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The Economics of Korean Unification

  • Marcus Noland


    (Peterson Institute for International Economics)

  • Sherman Robinson

    (Peterson Institute for International Economics)

  • Li-Gang Liu

    (Peterson Institute for International Economics)

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 an exchange rate unification of the two economies both in the presence and absence of cross-border factor mobility, treating technological transfer in three ways. 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 unified exchange rate 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. Similarly, the specific form of technological transfer is important: if North Korea succeeds in adopting South Korean technology, it experiences a tremendous boost in productivity in the traded goods sector, which tends to increase the magnitude of change in macroeconomic aggregates and distributional shares exhibited by South Korea. If integration is accompanied by large capital inflows, there is a significant appreciation of the real exchange rate with deleterious implications for the South Korean traded-goods sector.

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Paper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP97-5.

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Date of creation: 1997
Date of revision:
Handle: RePEc:iie:wpaper:wp97-5
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  1. Marcus Noland, 1996. "German Lessons for Korea: The Economics of Unification," Working Paper Series WP96-3, Peterson Institute for International Economics.
  2. Bernhard Herz & Werner Roger, 1995. "Economic growth and convergence in Germany," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 131(1), pages 132-143, March.
  3. Hughes Hallett, A. & Ma, Y. & Melitz, J., 1996. "Unification and the policy predicament in Germany," Economic Modelling, Elsevier, vol. 13(4), pages 519-544, October.
  4. Boltho, Andrea & Carlin, Wendy & Scaramozzino, Pasquale, 1997. "Will East Germany Become a New Mezzogiorno?," Journal of Comparative Economics, Elsevier, vol. 24(3), pages 241-264, June.
  5. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, October.
  6. Hans-Werner Sinn, 1995. "Staggering along: wages policy and investment support in East Germany," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 3(4), pages 403-426, December.
  7. Stone, Richard, 1986. "Nobel Memorial Lecture 1984: The Accounts of Society," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 1(1), pages 5-28, January.
  8. Golan, Amos & Judge, George & Robinson, Sherman, 1994. "Recovering Information from Incomplete or Partial Multisectoral Economic Data," The Review of Economics and Statistics, MIT Press, vol. 76(3), pages 541-49, August.
  9. Marcus Noland & Sherman Robinson & Li-Gang Liu, 1998. "The Costs and Benefits of Korean Unification," Working Paper Series WP98-1, Peterson Institute for International Economics.
  10. Christian Thimann & Michael Breitner, 1995. "Eastern Germany and the conflict between wage adjustment, investment, and employment: A numerical analysis," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 131(3), pages 446-469, September.
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