The fact that South Korea clearly doesn't want war suggests its leaders do believe that the regime will eventually change, or perhaps that their discount rate is higher than their rate of economic growth. For example, they might value their own lives more than those of their children and grandchildren, which would lead them to postpone war. But if the attacks start to become more costly than the sinking of a ship, the shelling of an island, or a shooting skirmish, then they could be goaded into action. After all, North Korea might be emboldened by its unchecked aggression, and South Korea's new president, Park Geun-Hye has promised a "strong response" to any violence.
Herein lies the problem: Doing nothing might someday incur a heavy cost for South Korea, but responding could impose a much bigger cost on the global economy by increasing the chance that war will occur before North Korea changes its tune. So, how can the world persuade South Korea to tolerate the North's transgressions?
I'd suggest a payoff. If the North destroys another Korean ship, the world's major economies should chip in to replace it. If the North kills more South Koreans by bombing an island or shooting across the border, the economic powers should set up a fund to compensate them. Every time the North attacks, the rest of the world ought to bolster the South, trying to make it whole or even better than before. Just as it was worth billions to reduce the probability of war, it would be worth billions to stop the probability of war from increasing.
Sounds good, right? Assuming it worked politically -- a big assumption if more South Korean lives were lost as a result -- this would be an economically sound strategy, but only up to a point. If the chance of war were to rise high enough, the course of action would have to change.
The reason has to do with the details of the conflict itself. As some analysts have pointed out, giving the North the initiative could make a war much more difficult and costly to win. A pre-emptive strike might reduce the extent of damage to South Korea and lead to a quicker victory. Obviously, the first benefit is of special interest to South Korea, and the second benefit is of even more interest to the global economy -- the shorter the war, the less disruption to markets and trade.
Let's say that a pre-emptive South Korean attack would cut the cost of war in half. Now, this is a cost that the world would incur with certainty, not a cost with a probability attached; in the event of a pre-emptive attack, there will be war for sure. Is the cost worth paying?
Under our assumptions so far, the answer is almost certainly yes. With a 50-year time horizon, the annual likelihood of war would have to fall below 1.4 percent to make waiting preferable to an immediate, pre-emptive attack. I'm not a military expert, but even the chance of a war starting by accident seems higher than that. And this result holds no matter what share of economic output would be lost to war.
But let's not push the button just yet. A final wrinkle in this analysis comes in the form of a different kind of uncertainty, one that concerns not war but intelligence. Outsiders know very little about how the government in Pyongyang operates. There is no way to say for sure what the probability of war really is. If it's lower than intelligence experts think, then a pre-emptive strike might be needlessly costly. If it's higher, then a pre-emptive strike might not come in time.
This extra layer of uncertainty merits additional caution. It's not clear which failure of intelligence is worse: a false positive (see: Iraq) or a false negative (see: Pearl Harbor). To reduce the likelihood of either of these errors, the surefire solution is to get more information. In this case, that means sharing intelligence and combining a range of assessments to make a more precise estimate.
And that's a common thread in all of these economic approaches; The key is collaboration. If anything, North Korea's antagonism should bring the rest of the world closer together.
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