SEOUL, KOREA -- Some experts suggest that South Korea may face another foreign exchange crisis if the North Korean regime were to collapse following the death of Kim Jong-il.
In a report entitled "Advent of Kim Jong-un Regime in North Korea and Uncertainty of South Korean Economy", published on December 22, LG Economic Research Institute (president: Kim Ju-hyeong) offered four scenarios that could result from the new N. Korean regime after the death of Kim Jong-il.
The first scenario -- as Kim Jong-un’s regime stabilizes over time, North Korea will attempt a more gentle and experimental reform than China did, and slowly open its doors to the rest of the world. The institute predicts that "if North Korea opens the country in a mild and safe way, it will not only expand the economic cooperation between the North and South Korea but also reduce the threat to South Korea, and therefore, bring a positive effect on the South Korean economy.”
In the second, in a stable regime led by Kim Jong-un, North Korea will continue, as before, to confront and negotiate with the US while maintaining its exclusiveness. “In this case,” the institute argues, “Kim Jong-un’s regime could raise a new nuclear issue or attempt military provocations on a regular basis to exhibit its solidity.” However,“ although it is inevitable for the South Korean economy, which is highly exposed to foreign capital, to be affected intermittently, the impact on the real economy will be limited,” the institute says.
According to the third scenario, the power system of North Korea will become increasingly unsettled and the intervention by neighboring countries like China or the US will lead to intensified and prolonged military tension on the Korean peninsula. The report suggests that “if this becomes the case, it will aggravate the ‘Korea Discount’ phenomenon with side effects such as withdrawal of foreign investment, rising interest rates, and credit crunch, which will bring adverse effects on the real economy.”
Lastly, the worst case scenario is that either North Korea collapses entirely or a radical adventurism spreads within the country, leading into a local or full-blown war. “Drastic collapse of the North Korean regime will inevitably exacerbate South Korea's budget deficit and the national debt by supporting the North Korean economy,” the institute explains. “We can also expect inflation caused by currency volatility, huge withdrawal of foreign capital, stock market crash, and soaring interest rate and foreign exchange rate."
If a war were to break out, the South Korean economy will suffer a far greater shock than the previous foreign exchange crisis, due to rapid withdrawal of foreign capital, and the subsequent mayhem in the financial market will be crushing, according to the institute’s forecast.
“These scenarios are not independent from one another, and the order might change, or one scenario can set the stage for another,” the institute says. "South Korea needs to strengthen its ability to absorb external shock, in advance, in terms of foreign currency or finance.
“Each economic entity must prepare for an emergency plan, and the government should play a leading role in preventing the rise of tension among interested parties,” the report concluded.