Institutional Economic Integration between South and North Korea and the Economic Impacts of Integration

Abstract

This paper proves theoretically that bilateral trade between South and North Korea, between whom many political barriers to trade exist, is Pareto-inefficient, and that a Pareto-efficient situation can be achieved through the attainment of institutional economic integration, enabled by mutual agreement between South and North Korea. Based on our theoretical analysis, we propose a comprehensive economic integration agreement as an instrumental framework for the gradual integration of South and North Korea. In addition, we analyze the economic impacts of such integration. We estimate that gradual integration would positively affect North Korean GDP, increasing it by 3.55-4.88 percent from the baseline, depending on the various scenarios we analyze.

Investigating the Impact of Institutional Quality on FDI: Are There Promotional Effects in Economic Integration Regions?

“…Furthermore, the promotional effects of RIAs are larger than BITs [40]. The economic integration agreements between two regions with many political barriers may turn Pareto-inefficient into Pareto-efficient, thereby decreasing institutional challenges [41].…”

Prospects and Economic Impacts of Korean Unification: An Introduction

“…There are several possible scenarios in terms of reforms in the North Korean economy (see Haggard and Noland (2018), Lee and Pyun (2018), McKibbin et al (2018) and Kang and Park (2018) of this special issue on reforms of the North Korean economy). Although the possibility of a serious military conflict in the Korean Peninsula has been reduced significantly, it could take more than a decade to achieve complete denuclearization of the Korean Peninsula.…”

“…Furthermore, the North Korean leadership may not want to undertake serious domestic reforms and institutional changes that will undermine its iron grip on power. There are several possible scenarios in terms of reforms in the North Korean economy (see Haggard and Noland (), Lee and Pyun (), McKibbin et al () and Kang and Park () of this special issue on reforms of the North Korean economy). First, the North Korean regime may abandon nuclear weapons and embark on comprehensive market‐oriented reforms that open the domestic economy to international trade and investment.…”

“…The second paper, by Kang and Park (), examines the issue of North–South integration from an institutional perspective. The authors argue that political rivalry has generated a prisoner's dilemma outcome that yields a suboptimal degree of economic integration between the two economies.…”