Marcus Noland on the Economic Implications of Nuke Test

[Update:   link fixed, thanks!]   Last night, just before “Yoduk Story” (my not-a-review  post here), I met several of the people often quoted and cited in these pages, including Ambassadors Vershbow and Lefkowitz, but also the scholar and economist Marcus Noland, someone whose work I’ve long admired for its rigor, research, and objectivity.  This morning, Mr. Noland kindly forwarded two of his recent articles:  “The Economic Implications of a North Korean Nuclear Test,” and “The Economic Implications of a North Korean Nuclear Breakout.”  I haven’t had time to read either in toto, but from the latter, here are two servings from the executive summary.

“¢ South Korea would likely suffer from capital flight, consequent declines in asset prices and investment, and possibly a minor budgetary loss associated with existing investment guarantees to companies operating in the North.

“¢ Japan’s economy would also suffer from capital flight, asset price declines, and a reduction in investment. The true consequences, however, will be political: a nuclear test might strengthen Japanese attitudes towards re-militarization.

“¢ China will be the least directly economically impacted, though significant indirect effects could be felt if China’s policy toward North Korea became entangled in trade policy tensions with the United States, the European Union, and Japan.

“¢ North Korea. A nuclear test would lead to a temporary economic shock, but concerns about North Korean political stability would keep South Korea and China engaged.

Noland also mentions these policy implications:

“¢ North Korean nuclear proliferation activities could have large negative economic spillovers on its neighbors in Northeast Asia.

“¢ The negative impact a nuclear breakout would have on the region underscores the importance of international cooperation to solve the North Korean nuclear problem and to deter Pyongyang from carrying out provocative policies.

“¢ Governments with interests in Northeast Asia should prepare cooperative measures to lessen the economic and political impacts of a North Korean nuclear breakout.

Noland doesn’t think the threat of sanctions will prevent a nuke test, and I agree.  Although I’m not completely on board with Richardson on  “strategic disengagement” — I think Kim Jong Il knows that he needs outside cash to survive — I  agree that  the regime  fears opening its economy or society to the outside  world.  It has said as much.  I also agree with Richardson and Chuck Downs that the reasons for these tests and test threats is probably domestic, and don’t rule out my theory on that yet.  Perhaps out of desperation, Kim Jong Il  has confronted and accepted the risk  that the South Koreans and Chinese  would  cut him off (mitigated by  private assurances, perhaps?).  That means that as long as the regime persists, it will keep scaring capital  away from  South Korea, and the risk is always there that a big enough scare will throw a bank or two into insolvency.

It makes you wonder just who is really balancing who here.