North Korea
10 August 2017
“North Korea best not make any more threats to the United States. They will be met with fire and fury
like the world has never seen” – Donald Trump.
This quote from US President Donald Trump has thrust the geopolitical situation in North Korea back into
the spotlight. Back in April (last time they were in the market spotlight) we wrote the below essay on the
situation in the country. It has not been updated with the material for the last few months but the details
are still basically the same. Please see below:
North Korea has been in the news again this
month and under its most recent monarchical
dictator is flexing its apparent ‘military
muscle’ (they do this every so often for
attention and aid). I found myself discussing
North Korea and its impact on the financial
markets on numerous occasions with my
clients over the last month. I therefore felt compelled to write a short article on the
and my share my opinions on the regime.
The Humanitarian Situation:
From a humanitarian perspective, the situation in North Korea is dire. I will not
mince my words here – I believe that North Korea is a disgrace to the international
community and a failure of globalisation. If you are unlucky enough to be born in North
Korea you have a 1 in 3 chance of being stunted, being too small/short for your age
because of chronic malnutrition (North Korean men are on average 3-8cm shorter than
their South Korean counterparts). It is also likely that you will not have access to basic human rights
such as freedom of speech, education, religion and healthcare.
Warren Buffett is quoted as saying that he won the “ovarian lottery” by being born in America,
implying that he could have been born anywhere. If he had been born in North Korea
we would never have heard of him. For children born in North Korea today you are
not only born hungry but with no hope or opportunity for improvement and
progression. Since Kim Il-Sung and the formation of North Korea in 1948 there have
been three ‘lost’ generations of North Koreans, it is impossible to compute the human
potential that has been wiped out. Not to mention the money, resources and military
muscle that has been wasted preserving and appeasing the regime.
The situation is best evidenced when you look at satellite images of North Korea at
night. From a development perspective, this does not really require explanation and
points out the obvious. But it also highlights inequality within the country itself with
the only ‘bright’ spot being Pyongyang where the political and privileged elite maintain
power. This inequality is symbolised most pointedly by its dictator Kim Jong Un (above)
who unlike the rest of the population clearly does not have the same day-to-day battle
with malnutrition.
The Geopolitical Situation:
The situation in North Korea has persisted for nearly 3 quarters of a century. 10 years
ago, when I was at University I wrote a paper on the prospects of North Korean
unification. I could reproduce that here because not a lot has changed. This is because
geographically North Korea has not moved. On its northern border is China and in the
south, is the United States who have maintained a military presence with its staunch
ally South Korea since the end of the Korean War. The details surrounding this
geopolitical stalemate are intricately complex and well beyond the scope of this article.
Potential Solutions and its Impact on the Financial Markets:
I would welcome the dissolution of North Korea in its current form and I believe that
its integration into a globalised world would only offer long term economic and
humanitarian benefits as well as providing political stability to the region. Economic
growth in the country from this scenario would be from a virtual standing start and
would therefore be a centre of growth in the region.
I can visualise three broad and unlikely situations where this could eventuate (note
that there are undoubtedly other potential outcomes with numerous different
iterations).
Military Action:
Both the United States or China would be able to act independently and launch military
attacks on North Korea. The chances of this happening are slim, both will not take
independent action because it would increase political instability and dramatically
increase the chances of wider conflict between the superpowers.
One possibility would be for the United States and China to work together on a military
solution for the region. From a military perspective, any confrontation would be short
with the North Korean military being quickly overrun and defeated. North Koreas
annual military spending totals approximately US$6 billion, compared to China’s which
is US$145 billion and the United States which is US$597 billion. However, such an
action would require a long-term commitment from the superpowers and would likely
be unpopular domestically and internationally. There would be parallels between Iraq
and Afghanistan where military victories were swift and decisive but where long term
outcomes are unclear and marred by uncertainty.
Any military action by China and the United States to change the situation in North
Korea would likely be devastating for the financial markets over the short to medium
term. It would be a time of increased volatility where material events would develop
almost daily.
Such military action would only develop if the superpowers were aggressively
provoked and tangibly threatened by North Korea. A situation that is unlikely because
even the disillusioned North Korean dictatorship realises that this would be akin to
shooting themselves in the foot.
US and China Working Together:
I believe that it would be possible for the United States and China to work
diplomatically together over the long term to implement change in North Korea. If the
two superpowers put their heads together in a genuine effort there is very little that
they would not be able to accomplish. However, such an outcome is unlikely as both
superpowers would find it difficult to be able to work together. I cannot imagine a
situation where both would put their own national interests and influences aside to
achieve a diplomatic solution.
Such an outcome may cause short term instability and volatility in the financial markets
but not to the same extent as military action. Long term this would have extremely
positive economic and humanitarian implications as North Korea is integrated with the
rest of the world economy. It would likely also be a significant growth point for
international companies and have positive and lasting benefits for US and Chinese
relations.
An Internal Solution:
This would be achieved either through Kim Jong Un “opening up” North Korea to
reform or through a Mikhail Gorbachev type figure working into a position of political
influence within the countries inner-circle. From a financial market perspective, this
would be the preferred outcome and actions in this direction would likely provide both
short and long-term upside. At the moment, these outcomes while preferable seem
unlikely.
Most Likely Outcome:
The status-quo is likely to prevail. The people of North Korea will continue to suffer
and be left behind internationally. Every so often North Korea will rear its head
militarily for reasons of pride, for aid and recognition. These flare ups will fuel short
term volatility in the financial markets while China and the United States are likely to
continue to appease and tip toe around the regime.