Sunday, November 18, 2012

Prepare for N.Korea collapse - S&P


I missed this when it was published in the Financial Times but thankful to MSNBC publishing it on its web site today (must be a slow news day for MSNBC).

I think Chambers' assessment is correct but does not go far enough.  It will have impacts well beyond Seoul and have global economic impact:

John Chambers, managing director for sovereign ratings at S&P, told reporters in Seoul that state collapse in North Korea was just a matter of time and could cause a bigger shock to the South’s economy than the 1997 Asian financial crisis.

This is the explanation for why the north will not and cannot change or reform:

“Although some other Asian nations that used to have centrally planned economies have successfully moved to a market-based system, the North Korean leadership probably lacks the flexibility and the vision to undertake such a change,” said S&P in a statement

But I think this is the key to the future.
In a recent report, Dominique Dwor-Frecaut, economist at Barclays Capital, said state failure in North Korea need not lead to credit rating downgrades in the South. She said the cost of reconstruction would be spread over many years and would be offset by the economic benefits of reunification.
“The Korean peninsula could become a new Asian economic powerhouse if it could associate Chinese-level labor costs in the North with OECD-level financial and legal systems and R&D in the South,” she said.
V/R
Dave
Prepare for N.Korea collapse - S&P
By Andrew Ward
SEOUL, South Korea, Nov. 3 —


Standard & Poor’s, the credit rating agency, said on Monday the collapse of Kim Jong-il’s communist regime was more likely than gradual reform in North Korea and urged South Korea to build financial reserves to cope with the cost of reunification.

John Chambers, managing director for sovereign ratings at S&P, told reporters in Seoul that state collapse in North Korea was just a matter of time and could cause a bigger shock to the South’s economy than the 1997 Asian financial crisis.

The comments brought a reminder of the threats posed to Asia’s third-largest economy by its poverty-stricken but heavily armed neighbor. North Korea’s pursuit of nuclear weapons has focused attention on the risk of war on the divided peninsula but most analysts say internal collapse in the North is a more likely event.

North Korea has started to reform its rigid command economy in recent months by liberalizing prices and wages but S&P said the regime was too rigid to emulate the market openings adopted by communist governments in China and Vietnam.

“Although some other Asian nations that used to have centrally planned economies have successfully moved to a market-based system, the North Korean leadership probably lacks the flexibility and the vision to undertake such a change,” said S&P in a statement. “Unless South Korea has substantially built up fiscal reserves in the meantime, its [credit] ratings would fall from their current level upon sudden reunification of the peninsula.”

Analysts have been predicting collapse of the North Korean regime since 1989, when communist states started to fail in eastern Europe. The state has proved more resilient than many expected, surviving a famine in the mid-1990s that killed at least 1 million people and recording modest economic growth over the past three years. However, dwindling international food aid to the country and U.S. attempts to block some of the regime’s most important sources of cash, such as exports of arms and drugs, has prompted fresh doubts about the durability of the world’s last Stalinist state.



(Continued at the above link)

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