S. Korea's fiscal health to reel from reunification with N. Korea: report

By Lee Joon-seung

SEOUL, Aug. 27 (Yonhap) -- South Korea's fiscal health would reel from the shock of a sudden reunification with North Korea, due to the huge disparity in incomes between the two countries, a report by a state-run think tank said Thursday.

The Korea Institute of Public Finance (KIPF) said that while the income level of
an average South Korean was 6-8 times higher than North Koreas in 1990, the
figure had expanded to 17-fold as of 2007.
If Seoul decides to extend social security coverage to North Korea after
reunification it would require huge outlays that could be detrimental to the
national economy, the report said.
"If South Korea's current social security rules are applied to the North, most
people there will fall into the underprivileged category and be eligible for
state aid," KIPF said. It said the funds needed to support more than 20 million
people would roughly be equivalent to 300 percent of North Korea's GDP and 8
percent of the GDP of a unified Korea.
The institute said that the situation is complicated because there is almost no
way that North Korea will be able to reduce the income and economic gap on its
own in the future.
It said that if the North can pull off 8-9 percent growth in income for the next
20 years, while South Korea's income growth gains just 4-5 percent in the same
time period, the South's earning levels will still be 10 times higher than that
of the North in two decades.
KIEP, in addition, warned that if the two Koreas unify, there is a chance that
the tax burden for income earners will rise by 2 percent every year for 60 years,
potentially seriously undermining the economy. Excessive taxes can hurt private
consumption and business investment.
It said the only viable option to prepare for eventual reunification is to get
the North Korean economy to do better and reduce the gap in income between the
two neighbors.