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North Korea: Witness to Transformation

Continuing North-South fallout from economic sanctions

by | May 29th, 2012 | 06:17 am
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Last week, on the anniversary of the “24 May measures” undertaken in response to the shooting of a tourist at Mt. Kumgang, the sinking of the Cheonan, and the shelling of Yeonpyeong Island, the Hyundai Research Institute (HRI) released a report claiming that North-South economic activity has been depressed greater than originally expected. According to HRI’s counterfactual estimates, South Korea has experienced roughly $8 billion in economic losses while North Korea has lost almost $2 billion. Most of the South Korean losses were due to activity not undertaken due the suspension of the second phase of Kaesong Industrial Complex (KIC) construction, while most of the North Korean losses were due to a decline in trade from what it otherwise might have been.  It goes without saying that that the study’s sponsor, Hyundai, has been in the forefront of North-South economic integration initiatives, including KIC.

On the same day, the Korea Chamber of Commerce and Industry released a survey of 200 businesses operating in the KIC.  As we previously observed, the KIC has been relatively immune to the downturn in North-South relations, and due to its provision of investment insurance, the South Korean government has a parochial fiscal interest in keeping the project operating. As reported in the Chosun Ilbo, the KCCI survey found that South Korean firms operating in the KIC reported that operating losses roughly doubled following the 24 May measures, and that a relatively small share (13.4 percent) have since recovered completely.

As reported in Hankyoreh, a debate is ongoing as to who is to blame for these losses: the Ministry of Unification says that the firms bear the risk, while the firms claim that the losses are due to government policies, not management errors, and that they deserve compensation for their losses. Presumably the Saenuri presidential candidate will want to avoid a “who lost North Korea” debate in the upcoming election campaign.

In a recently released paper based on a survey of Chinese enterprises operating in North Korea, we found that they adopted a variety of coping strategies to deal with North Korea’s decrepit physical infrastructure and weak business-enabling institutions.  In a forthcoming paper, based on a comparable survey of South Korean firms operating in North Korea, we find that the South Korean government has effectively socialized risk, and that the level and composition of North-South economic integration is highly dependent on South Korean public policy.