A Capitalist Sprout In N. Korea's Dust

Indeed, by most accounts, those who thrived under the communist system had connections to the government, the military or black market. These officials have capitalized on the new system with increased access to imported goods and new ways to use their connections to benefit from the legalization of open commerce -- particularly in markets and trading on the Chinese border. Mid-level government officials, for instance, have become notorious for stripping abandoned factories of scrap metal and selling it to the Chinese, South Korean intelligence sources said.

By contrast, those at the lower rungs of society -- especially in rural regions far from the relatively prosperous capital -- face even greater challenges now, battling soaring inflation as government-set prices and state rations steadily disappear.

The U.N. World Food Program now calculates that 6.5 million of North Korea's 22 million people are facing food shortages this year. Those figures include a "new underclass" generated by the experiment with market reforms, according to Tony Branbury, the WFP's Asia director.

"When there are broad economic reforms in any society, there are going to be winners and losers, and clearly, in the case of North Korea, the reforms have created a new class of losers," said Branbury, who last month concluded an extensive fact-finding mission in North Korea.

On a rare tour through five North Korean cities including Pyongyang, Branbury and his team observed the polarizing power of the economic changes. In Pyongyang, he witnessed a proliferation of cars and cell phones -- which, according to South Korean government officials, are available almost exclusively to Communist Party members, the only North Koreans who can afford the approximately $1,000 registration fee.

At the same time, WFP officials noted the rise of urban slums populated by those living in increasingly desperate conditions. Although North Korea has raised workers' salaries approximately sixfold, prices for staples including rice have gone up ninefold or more.

North Korea once paid even idled factory workers, but many have now been reassigned to menial jobs with lower pay. "I could see workers, who we were told once worked in factories, sweeping up dirt on the sides of rural roads in the middle of nowhere," Branbury said. "The government is redistributing jobs as it can, but the North Korean authorities told us they recognize there is a problem with a new group of vulnerable people excluded from the so-called economic reforms."

In the new North Korea, it takes money to make money -- money accessible to those who already enjoy influence. For instance, take the account of Kim, a gaunt refugee in her thirties who left North Korea late last year and agreed to an interview in Seoul, where she has resettled. She spoke under the condition that only her last name be used to protect her family still in North Korea.

A potato farmer from a northeastern province where North Korea's chronic food and power shortages are at their worse, she said her life "became a nightmare" after the changes on July 1, 2002.

She said she watched as neighbors who had friends among party officials or Chinese traders in the black market bought or received fertilizer to cultivate corn, which, when made into value-added corn meal, easily outsold her potatoes at market.

She could not substantially raise her prices even as inflation soared -- the price of rice alone went up 40-fold, she said. Barely able to feed her two daughters, the single mother resorted to a daily porridge of boiled potato peels to survive.

"Everything went up in price, but the only people selling and buying in [the new system] were the ones who had the right friends or people who could loan them money," Kim said, adding that her plight forced her to risk being shot by guards by dashing illegally across North Korea's border with China. "People like me, people who were no one, were out of luck. People like me are starving."

Nevertheless, the North Koreans appear to be forging ahead. Most of the factories still functioning in North Korea, for instance, must now meet payrolls based on their own profitability. Managers, rather than Communist Party officials, have been vested with more power to make independent business decisions. A central bank in Pyongyang is offering loans, rather than government subsidies, to state-run factories.

A man linked to the North Korean government who agreed to an interview on the condition he not be identified cited one concrete example in the town of Kosong, about 10 miles south of North Korea's border with China. He insisted that a 1,000-worker lathe factory there -- the Kosong Machine Tool Factory -- has more than doubled productivity and increased exports to China and Southeast Asia as the hardest workers have been paid higher wages and have earned promotions. Employment, he said, has gradually increased.

"The point is to give rewards for results," he said. "Those workers doing their best are earning more."

The North Korean reforms have seen some of their greatest advancement through the help of the country's old enemies -- capitalist and wealthy South Korea, which during the late 1990s embraced a "sunshine policy" of broad engagement with Pyongyang.

In 2000, Seoul-based Hyundai Asan, with aid from the South Korean government, built a multimillion-dollar tourist resort at North Korea's Mount Kumgang. More recently, South Korean efforts have been centered on the new Kaesong Industrial Park.

The South Koreans insist they are not under any illusions, seeing North Korea's transformation, like the industrial park itself, very much as a work in progress.

"North Korea has been trying to reform and open their economy, [and] the Kaesong project will teach them the benefits of opening their society," said Ban, South Korea's foreign minister. But "however much they have in their mind for real change, it may take a long time . . . considering the very controlled nature of North Korea."

Special correspondent Joohee Cho contributed to this report.