The Dilemma of Unification

South Korea vs North Korea

Prepared for
Introduction to Game Theory

Group 4
Imelda Theresia 1806217653
Melanie Permatasari 1906285384
M. Sayyid Ramadhan 1906387253
What We Will Be Discussing Today

1 Background

2 Literature Review

3 The Model
Background
History of divided Korean Peninsula | Chances of reunification

● Since 1392, the Korean peninsula was a united territory under the Joseon dynasty that ruled over the
region for more than 500 years.
● The united was ended by 1910, because of Japanese annexation of Korea (1910-1945).
● After the news of Japan’s surrender broke out. The USSR was advancing ahead through Korea.
● At that point, The US did not have a base in Korea (because of lack calculation of when Japan
surrender) and feared full takeover of the Korean peninsula by the Soviet forces.
● To restrict the USSR from seizing the entire peninsula, the US suggested a temporary division of the
Korean peninsula between the US and USSR.
● Cause the emergence of the thirty-eighth parallel, mark the division of the region which divide the
north under USSR and the south under the US.
● On the other hand, The differing political ideologies that existed within Korea, the Soviets backed
communism and the US favored capitalism.

Introduction Literature Review The Model

Background
History of divided Korean Peninsula | Chances of reunification

38th parallel, popular name given to

latitude 38° N that in East Asia roughly
demarcates North Korea and South
Korea. (the black thin line)

Introduction Literature Review The Model

Background
History of divided Korean Peninsula | Chances of reunification

● In 1948, the US and Soviets were to withdraw their armies from the korean peninsula (UN Agreement).
● But, In mid-1950, DPRK (North Korean), backed by the Soviets and China, saw a chance to unite
the entire peninsula under communist rule and launched an attack on ROK (South Korean).
● However, as the UN intervened, troops from around 15 nations (with a majority from the US) came as
reinforcement for South Korea.
● In 1953, fighting ended in an armistice, giving birth to the Demilitarized Zone (DMZ), a heavily
guarded border almost along the thirty-eighth parallel.
● Currently, North Korea and South Korea are not only separated politically and geographically, the
two nations have different citizen’s rights, laws and order, economies, societies, and daily life.

Introduction Literature Review The Model

Background
History of divided Korean Peninsula | Chances of reunification

Potensial of reunification

The 2018 North Korea–United States

Singapore Summit, commonly known
as the Singapore Summit, was a
summit meeting between North
Korea Chairman Kim Jong-un and
U.S. President Donald Trump, held at
the Capella Hotel, Sentosa,
Singapore, on June 12, 2018.

Introduction Literature Review The Model

Background
History of divided Korean Peninsula | Chances of reunification

● In 2018, Initiate by US, Donald Trump held a summit with North Korean leader, Kim Jong Un. The two
leaders discussed the possibility of normalized relations between their respective nations and Talks of
denuclearization pointed toward potential future discussions of reunification.
● In the 2018 New Years' address, Kim Jong Un repeatedly mentioned reunification, signaling a deal
committing to peace between both Koreas (Based on NCNK)
● There is legislative and political basis for that consensus, bases on the the elections in South Korea
in 2018, which the left-leaning Minjoo Party won. This means that President Moon Jae-in's party, which
had been fighting for better relations with the North, strengthened its influence on policy decisions
● Is it possible the both nations have reunification and back together? What the cost and benefit
being separated or united? Which model should be use to simplify and complete the game?

Introduction Literature Review The Model

Literature Reviews
Previous case study about Korean unification using game theory
We did not find much literature related to Korea unification using dynamic game theory. Meanwhile, we found
dynamics game theory but the South Korea and China conflict, so it doesn't relate to our paper. However, we find
literature that discusses Korean unification from a different perspective
This study discusses the Korean unification phenomenon
using payoffs game theory.
First, any movement by both sides from choice (D,D) to choice
(C,C) lessens the possibility of war. Second, by establishing
effective communication between the two sides it becomes
less likely that one side might perceive the payoffs of choice
(D,D) and (D,C) or (C,D) as being equal. Once perceived as
being equal there is no incentive net to take one's first choice,
which in this case is (D). In all likelihood, this would mean war.
Third, through negotiations it is possible to come to an
agreement that would decrease the chance of war.
In doing so, the choice by both players of the joint cooperative
outcome (C,C) is enhanced. This is true in the sense that
Source: Cook, 1984. choice (C,C) would have a more predictable, positive outcome
than the high risk first preference, (D,C) or (C,D), of either
North or South Korea. The payoffs of choice (D,D), the
status quo, would be reduced making it easier for both
sides to cooperate and jointly choose outcome (C,C).
Introduction Literature Review The Model
Literature Reviews
We conduct literature reviews to determine the payoff for each player
in the unification game
South Korea

