A Capitalist Sprout In N. Korea's Dust

Industrial Park to Broach Free Market

DORA OBSERVATORY, South Korea -- From this observation tower perched above the 38th parallel, mountainous North Korea unfolds through rows of long-range viewfinders trained across the world's most heavily militarized border. Orderly farm collectives radiate out from an aging model village, built soon after the Korean War to showcase the prosperity of the communist dream.

Today, a new symbol of progress comes into focus on the horizon -- the bustling site of North Korea's first capitalist industrial park.

Though North Korea remains a wasteland of shuttered factories plagued by an inefficient bureaucracy and pervasive malnutrition, the $180 million project just across the three-mile-wide Demilitarized Zone separating the two Koreas marks the most profound example of a 22-month-old experiment to bring the free market to one of communism's last frontiers.

Abuzz with activity as earthmovers clear land near the North Korean town of Kaesong for the first phase of five to 10 factories, the plants at Kaesong, to be owned and operated by South Korean companies, will employ up to 1,000 North Korean workers paid in U.S. dollars and receiving raises -- or dismissal slips -- based on performance. The long-term development plan calls for apartment complexes, hotels, restaurants -- even an amusement park by 2020.

"For North Korea, this is a first," said Jang Whan Bin, senior vice president of Seoul-based Hyundai Asan Corp., financed in part by the South Korean government. "The market system in this industrial zone will be more flexible than anything now existing in North Korea. It is more than symbolic. The North Koreans are eager to understand the free market, and now we're bringing it across the border for them to take part."

The Kaesong Industrial Park underscores mounting evidence that North Korea is undergoing its boldest attempt at economic reform since Kim Il Sung founded the Stalinist nation more than half a century ago.

With the end of the Cold War, North Korea lost hefty aid from Moscow and Beijing. The funds had propped up the economy, as did trade with other communist countries, and the loss of revenue sparked a financial collapse and bouts of starvation during the 1990s estimated to have killed as many as 2 million people. Bankrupt and desperate, the secretive Pyongyang government launched an experiment with the free market in July 2002, deregulating prices and hiking salaries.

No one expects the kind of societal transformation -- or foreign investment -- seen in China or even Vietnam while North Korea remains on its current path as a renegade nuclear power. But almost two years into its experiment, the reforms have spread far more deeply and quickly than many had anticipated, according to interviews with Asian and Western diplomats, business executives, aid groups and analysts, including a series of recent visitors there.

In addition to the industrial park, they noted new steps to phase out the state's food rationing system, the rapid proliferation of deregulated markets, attempts to reform state-run factories into profit-based operations, even the launch of a Web site selling "Made In North Korea" products over the Internet.

Since reforms went into place, North Korean trade with China jumped 38 percent to $1.02 billion in 2003; trade with South Korea spiked 12 percent to $724 million. In Pyongyang, the capital, eyewitness reports suggest a consumer culture is on the rise, with a proliferation of new markets selling oranges from Spain and electronics from China without state-set or subsidized prices. Many of these enterprises deal in dollars or euros. Smaller, independently run kiosks also dot the urban landscapes, selling cigarettes and soda pop.

Capitalist advertising -- roadside billboards peddling the Whistle, a type of Fiat assembled in North Korea -- has gone up along highways peppered with more and more late-model cars. The number of cell phones in the capital has reportedly soared from 3,000 in 2002 to an estimated 20,000 today.

North Korean ruler Kim Jong Il -- who succeeded Kim Il Sung, his father, following the latter's death in 1994 -- has dispatched special emissaries to China and Vietnam to further analyze the economic openings there, according to Ban Ki Moon, South Korea's foreign minister. During a surprise summit with Chinese leaders last month, Kim spent an entire morning touring a village outside Beijing touted by the Chinese as a model for introducing private enterprise and extending ownership rights.

"There are some who think that North Korea is only going through the motions of reform," said Wi Sung Lac, senior policy coordinator for South Korea's National Security Council. "But measured by North Korea's own yardstick, the reforms going on there have become more and more significant."

Many observers have concluded that the reforms are irreversible, while others insist the North Korean leaders are not about to embrace a genuine modernization. Rather, critics say, they seek only to stabilize the tattered economy to enhance their grip on power.