Factbox: Key political risks to watch on the Korean peninsula

SEOUL (BestGrowthStock) – North Korea fired dozens of artillery shells at a South Korean island on Tuesday, setting buildings on fire and prompting a return of fire by the South.

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

For decades, the Korean leadership has played a carefully calibrated game of calculated provocations in order to win concessions from the international community. The risk is that the leadership transition has upset this balance and that events spin out of control.

Following is a summary of key risks to watch:

THE THREAT OF WAR

Twice this year, North Korea has unleashed attacks on the South that have sharply raised the risk of war.

A torpedo attack on the South Korean corvette ‘Cheonan’ in March killed 46 sailors and rattled markets which until then had increasingly taken Pyongyang’s provocations in their stride.

Tuesday’s shelling of the island of Yeonpyeong has further raised the risk level across north Asia, which accounts for one-sixth of the global economy.

If major conflict erupted, North Korea could lob thousands of artillery rounds into the Seoul region, home to about half South Korea’s population, and fire missiles at cities in South Korea and Japan, causing crippling economic damage.

But analysts believe war to be very 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 miniaturize an atomic weapon to place on a missile.

Though the probability of a full-scale conflict is very low, the risk remains that small-scale skirmishes like Tuesday’s incident escalate and lead to disaster.

What to watch:

— South Korea’s response. President Lee Myung-bak, who has pursued a hard line with the North since taking office three years ago, said the response to the shelling must be firm. But Seoul does not want war. Following the Cheonan attack on March, the South Korean government was careful not to provoke a further serious escalation in tensions. Can it do the same now?

— Popular sentiment in South Korea. Will public anger push the government toward taking a tougher line that could spark further escalation from the North?

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.

Besides 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 in the South. 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.

President Lee proposed a new tax earlier this year to help fund the eventual bill for reunification, but the suggestion met with a lukewarm response, especially from younger South Koreans, many of whom would resent having to make sacrifices for the sake of their impoverished northern 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 elites 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 on 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 dies or is incapacitated before Kim Jong-un has a firm grip on the reins of power, the chances of upheaval and regime collapse would be much greater. (Writing by Andrew Marshall; Editing by John Chalmers)

(Reporting by Andrew Marshall)

Factbox: Key political risks to watch on the Korean peninsula