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Title Economic Effects of North Korean Infrastructure Development

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    2019-09-30

Economic Effects of North Korean Infrastructure Development


Published on 30 September 2019
Published by Population & Strategy Analysis Division of the Economic Analysis Department


This report analyzes the long-term effects of North Korean economic development and inter-Korean capital market integration on closing the economic gap between South and North Korea.

 

    Chapter II summarizes previous studies regarding the economic impacts of investments in North Korea, inter-Korean economic integration and South-North unification. A review was conducted on the scenarios and assumptions of each study as well as on the characteristics and outcomes of each model used, accompanied by an explanation mainly about the attributes of this research study.

 

    Chapter III describes major examples of economic development and economic integration. To begin with, research was conducted on China and Vietnam, which are experiencing rapid economic growth as a result of introducing aspects of the market economy in a planned economy, as well as on South Korea which has a history of skyrocketing growth. In addition, research was also conducted on examples that may provide insights regarding the economic integration and reunification of the two Koreas including on the European Union and the Eurozone, China-Hong Kong and China-Taiwan economic integration as well as German reunification.

 

    Chapter IV assumes that the North Korean infrastructure development plan will follow the relationship between South Korea’s past economic growth and realized infrastructure development in nine areas: roads, railways, harbors, airports, telecommunications, power plants, industrial complexes, agriculture projects and public health initiatives. Based on this assumption, the area-specific investment volume from 2021 to 2050 (over 30 years) in the nine areas of infrastructure development was calculated using quantitative methods. As a result, it was found that approximately 324 trillion KRW (at 2017 prices) is required in investments over 30 years.

 

    Chapter V analyzes the economic impacts of North Korean infrastructure development and inter-Korean capital integration, using an economic model in which production, investment and trade of both Koreas and the international community are interconnected. The North Korean real GDP per capita is expected to rise to about 54% of South Korea’s, under the scenario in which North Korea develops infrastructure from 2021 through 2050 using the investments calculated in Chapter IV, borrowed from South Korea and the international community, and inter-Korean capital integration is achieved in 2051. In addition, the North Korean real GDP per capita is estimated to increase by 1,300% to 47.47 million KRW under the scenario of infrastructure investment and inter-Korean capital integration, whereas the figure is estimated to remain at 3.38 million KRW if sanctions on North Korea and current economic system in North Korea are maintained. This is due to the interaction between various effects such as the infrastructure investments in North Korea and the productivity increase and international private investments incurred by such infrastructure investments. However, analyses of the effects on North Korean growth would vary significantly depending on the degree of productivity enhancement.

 

    In Chapter VI, the decreased volume of fiscal demands of the National Basic Livelihood Security (NBLS) system in the North Korean region was estimated under the scenario in which the two Koreas are reunified in 2060 after infrastructure development in North Korea over 2021-2050 and inter-Korean capital integration in 2051. The analysis revealed that as a result of an income increase in the North Korean region, the fiscal demands of the North’s NBLS in 2060 would be approximately 151 trillion KRW lower (at 2017 prices), compared to if North Korean sanctions and North Korea’s current economic regime is maintained by 2060.

 

    Chapter VII highlights the research results and implications. First, infrastructure investments in the North Korean region are expected to serve as a steppingstone for economic growth in the region. Second, since it was found that productivity plays a significant role in the North Korean economic growth, various efforts to improve productivity should be made together.

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