Three essays on trade and investment in North Korea

다국어 초록 (Multilingual Abstract)

As the tension on the Korean peninsula is eased, discussions on economic cooperation between the two Koreas are resuming. Since 2000, South and North Korea have experienced a qualitative change in economic cooperation from a simple processing contracts to Kaesong industrial complex in 2004.
Considering a constant political stability in the future, economic cooperation between the two Koreas can develop into economic integration, which is expected to have an impact on the two Koreas as well as Northeast Asia. The effect of economic cooperation can be predicted more accurately only when we understand the characteristics of trade of South and North Korea.
Most of North Korea's trade is known to be done through China, which means that the structure of North Korea's trade can be understood only through the trade between North Korea and China. The features of North Korea's trade can be observed clearly through the patterns of North Korea's trade after economic sanctions, which suggest that the changes in North and South Korea trade can occur when political tensions are resolved and inter-Korean economic cooperation deepens.
Also, South Korea is connected to each country through a global production network in Asia region. Therefore, when the economic cooperation between the two Koreas is intensified, there will be the change in the trade volume of intermediate and final goods. In turn, it can affect its neighboring countries as well as South-North Korea.
Accordingly, before analyzing the effect of economic integration between two Koreas on its surrounding regions, understanding the features of South-North Korea trade is a factor to consider first. Unlike South Korea, in the case of North Korea, it is difficult to know the structure and characteristics of its trade. Therefore, we should find out the trade features through North Korea-China trade.
However, most of the existing researches on this subject have analyzed the strategy of the economic integration of the two Koreas from various perspectives, but the scope of the analysis is confined to the economies of South and North Korea. Due to this limitation, the economic effects of the economic integration between South and North Korea are not properly analyzed.
Therefore, in an effort to handle this limitation, my dissertation examines the effects of UN economic sanctions, the trade patterns and features through North Korea-China trade. I also analyzes the effects of economic integration on the neighboring countries including South and North Korea through actual transaction data that reflect the characteristics of North Korea 's trade.
In addition, I analyze the productivity of the Kaesong Industrial Complex, which is a symbolic model of inter-Korean economic cooperation, to suggest implications for the establishment of desirable policies for inter-Korean economic cooperation in the future. The details of this study are as follows.

The first essay examines the effect of economic sanctions on North Korea and China trade.

This essay examines the effects of UN sanctions on North Korea-China trade through four types of trade. The trade data of North Korea and China was collected through China Customs and the analysis period was set from 2001 to 2008. China Customs data includes import and export data between North Korea and China classified by four types of trade: general, processing, bonded warehouse and border trade.
The results show that after UN sanction, North Korea-China trade increased across all types of trade. Particularly, North Korea’s imports of sanction-sensitive items from China increased after the sanctions.
Before the economic sanctions in 2006, more than 50% of North Korea's total exports came from the mining sector, and its proportion sharply increased after the sanctions.
North Korea imported fuel and food through border trade, and the luxury goods specified by the United Nations as sanctioned items were secured through general trade after the sanctions. Strategic materials that can be used for weapons development were imported through bonded trade.
Based on these results, the results show the following two implications. First, after the economic sanctions, North Korea’s economic dependence on China had increased. It can be explained as a factor that can weaken the sanction effect. Second, after the sanctions, the features of North Korea's trade can be observed more clearly, and thereby we can expect the changes in import and export items when inter-Korean economic cooperation deepens.
As North Korea mainly has exported mining products and imported light industry products such as daily necessities, North Korea can convert parts of export of mining sector to South Korea as economic integration between progresses, and there is the possibility to import from South Korea in light industry sector.

The second essay examines the impact of economic integration between South and North Korea on Northeast Asia using WIOT.

