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.