The Microeconomics of Engagement: Marketization and Trust in China-North Korea Trade
34 Pages Posted: 1 Aug 2011 Last revised: 16 Aug 2011
Date Written: 2011
A central hope of the strategy of engagement is that increased cross-border exchanges with North Korea will have the effect of encouraging the process of marketization and ultimately contribute to a moderation of the country’s foreign policy. Results from a unique survey of Chinese enterprises operating in North Korea reveal that trade is still largely dominated by state entities on the North Korean side, although we cannot rule out de facto privatization of exchange. However little trust is evident beyond the relationships among Chinese and North Korean state-owned enterprises. Formal networks and institutions - including dispute settlement mechanisms - are weak and do not appear to have consequences for relational contracting. Rather, firms rely on personal ties for identifying counterparties and resolving disputes. The weakness of formal institutions implies that the rapid growth in exchange does not conform with the expectations of the engagement model and may prove self-limiting. The results also cast doubt that engagement between China and North Korea, at least as it is currently proceeding, will foster reform and opening in the country.
Keywords: sanctions, trust, relational contracting, China, North Korea
JEL Classification: F5, P33, L14
Suggested Citation: Suggested Citation