After fears over Greece and European economies, fears over the tension between the two Koreas are reported to be responsible for the fall of stock market indices on world markets. How serious is the North Korean threat? It is true that the two Koreas are technically still at war and that dictator Kim Jong Il's regime appears unpredictible. The finding that a North Korean submarine torpedoed a South Korean warship, killing 46 soldiers is yet another episode in the tension created by the North Korean regime. Over the last ten years, there have been multiple episodes in the Korean drama, from multiple missile launches to the conducting of nuclear tests and the building of nuclear facilities, the shooting of South Korean tourists to the episodic insult campaigns launched by North Korean media against South Korean President Lee Myung Bak.
Episodes of escalating tension, like the current one, should not hide the fact that the North Korean regime is extremely weakened economically and militarily. Any military adventure against South Korea would backfire immediately and almost surely lead to very fast regime collapse. North Korean leaders however want to continue appearing threatening so as to obtain foreign aid to keep their economy afloat for yet a little while. While they may be good at inspiring fear, the South Koreans who stand to lose the most from a North Korean attack are less and less impressed. In research I did with Byung-Yeon Kim from Seoul National University using event analysis, we found that episodes of tension in the Korean peninsula generally did not affect the Korean stock markets, bond yields or the value of the South Korean currency. This suggests that financial markets in South Korea do not take the North Korean threat seriously. The same can be said for this week's episode. The South Korean Kospi index fell by 2.7% today but the Japanese Nikkei or the Hong Kong Hang Seng index fell by over 3%. The fall in the South Korean stock market was not higher than in the Indian stock market where the consequences of a military crisis in the Korean peninsula would not be felt as strongly as in North East Asia. The Dow Jones index which today fell at some point by nearly 300 points nearly completely recovered by the end of the day.
There will be more episodes of tension in Korea in the coming months but they will in all likelihood not lead to a major crisis. Does that mean that we should not worry about the situation in Korea? Not as long as the North Korean regime is in place. However, given its utter weakness it might collapse sooner rather than later. A regime collapse, triggering famine and disorder in North Korea might be the source of a very important international crisis if not handled well. Narrow collaboration between countries involved in the six party talks (China, the US, Japan, Russia and South Korea), and especially between the US and China will be crucial to avoid such a crisis when the time comes.