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The microeconomics of North-South Korean cross-border integration

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  • The microeconomics of North-South Korean cross-border integration
  • Haggard, Stephan; Noland, Marcus
  • East-West Center


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Title The microeconomics of North-South Korean cross-border integration
Similar Titles
Material Type Reports
Author(English)

Haggard, Stephan; Noland, Marcus

Publisher

Honolulu:East-West Center

Date 2012-06
Series Title; No East-West Center Working Papers(Economics Series) / 130
Pages 38
Subject Country North Korea(Asia and Pacific)
South Korea(Asia and Pacific)
Language English
File Type Link
Original Format pdf
Subject Economy < Macroeconomics
Holding East-West Center

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.