How to Finance N. Korean Economic Reconstruction

As a U.S.-North Korea summit approaches, much attention is being paid to how to finance the reconstruction of the North Korean economy.

The total cost for the unification of two Koreas that includes the bill for North Korean economic development varies from expert to expert, ranging from 150 trillion won (US$135 billion) to 3.1 quadrillion won (US$2.79 trillion), due to the wide array of variables that should be taken into account.

Recently, some foreign news outlets reported that the cost would total 2 quadrillion won (US$1.8 trillion) to 3 quadrillion won (US$2.7 trillion) over a span of 10 years or so. According to some local organizations, 500 trillion won (US$450 billion) to 800 trillion won (US$720 billion) will be required to boost North Korea’s national income per capita to US$10,000 in 20 years.

Late last year, the Korea Development Bank (KDB) estimated the total cost for North Korean economic reconstruction at 428 trillion won (US$385 billion) for 10 years, 705 trillion won (US$634 billion) for 20 years and 1.241 quadrillion won (US$1.117 trillion) for 30 years. In the previous government, the Financial Services Commission estimated the cost at US$500 billion for 20 years, including approximately US$175 billion for infrastructure and industrial development. It is divided into US$77.3 billion for railroads, US$37.4 billion for roads, US$10.4 billion for power supply, US$9.6 billion for communications, US$3 billion for airports, US$27 billion for the agricultural, forestry and fisheries industries, US$2 billion for the mining industry and US$0.8 billion for the light industry.

At present, four methods are being mentioned for the purpose, that is, official development assistance (ODA), government-sponsored financing, private-sector investment, and financing within the North.

According to the South Korean government, the private sector and itself can equally share the cost. In one of its scenarios, government-owned financial institutions can procure US$250 billion to US$300 billion with US$17 billion prepared from multilateral development banks and international aid organizations. In this case, the government-owned financial institutions need to provide 10 trillion won or so each year. “This amount is what can be prepared without difficulties by those institutions including the KDB and the Export-Import Bank of Korea,” a government official remarked, adding, “Private-sector investment from both at home and abroad is estimated at US$107.2 billion to US$186.5 billion and US$100 billion can be procured by means of profits from resources development and the tax revenue in the North.”
 

Some experts point out that North Korea can issue government bonds in the long term. Still, government bond issuance by the North can be resumed only after its default back in the 1970s is addressed. Even if the North issues government bonds, the rate should be lowered through credit enhancement. Another government official mentioned that the South Korean government can provide the credit enhancement for the North once inter-Korean relations become more stable.
 

In any case, South Korea’s fiscal burden is likely to be quite heavy in that the roles of the private sector and the international community cannot but be limited and time-consuming and it is the South Korean government in the end that should prepare the initial funds. International aid is unlikely to become available until North Korea’s accession to the IMF, which will take at least years, and private-sector investment has its own limitations before safety is guaranteed in the North.