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KDI Policy Forum

KDI Policy Forum

Path to Inter-Korean Economic Integration: Gradual Merger Within Temporary Separation

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  • Author Hongtack Chun
  • Date 2015/05/21
  • Series No. KDI Policy Forum Vol. 256
  • Language English
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SUMMARY □ Broadly speaking, the unification of the Korean Peninsula can unfold in either rapid or gradual scenarios. The rapid scenario may be further divided into two tracks: immediate and simultaneous political and economic unification or fast political unification coupled with gradual economic unification.

○ The latter track would have the North Korean and South Korean economies remaining apart for a designated time period after political unification. During this temporary arrangement, the North Korean economy would be managed as a special zone and two different economic systems would continue to coexist on the peninsula.

□ The objective of this paper is to explore methods of running the economy in North Korea and of gradually integrating the economies of the North and South during a designated time period. It assumes both sides have agreed to rapid political unification but opted for a moderate pace in merging their economies.

○ The operation and integration of the economic system will naturally span various areas, including the labor market, currency and finance, health and medical care, and trade. However, in this paper, the focus will be placed on the labor market, which will be a key sector while the two economies remain separated, and social security areas such as employment insurance, pension, and public assistance, which will be important in terms of political and social stability and the cost of unification.

□ As for the labor market, operating the North Korean economy as a separate special zone will require phased entry of its residents into the South for work. Simultaneously a market economy system should be introduced into the labor market with an employment safety net.

○ Mechanisms for determining price (wages) through free supply and demand must be installed in the labor market and the full employment policy must be abolished.

○ Nevertheless, it will be necessary to create an employment safety net for the unemployed and to provide public assistance for those who are unable to work.

□ The basic South Korean pension and public assistance systems should be assimilated in North Korea as quickly as possible. However, considering the gap in economic capacity and wages between South and North, North Korean pension and public assistance systems should be operated differently from the South Korean system. In other words, while the pension payment formula should be the same for South and North Korea, the average income level used to calculate payouts should differ temporarily between the two sides. The vested rights that North Koreans have accrued from their subscription period should be preserved, but other preferential benefits (such as pension for services rendered) should not be recognized.

○ Pension financing and bookkeeping in South and North Korea should be split, and any deficit in the pension financing for the North Korean zone should be covered by fiscal support from the South.

□ During the first two to three years after a special economic zone is established in North Korea, it is particularly important to obtain information about North Korean economic and social statistics, accounting, and the administrative organizations in charge of these.

○ One priority is collecting information on related areas in order to design a system for split operation of the systems for pension, public assistance, and the employment safety net.

○ To accomplish this, a fact-finding team comprised of government and civilian experts should be dispatched and joint surveys should be conducted on each area of concern.

□ There are also other important elements that are only briefly touched upon or are not covered at all in this paper.

○ This paper only offers a broad outline about the unification scenario under which the “North Korean Special Administrative Zone” would be established and governed.

○ An estimate of the scale of financing needed for gradual integration of the employment safety net, pension, and public assistance is also needed, but because of the limitations of research sources and the period of research, this question will have to be deferred for subsequent research.
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