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North Korea Nuked … North Korea

 February 13, 2013 03:37 PM


An earthquake alerted the world to North Korea's third nuclear test, Tuesday. The US and China were among those to condemn the test as provocative and threatening. And in reality it was probably meant to be nothing more. We'll leave analysis of North Korea's motivations and America's potential response to geopolitical strategists. Instead, we'll focus on the longer-term economic and market impact—which is likely nil. The more important lesson here is how much better countries embracing capitalism fare overall.

Whether or not North Korea's latest foot stamp heightens geopolitical tensions or even leads to outright war is debatable. But there's no evidence heightened tension is a guaranteed negative for the global economy or markets. History shows us global stock market returns in years with major, seemingly disastrous events—in other words, just about every year—aren't consistently high, low or flat. The only visible pattern is, overall, markets post positive returns more often than negative. So while there's never a dull moment to quell fears, global market reactions aren't necessarily in line with universal concerns.

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Though the macro-economic impact is likely nil, the same can't be said of North Korea. North Korea relies heavily on global powers (the same ones it seems intent on irritating with repeated nuclear tests) to provide aid to its citizens. But after recent shenanigans upsetting even China, its only powerful ally, a disruption of that aid, at least from some corners, doesn't seem unlikely.

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Now, in other developed countries (which are all capitalistic economies) and even major developing ones (which are a mixed-bag of capitalistic to communistic with some capitalistic tendencies), a disruption to external supply (which is what North Korean aid is—a lifeline for basic necessities) could be offset by seeking alternative supply elsewhere or from within their own borders. Perhaps that's not easy in every category of good, but it would be possible. However, not having much an economy of its own, North Korea likely can't supplement supply of foreign goods with domestic goods because, well, there really aren't domestic goods. At least not widely or publically available. (And need we repeat they only have one, now rather annoyed, real ally?)

We'd argue, rather than asserting its (questionable) military prowess, if North Korea really wanted to improve its citizens' lot, it might try opening its economy or incentivizing its citizens to produce more (and better). But instead, travesties like gulags still exist.

Earlier this year, Kim Jong-Un seemed more to open basic economic principles like, "If workers don't have anything to gain from producing more, they probably won't." Unfortunately, not much seems to have developed along those lines. Perhaps North Korea's government had another economic realization since: Exposure to the much better quality of life available outside North Korea, which would undoubtedly follow an introduction to capitalism, would certainly make controlling its citizens harder for the government.

So it seems highly likely the North Korean economy will remain reliant, for some time, on foreign aid.  Though from whom the aid comes or how often depends on its foreign relations, which at the moment aren't particularly rosy. Mind you, in the past, saber rattling from North Korea has resulted in some finger wagging, tsk-ing, strongly worded letters and eventually caving by its major patrons (the US included) and little change to aid supplied. Whether tunes are changed remains to be seen. But in the end, North Korea's nuclear test really only hurt North Koreans.

source: Market Minder
Disclaimer: This article reflects personal viewpoints of the author and is not a description of advisory services by Fisher Investments or performance of its clients. Such viewpoints may change at any time without notice. Nothin herein constitutes investment advice or a recommendation to buy or sell any security ot that any security, portfolio, transaction or strategy is suitable for any specific person. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
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