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.