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.

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.

Officials attended a ceremony in December at the Kaesong Industrial Park in North Korea, which will bring a slice of capitalism to the communist country.North Koreans worked in the fields near the border town of Kaesong last summer near a planned industrial park that will pay workers in dollars.