The Economics of the Korea Crisis
Image Credit: Wikicommons

The Economics of the Korea Crisis


It would be understandable if the more than week-long war-like rhetoric on the Korean peninsula had long ago spooked investors into abandoning the more successful of the two countries. Threats of nuclear strikes, combined with daily news reports of ever more powerful U.S. military hardware being deployed through the region, could easily have had investment managers selling down the Won or fleeing the South Korean stock markets.

Not surprisingly, there is not much economic activity between the two Korean rivals.  The state of high tension means that the Kaesong Industrial zone is the only economic exchange of any note – producing less than half a billion USD of goods last year— although generating an estimated US$2 billion in trade for North Korea— it is hardly significant for the successful and rich South Korean economy.  Of course this is not to say that South Korea’s economy and investment climate are immune to any conflict. Were any serious hostilities to break out, severe economic disruption would presumably afflict the South, especially since its capital and financial hub – Seoul – is within range of a mass of North Korean artillery (the “real” North Korean deterrence).

The Kaesong zone is thus far from being of strategic economic importance to South Korea, although it is believed to be a vital source of earnings for the heavily-sanctioned North.  Despite all the fiery rhetoric emanating from Pyongyang over the last few weeks though, the zone remained conspicuously open – with South Korean staff being allowed to enter as normal. Ignoring the alarm and excitement in the media, the main Korean Composite Stock Price Index (KOPSI) actually climbed last week. Meanwhile, the Won continued its gradual weakening – a trend which far pre-dates the current tensions on the peninsula – and was not related to ongoing threats.

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It was an odd contrast; on the one hand, the global media seemed to point towards an imminent military conflict, perhaps even nuclear war, and yet market participants seemed to be dismissing the chances of any real disruption. Meanwhile, for all of its bark, the daily flow of South Korean workers into the fully operational Kaesong Industrial Zone seemed to suggest that the markets were correct – this was all just bluster – until Wednesday that is. 

The trigger for the sudden change in market sentiment Thursday seems to have been the reversal of North Korea’s apparent paradoxical position on the Kaesong Industrial zone.  When Pyongyang started blocking the entry (not exit) of South Korean workers and trucks heading into the zone, and then media rumors suggested that the North had ordered the zone to be emptied by April 10, the financial markets seemed to finally take note.  The KOPSI dropped dramatically on Thursday, eventually pulling back to close down 1.2%. 

South Korea has denied that Pyongyang set a deadline by which workers from the South must withdraw. At the same time, it has threatened to withdraw the North Korean workers from the park and, without letting trucks cross over the DMZ to bring in materials, work in the park will soon come to a halt.

Whatever the case may be, it is clear now that Korean markets at least are now focusing more closely on the geopolitical situation.  Regional investors may be wise to follow suit. Financial markets, obsessed as they are with measuring and reacting to real risk, often see things differently from other observers. Now it is clear that from their point of view, the disruptions at the Kaesong Industrial zone carry far more symbolic significance than any of the other bluster.

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