estimated a cost of at least $500 billion to cover the financing the development of North Korea if the two Koreas are reunited.

“It would take at least $500 billion to develop North Korea (after reunification), which includes economic development and costs for educating North Koreans,” said Shin Je-yoon, chairman of the Financial Services Commission, at a conference on inter-Korean unification and finance held in Seoul on Wednesday.

Some $17 billion is expected to be provided by official development assistance and the rest will be funded through debt financing, private investment and tax revenues, Shin added.

The watchdog chief also raised some alarms regarding reunification, saying that while it could help jumpstart the flagging South Korean economy ― the South would have access to abundant North Korean labor and natural resources ― the country was widely unprepared for it.

“When global panic was sparked by the collapse of Lehman Brothers, there was nothing Korea’s financial authorities could do. Reunification will similarly be accepted as an exogenous variable, as we have no specific master plans,” Shin said.

He stressed that if Seoul is not prepared to properly respond, reunification with Pyongyang will be a “disaster to both economies rather than an opportunity.”

Part of the concern lies in the huge economic gap between the two Koreas.

South Korea’s nominal gross domestic product is 42.5 times larger than that of the North. This difference is much wider than between East and West Germany upon their unification in 1990, when the latter’s nominal GDP was about 9.7 times larger than that of the East.

“To overcome this, we need to be fully prepared in terms of financing the economic development of North Korea, and also to educate the people and cooperate with international organizations on key issues,” he said.

During the conference, there was a consensus among experts that South Korea should properly understand what position it should take in the lead-up to unification.

“Inter-Korean unification means that North Korea is incorporated into international society. There will be much engagement from international financial organizations like the International Monetary Fund and the World Bank and also its neighboring countries like China and Japan,” said Jang Hyung-soo, an economics professor at Hanyang University.

“It is important for South Korea to understand what roles it should play with the new players,” Jang said.

By Shin Ji-hye (shinjh@heraldcorp.com)