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Estimating the Potential Size of Inter-Korean Economic Cooperation
Author: Doowon Lee
Region: Asia
Published February 15, 2012
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Even though inter-Korean economic cooperation has been growing steadily for the past two decades, the volume of inter-Korean trade is still small compared to the other emerging Asian economies’ trade volume with South Korea. This paper tries to estimate the potential size of inter-Korean trade volume on the basis of the assumption that North Korea will be a normal market economy. First, this paper estimates the bilateral gravity model of South Korea with its major trading partners, and will apply this result to inter-Korean trade. Conventional gravity models usually have three explanatory variables of GDP, GDP per capita, and distance. However, this paper has augmented this conventional model by removing GDP per capita and adding RTA (regional trade agreement) dummy and TL (trade liberalization) index. According to this augmented gravity model, inter-Korean trade volume would increase by 6 to 8 times as of 2008 if North Korea because a normal market economy. Even though there exists a substantial gap between the actual and the potential trade volumes, this gap has been nar- rowed during the previous two decades.

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