The Fiscal Burden of Korean Reunification: A Generational Accounting Approach

Abstract

This paper uses Generational Accounting to assess the fiscal impacts of Korean reunification. Our findings suggest that early reunification will result in a large increase in the fiscal burden for most current and future generations of South Koreans. The Korean reunification's fiscal impact appears much larger than that of German reunification, due to a wider gap in productivity between the two Koreas and North Korea's much larger share of the unified country's population. The projected largescale fiscal burden on South Korea is attributable primarily to the rapid increase in social welfare expenditure for North Korean residents, rather than to the direct reconstruction cost of the North Korean economic system after the disintegration of its old economic regime.

Population Aging, Fiscal Policies, and National Saving: Predictions for Korean Economy

“…In addition to the population aging and the generational imbalance of fiscal burden, premature reunification of South and North Korea will be a large burden of South Korean taxpayers. Auerbach, Chun, and Yoo (2005) showed that to finance the reunification cost, the tax burden of cohorts alive in 2010 and thereafter should be raised by about 30 percent of tax burden under current fiscal policies, which will further reduce national savings of the future. In order to restore the sustainability of fiscal policies as well as to prevent a drastic decrease in the savings rate, fundamental reforms of fiscal policies, such as public pension reform, medical insurance reform, and restructuring of government consumption policies, are necessary.…”

“…A similar presentation method to this one has been used by others in the past, includingAuerbach and Oreopoulos (2000) andBovenberg and ter Rele (2000).14. The data source and calculation procedure is explained in detail inAuerbach and Chun (2006) andAuerbach, Chun, and Yoo (2005).15. The accounts are expressed in thousands of won, the domestic currency of Korea.…”

Economic Impacts of Reunifications in Germany and in Korea

“…First, our paper is complementary to numerous papers that focus on the fiscal burdens of reunification (Bae 1996;Piazolo 1997;and Auerbach, Chun and Yoo 2005). For example, if the South Korean government decides to invest in North Korea after reunification, then this investment is initially considered as a "cost" in the sense that resources flow out of South Korea. The output from this investment can be shared by South Korea, however, so this needs to be eventually included as a "benefit."…”

Korean Economic Integration: Prospects and Pitfalls

“…At the same time, it seems inevitable that reunification would slow the growth rate of South Korea for a decade or more. Numerous authors have estimated a number of projected costs for reunification (see, for example, Bae, 1996;Piazolo, 1997;Kwon, 2000;Noland et al, 2000;Auerbach et al, 2005; Correspondence Address: Max St. Brown, School of Economic Sciences, Washington State University, PO Box 646210, Hulbert 101, Pullman, WA, 99164-6210, USA. Email: mstbrown@wsu.edu…”