The Korean President has proposed a reunification tax to prepare for the presumed high cost of Korean reunification. The North has predictably responded with anger and saber rattling. Many of the Korean scholars I have met in Germany believe, on the basis of German experience, that the costs of their reunification would be high, perhaps prohibitively so. The German experience, however, is not an appropriate benchmark for Korea for a number of reasons.
First, the German constitution’s federalism laws call for equal treatment in transfers among the states and also German labor unions demanded wage equality between East and West despite huge productivity differentials at the time of reunification. These two features meant that East Germans had immediate access to Germany’s generous welfare state and that East Germans were required to be paid wages well in excess of their productivity. The result has been persistent and exceptionally high unemployment in the East. In the Korean case, there are no constitutional requirements for equal transfers that I know of. Also the South Koreans can learn from the German experience and avoid the mistake of requiring wage equality between North and South. Another factor is that social welfare transfers in the South are a small percentage of total government, unlike the German case where they are the dominant state expenditure.