S. Korea Plans $50B Fund for Reunification

By Brian Fowler and Eunkyung Seo - Nov 1, 2011 2:05 PM GMT+0700

South Korea will set up a fund as early as this year to begin raising up to 55 trillion won ($50 billion) to pay for its eventual reunification with North Korea.

Individual Koreans at home and abroad will be able to make donations to the fund and the government in Seoul may earmark money including budget surpluses, Unification Minister Yu Woo Ik said in his first interview since being sworn in on Sept. 19. While foreigners will also be allowed to donate, there is no plan to ask overseas governments to contribute, he said.

Yu, 61, is asking South Koreans to put aside more than 60 years of animosity on the divided peninsula and prepare for the fiscal shock of incorporating their impoverished northern neighbors. Fifty South Koreans died last year in attacks blamed on Kim Jong Il’s regime and negotiations to resume six-nation talks aimed at shutting down North Korea’s nuclear-weapons program have made little progress.

“Government agencies are near an agreement over the unification account and I hope lawmakers will pass legislation within this year,” Yu said in his office in Seoul yesterday. “This will unite people and foster their desire for unification.”

Yu, who begins a six-day visit to the U.S. tomorrow to meet lawmakers, State Department officials and United Nations Secretary-General Ban Ki-moon, said he expects the two Koreas to reunite within his own lifetime.

Peaceful Transition

The fund would meet the minimum cost of unification estimated by external researchers, assuming it takes place within the next 20 years and is a peaceful transition, according to his ministry.

Yu and his counterparts at other government agencies are not considering the idea of a special tax to fund unification, said Park Soo Jin, the ministry’s deputy spokeswoman.

President Lee Myung Bak called on South Koreans to think about the option of a “unification tax” in a speech on Aug. 15, 2010. North Korea said the idea was as a “petty trick” to conceal Lee’s aim of regime change in Pyongyang.

“We’re looking at the issue of how to finance the possible unification from various perspectives, considering public opinion and fiscal conditions,” said Suh Kyu Sik, a deputy director of the Finance Ministry. “Unification is one of major reasons that we are trying to improve our fiscal strength as fast as possible.”

Food Handouts

Yu said figures for the cost reach as high as 269 trillion won, or almost a quarter of South Korea’s 2010 gross domestic product. Its economy is more than 40 times larger than North Korea’s, which has relied on outside handouts since the mid-1990s when an estimated 2 million people died from famine, according to South Korea’s central bank.

The population of Kim’s totalitarian state is almost half that of South Korea’s 49 million people. East Germany’s population was about one-quarter that of West Germany’s 61 million when the Berlin Wall fell in 1989, and per capita income was almost one-third that of its larger neighbor, according to a 2009 report by Goldman Sachs Group Inc.

“We cannot apply the German unification model to Korea as the North is much poorer and has a bigger population,” said Moon Chung In, a professor of political science at Yonsei University in Seoul. “Germany had a strong economy while ours is still fragile.”

Generational Costs

South Korea’s budget, which has been in deficit since 2008, is projected to be balanced in 2013, according to the finance ministry. North Korea relies on China to prop up its economy, with bilateral trade accounting for 83 percent of the nation’s $4.2 billion in international commerce last year, according to the Seoul-based Korea Trade-Investment Promotion Agency.

“Reunification won’t result in a debt crisis or multiple sovereign-rating downgrades as most people fear,” said Kwon Young Sun, a Hong Kong-based economist at Nomura Holdings Inc. “South Korea could spread the cost across generations and share the burden with other countries.”

Yu, a former South Korean ambassador to China and chief-of- staff to Lee, promised a more "flexible" approach to North Korea when he replaced Hyun In Taek. Hyun, who once suggested abolishing the Unification Ministry, was vilified by the state- run media in Pyongyang as an "anti-reunification maniac."

Artillery Attack

Still, he dismissed the chances of a summit between Lee and Kim in the near-term after the deadly shelling of a border island and sinking of a South Korean navy ship last year. North Korea blames the South for provoking the artillery attack and denies responsibility for torpedoing the ship.

“A summit between the leaders of the two Koreas would be a very strong and effective event,” said Yu, a former professor of geography at the Korea Military Academy and Seoul National University who received his doctorate from the University of Kiel in Germany. “But we don’t have any specific plan for it at the moment because it’s hard to see any tangible or substantial results.”

North Korea, which remains technically at war with the South after their 1950-1953 conflict ended in a cease-fire, tested nuclear weapons in 2006 and 2009. Six-nation talks on its nuclear program involving China, Japan, Russia, the U.S. and South Korea haven’t convened since 2008. U.S. and North Korean officials resumed direct talks last month that have not yielded any breakthroughs.

‘Fear of War’

Working toward unification with North Korea is better than living with the fear of war, said Kim Seok Joong, 43-year-old orthopedic surgeon from Seoul.

“I want peaceful unification for my five-year-old son, he said. ‘‘I will contribute regularly to the fund if it’s run in a transparent way and not to be used for political purpose.’’

Kim Do Hyung, 38, a manager at SK Telecom Co. in Seoul, said he questions the goal of unifying the Korean peninsula and that he won’t be paying many into the fund.

‘‘My parents may want a unified Korea at whatever cost but my generation is different,’’ he said. ‘‘We’re the ones who’d have to shoulder all the burden and my life is tough enough.”

Kim’s regime has vowed to build a “thriving nation” where all citizens can enjoy meat soup by 2012, the 100th birthday of his father and North Korea’s founder, Kim Il Sung. He is grooming his son Kim Jong Un to succeed him amid worsening food shortages and a “rapid” rise in child malnutrition, according to a UN report in September.

The country faces a shortfall of as much as 700,000 metric tons of food this year, which could affect a quarter of the population, Hiroyuki Konuma, the UN Food & Agriculture Organization’s Asia representative said on Sept. 15.

The Korean Central News Agency reports on an almost daily basis on Kim Jong Il’s exploits, ranging from the multiple holes-in-one he scored in his first game of golf to advice given to farmers and engineers to improve farm and factory output.

“All the stories idolizing the Kim family may undermine North Korea’s credibility both at home and abroad,” Yu said. “The North Koreans I’ve met haven’t been free to say they whether they believe these myths, but defectors from the North don’t believe in them.”

To contact the reporters on this story: Brian Fowler in Tokyo at bfowler4@ bloomberg.net Eunkyung Seo in Seoul at eseo3@bloomberg.net

To contact the editors responsible for this story: Peter Hirschberg in Hong Kong at phirschberg@bloomberg.net Paul Panckhurst at ppanckhurst@bloomberg.net