Tensions With North Korea Unsettle South’s Economy

The development magnified the challenge Seoul and Washington face. The two powers are trying to show the North’s novice leader, Kim Jong-un, that they will not be blackmailed by his bluff and bluster. But at the same time, they do not want to escalate the tensions to an extent that they hurt the South Korean economy, the pride of the local population here, and Park Geun-hye’s political standing at home.

“In the past, North Korea-related events had little impact or the markets recovered quickly,” the South’s vice finance minister, Choo Kyung-ho, told a meeting of top finance officials on Friday. “But recent threats from North Korea are stronger and the impact may therefore not disappear quickly.”

His comment came hours after General Motors’ chief executive, Dan Akerson, underscored the increased worry by saying that his company was making contingency plans for employee safety at its South Korean plants and that further increases in tensions would even prompt GM to look at moving production elsewhere long term. In an interview with CNBC, he said, “If there were something to happen in Korea, it’s going to affect our entire industry, not just General Motors.”

South Korean stocks slumped 1.64 percent on Friday in a selling spree among foreign investors that analysts attributed to jitters over North Korea. The Korean won also sank against the U.S. dollar.

Although South Koreans have become almost nonchalant after decades of on-and-off threats from North Korea, they believe that when things get ugly with the North, their globalized economy has much more to lose than the North’s isolated and already highly sanctioned economy.

“The North Koreans are now using the propaganda in an extreme form to try to damage foreign direct investments into South Korea,” said Tom Coyner, a member of the American Chamber of Commerce in Korea and author of “Doing Business in Korea.” “They are in a sense at this point winning in an asymmetrical psychological warfare, attacking the economic strength of South Korea.”

War cries from North Korea have been factored into the stock market for decades. Still its threats have grown in their intensity and frequency since the country upheld Mr. Kim as its top leader in late 2011, and especially after the United Nations imposed sanctions against the North following its nuclear test in February. The sanctions took direct aim at North Korea’s Achilles’ heel by targeting cash transfers and luxury items which the Kim regime uses to buy the loyalty of the elite.

North Korea has since called the Korean Peninsula “back to a state of war” and declared that it would launch “pre-emptive nuclear strikes” at the United States and its allies. It also said it would never bargain away its nuclear arsenal but rather expand it.

What made the situation different too was the way Washington and Seoul responded. South Korea matched the tone by declaring that if provoked, it would target the North Korean military leadership, and revised the rules of engagement to let its military respond more swiftly, forcefully and “without political consideration.” Meanwhile, the United States flew nuclear-capable bombers over the peninsula on training sorties and signed an agreement with Seoul to respond jointly to any North Korean provocation.

“The relentless show of force on a daily basis by not just North Korea, but also the U.S. and South Korea as part of their annual military exercises has captured the attention of the world, and made the Korean Peninsula a place associated not with ‘Gangnam Style’ but with nuclear weapons and stealth bombers,” said John Delury, an American scholar who teaches at Yonsei University in Seoul.

“Markets hate risk, even if it is the perception rather than reality of risk,” he added. “This poses a serious challenge to President Park, who was elected on the basis of promises to keep growing the South Korean economy and improve relations with the North.”

Government officials said that the military tensions have so far had only limited impact on the markets. But for the South Korean economy, the North Korean imbroglio is an additional drag that comes at an inopportune time. In the face of the weakening Japanese yen, which hurts South Korean exporters, South Korea recently announced a sharp cut in growth forecasts.

Officials vowed to ensure stability if the situation worsens.

Article source: http://www.nytimes.com/2013/04/06/world/asia/tensions-with-north-korea-unsettle-souths-economy.html?partner=rss&emc=rss