Modeling Inter-Korean Economic Integration

Modeling Inter-Korean Economic Integration

We construct the Korean Integration Model (KIM), a two-country computable general equilibrium (CGE) model linking the North and South Korean economies. Using KIM, we simulate the impact of a customs union and a monetary union of the two economies both in the presence and absence of crossborder factor mobility. Factor mobility is of critical importance. If factor markets do not integrate, the macroeconomic impact on South Korea of economic integration with the North is relatively small, while the effects on North Korea are large. With a monetary union and factor market integration, there is a significant impact on the South Korean income and wealth distribution. If investment flows from South to North and labor flows from North to South, there is a shift in the South Korean income distribution toward capital, and within labor toward urban high skill labor, suggesting growing income and wealth inequality in the South. (JEL Classification: F15, O53, P33)