We construct a computable general equilibium (CGE) model of the North Korean economy and use it to simulate the response of the economy to reform, focusing on three issues: static gains from increased trade, increases in total factor productivity, and the obsolescence shock reduction in the value of the pre-reform capital stock.
Empirical results indicate that North Korea is a tremendously distorted economy, and potential income gains from trade liberalization are on the order of 40–50 percent. Even with these income gains, the gap between per capita incomes in the North and South would remain daunting. For the 1990 calibration of the model, the additional capital investment necessary to raise North Korean incomes to 60 percent of those in the South would be $319 billion. This figure rises rapidly as the onset of reform is delayed and the gap between North and South Korean incomes continues to grow. (JEL: F14, C68, 0.11 and 0.53)