Kim Jong Il Is Dead. What Are the Implications?

by Erik Lueth, Royal Bank of Scotland, 20 December 2011

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Risk Management

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Kim Jong Eun Kim Jong Il Korean Unification

North Korea’s Kim Jong Il died, according to South Korean media. He will be succeeded by his son Kim Jong Eun, who has been officially groomed for this role for about two years now.

There is no question that markets will be volatile for a week or two. As of 11:30am on Monday, 19 December, the won is down 1.4% and the Kospi has lost 4%.

But what are the chances of impending regime collapse or a military aggression during this time of heightened vulnerability for the Northern state?

We believe that the chances of a military aggression are limited. Kim Jong Il suffered from pancreatic cancer, so his death was more or less anticipated by the Northern leadership. Despite this, North Korea remained very engaged in efforts to restart the six-party talks involving the two Koreas, China, the US, Russia and Japan.

In fact, many interpret the aggressions of 2010 – the sinking of a South Korean warship and the shelling of a South Korean island – as efforts to bring its opponents back to the negotiating table. North Korea has no record of aggression while engaged in negotiations with opponents.

Having said that, the Northern regime will be prickly over the coming months and we should look out for signs that it is withdrawing from low-level diplomatic efforts to mend fences.

The chances of a regime collapse have increased with the death of Kim Jong Il. This could be brought about either by a coup or by a failed attempt to reform the political and/or economic system (the Gorbachev legacy).

There is a slight chance that regime collapse would lead to anarchy and civil war. However, North Korea’s centralised organisation and concentration of power should prevent this worst of all outcomes. It would also call for the deployment of an international army, given the risk of nuclear proliferation.

Unification scenarios

A Big Bang unification comparable to the German model is not an option for Korea. German reunification is estimated to have cost between US$600 billion and US$1 trillion over ten years, equivalent to 30%-50% of West German GDP.

The price tag would be significantly larger in the case of Korea, which effectively rules out this option altogether.

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