Korean unification may cost South 7 percent of GDP: ministry

SEOUL Tue Jan 1, 2013 7:56am EST

A visitor looks at a village in North Korea's Kaepoong county through binoculars from a South Korean observation post near the demilitarized zone separating the two Koreas in Paju, about 45 km (28 miles) north of Seoul, August 17, 2009. REUTERS/Jo Yong-Hak

A visitor looks at a village in North Korea's Kaepoong county through binoculars from a South Korean observation post near the demilitarized zone separating the two Koreas in Paju, about 45 km (28 miles) north of Seoul, August 17, 2009.

Credit: Reuters/Jo Yong-Hak

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SEOUL (Reuters) - Unification of the two Koreas could cost the South up to 7 percent of annual GDP for a decade though the South would benefit in various ways such as cheap labor and the North's resources, South Korea's Finance Ministry said on Wednesday.

Korea has been divided since the end of World War Two and the Stalinist North and capitalist South have been fierce rivals since the 1950-53 Korean war.

But both Koreas see themselves as the rightful leaders of the Korean people and while there would appear to be no chance of unification in the immediate future, people in both Koreas harbor that hope.

The Finance Ministry said in a report on mid- to long-term policy-making strategy that if the two Koreas unified within the next eight years, South Korea would likely pay from one to seven percent of its annual gross domestic product (GDP) every year for 10 years.

"Unification will contribute to the expansion of the economy's potential growth through increased labor, investments, production and economic cooperation," the ministry said in the report.

Seven percent of South Korea's GDP last year of 1,237 trillion Korean won ($1.15 trillion) would be 86.6 trillion won ($80.62 billion).

The estimates reflect the costs as seen in the short-term, or until 2020.

Though relations between the North, which has twice tested a nuclear device, and the South have been particularly bad over the past few years, they could soon improve.

South Korea's conservative president-elect, Park Geun-hye, has said she could hold talks with North Korean Kim Jong-un but she wants the South's isolated and impoverished neighbor to give up its nuclear weapons program as a precondition for aid, something the North has refused to do.

Park takes office in February.

MORE GOOD THAN BAD

The South Korean government has yet to release a formal estimate for the cost of unification. The Finance Ministry's estimate was based on projections by research institutions.

However, research outsourced by the Unification Ministry in 2011 estimated it would cost South Korea a total of 371.5 trillion won to 1,253.5 trillion won if unification occurred by 2020.

The Finance Ministry said the cost would result in a heavier financial burden and more government debt in a country where growth is expected to fall to the 2-percent range this year.

Sovereign debt stood at 34 percent of South Korea's GDP in 2011, which the government aims to lower in the long term.

Despite the risk of an enlarged debt burden, the government sees more good than bad in the unification, with the ministry saying it would act to off-set the swift ageing of the South Korean population.

The ministry also pointed out the benefits of increased cooperation with neighboring countries, including the development of a gas pipeline linking South Korea and Russia.

Plans for the pipeline hatched during the administration of outgoing President Lee Myung-bak have been shelved indefinitely because North Korea has not cooperated.

The ministry also said the elimination of the North Korean risk factor would result in increased offshore investment and South Korea would benefit in the long term from mineral resources in the North.

(Editing by Robert Birsel)

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