Geopolitical tensions appear to have stopped the global economy in its tracks, so it would be helpful if those tensions were to ease as the dust settles in Iraq. The problem is that there is no shortage of other geopolitical issues to preoccupy economic decision-makers.
An emerging source of concern is the Korean Peninsula. In October 2002, North Korea admitted to running a clandestine nuclear weapons development program, in contravention of its international agreements.
This admission sparked a steady escalation of rhetoric between North Korea and the U.S. In January, North Korea served notice that it would withdraw from the Nuclear Non-Proliferation Treaty in April, and that withdrawal is now official.
All indications are that North Korea now has the ability to inflict heavy casualties on South Korea and its other neighbours, or transfer the technology to other rogue states.
Why? The official line is self-defence, but the real reason is that the North Korean economy is in truly desperate straits, and the political regime is completely preoccupied with its own survival. Although they cannot hope to accomplish anything meaningful through a military operation, they appear to be prepared to make threats to get what they really need – a serious injection of outside money.
This additional uncertainty comes at a bad time for South Korea, which only three months ago seemed to be in the economic sweet spot. South Korea is extremely dependent on imported oil to fuel its manufacturing economy, so high oil prices have taken a toll on growth expectations. Meanwhile, rising credit card defaults have led to concerns that the consumer debt boom has been overdone, prompting banks to tighten credit conditions.
Further, the SARS scare has cast a pall over some key elements of the South Korean economy – China is South Korea’s largest destination for foreign investment, and has surpassed Japan and the U.S. to become South Korea’s biggest trading partner.
Adding to all the clouds of uncertainty blowing in from the north, 2003 growth forecasts for South Korea are being scaled back from six per cent to about four per cent. This matters because South Korea is at the hub of the Asian comeback story.
Although Asian economic growth has become more self-sustaining because of rising domestic demand, each economy depends on all the others.
Ironically, while it was the looming war in Iraq that first prompted North Korea to take this course, the war’s quick resolution may have shaken their confidence in the strategy. The past week has seen them bend on their previous position that they would negotiate only with the U.S. – it now seems that the door is open to a multilateral solution involving North Korea’s neighbours as well.
The bottom line? A negotiated settlement to the Korean crisis remains the most likely outcome, and the most practical. The world needs badly to check the proliferation of nuclear missile technology, while North Korea badly needs economic assistance. But the fact remains that, like the situation in Iraq, this one could keep the global economy on pause a while longer.
(Stephen Poloz is vice-president and chief economist for Export Development Canada. He can be reached at spoloz@edc.ca)
