Unification of the two Koreas will no doubt bring about massive demands for infrastructure investment in the unified Korea. The newly created mass scale investment demand is predicted to provide a new opportunity for South Korea’s economic growth, which is currently facing serious lack of demand due to the 2008 Global financial crisis and China’s economic slowdown. We also predict that this would not only benefit South Korea, but also benefit countries that have close ties with South Korea such as Japan, China, US and Russia.
This research adapts Solow’s neoclassical growth model and inter-industry relationship table and empirically analyzed how fast North Korean economy would grow after unification through infrastructure investment in the North Korean region and how such infrastructure investment would affect not only South Korea but also Japan, China, US and Russia.
The main findings of this research are as follows. First, we found that for rapid economic growth in the North after unification there must be massive amounts of infrastructure investment. Once they begin building infrastructure, the Northern region will be able to catch up to South Korea’s current level of economic development (in 20 years).
Second, the massive demand for funding needed for necessary infrastructure building which is a must in order for unified Korea to achieve economic growth in the Northern region cannot be procured only through domestic savings in unified Korea. To fill this gap we believe Japan has an important role as a provider of funds and technology.
Third, we showed that the massive increase in infrastructure investment in North Korea will bring about big increase in output in not only South Korea but also Japan, China, Russia and the US. Results show that increase in infrastructure demand in North Korea will result in higher output increase effects in Japan, China, Russia and the US than in Korea. In particular, the US was the biggest beneficiary of output increase effects in the service industries. It is evident that economic integration of the two Koreas will not only contribute to economic growth of current South or North Korea, but also to the growth of neighboring countries or the world.
There is no doubt that there are many limitations in this research, as listed in the following. First, the biggest limitation in analyzing the effects of the Korean unification is the lack of North Korea’s economic data. Without exact information on North Korea it is extremely difficult to have a correct estimate of the effects of infrastructure investment. Since it is difficult to obtain accurate data from within North Korea, we need to obtain accurate data through partnerships with international organizations that collect data related to population and health.
We believe that through collaboration with development financial institutions such as the World Bank, we would be able to obtain more accurate information regarding infrastructure building situation used in this research. In particular, data on infrastructure building data related to electricity and transportation is important.
After that, we also need to obtain information on trade between North Korea and its major trading partners such as China and Russia. Import and export data well reflect North Korea’s economic situation and therefore there needs to be cooperative investigation between Chinese and Russian governments and civilian institutions that have access to not only official trade but also unofficial trade statistics.
 In order to accurately understand and analyze North Korean economy through the obtained current data we need to create a detailed database consisting of system of national accounts, inter-industry relation table, and price index categorized by industry and by product. If we are able to create such a database that would enable us to understand North Korea’s current economic situation we will be able to more accurately estimate the effects of infrastructure establishment as well as discuss what kind of policies would be effective.
Second, our analysis assumes that there is no labor movement from the dilapidated North Korea to the wealthy South Korea. In other words, we did not consider any political or social tension rising from inter-Korean economic integration and only analyzed the pure economic aspects. We believe that since political integration or the issue of political structures are beyond the scope of this research, and therefore did not consider these issues.
Considering such limitations the research findings can be considered as analysis of the effects of economic integration such as free trade agreements, since we did not consider free labor movements or tax. In this aspect, the estimates that we drew is a calculation of benefits that free labor movements and trade would entail if current South and North Korea mutually accept the fact that infrastructure investment will bring significant benefits not only to both Koreas but also to Japan, China, Russia, and the US.
We believe that South and North Korea must begin discussing whether to choose an economic integration model that would minimize costs or to choose a unification model that consists of high costs but also have high socio-political benefits, as soon as possible. In particular, it is important to analyze not only the benefits of infrastructure investment which is estimated in this research, but also the social costs of unification.
Since it is evident that free interaction between the two Koreas will bring about great economic benefits not only to the two Koreas but also to all relevant countries, Japan, China, Russia and the US must cooperate to establish a diplomatic environment conducive to a peaceful economic integration of the Korean peninsula.