Modeling Inter-Korean Economic Integration

Abstract

We construct the Korean Integration Model (KIM), a two-country com - putable general equilibrium (CGE) model linking the North and South Kore - an 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 mar - kets 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 sig - nificant impact on the South Korean income and wealth distribution. If invest - ment 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 inequali - ty in the South.