Daily Management Review

Will the world economy endure a new Korean war?


05/18/2017


Rise in the price of consumer electronics, broken world trade and increase in US federal debt are some of the most important consequences of a possible war on the Korean peninsula, according to a new report from Capital Economics consulting agency.



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The US and South Korean troops entering into an open, full-scale conflict with North Korea is the last opportunity for Washington and Seoul to restrain North Korea's nuclear programme, which, in Western opinion, poses a threat to the world community.

In the meantime, Japanese Prime Minister Shinzo Abe said in an interview that the international community must respond by acting on such actions, as isolated states continue to launch ballistic missiles that are becoming increasingly sophisticated from a technical point of view.

If military operations begin on the Korean peninsula, this, undoubtedly, will lead to turnabouts around the world, given high probability of the US’ involvement in this conflict, as well as level of economic influence of South Korea.

South Korea is the world's fourth largest producer of electronic goods by added value. The country accounts for just over 6% of global production, says Capital Economics. "Even a relatively short-term conflict will cause catastrophic damage to the economy of South Korea," the report said.

If a war with North Korea disrupt electronics production, companies will start looking for alternative suppliers. Yet, the world economy does not have enough spare capacity to compensate for the lost production of South Korea, the report explains. This means that several companies around the world will be forced to restrain production, which will lead to a sharp rise in prices for electronic goods everywhere.

More expensive goods will have an impact on developed economies. "The US spends on electronic products, including smartphones, cameras, tablets, computers, on average 1% of the amount of the consumer basket. If prices of electronic goods double, this fact will add 1 percentage point to inflation in the US", as other industrialized countries will face similar consequences. Real purchasing power of consumers will drop, and lower spending will force central banks to respond to this by raising interest rates, the company’s analysts.

"Undermining of world trade flows will be the war’s biggest consequence on the world economy due to the deep integration of South Korea's economy into regional and world supply chains", the report says.

Nine out of the ten busiest cargo ports are located in Asia, including the South Korean port city of Busan. Therefore, even those countries that are not involved in the conflict will face its influence if it becomes too dangerous to transport goods in the region.

If South Korea's GDP falls by 50% as a result of the war, this will immediately lead to a reduction in world GDP by 1 percentage point. "A prolonged war in Korea can lead to a significant increase in the US federal debt, which is 75% of GDP and is high enough even now".

However, given military superiority of Washington over Pyongyang, Capital Economics experts believe that any conflict will be relatively short: "a few months, but not years." If the US is involved in the postwar reconstruction of South Korea, this will further increase the financial burden on Washington. "If the US spends the same amount of funds for reconstruction in South Korea, as was the case with Iraq and Afghanistan, it will add an additional 30% to the debt", the report's authors warn.

source: cnbc.com






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