Indeed, it caused a stir in Washington when several American experts on Asia returned from a visit to the North in January and reported that a surprisingly vibrant small-business sector was helping to energize the long-battered economy. Contrary to many experts' opinions, economic reforms seem to be having an effect. To provide an incentive for higher production, the government hiked official prices for food and basic necessities by up to 55-fold and wages by an average 18 times in July 2002. Since then, prices in private markets have more than tripled, while the supply of goods has improved. Aided by good weather and legal changes that permit larger private farm plots, grain production is up by 7.6% since 2001 -- though still a million tons short of Pyongyang's needs. Private restaurants and bakeries are popping up. "We saw a market economy beginning to emerge. This is not a regime that's going to implode," says John W. Lewis, a Stanford University Asia expert who led the U.S. delegation.
Analysts now think the North's tentative rebound could prove a major factor in shaping the nuclear talks. Some believe Pyongyang will refuse to bow to U.S. demands to dismantle its nuclear program because the country isn't as economically desperate as it was a few years ago. But many other North Korea watchers argue that the changing economic dynamics increase the chances for a breakthrough. For starters, an improving North Korean economy undermines the position of Bush Administration hard-liners, who were convinced the North would collapse if the U.S. stonewalled long enough.
Just as important, experts believe that officials in Pyongyang -- perhaps including strongman Kim Jong Il -- are more interested than ever in improving the economy by reaching out. The government wants to establish four economic zones and a legal framework to protect foreign investors in industries such as mining. Pyongyang seems to recognize that its reform drive will stall without outside investment and that nukes are an obstacle. Kim also has political reasons for defusing the crisis -- as long as he gets something in return. This year marks his 40th year as a Workers' Party member and his 10th anniversary as leader. "This is a year when North Korea needs a breakthrough for the economy and security," says Paik Hak Soon, a North Korea expert at Sejong Institute, a think tank near Seoul. "The key is resolution to the nuclear problem."
If there is a breakthrough, what form might it take? Should North Korea follow Libya's example and pledge to dismantle its nuclear program and allow inspections, Washington -- together with South Korea, Japan, and China -- could take serious steps to help solve the North's energy problems. One idea: financing a pipeline to bring in Russian natural gas. With luck, the hope of prosperity may prove more effective than threats in ending this crisis. By Stan Crock in Washington and Moon Ihlwan in Seoul, with Dexter Roberts in Beijing EDITED BY Edited by Rose Brady