Investors Should Be Worried About Erratic North Korea

North Korea's unprovoked artillery attack this week on the sparsely populated South Korean island of Yeonpyeong put a scare into the international community. What's even more frightening is contemplating the despotic regime's next step.

Tensions between North Korea and the West have been escalating for months. North Korean officials recently showed off their new uranium enrichment facility to Siegfried Hecker, a former head of the Los Alamos National Laboratory who was visiting the impoverished nation. In March, a North Korean submarine sank a South Korean warship, killing 46 sailors. And in 2009, it tested a nuclear weapon that was as powerful as the one that destroyed Hiroshima.

Add to this the uncertainty surrounding the transition of power between ailing ruler Kim Jong Il and his youngest son, Kim Jong-Un (pictured), who was recently given the rank of four-star general in the North Korean military, and the international community is in an extraordinary pickle -- especially given North Korea's possession of nuclear bombs, although its conventional artillery alone could rapidly wreak havoc on South Korea. The odds of greater U.S. involvement in the Korean peninsula appear to be increasing by the hour, while investors wait on the sidelines until the issue is sorted out.

"North Korea carries out such shenanigans because it gets away with them," writes Michael O'Hanlon, senior fellow at the nonpartisan Brookings Institution. "And it does so because it has few other ways to demand the world's attention. Brinkmanship brings it global prominence. It often also brings it economic aid as the international community prefers to offer a few carrots rather than force a confrontation with an unpredictable state owning around 10 nuclear weapons and deploying thousands of artillery tubes within range of South Korean territory."

South Korea, though, is furious about the attack, which killed two Marines and two civilians. Seoul has vowed to "sternly retaliate" if the event of further provocative moves by the North Koreans. Japan's Prime Minister Naoto Kan has ordered his minister's to prepare for any eventuality, according to London's Telegraph. The U.S. and South Korea have agreed to hold joint military exercises.

North Korea Looks Highly Unstable

The solution for such erratic behavior is, of course, a regime change. Secretary of State Hillary Clinton was quoted as saying that the U.S. and its allies were preparing for just that in North Korea. The trouble is that the U.S. has been making similar statements for decades. That's the main reason why 20,000 U.S. troops remain deployed in South Korea, where experts agree they will get drawn into the fray if the North Korean regime collapses.

Sponsored Links

Even experts accustomed to decades of North Korea's erratic behavior (kidnapping civilians, holding the USS Pueblo for 11 months in 1968, on-gain, off-again talks with the international community), say this latest attack has left them speechless.

"It really makes the North Korean domestic political situation look highly unstable. No one knows what the balance of power is in North Korea," says James Metzl, executive president of the Asia Society. "We would have to assume that there could be more [incidents]."

That's a dangerous game for Pyongyang. South Korea cut off almost all humanitarian aid to its impoverished neighbor after the North Koreans defied international sanctions and tested a nuclear device in 2009. The UN's World Food Programme and Food and Agricultural Organization estimates that about 5 million North Koreans continue to face food shortages, despite a "relatively good harvest" and a slight increase in food supplies.