When North Korea Falls...

The most important lesson to have come out of the financial crisis is to worry about "black swans." These are, in Nassim Nicholas Taleb's formulation, events that are unlikely but with the potential to cause major disruption. In geopolitics there is one such event that should have us all thinking hard -- the collapse of North Korea.

Most of Washington's attention has been devoted to the Pyongyang regime's small nuclear arsenal. But perhaps a more likely scenario, and possibly one that would be even more disruptive, is a meltdown of the regime.

As Christopher Hill, the veteran diplomat who led the U.S. team that negotiated with the North Koreans, pointed out to me in Seoul last week, the situation in North Korea sounds like a story out of medieval Europe. An aging king, who rules in strange ways but with total power, finally names an heir -- his youngest son. The 27-year-old has little experience with arms or government, so his father appoints a regent. The regent is his brother-in-law and, further consolidating the family's tight grip, the king gives his sister a high military rank.

That's North Korea today. Kim Jong Il, the country's "Dear Leader," has finally appointed a successor, his son, Kim Jong Eun, and given new powers to his sister and brother-in-law. The Shakespearean drama would be entertaining if it did not portend trouble. "This looks like a succession designed to stabilize a situation that is not stable," says Hill.

North Korea is showing many signs of instability. It has had a bad year economically with a disastrous revaluation of its currency. Food shortages and famine are still part of the landscape. Internal political tensions, perhaps relating to the succession, produced external belligerence, most dramatically with the sinking of the South Korean navy ship, the Cheonan, last March.

Perhaps most telling, North Koreans are beginning to learn more and more about the outside world. There are now about 200,000 mobile phone subscribers in the country, and DVDs are selling widely on the black market. If North Koreans truly get a picture of life in the south -- modern, prosperous, democratic -- it will surely produce social discontent and perhaps more. North Korea's per capita gross domestic product is $1,900; South Korea's is $28,100. At some point, North Koreans are going to start moving south, to jobs, money, opportunity and freedom.

And at that point, unless there is careful planning among South Korea, China and the United States, all hell will break loose.

South Koreans don't want to think about this problem. The questions I put to South Korean politicians about these issues were met with nervous laughter, hurried responses and a change of topic. Last month, President Lee Myung-bak wisely raised the prospect of a reunification tax to deal with the inevitable, but the public was strongly opposed and the issue quickly disappeared.

This is understandable. Koreans remember the world's last such experiment. Ten years after the reunification of Germany, there remain deep scars and persistent tension between the two lands. Five percent of German GDP has been devoted to unification -- for a decade! The Korean case is far more dramatic. North Korea is much bigger and much poorer than was East Germany.

Beijing has resisted efforts to put serious pressure on North Korea, both out of some sense of solidarity with the regime but mostly out of genuine horror over the possibility of the regime collapsing (with refugees streaming not just south but also north into China.)

Washington has been mostly preoccupied with North Korean nukes. But to solve that problem, it will need to discuss with China the rules of the road when Pyongyang falls.

There are big issues at stake. Does a unified Korea retain its close alliance with the United States? Does it keep the North's nuclear arsenal? Do American troops stay in the country? If the answer to all three questions is "yes," then a unified Korea will be an American ally, with American troops, and nuclear weapons -- sitting on China's border. How is Beijing likely to react to that? Would it move troops in to shore up the regime? What would South Korean and American forces do then?

When North Korea collapses, it is easy to imagine chaos on the Korean peninsula that triggers a series of reactions from Beijing and Washington that are competing and hostile. Forget genteel rows over the yuan's value -- this is what could produce serious geopolitical instability. And that's why it's crucial that the United States, China and South Korea start talking about "black swans."