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Why did North Korea launch its latest attack?

North Korea's deadly artillery barrage targeting a disputed South Korean island has rattled global markets and raised the perceived political risks of investing in North Asia.

world Updated: Nov 24, 2010 15:15 IST

North Korea's deadly artillery barrage targeting a disputed South Korean island has rattled global markets and raised the perceived political risks of investing in North Asia.

But far from heralding the start of an escalating conflict that could drag regional powers into a catastrophic war, the attack seems to have followed a familiar pattern of calculated North Korean provocations designed to raise the geopolitical temperature but not to precipitate a major military conflict.

That implies any knee-jerk sell-off in North Asian markets provides a buying opportunity for smart investors.

But forecasting Pyongyang's next moves requires taking an educated guess about why the secretive regime chose to launch the attack now. Some scenarios are much less sanguine than the baseline forecast and imply prolonged instability on the Korean peninsula that could keep markets edgy for months or years.

Following is a summary of the most likely scenarios and their implications for markets.

It was all a misunderstanding

North Korea's military and government are on a permanent war-footing and regard military manoeuvres by South Korea and its allies with genuine alarm. South Korea's armed forces are holding military exercises and had been conducting live firing drills in the vicinity of the disputed islands.

It is possible that nervous North Korean officers misinterpreted the drills and believed they were under attack.

Analysts regard this as unlikely, however. Such drills are routine and there appears to be nothing unusual about this week's manoeuvres that could have caused a misunderstanding. Also, the North's response appears to have come at least half an hour after the live firing exercise finished.

It is much more likely that the attack was planned in advance but that Pyongyang used the South Korean drills as a pretext. This allowed it to claim it was acting in self defence - and indeed North Korea was unusually fast in issuing a statement on Monday saying Seoul was the aggressor.

If the attack really was the result of a spur-of-the-moment misunderstanding or overreaction, this is by no means good news for the risk profile of the Korean peninsula.

North Korea has a vast amount of artillery aimed at Seoul that it can unleash within minutes. If procedures are lax enough to allow jumpy commanders to launch a major attack by mistake, this sharply raises the longer-term risk of war.

It was another blackmail attempt

For decades, North Korea's leadership has followed a strategy of trying to get what it wants from the international community through bouts of bad behaviour followed by promises to stop making trouble in return for concessions.

It is a strategy that has been highly successful - repeatedly Pyongyang has agreed beneficial deals with the United States and its allies only to abandon them when they cease to be useful. This week's artillery attack is likely to be the latest example of this strategy in action.

It followed revelations earlier this month that the North had made significant technological leaps in its nuclear capabilities. It now appears to have a developed uranium enrichment programme, giving it a potential second path to create fissile material for nuclear weapons.

Pyongyang may have revealed the progress it has made to strengthen its hand in future negotiations on disarmament. North Korea has been pressing for a resumption of talks, including direct talks with Washington.

"I don't expect the situation to further escalate, because North Korea has already achieved its goal of getting everyones attention," said Xu Guangyu, a retired major general in China's Peoples Liberation Army who now works for the government-run China Arms Control and Disarmament Association.

"North Korea wants to reopen dialogue with the United States and South Korea, but experience tells us that often its idea of getting there is to undertake extreme acts. The United States and South Korea have been notably reluctant to reopen dialogue with North Korea, and so the North chose the shelling of the South Korean military exercises to make its point.

This means that however angry the rhetoric in coming days, there is negligible risk of an escalation into serious conflict. However, the North may well attempt more provocations to bolster its bargaining position and increase its leverage - a third nuclear test certainly cannot be ruled out.

It was a bid to bolster support at home

North Korea has entered a potentially long and unpredictable period of leadership transition, with the elevation of Kim Jong-il's youngest son, Kim Jong-un, to the rank of general in a clear signal he is the chosen successor.

The media has begun celebrating Kim Jong-un as "the young general" - even though his military experience appears to be zero. The unveiling of a clear succession plan may have led to internal conflicts and sparked anger among other powerful and ambitious members of the military and political elite.

The fact that Kim Jong-il may be having to rush his succession plan due to ill health, he is thought to have suffered a stroke in 2008, adds to the unpredictability.

Monday's artillery attack, therefore, may have been an attempt to burnish the military credentials of the "young general" and win him more support among the armed forces.

Or more broadly, it could have been an effort by Kim Jong-il to deal with internal dissent by focusing attention on a supposed external threat - South Korea and its allies.

In this scenario, the risk of war is also extremely low, because Pyongyang's provocations are calculated to boost support at home without sparking a major conflict that the regime does not want and knows it cannot win.

"Over several decades, North Korea has created similar geopolitical tensions in order to redirect their national interest to defence, which we believe helps the regime maintain power," said UBS analyst Young Chang in Seoul.

"North Korea's interest is to maintain the regime and not to invade South Korea, in our view. This is why we believe the KOSPI reaction has been very short-lived."

It was a sign of desperation

North Korea's economy has been struggling for decades, and the leadership's policy of putting the interests of the huge military ahead of even feeding the population has taken a huge human toll in terms of famine, malnutrition and misery.

A botched currency reform scheme last year significantly worsened the plight of ordinary North Koreans and provoked rare signs of dissent. Food production this year is believed to have been badly hit by flooding. And winter is coming.

The regime has survived in the past despite inflicting mass starvation on its people, but particularly if hardship is also affecting senior members of the military, there may be an element of desperation in Monday's attack.

Kim Jong-il may have an urgent need for aid, and the artillery barrage may have been his way of demanding it.

It was the military making trouble

One of the most worrying scenarios is that Monday's artillery attack, and the sinking of the corvette Cheonan in March, were not ordered or approved by Kim Jong-il at all, but were the work of hawkish and disgruntled elements in the military who are increasingly acting on their own.

This theory is supported by Christopher Hill, former envoy to North Korea under President George W. Bush, who says the North Korean military is unhappy about Kim Jong-un's planned succession and is driving events without direction from Kim Jong-il.

"With the ongoing leadership transition in North Korea, there have been rumors of discontent within the military, and the current actions may reflect miscommunications or worse.