Korea’s Reunification and Financial Policy Tasks – 5 Utilization of NK Development Fund

Wisely using money is more important than collecting it. USD500 billion raised to support NK Development will be concentrated in areas that have potential to increase NK economy’s productivity. 

The government and policy banks will evaluate NK’s major special economic & industrial zones in order to select areas for the development fund to be invested. Factors such as industrial location and conditions for economic cooperation will be taken into account when deciding whether or not to make investment.Participation by policy banks is particularly crucial because they are more capable than the government to assess and make analysis on projects. For example, ‘infrastructure fund’ will be created centered by policy banks to fund major infrastructure projects in the North.

Korea’s Reunification and Financial Policy Tasks – 4 Measures to Support NK Development

With reunification comes huge cost. It is expected to cost huge amount of money considering NK’s underdeveloped economy. North’s nominal GDP is KRW33.6 trillion, mere 2% of the South’s. What’s more, NK’s basic infrastructure and industries are subpar. If we look into the German reunification case, West Germany’s sovereign debt to GDP rose from 40% to 62% just in 6 years after reunification due to the East’s underdeveloped economy. 

Now, raising such a huge amount of money to develop NK becomes a crucial issue. Relying heavily on government budget can cause social conflict and accumulating money through foreign ODA has its limits which make the role of finance more important.

Approximately USD500 billion is expected to be needed to support NK development. Among the total, about USD175 billion will be used to build necessary infrastructure and develop industries.

USD17 billion will come from foreign ODA from countries such as US, Japan, China, and Germany and international organizations such as the World Bank, Asia Development Bank and United Nations. USD250-300 billion will be raised by policy banks. USD107.2-186.5 billion will be accumulated by attracting private invcestment in profitable projects and special economic zones. Lastly, approximately USD330 billion is expected to be earned in NK through tax and economic development.

Korea’s Reunification and Financial Policy Tasks – 3 Financial Policy Upon Economic Integration

Main tasks for successful economic integration can be divided into 3 stages: Development, Implementation, and Integration.

In ‘Development’ stage, the main objective is to create a firm foundation for sustainable growth. We need to select and develop promising industries, re-establish railroad and harbor, open markets, and develop natural resources.

Implementing core system for market economy system will be the main challenge in ‘Implementation’ stage. It includes liberalizing price, privatizing properties, and adopting market system.

Lastly, in ‘Integration’ stage, the two different economic systems will be finally integrated. To do so, we need to integrate legislative system, infrastructure, and markets altogether.

It is also very important to study and benchmark successful cases of economic integration outside of Korea.

Korea’s Reunification and Financial Policy Tasks 2: Current Status of NK’s Economy

North Korea’s GDP is around 34 trillion won, an equivalent to that of South Korea in 1971 and 1/5 of our size of GDP as of last year.

Economic gap between the two Koreas is huge compared to the German case. Disparity in per capita GDP between South and North stands at staggering 20 folds which is more than 9 times wider compared to the gap between West and East Germany.

North Korea’s financial system is underdeveloped, saying that it has mono-banking system, state-controlled monetary system, supply-oriented financial system, and no cash transaction. Central Bank of the DPRK, North’s central bank and the only functioning commercial bank at the same time is the sole source of money supply. Its only monetary policy means is controlling the size of bank loans. Moreover, the foreign exchange is directly controlled by the regime due to which the gap between official and commercial rate is widening. Although North Korea has been making laws and taking measures to improve its financial system and economy, the disparity between financial laws and economic realities is worsening.

 

 

Korea’s Reunification and Financial Policy Tasks 1

2015 marks the 70th year since the Korean peninsula was divided. As President Park mentioned, Korean reunification is one of the biggest historical mission of our generation that can not be put off any longer.

Korea is faced with several structural problems. Korea’s growth rate has been stagnant for more than a decade at 3%, a 3 to 4% decrease since the 1990s. Youth employment fell sharply from 44.9% in 2005 to 39.7% last year. Yet worse, the population is aging rapidly while the number of men and women not contributing to the population growth is increasing.

In such situation, reunification is expected to provide tremendous economic opportunities. Combined 80 million population and investment demand in North Korea’s development will create strong domestic demand. South’s abundant capital and cutting-edge technology integrated with the North’s diligent work force and precious natural resource will greatly strengthen our global competitiveness. Moreover, there won’t be any geopolitical risks posed by North Korea’s nuclear weapon and consequent arms race.

West and East Germany was united suddenly due to East Germany’s unexpected collapse. Even though their economic systems were integrated after going through 1 to 2 years of implementation period, and they have been preparing for the reunification in advance, the gap between the West and East hasn’t yet been fully resolved. Korea, therefore, must be thoroughly prepared for the possible integration of the two economies upon reunification.

In the following series of articles, we’ll look into the reasons why we must be ready in advance and what we can do to minimize negative effects while maximizing synergies upon Korean reunification.

 

Finance and Korean re-unification

As President Park Geun-hye underscored, re-unification is a golden opportunity to take a quantum jump for Korea’s economy. It addressed low growth and aging population in the South. At the same time, it helps the North escape from extreme poverty. With re-unification, the Korean economy can build a stronger, sustainable, and good economy.

However, re-unification requires tremendous cost. The fear of high cost has been lingering around. “This is where ‘Re-unification Finance’ comes in”, FSC Chairman Shin Je-Yoon mentioned.

“It will replace the ‘fear of re-unification cost’ with the ‘hope for re-unification bonanza’.”

Finance will primarily serve to alleviate the economic impact of the re-unification. Afterwards, it will facilitate the economic integration.

To make sure that the current fear turns into the hope for bonanza, there are four key areas to focus on. First, North Korea’s monetary system must be reset. Its current mono-banking system needs to be changed into a two-tier banking system. Moreover, introducing a single exchange regime and restructuring its external debts will help the North gain competitiveness in the global financial market. Surely, such approaches should be undertaken in an orderly manner to minimize the impact of resetting the monetary system.

Second, the North’s financial infrastructure must be reformed. It is not an exaggeration to say the North Korea has no financial infrastructure. Essential financial infrastructures such as deposit insurance system, payment and supervisory system need to be established.

Third, there must be appropriate ways to finance development needs of the North. Rebuilding the North Korean economy is an investment that ensures brighter future for both, not a one-time cost. Therefore, funding plans for a wide range of areas need to be formulated pre-emptively. The government will use various measures to encourage private and foreign investors, and international organizations to invest in the North taking full use of Korea’s experience of achieving the ‘Miracle on the Han River.’

When the South’s rich capital and invaluable experience are combined with the North’s young and disciplined labor force, it will create tremendous synergy and lead to a sustainable economy. It will also benefit the global community since countries would be provided more room to spend for the good of their people instead of an arms race.

Chairman Shin sited Ahn Chang-ho, a Korean independence activist, “A building stands firm when it is build on a strong foundation, and good fruits come from a tree with strong roots.” It is clear that ‘One Korea’ would provide tremendous growth opportunity for the two Koreas and the rest of the world, however, it cannot happen without sufficient preparations, which means that we need to strengthen competitiveness and encourage innovation for the financial industry.