Natural Resources Trade Hub Potential Income and Taxes

North Korea has large mineral South Korea can use North Korea could now
deposits especially iron ore and North Korea’s railroad purchase South Korea’s
coal and estimated 200 system to trade with products that could generate
Europe with a cheaper more income to the South
minerals are of economic value
cost (Kim, 2013) (Kim, 2013)
Peace (Britannica, 2019).
Dividend to
The South Young Labor from NK Lower Defense Cost
(PDSK) The average age of a North Korean is 34, South Korea doesn’t have to
while the average age of a South Korean is pay military cost to protect its
42. An influx of young people eager to alter border. They could then shift
their life is an advantage for an economy like their initial budget that once
South Korea, which will need to balance the used for border defense to
costs of an aging society if unification occurs strengthen their military power
(Harding, 2018). (Kim et al, 2013).

Introduction Literature Review The Model

Literature Reviews
We conduct literature reviews to determine the payoff for each player
in the unification game
North Korea

GDP Capital Inflow Lower Defense Cost

North Korea doesn’t have to
Increase the real GDP North Korea could receive pay military cost to protect its
Peace per capita of North capital inflow from opening border. They could then shift
Dividend to Korea to $10,000, their border as well as their initial budget that once
The North which is around 30% of South Korea’s factories used for border defense to
that of South Korea, by relocation (Lee, 2017) strengthen their military power
(PDNK) 2036 (Lee, 2017) (Kim et al, 2013).

Introduction Literature Review The Model

Literature Reviews
We conduct literature reviews to determine the payoff for each player
in the unification game
Unified Korea

Germany’s Unification Cost

Reflecting from Germany’s

unification costs, there are several
most significant expenditure that has
to be borne by both countries, which
are:
Unification
Cost - Infrastructure cost
(UC) - Economic vitalization
- Social security compensation
- Institution cost from structural
changes

(Lee, 2018)

Introduction Literature Review The Model

Literature Reviews
We conduct literature reviews to determine the payoff for each player
in the unification game
South Korea

Military Border Settlement for NK Defectors

Cost of South Korea allocated 2.4% of
Armistice their GDP for defense in 2019.
(CASK) Most of it were used to train the
military power and protect their
border (Statista, 2021).
South Korea has accepted around 33,752
North Korean refugees since 1998 (Ministry
of Unification, 2020). They are provided with
basic support for the first few years to adapt
in South Korea.

North Korea

Military Border Communism Enforcement & Oppression

Cost of North Korea puts heavy emphasis To protect their economy system, North
Armistice on military power. In 2020, North Korea puts in place strict and rigid rules and
Korea's military spending punishments in their country. Therefore,
(CANK)
accounted for around 24% of its there is a need to allocate a significant
GDP. (Statista, 2021) budget to supervise the implementation.
Introduction Literature Review The Model
Literature Reviews
We conduct literature reviews to determine the payoff for each player
in the unification game
For Both South and North Korea

Monetary Support Potential GDP Growth

During the 1st Korean War in 1953,

The North Korea was successful in
securing foreign aid from China and
Potential
other socialist country. South Korea
Benefit
also received monetary backup
from a War from USA (Shen, 2012). If there is
another war occurs, it is expected
that the same scenario would
repeat.
The country that wins the war has the
potential to get GDP growth with the
additional resources they obtain.
To give an example, the leader of the
western bloc during the world war II, the US
had the most rapid economic growth
(Mason, 2017).

Introduction Literature Review The Model

Literature Reviews
We conduct literature reviews to determine the payoff for each player
in the unification game
For Both South and North Korea

The Damage from The 1st Korean War

Military Cost
The countries required to provide a
substantial budget to both defense and
attack. For comparison, the 1st Korean
War cost $30 billion, which is
equivalent to $341 billion in 2011.
(Congressional Research Service,
Potential 2011)
Cost (WC)
Potential Loss
Both North and South Korea would be
devastated by the war. Bombings, the
loss of life, destroyed properties and
facilities would hurt their economies
and production capacity.
(Lee, 2018)

Introduction Literature Review The Model

 The choices that South and North Korea have are being
modelled using dynamic game.

