Integration in the Absence of Institutions: China-North Korea Cross-Border Exchange

Peterson Institute Working Paper WP 11 – 13
Stephan Haggard, Jennifer Lee, and Marcus Noland

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Theory tells us that weak rule of law and institutions deter cross-border integration, deter investment relative to trade, and inhibit trade finance. Drawing on a survey of more than 300 Chinese enterprises that are doing or have done business in North Korea, we consider how informal institutions have addressed these problems in a setting in which rule of law and institutions are particularly weak. Given the apparent reliance on hedging strategies, the rapid growth in exchange witnessed in recent years may prove self-limiting, as the effectiveness of informal institutions erode and the risk premium rises. Institutional improvement could have significant welfare implications, affecting the volume, composition, and financial terms of cross-border exchange.

JEL: P3, P33, F15, F36
Keywords: economic integration, property rights, institutions, transition, China, North Korea

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