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Kim Jong Il’s death could upset regional economy in Asia

The unexpected death of North Korea’s cult-like leader has added a new layer of risk in Asia, a region that has generally been a bright spot in a slowing global economy.

Underscoring that concern, stock markets in South Korea and elsewhere in Asia sank on the news Monday that Kim Jong Il had died at age 69, ending two decades of rule marked by devastating famine at home and skirmishes with South Korea, the U.S. and other countries over North Korea’s nuclear weapons program.

Although experts expect Asian stocks to recover fairly quickly, some also warned of more potential financial shocks as North Korea, one of the world’s poorest and most repressed countries, embarks on a dicey dynastic transition from “Dear Leader” to his young and inexperienced son, Kim Jong Un.

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PHOTOS: Kim Jong Il | 1942-2011

“I think we will be entering a period of heightened uncertainty, a possibility of more bad things happening … like another nuclear test, and those could disrupt regional markets,” said Marcus Noland, an economist and North Korea expert at the Peterson Institute for International Economics in Washington.

By itself, North Korea’s closed and backward economy is too puny to matter. Based on official exchange rates, the country’s gross domestic product was estimated by the CIA at $28 billion in 2009, roughly the size of Bakersfield’s and only about 3% of South Korea’s GDP.

But if North Korea’s chronic food shortages and other entrenched economic problems worsen — and there are signs that the country is straining under higher grain prices — and the new leader has trouble consolidating power, it could touch off events creating more political and military instability. And that could upset the whole regional economy.

Noland said, for example, there are indications that North Koreans are switching to corn from rice, the more expensive and preferred staple. “It’s a signal things are getting tighter [and] households are having to conserve,” he said.

The increased risks in the Korean Peninsula come at a time when the global economy is relying more on Asia as the traditional powers of Europe and the U.S. struggle with high debts and unemployment.

With China and India leading the way, the developing economies in Asia are projected to grow 8% next year, according to the latest forecast by the International Monetary Fund. That compares with 1.9% for the U.S., Europe and other advanced economies. Even that projection may be too optimistic, given the Eurozone’s still-festering debt problems and a U.S. economic outlook clouded by political gridlock.

“Markets hate uncertainty, and Kim Jong Il’s death adds uncertainty to an already uneasy global economy,” Keith Ducker, the San Francisco-based chief investment officer at technology operator TORA, told MarketWatch.

Adding to the concern, Japan’s economy is still grappling with changes wrought by the March earthquake, tsunami and nuclear crisis. The country’s economy grew slower than expected in the third quarter and faces a steep decline in exports to Europe.

China, the world’s second-largest economy, is just as vulnerable in terms of exports. Meanwhile, Beijing is struggling to deflate the nation’s property bubble without derailing economic growth.

The geopolitical question of stability in the Asia-Pacific region has long been a priority for the U.S., both economically and militarily. In the last year the Obama administration has made a concerted effort to solidify relations with allies such as South Korea and Japan, while sending a clear message that the U.S. intends to remain an influential party in the face of a rising China.

China has been North Korea’s biggest benefactor, and some analysts don’t think Beijing will allow things to deteriorate so much in Pyongyang that China’s self-interest in the region is threatened. What’s more, China is facing a highly sensitive political transition at home next year, and problems in the Korean Peninsula will make that more complicated.

“China, from a foreign perspective, will keep North Korea on a short leash,” said Barry Bosworth, a global economics expert at the Brookings Institution. As a result, he said, North Korea “is not going to go off the reservation too much. [China] won’t tolerate that.”

Noland agrees that China has a vested interest in maintaining stability in the region. At the same time, he said, Beijing has far less control over North Korea than many people might think.

What’s more, Noland cited an example from the 1990s in which rising global grain and food prices strained China’s own economy, forcing it to impose an export embargo that badly affected North Korea.

“China has its own internal politics as well,” he said. As such, “it’s an imperfect insurance policy.”

don.lee@latimes.com

david.pierson@latimes.com


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