International Herald Tribune
Why haven't the markets panicked?
HONG KONG The front pages scream "global condemnation of North Korea," "new era of nuclear danger." The business pages record scant market reaction, even in South Korea where the share index has fallen less than 2 percent. Is the financial world missing something, or is the "shock and awe" response of governments to Pyongyang mostly rhetoric?

The foreign responses are in part attributable to the way in which the test has jeopardized their other policies. It has been assumed for some time that the North had the material and know- how for a basic bomb.

The broadly shared miscalculation was in assuming that the North would prefer to keep this capability as a bargaining tool rather than raise the stakes and risks by playing its one big card.

The South Koreans are angry because the "sunshine policy" of offering carrots to the North appears to have failed, yet no one can offer much of a constructive alternative other than to cut off all aid, which will cause more Koreans to starve.

The South is also upset because for all its conventional warfare superiority, it is now seen to be still reliant on the U.S. nuclear umbrella. That in turn limits its ability to pursue an independent policy.

The United States is angry because the bomb exposes the foolishness of having refused to engage the North directly. Isolation and additional sanctions, not to mention the insults that pass for policy in Washington, have stalled the six-party talks and encouraged the North to raise the stakes. America is also angry because inability to stop the North's nuclear progress weakens its position on nonproliferation in general and Iran in particular.

The Japanese are angry partly because the North Koreans always present an easy "enemy" around which to unite. They are doubly angry because one reason for Prime Minister Shinzo Abe's attempt to improve relations with China and South Korea was to increase the pressure on Pyongyang to abandon its bomb project.

China is angry because North Korea, in a typical act of putting perceptions of its nationalist and security interests before all other considerations, has so brazenly ignored it. China is now in the embarrassing position of being the one country with significant economic leverage over the North, yet shown to be incapable of using it for fear of creating chaos on the Korean Peninsula.

The only power and neighbor which does not appear to be angry is Russia, which will go along with the Security Council sanctions but may be quietly amused at the discomfort of China and America.

So what is Pyongyang's objective in angering its supposed friends as well as enemies?

The timing is interesting. First, it occurred on the eve of the anniversary of the founding of the ruling Workers' Party and hence was intended as a symbol of the success of the party's ideology of "juche" - extreme nationalist self-reliance. Second, it coincided with Abe's fence-mending with Beijing and Seoul, which was partly intended to enhance pressure on the North not to develop a bomb.

The North Korean bomb, however crude, however lacking a delivery system, is now a reality. So the issue now is, what can be done to stop the North from moving from a demonstration bomb to a significant arsenal and a delivery system? And to prevent the North, desperate for cash, selling its technology to others?

Force has been ruled out. China, ever mindful of the Korean War and saddled with a 1961 mutual defense treaty with the North, will not countenance U.S. action, even if America were in a mood for another conflict.

Economic sanctions will be stepped up and will cause more hardships for North Koreans. But it is doubtful that they can undermine the regime itself, particularly given the nationalistic cachet of having built a bomb - a sentiment shared by some South Koreans.

Kim Jong Il appears to have calculated that his neighbors have far more interest in a stable northeast Asia than in risking chaos on the peninsula. In which case, after much huffing and puffing and more ineffective sanctions, they will go back to trying to deal with the "rogue" regime, to offer some bigger carrots next time to get it to halt its nuclear program.

Kim may have miscalculated in a way that will be disastrous for the region and perhaps the world. But the markets so far are telling us that Kim is the likely winner from his attention-seeking behavior.