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The Microeconomics of North--South Korean Cross-border Integration

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  • Stephan Haggard
  • Marcus Noland

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 we 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. We 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.

Suggested Citation

  • Stephan Haggard & Marcus Noland, 2012. "The Microeconomics of North--South Korean Cross-border Integration," International Economic Journal, Taylor & Francis Journals, vol. 26(3), pages 407-430, September.
    • Handle: RePEc:taf:intecj:v:26:y:2012:i:3:p:407-430
    DOI: 10.1080/10168737.2012.707872
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    References listed on IDEAS

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    Cited by:

    1. Jeffrey J. Schott & Euijin Jung & Cathleen Cimino, 2015. "An Assessment of the Korea-China Free Trade Agreement," Policy Briefs PB15-24, Peterson Institute for International Economics.
    2. Marcus Noland, 2019. "North Korea: Sanctions, Engagement and Strategic Reorientation," Asian Economic Policy Review, Japan Center for Economic Research, vol. 14(2), pages 189-209, July.

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    More about this item

    JEL classification:

    • P3 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions
    • F15 - International Economics - - Trade - - - Economic Integration
    • P33 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - International Trade, Finance, Investment, Relations, and Aid

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