There has so far been a wealth of research on economic integration between the two Koreas, however most of the studies are confined to the two Koreas.
In the case of South Korea, it is connected with many countries through the production network, and a change in the trade volume of intermediate and final goods due to inter-Korean economic integration may affect neighboring countries. Therefore, in order to establish a specific economic integration policy between South and North Korea, it is necessary to analyze the characteristics of trade between South and North Korea and the foreign trade environment based on the present point of view.
In the second essay, to establish a desirable strategy, I extend the scope of analysis to Northeast Asia by using the World Input Output Table(WIOT) that contains actual transaction data and examine the effect of the economic integration between the two Koreas on both countries and neighboring countries respectively.
Since most of the foreign trade in North Korea, which is a closed country, is carried out through China, it is possible to understand the structure of North Korea's import and export by observing the features of North Korea-China trade.
The structure of North Korea-China trade explains that North Korea's exports are mostly made in the mining sector and imports are made in the light industry sector including daily necessities.
Accordingly, if the two Koreas is economically integrated, North Korea can shift its exports from China into South Korea in the mining sector and import from China into South Korea in light industry. Based on these prediction, I calculate the production and value-added inducement effect using WIOT.
The results show that as North Korea shift its exports from China to South Korea, the production inducement effect of the World is declined by a billion dollars in the long term. In the long term scenario, the production inducement effect of South Korea is more than three times higher than that in the short term, and the production inducement effect of China decrease.
In addition, value added inducement of the World increases across all scenarios. However, its effect is not great. In addition, South Korea and China show a significant decrease in the value added inducement effect.
The production inducement effect of South Korea's conversion of imports to North Korea increase to $ 3.4 billion globally. South Korea show a great increase in the production inducement effect, while Indonesia show a great decrease. The value added inducement effect increases globally across all scenarios, but it size is not large.
In sum, this study shows that, as shown in the production inducement effect of major countries, if the trade between South and North Korea is converted from existing trading partners in Northeast Asia to both countries, the production inducement effect of the World can be greatly decreased. Accordingly, the economic integration of South and North Korea needs to be achieved sequentially, focusing on industries of North Korea that has strengths over Northeast Asian countries.

The third essay analyzes a participation in the Kaesong Industrial Complex(KIC) and its impact on productivity with a focus on South Korean textile firms’ experience.
Presently, the resumption of the Kaesong Industrial Complex(KIC) is unclear, however, as inter-Korean relations are being thawed, economic discussions on inter-Korean economic cooperation is becoming more active. the Kaesong Industrial Complex has already reached consensus on business procedures and legislative measures between the two Koreas during the construction phase and has accumulated the unique experience of inter-Korean joint operation.
Accordingly, a fundamental evaluation of the Kaesong industrial complex can provide an insight for enterprises contemplating a participation in North-South economic cooperation. Thus, Analyzing the performance of firms in the Kaesong Industrial Complex has great value as a basic information for discussing the future economic cooperation and establishing related policies.
Therefore, I examine the effect of participating in Kaesong industrial complex on firm’s productivity using firm-level data from 1996 to 2016. And, the research scope is limited to the textile sector. To do this, I implemented PSM estimations employing the radius matching method with 0.01 caliper and 10nearest-neighbor matchings with replacement.
For each treated firm, I find matches except one firm. For 5 treated firms that have opened factories in Kaesong, and I find 49 matched firms in control groups(Domestic firms). For methodology, this study uses Difference-in-Differences(DID) framework and also extends the basic DID framework to event study framework of Gathmann, Helm, and Schönberg(2018).
The results report that the treated firms experienced its productivity improvement after investment to Kaesong. This result can be found in DID event study as well as DID analysis. However its effects did not last long.
These results show that the participating of Kaesong Industrial Complex is influenced by the infrastructure and institutions conditions supported by South Korea. For example, Government of South Korea exempted corporate tax firms operating for more than 15 years from the year in which they earn profits up to 5 years and gives 50% of tax reduction from 3 years thereafter. Besides, government gives different measures equivalent to domestic industrial complexes such as infrastructure support.
Therefore, it is necessary to consider establishing a strategy of attracting firms to effectively utilize the strengths of labor costs and industrial relations in North Korea for the purpose of economic operation and growth.

목차 (Table of Contents)

• Part Ⅰ. The Effect of Economic Sanction against North Korea on North Korea-China Trade 1
• 1. Introduction 1
• 2. Stylized Facts on North Korea’s Trade 7
• 3. Estimation Strategy 12
• 4. Results 18
• 5. Conclusion 22
• References 25
• Part Ⅱ. The Impact of Economic Integration between South and North Korea on Northeast Asia : Using World Input Output Data 34
• 1. Introduction 34
• 2. Methodology and Data 36
• 3. Results 42
• 4. Conclusion 47
• References 50
• Part Ⅲ. A Participation in the Kaesong Industrial Complex and Its Impact on Productivity : South Korean Textile Firms’ Experience 58
• 1. Introduction 58
• 2. Data 62
• 3. Methodology 66
• 4. Results 68
• 5. Conclusion and Discussion 72
• Reference 74
• Appendix 84