The South Korean government has actively promoted economic exchange with the North based on the principle of separating politics from economics as a strategy to implement its engagement policy toward North Korea, better known as the "Sunshine Policy". There has not been, however, much progress in intra-Korean relations, except for the Mt. Kumgang tours, despite continued endeavors by the South Korean government. There are two important reasons for the sluggishness of intra-Korean economic relations. First, the investment environment in North Korea is extremely poor as a result of continued economic crisis; and intra-Korean trade cannot increase significantly unless the North Korean economy is revitalized. Another important reason for sluggish intra-Korean economic relations is North Korea`s recalcitrance against Chinese-style open-door and reform policy as well as government level cooperation with the South. Still, North Korea is hesitant to abide by the above prescriptions because it worries that such a policy may undermine regime stability. Therefore, it is best to provide an environment that will make North Korea shift its policy to peaceful coexistence between the North and the South through a comprehensive approach to the engagement policy. If North Korea can be persuaded to shift its policy to peaceful coexistence with the rest of the world including South Korea, North Korea`s economic difficulties will begin to ease. As North Korea can see a light at the end of a long tunnel of economic hardship, it will likely undertake the first step of economic reform and opening with more confidence in regime survival. If this is the case, there may arise a virtuous cycle in North Korea of cautious reform and opening, recovery of North Korean economy with more investment by South Korean and foreign firms, and a next step to a more fundamental reform.