Glossary

[(PDSK-αUC), (PDNK-(1- CASK: Cost of Armistice for South Korea

pt CANK: Cost of Armistice for North Korea
A cce α)UC)]
CWSK: Cost of the War for South Korea
CWNK: Cost of the War for North Korea
ion
ficat GDPG: potential of GDP growth
Uni Reje
ct MSSK: Monetary Support to South Korea
[-CASK, -CANK]
MSNK: Monetary Support to North Korea
PDSK: Peace Dividend to South Korea
in
No inta PDSK: Peace Dividend to North Korea
Un Ma istice [-CASK, -CANK]
i UC: Unification Cost
(Sp fica Arm
lit) tion
α: Proportion of burden sharing (0<α<1)
Esca [(MSSK+βGDPG-CWSK), β: 1 if South Korea wins the war, 0 if North
into late (MSNK+(1- Korea wins
War β)GDPG-CWNK)]

Our Hypothesis of the Subgame Perfect Nash Equilibrium (SPNE): {No Unification, Accept-Maintain Armistice}

Introduction Literature Review The Model

Thank You
References

● Altman, D. (2013). The Economics of War with North Korea. Accessed From
https://foreignpolicy.com/2013/04/15/the-economics-of-war-with-north-korea/
● Britannica. (2019). North Korea - Resources and Power. Accessed from
https://www.britannica.com/place/North-Korea/Local-government
● Cook, D.L. (1984). Korean unification: a game theoretical and bargaining analysis. Calhoun: The NPS
Institutional Archive.
● Easley, L.E. (2018). Why Declaring Peace With North Korea Could Make The World a More Dangereous Place.
Accessed From
https://www.zocalopublicsquare.org/2019/02/26/declaring-peace-north-korea-make-world-dangerous-place/ide
as/essay/
● Economic Consequences of Korean Reunification. (2021, January 26). Investopedia.
https://www.investopedia.com/articles/investing/082515/will-north-and-south-korea-ever-reunite.asp#citation-10
● Feffer, J. (2017). North Korea: The Cost of War, Calculated. Accessed From
https://fpif.org/north-korea-costs-war-calculated/
● Harding, J. (2018). Reuniting North Korea and South Korea could costs trillions of dollars. Accessed from
https://www.cbsnews.com/news/reuniting-north-korea-and-south-korea-could-cost-trillions-investment/
● Kim et al. (2012). The Attraction of Korean Unification. Research on Unification Cost and Benefit. Page 22 Vol.
2.
References

● Lee, Heonyoung, “The Estimation of the Reconstruction of North Korean Economy Using Growth
Accounting Method”, KDB North Korea Development, Vol.13, 2017: pp. 47-48. (in Korean)
● Mason, J.W. (2017). The Economy During Wartime. Accessed from
https://www.dissentmagazine.org/article/second-world-war-economy-mark-wilson-destructive-creation-revie
w
● Shen, Z. (2012). China and the Post-War Reconstruction of North Korea, 1953-1961. NKIDP Working Paper 4.
Page 8. Accessed from
https://www.wilsoncenter.org/sites/default/files/media/documents/misc/NKIDP_Working_Paper_4_China_and
_the_Postwar_Reconstruction_of_North_Korea.pdf
● Statista. (2021). Defense expenditure as a percentage of GDP in South Korea from 2010 to 2019. Accessed
from https://www.statista.com/statistics/1040709/south-korea-defense-expenditure-as-percentage-of-gdp/
● Statista. (2021). Military spending as a share of gross domestic product (GDP) in North Korea from 2018 to
2020. Accessed from
https://www.statista.com/statistics/747387/north-korea-share-of-military-spending-in-budget/
● Sung mi, A. (2021). Defense Cost Sharing sheds light on seven decades of Korea-US alliance. Accessed from
http://www.koreaherald.com/view.php?ud=20210310000727
● Why North Korea and South Korea Are Separated. (2020, June 23). Investopedia.
https://www.investopedia.com/articles/investing/040515/why-north-korea-south-korea-are-separated.asp