President Lee Myung-bak’s administration has made its final decision on how to finance unification with North Korea: to build a “unification account” with carryovers from a government fund and contributions from civilians and corporations. The plan is an ill-conceived retreat from President Lee’s earlier proposal to levy a new unification tax.
No one can tell whether or not South and North Korea will be reunified during the next two decades, as the administration expects. And there is no knowing how much it will cost if unification is realized. Yet, South Korea is better prepared for a unification that might come as a consequence of the North’s sudden collapse than taken by surprise, as West Germany was when East Germans flooded into its territory in 1989.
But few preparatory measures had been taken until Lee proposed in his Aug. 15, 2010, Liberation Day speech to establish a fund with a new tax to finance national unification. True, South Korea has maintained the South-North Cooperation Fund. But the fund is aimed at funding aid programs for the cash-strapped North and inter-Korean exchange projects.
One of the first things the administration did with regard to Lee’s tax proposal was to commission the state-funded Korea Development Institute to calculate cost of unification. The KDI came up with cost estimates for the first year of unification, which ranged from 55.9 trillion won to 249 trillion won, with the two sides assumed to be united in 2030.
Now the administration says it will create a “unification account” into which it will put annual carryovers from the South-North Cooperation Fund and private contributions. For this purpose, it says, the law governing the South-North Cooperation Fund will have to be revised during the current or next parliamentary session. It says it is aiming at accumulating 55.9 trillion won or more, adding that the money will be used for “projects designed to promote smooth regional integration and social stability” in a newly united nation.
In the past, the administration has seriously considered levying a new tax and issuing treasury bonds as options. But it has given up on taxation and bond issuance in fear of taxpayer resistance and damage to fiscal prudence, respectively.
Instead, the administration has decided to adopt an alternative proposal ― to create a special unification account. But this idea is seriously flawed, given that it will be virtually impossible to accumulate 55.9 trillion won with carryovers from the South-North Cooperation Fund and private donations during the next two decades.
Each year, about 1 trillion won is allocated for the South-North Cooperation Fund. It is the same with this year. If all the allocations were to be saved during the next 20 years, total input would amount to 20 trillion won, well short of the targeted amount.
True, most of the 1,015.3 billion won in the fund will be carried over to next year, with a mere 28.1 billion won having been used by the end of October. But the reason is that the Lee administration has stopped funding most of the aid programs and exchange projects since North Korea sank a South Korean corvette in a surreptitious torpedo attack.
Carryovers will be massively reduced once inter-Korean relations improve in the future. Moreover, it is assumed that private donations will not amount to much, given that total donations to the Community Chest of Korea, the largest charity in the nation, last year was 340.9 billion won.
Lee was not mistaken when he proposed to build a 55.9 trillion won fund for unification in 10-15 years by levying a new tax. But he made a serious mistake when he did not throw his full weight behind his proposal immediately. Instead, he squandered much of his political capital by sitting on it for too long.
As Lee is now lapsing into lame-duck status, he apparently finds it extremely difficult to have his tax proposal written into law. It is even doubtful that he will be powerful enough to have the law on the South-North Cooperation Fund revised early next year, if not during the current parliamentary session.
