Modeling the Economic Impacts of Korean Unification

Abstract

This paper explores the economic impacts of Korean unification on North and South Korea. It presents a new consistent database on macroeconomic, sectoral and trade data, and an input-output table for the North Korean economy, and then incorporates it in a global intertemporal multi-sector general equilibrium model. Assuming hypothetical scenarios such as North Korea's reform and gradual convergence, its sudden collapse and immediate unification, and chaos and crises in both Koreas, we quantify the consequences of Korean unification on economic activity, trade and capital flows in the two Koreas. The results highlight the importance of the unification processes and of alternative policy responses in both Koreas to the economic impacts of unification.

What do we know about poverty in North Korea?

“…The existing historical GDP growth figures for the country obtained by the Bank of Korea for the period 1990-2015 imply a shrinking economy at a rate of −0.5% per year, although positive economic growth is estimated on average since 2000. The Bank of Korea's estimates imply a drastic fall in trade between 2014 and 2015, which is compatible with the decrease in income per capita (and increase in poverty) estimated using our methodology during this period (McKibbin et al, 2018). Fig.…”

“…The few past attempts in the academic literature aimed at estimating economic output in North Korea give insights, which are in part remarkably compatible with some of the stylized facts of our estimated figures. Our GDP per capita figures fall in the range defined by existing estimates from the Bank of Korea ($625 per capita in 2015) and the Central Intelligence Agency ($1700 per capita in the same year) (McKibbin et al, 2018). The existing historical GDP growth figures for the country obtained by the Bank of Korea for the period 1990-2015 imply a shrinking economy at a rate of −0.5% per year, although positive economic growth is estimated on average since 2000.…”

Reunification on the Korean Peninsula: Is Social-reunification Feasible?

“…In addition, literature that attempts to model economic effects of unification are also plentiful. McKibbin et al (2017) have analysed the potential economic impacts of reunification based on three different scenarios. 2 This recent study is one that does not follow the stereotypical assumption of North Korean economic collapse.…”