Factbox: Key political risks to watch in South Korea

By Jack Kim

SEOUL (BestGrowthStock) – South Korea on Wednesday announced land and sea military exercises including its largest-ever live-fire drill near North Korea in a big show of force just as tension on the peninsula was easing after Pyongyang’s attack on a southern island in November.

The land drill, involving artillery, fighter jets and the largest number of personnel in a peace-time exercise, will take place on Thursday, after the South’s live-fire artillery exercise on Monday on the island of Yeonpyeong, and is bound to infuriate the North.

North Korea this week offered to re-admit U.N. inspectors concerned about its nuclear-weapon program, leading to speculation of a resumption of six-party disarmament talks and a general sigh of relief around the world that the crisis had passed.

Tensions had been high since the two sides exchanged artillery fire on November 23 and North Korea shelled a South Korean island near their disputed sea border.

Two civilians and two Marines were killed in the worst clash involving non-military personnel since the downing of a Korean Air passenger jet in 1987 by a pair of North Korean agents that killed more than 100.

Uranium enrichment could give the North a second source of fissile material for weapons on top of its plutonium production program at the Soviet-era nuclear program at Yongbyon, frozen under a now-defunct international disarmament deal.

The new tension put a brake on conciliatory moves in recent months that had appeared headed for renewal of dialogue, after ties sank to their lowest point in years when a South Korean navy ship was torpedoed in March, killing 46 sailors.

North Korea is entering what could be a lengthy period of leadership transition fraught with uncertainty, after Kim Jong-il’s youngest son surfaced in September as heir apparent,

which could push the risks to South Korean asset prices upwards.

Following is a summary of key South Korea risks to watch:

TENSIONS BETWEEN RIVAL KOREAS

The North Korean shelling of the island amounted to an act that had been almost unthinkable: striking at a South Korean civilian area. The attack dramatically raised the risk level for the Korean peninsula and across north Asia, which accounts

for one-sixth of the global economy.

The incident was a reminder that the North could lob thousands of artillery rounds into more populated and developed areas of the South, including the dense capital region of Seoul, home to about half of the country’s population, and fire missiles at cities in the South and in Japan, causing crippling economic damage.

Analysts still believe war is unlikely. North Korea’s obsolete conventional armed forces and military equipment mean

quick and near certain defeat if it wages full-scale war, and

Pyongyang is well aware of its limitations.

Even though it has exploded nuclear devices, North Korea has not shown it has a working nuclear bomb. Experts say they do not believe the North has the ability to miniaturise an atomic weapon to place on a missile.

South Korean President Lee Myung-bak has ordered a review of the military’s rules of engagement to strengthen the response to any attack by North Korea, especially against civilian areas. It will also consider reinforcing military assets and troops on the islands that lie close to the disputed sea border with the North, the scene of fatal naval clashes in previous years.

Concern over the scope of the North’s nuclear program rose after U.S. nuclear expert Siegfried Hecker toured the Yongbyon site in November. He saw hundreds of centrifuges and was said to have been “stunned” by the program’s sophistication.

What to watch:

— Further aggression by the North. Artillery shots were heard from a South Korean island three days after the attack, a reminder to the few residents who remained there that rounds

can start raining down on them any time. A military official said South Korea would bomb the North if it staged a repeat attack.

— Impact on the South Korea won, stocks and bonds. Markets had become relatively immune to saber-rattling by Pyongyang but in the current climate of heightened tension they are more sensitive to geopolitical tensions.

REUNIFICATION

Besides war, the second major risk scenario for markets would be the implosion of the North Korean regime, leading to sudden reunification. Most estimates say it could cost Seoul more than $1 trillion to absorb its impoverished neighbor.

As well as the enormous fiscal costs, South Korea would have to deal with the possible influx of millions of refugees and the social upheaval that this would cause. Tensions with China could spike as Beijing tries to protect its interests, and influence the future of North Korea which it has used as a buffer against pro-Western states.

South Korean President Lee has proposed a new tax to help fund the eventual bill for reunification, but the suggestion met a lukewarm response, especially from younger South Koreans, many of whom would resent sacrifices for the sake of their impoverished neighbors.

What to watch:

— The leadership succession in the North. The appointment of Kim Jong-un, youngest son of the leader, to key positions confirms that he is the chosen successor. Rising with him are Kim Jong-il’s sister and her husband, creating a powerful triumvirate ready to take over the family dynasty that has ruled North Korea since its founding after World War Two. But given the parlous economic condition of the country, the ruling elite have an ever-shrinking share of the spoils to divide between them, and there is always the chance that other

powerful blocs, particularly within the military, try to make a power grab.

— Clues about the stability of the North Korean regime. The North’s decision to revalue its currency in late 2009 sparked rare internal protests, and Kim Jong-il’s efforts to push through new measures to reassert control over the sanction-hit economy may further destabilize his regime.

— Clues about Kim Jong-il’s health. He is widely believed to have suffered a stroke in 2008. If he were to die or become

incapacitated before Kim Jong-un has a firm grip on power, the

chances of upheaval and regime collapse would be much greater.

GOVERNMENT EFFECTIVENESS AND ECONOMIC REFORM

South Korea is regarded as having a high-quality bureaucracy but policymaking and progress on economic reforms are often stymied by fractious politics. It is not uncommon for parliament to be disrupted and blocked for days or weeks at a time, hampering the implementation of policies. President Lee’s Grand National Party (GNP) controls parliament, but his legislative agenda was held up for months this year in a row over plans to move some ministries to a new administrative capital.

Another major Lee project, to clean up and refurbish the country’s four major rivers, has drawn heavy criticism. The opposition is against Lee’s plan to spend public money on what

they say is harmful to the environment.

As Lee looks to secure his legacy as a reformer, he has made clear in recent weeks that his focus is on middle- and working-class welfare as much as improving business conditions. A ruling GNP legislator and confidant of Lee has proposed abandoning planned tax cuts in order to secure resources needed for welfare projects, fuelling a potentially divisive internal party debate.

What to watch:

— The budget. After a lengthy and unruly debate, parliament endorsed the 2011 budget within a week of a December 2 constitutional deadline. But the fallout from the disputes has

left the assembly in limbo, with many opposition legislators angry at the ruling party’s tactics in securing the vote.

— South Korea and the United States have clinched a compromise deal on free trade after concessions made by Seoul on cars. But more than three years after the deal was originally signed, the legislatures of both countries must still ratify it, with animosity still possible on both sides.

(Editing by Daniel Magnowski)

Factbox: Key political risks to watch in South Korea