Will North Korea’s artillery blast the global economy?

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Here we are again in another round of belligerent and stupefying behavior by those wacky North Koreans. On Tuesday, North Korea suddenly shelled a South Korean island along a disputed border, setting buildings ablaze and prompting South Korean forces to fire back. The exchange came just days after the world discovered that North Korea has a new, modern facility to enrich uranium that could expand Pyongyang’s nuclear capability.

What does all this mean for the fragile world economy? North Korea’s dangerous behavior comes at a terrible time, just as global markets are already jittery about Europe’s woes after Ireland sought a bailout for its debt-plagued economy over the weekend. Traders and analysts are already predicting North Korea’s actions will only make investors more risk averse, likely leading to a strengthening dollar (still seen as a safe haven) and weakening stocks around the world. And with Asia acting as the engine of world growth, anything that undermines Asia’s outlook would be a big, big problem for the global rebound from the Great Recession.

But I wouldn’t get too worked up about the potential economic fallout from rising tensions on the Korean peninsula. Kim Jong Il’s unpredictability and continued willingness to use lethal force for unknown ends might shake up markets a bit but is unlikely, in my opinion, to have any greater negative impact.

Or at least that’s what history tells us. South Korea’s economy has been one of the world’s best performers over the past 50 years, with North Korea hurling threats (and occasionally something more deadly) throughout that entire growth story. In recent times as well, rising tensions produce little more than short-term market volatility. In March, North Korea sank a South Korean naval vessel, but there was no medium or long-term damage done to either the economy of South Korea or the wider East Asian region. The prospects for the South Korean economy continue to be so strong I can’t see Pyongyang derailing them. We can say the same about the entire Asia region. In my opinion, the geopolitical risk to investors from North Korea has always been way overblown.

This analysis is based on the assumption that Tuesday’s exchange of artillery fire won’t lead to a full-on war between the two Koreas. We’ll have to see how things play out over the next few days, but Seoul has little incentive to turn North Korean provocations into all-out shooting wars. As my colleague Bill Powell smartly pointed out, South Korea has far too much at stake to allow Kim Jong Il to draw the country into a war that would truly undercut its economic prospects. That’s frustrating for the government in Seoul, but unlikely to change due to today’s events.

So in the end, the only real victim of North Korea’s belligerence is – North Korea. By continuing to live in a Cold War that everyone else has forgotten, Pyongyang traps its economy in the Dark Ages and its hungry people in destitution. That’s bad for the North Koreans, but sadly matters little to a roaring Asia economy.

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