A woman talking on the phone walks past an electronic board of the Korea Composite Stock Price Index (KOSPI) at the Korea Exchange (KRX) in Seoul, South Korea, January 20, 2016 REUTERS/Kim Hong-Ji

Despite recent stock market fluctuations, South Korea remains an attractive investment. It has a highly developed and free economy that has shown an ability to resist political instability, both domestically and from North Korea.

On the Index of Economic Freedom, produced by the Heritage Foundation, South Korea is ranked as the 23rd freest economy in the world.

Its highest scores are in Fiscal Health (97), Business Freedom (90.6), Monetary Freedom (79.5), and Property Rights (77.8). South Korea’s economy is defined by free trade, rule of law, and monetary stability.

They have a low debt-to-GDP ratio, at 38%. Monetary policy, while relatively loose in recent years, has been more restrained than most developed economies.

Interest rates have not fallen below 1.25%. Inflation in South Korea has been under 3% for the past 5 years, and they have not fallen into deflation in decades.


source: tradingeconomics.com

While it might be tempting to panic about South Korea because of recent news, their economy is a resilient and stable one that is able to grow and reform despite North Korean threats or domestic instability.

In any event, the threat North Korea poses, and the probability there will be a war between the North and the South, has been overstated.

The goal of the Kim dynasty has always been survival. Not just of themselves, but of the regime. The entire North Korean foreign policy can be understood from this perspective.

The goal of the Kim dynasty has always been survival. Not just of themselves, but of the regime. The entire North Korean foreign policy can be understood from this perspective.

Kim’s acquisition of nuclear weapons, though destructive for the greater good of humanity, could potentially lower the political risk to South Korea, not raise it.

After a week of rhetorical escalation, Kim publicly calmed down on August 14th. State media indicated that he had backed away from a plan for a demonstrative missile test near Guam.

On the news, South Korean equities, which were down over the preceding week, returned to positive territory. This is the cycle of Korean crises: the North issues a bold and improbable threat, markets get jumpy, things calm down, markets return to normal.

From August 5th to August 15th, the primary South Korean stock exchange dropped 2.3%. Since the 15th, that market has gone up 0.5%.

If you were to assess political risk on the Korean peninsula based on stock performance, you would likely not conclude that North Korea’s latest nuclear development is an existential threat to South Korea.

While a lot of hype has been made over the theoretical capacity of NK to strike major West coast cities, there is no incentive for the North to do so; only for the North to have the capability to do so.

Kim is not Bin Laden. He is not an apocalyptic religious maniac, he’s a hedonist who wants to keep the power, wealth, fear, and respect his position grants him.

North Korea’s Kim Jong Un. Photo: Kyodo/Reuters

An attempt to invade South Korea, launch a nuclear missile at Tokyo or San Francisco, or otherwise push the US to the point of war, would result in the destruction of the North Korean state in relatively short order, and the likely capture and execution of its highest-ranking officials.

The way the Kims have avoided that result so far is this: they do something provocative, the US, Japan, and South Korea begin to fear an imminent war, the US talks tough in response, markets take a hit, and then things go back to normal.

Under more liberal regimes in the US and South Korea, North Korea will then get some favorable deal regarding electricity or food subsidies. This is a strategy that has worked for the Kim dynasty for decades.

The best example being the early 1990s, when Kim Jong Il provoked the US through nuclear weapons development, resulting in the “Agreed Framework,” under which the United States gave North Korea oil and assisted them in the development of civil nuclear power generation.

In exchange, Kim Jong Il said he would stop pursuing nuclear weapons. He didn’t, of course.

Through the pursuit of nuclear weapons, Kim Jong Il gained more economic and political security. His son has followed in his footsteps.

Through the pursuit of nuclear weapons, Kim Jong Il gained more economic and political security. His son has followed in his footsteps.

These are not the actions of raving genocidal lunatics, as has been alleged. The actions Kim Jong Un has taken, reprehensible as they are, are rational given his goals (survival of himself and his regime).

His latest provocation, the attempt to miniaturize a nuclear weapon that should have roughly the destructive capability of the bomb dropped on Hiroshima, is similarly rational.

It helps ensure the survival of his regime, by making the costs of removing him too high. And here’s the central point: in the long term, that should make war less likely, which, in turn, lessens political risk to South Korea.

That nuclear weapons lower the risk of war was conventional wisdom in the Cold War. Why did the US and the Soviet Union never go to war? Because in 1949 the Soviet Union detonated a nuclear weapon.

Had the Soviets never acquired nuclear weapons capability, the likelihood is one of the many Cold War crises would have escalated to war.

Nuclear weapons have been subject to such criticism in our society that we’ve forgotten that, in the hands of rational actors, they can be great geopolitical stabilizers.

There is little reason at this point to not assume that Kim Jong Un is a rational actor, as his actions have been rational. His foreign policy efforts are consistent with those of a reasoning individual focused primarily on personal and regime survival, not those of a madman with a death wish.

What Kim has done, effectively, is greatly reduce the threat his regime faces from the outside, by raising the costs of war for the United States to such a level that an invasion of North Korea, or an attempt at regime change have become almost untenable. The costs are simply too high.

Steve Bannon realized this, and, prior to his dismissal, stated in simple terms that the military option was not realistic.

“Until somebody solves the part of the equation that shows me that ten million people in Seoul don’t die in the first 30 minutes from conventional weapons, I don’t know what you’re talking about, there’s no military solution here, they got us.”

Charles Bowyer is the political risk analyst for Bowyer Research. Jerry Bowyer is Chief Economist for Vident Financial. Vident has S. Korea as the number one weighting in its international equity index. For more info see the country scorecard here.