Networks, Trust, and Trade

May 22, 2012 6:00 AM

Last week we put out a new working paper “Networks, Trust, and Trade: The Microeconomics of China-North Korea Integration.”  Based on our survey of 300 Chinese enterprises doing business in North Korea, it is a follow-on to our earlier paper “Integration in the Absence of Institutions: China-North Korea Cross-Border Exchange.”

 A central hope of engagement with North Korea is that increased cross-border exchange will encourage the strengthening of institutions, and eventually, a moderation of the country’s foreign policy. Our unprecedented survey of Chinese enterprises operating in North Korea reveals that trade is largely dominated by state entities on the North Korean side, although we cannot rule out de facto privatization of exchange. Little trust is evident beyond the relationships among Chinese and North Korean state-owned enterprises. Formal networks and 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 growth in exchange does not conform with the expectations of the engagement model and may prove self-limiting. The results also cast doubt that integration between China and North Korea, at least as it is currently proceeding, will foster reform and opening.