Economic Growth and Trade of North Korea with China: Cointegration and Granger Causality Test
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This paper uses cointegration tests and the Vector Error Correction Model (VECM) to examine causality between Sino–North Korean trade and North Korean economic growth from 1970 to 2012. To conduct empirical analysis, VECM is constructed, which is composed of four variables, North Korean GDP, imported capital as a proxy for investment, exports to China, and imports from China. The cointegration equation suggests that the mechanism of North Korea’s economic growth is basically similar with that of low-income and market-oriented countries, in the sense that trade and foreign capital inflows matter for its growth. The estimation of the VECM shows that in the long-run, exports, imports, and investments Granger-cause income through error correction mechanism, but not vice versa. With respect to short-term causality, however, the variables have slight causal relations with one another except for the causality that flows from imports to exports. This observation shows that traditional barter-type settlement remains prevalent in Sino–North Korean trade.
Abstract
This paper uses cointegration tests and the Vector Error Correction Model (VECM) to examine causality between Sino–North Korean trade and North Korean economic growth from 1970 to 2012. To conduct empirical analysis, VECM is constructed, which is composed of four variables, North Korean GDP, imported capital as a proxy for investment, exports to China, and imports from China. The cointegration equation suggests that the mechanism of North Korea’s economic growth is basically similar with that of low-income and market-oriented countries, in the sense that trade and foreign capital inflows matter for its growth. The estimation of the VECM shows that in the long-run, exports, imports, and investments Granger-cause income through error correction mechanism, but not vice versa. With respect to short-term causality, however, the variables have slight causal relations with one another except for the causality that flows from imports to exports. This observation shows that traditional barter-type settlement remains prevalent in Sino–North Korean trade.
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