The Microeconomics of North-South Korean Cross-Border Integration
Stephan M. Haggard
University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS)
Peterson Institute for International Economics; East-West Center
May 30, 2012
Peterson Institute for International Economics Working Paper No. 12-9
Economic integration between North and South Korea occurs through three modalities: traditional arm's-length trade and investment, processing on commission (POC) trade, and operations within the Kaesong Industrial Complex (KIC). In order, these three modalities are characterized by decreasing exposure of South Korean firms to North Korean policy and infrastructure. Through a survey of 200 South Korean firms operating in North Korea, the authors find that these modalities of exchange matter greatly in terms of implied risk. For example, firms operating in the KIC are able to transact on significantly looser financial terms than those outside it. The authors find that direct and indirect South Korean public policy interventions influence these different modalities of exchange and thus impact entry, profitability, and sustainability of South Korean business activities in the North. In effect, the South Korean government has substituted relatively strong South Korean institutions for the relatively weak Northern ones in the KIC, thus socializing risk. As a result, the level and type of cross-border integration observed in the survey is very much a product of South Korean public policy.
Number of Pages in PDF File: 29
Keywords: economic integration, transition, institutions, socialization of risk, South Korea, North Korea
JEL Classification: P3, F15, P33working papers series
Date posted: June 2, 2012
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