August 8, 2006

N.Korea atomic test seen harming NE Asia economies

WASHINGTON (Reuters) - A test of a nuclear weapon by North
Korea would have a "negative though not cataclysmic" impact on
South Korea's economy and could pose strains on China, said a
study on Tuesday by a leading U.S. economist.

An analysis by Marcus Noland of the Institute for
International Economics found that among North Korea's
neighbors, South Korea was the most economically vulnerable to
a nuclear breakout by the North.

A test by isolated North Korea, which declared itself a
nuclear power in February 2005 without testing, could cause
Japan to suffer some capital flight. China had slight economic
exposure to North Korea, but could suffer if a crisis provoked
by Pyongyang soured ties with the West and Japan, it said.

"The economic implications of a nuclear test for the region
while not catastrophic, would not be benign," wrote Noland, a
leading expert on the North Korean economy.

Defying international warnings, North Korea test-fired
seven missiles on July 5 in a move that was later condemned in
a U.N. Security Council resolution. Talks on ending North
Korea's nuclear programs among the two Koreas, China, Japan,
Russia and the United States have been stalled since November.

Noland's 22-page study used the results of the 1998 nuclear
test by Pakistan that drew widespread sanctions against
Islamabad and the 1997-98 financial crisis in South Korea to
project the economic impact of a North Korean nuclear test.

South Korea's vulnerability to a market panic has risen
because its financial system is far more open and the level of
foreign investors' participation is far greater than it was
during the late 1990s financial meltdown, the study said.

Seoul authorities, however, have official reserves of over
$200 billion and the legal ability to reimpose capital controls
to mitigate the crisis, the study added.

China, with huge reserves and an economy centered on
coastal regions "would appear to be the least economically
threatened by a nuclear test," Noland wrote.

But China had indirect exposure to North Korean
provocations if trade partners reacted to Beijing's role as the
main backer of Pyongyang, the study said.

"A political dispute that spilled into trade policy or
simply contributed to soured trade relations with the U.S.,
Japan, and EU could significantly harm China's economy," it