The Microeconomics of North-South Korean Cross-Border Integration

29 Pages Posted: 2 Jun 2012

See all articles by Stephan M. Haggard

Stephan M. Haggard

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS)

Marcus Noland

Peterson Institute for International Economics; East-West Center

Date Written: May 30, 2012

Abstract

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.

Keywords: economic integration, transition, institutions, socialization of risk, South Korea, North Korea

JEL Classification: P3, F15, P33

Suggested Citation

Haggard, Stephan M. and Noland, Marcus, The Microeconomics of North-South Korean Cross-Border Integration (May 30, 2012). Peterson Institute for International Economics Working Paper No. 12-9, Available at SSRN: https://ssrn.com/abstract=2072334 or http://dx.doi.org/10.2139/ssrn.2072334

Stephan M. Haggard

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS) ( email )

9500 Gilman Drive
La Jolla, CA 92093-0519
United States
858-534-5781 (Phone)
858-534-3939 (Fax)

Marcus Noland (Contact Author)

Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

East-West Center ( email )

1601 East-West Road
Honolulu, HI 96848-1601
United States

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