Comment on “Korean Unification: Economic Adjustments under German Assumptions”

• Published date: 01 July 2019
• DOI: http://doi.org/10.1111/aepr.12266
• Author: Ken Itakura
• Date: 01 July 2019

Comment on “Korean Unification: Economic

Adjustments under German Assumptions”

Ken ITAKURA†

Nagoya City University

JEL codes: F15, H77, O19, O23, O53

Accepted: 16 January 2019

As the Korean unification process must be highly uncertain as asserted in Lee and

McKibbin (2019), estimating the potential economic effect of the unification is a

challenging and formidable task. Indeed, it may be possible to postulate countless

hypothetical scenarios for how the unification process could unfold, at least theoreti-

cally. However, drawing from the historical episode of the reunification of Germany,

Lee and McKibbin (2019) propose a sensible way to design realistic scenarios for the

Korean unification, and then discuss their simulation results for North Korea and

South Korea. For their quantitative evaluation, Lee and McKibbin (2019) use a global

dynamic intertemporal general equilibrium model and database developed in

McKibbin et al. (2018) which covers 12 regions and 6 production sectors.

There are two scenarios for Korean unification developed in this study and both

scenarios are constructed with reference to historical episodes. First, the baseline

scenario, also called the gradual reform scenario, is the case where the North Korea

gradually opens its market to the world economy, similar to China’s experience. This

baseline scenario serves as the basis for comparison with the second scenario, the col-

lapse and unification scenario. One may wonder why an economic collapse in North

Korea becomes the necessary precursor to the Korean unification process. Because the

experience of East Germany’s economic downfall is reflected in the scenario, it is inevi-

table for the North Korean economy to collapse under this scenario design. Once the

economic breakdown is over, the North’s reforms are assumed to progress orderly

toward unification. The productivity gap in sectoral production between the two

Korean economies is assumed to be gradually narrowed over time. On top of these

characteristics observed in the German reunification, Lee and McKibbin (2019) intro-

duce additional assumptions to make the scenario more plausible. In North Korea, the

physical capital stock becomes obsolete while labor productivity falls, and thereby

migration and capital flows to South Korea take place. In the opposite direction, large

fiscal transfers from South Korea to North Korea are imposed in the scenario. About

the equivalent of 1.0–1.5% of South Korea’s gross domestic product (GDP) is

†Correspondence: Ken Itakura, Graduate School of Economics, Nagoya City University,

1 Yamanohata, Mizuho, Nagoya, Aichi 467-8501, Japan. Email: itakura@econ.nagoya-cu.ac.jp

© 2019 Japan Center for Economic Research 285

doi: 10.1111/aepr.12266 Asian Economic Policy Review (2019) 14, 285–286