SERI’s Korean Peninsula Security Index Update: Collective Wisdom or Asleep at the Wheel?

In 2005, the Samsung Economic Research Institute (SERI) created the Korean Peninsula Security Index (KPSI) in order to provide “an objective assessment of the security situations on the Korean peninsula on a quarterly basis.” Well, sort of. The index is based on a survey of forty experts in what might be called the Five Parties--South Korea, US, China, Japan and Russia—and gets their collective read both on the current situation and on prospects. The index is calibrated so that average assessments above 50 indicate improvement and below 50 indicate deterioration.

The headline graph is reproduced above. The record suggests strongly that we should short the peninsula.

In the 4^th quarter of 2009, both the current assessment and outlook improved on the brief thaw of the Clinton trip, LMB’s “grand bargain” proposal and some positive signals from Pyongyang. In general, respondents systematically think that "the outlook" is more positive than reality and the outlook tends to lag what is actually going on (in economics-speak, the respondents have strongly adaptive (backwards looking) expectations).

The 4^th quarter 2009 assessments came just before the Cheonan. Oops. Like the ratings agencies after the financial crisis, there was a sharp downgrade in the wake of—not in anticipation of—that incident. But things seem to have turned up, suggesting that trouble is probably looming. Among the most obvious candidates: more missile tests, a nuclear test or some other military provocation.

The improvement in the outlook may be an artifact of the diversity of views represented; we would need to look more closely at the weight of the Chinese and Russian experts, who probably diverge from American ones.

But the real source of the ratings improvement is buried in a closer read of the surveyed items, which provide more useful information. The experts’ evaluation of “the potential for voluntary nuclear dismantlement” and “potential for peaceful resolution on the NK nuclear issue” are languishing in the 30s, ie., they are seen as highly unlikely. The items that are pulling the index up include very positive assessments of ROK-US relations, the stability of ROK-US military alliance and US-Japan relations. The net assessment may therefore be right, since a strengthening of the deterrent is stabilizing. As we always say with read-outs on the peninsula—including ours: caveat emptor.