Binding Up the Nation's Wounds: An Economic Analysis of the Korean Reunification

We study the integration process of the North and South Korean economies. Our model incorporates elements that are necessary for explaining closely-related transition experiences (i.e., the growth miracles of East Asia and the post-communist transitions of Eastern Europe). We calibrate the model so that it is consistent with the present economic conditions of the two Koreas at the macro and micro levels. We overcome the paucity of data for North Korea (especially at the micro level) by analyzing (i) the labor market outcomes of North Korean refugees in the South; (ii) South Korean firms operating in special economic zones in the North; and (iii) Chinese firms doing business in/with North Korea. We use the model to project the transitional dynamics of the unified economy under various integration scenarios and policy regimes.