May 29 (Bloomberg) -- Nouriel Roubini, Dr. Doom himself, has found an economy even he can love: South Korea.

That might sound surprising for a nation in the news for the wrong reasons. North Korea’s nuclear test, the suicide of former President Roh Moo Hyun and stock-market-bubble worries are making for some very ugly headlines this week. Getting Roubini’s seal of approval has been a rare and welcome news- cycle counterpoint.

Recent Korean data “suggest there is the beginning of an economic recovery, and growth might be already positive in the second quarter,” Roubini said at a May 27 conference in Seoul.

Roubini, among the few to predict the global crisis, is likely to be right about Korea, too. And there are two reasons the world should be paying more attention to Asia’s No. 4 economy. One, the lessons larger economies can draw from its experiences. Two, what recent events suggest about North Korea.

The first point isn’t an insignificant one for the U.S. The reason Roubini says Korea may grow more than 1.5 percent next year is the economic-policy changes made over the last 10 years. The 1997-1998 Asian crisis seemed like a curse at the time. It devastated the nation of 49 million and forced the government to accept a humiliating International Monetary Fund bailout.

Today, that experience is proving to be a blessing in disguise. The government assessed the magnitude of its problems and admitted how bad things were. It allowed weak companies and commercial and merchant banks to fail. It acted quickly to rid balance sheets of bad assets. As a result, Korea was the first Asian economy to recover from the crisis and repay the IMF.

Korean Lessons

Economists pondering how bad things might get in the U.S. tend to look at Japan. More insights may be found in Korea. Even though they are spending trillions of dollars stimulating the economy, U.S. officials remain in denial. Adding liquidity isn’t enough. Steps to restore confidence and trust among corporate executives, investors, and consumers are far more important. Korea did it. The U.S. still needs to.

Korea has its problems, not least of which is weak domestic demand. Korea still needs to wean its $970 billion economy off the U.S. consumer. While the government has room to increase spending and the central bank can cut interest rates, a rebound in the $14 trillion U.S. economy is what Korea needs most.

In the meantime, Korea is standing its ground better than wealthier Japan. Officials in Tokyo reveled in Japan’s exclusion from Asia’s meltdown, yet we see today that Asia’s biggest economy is experiencing that crisis -- just in slow motion.

Avoiding Disaster

Massive government spending and zero interest rates kept Japan afloat. They also delayed reducing overcapacity in most business sectors, raising productivity, getting a handle on public debt, opening the financial sector, attracting more foreign investment and revamping the tax system. Exports and public largess avoided disaster. Now, the lack of reform is leaving Japan uniquely vulnerable to the global recession.

Korea needs to focus more on its domestic economy and less on exports. The good news is that Korea has already proven that crises are opportunities for change. This global one is a window of opportunity that officials in Seoul shouldn’t squander.

That brings us to North Korea, an issue on which Roubini also made headlines this week. The New York University professor endorsed the Chinese model for Kim Jong Il’s reclusive regime. The idea is that Kim can have his proverbial cake -- maintaining his favored political system -- and eat it, too, by liberalizing his economy. It has worked for China and Vietnam.

Wild Card

The wild card in North Korea’s May 25 nuclear test is how China responds. China has incredible leverage over Kim’s nation. It could cripple his regime by cutting off food, fuel and the luxury goods that Kim hands out to loyalists. The question is the extent to which Kim’s antics are trying China’s patience.

Chinese officials have plenty to deal with. Stabilizing a $3.2 trillion economy and keeping the peace ahead of the 20th anniversary of the Tiananmen Square crackdown on June 4 is challenge enough. Kim’s provocations are something China hardly needs at the moment. Authorities in Beijing are increasingly frustrated by his defiance of United Nations resolutions.

Kim may have gone too far by following up his nuclear test with short-range missile tests. A fed-up China demanding that he ratchet down the hostility would be in the world’s best interest. So would progress that raises Kim’s 23 million people out of poverty and leads to a more stable Korean peninsula.

The promising economic trends to which Roubini is drawing attention are the best news that investors will find nowadays. Peace in Korea would be even better for the world.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net

Last Updated: May 28, 2009 15:00 EDT