SEOUL -- In one of its biggest experiments yet with capitalism, North Korea has started building hundreds of market halls around the country to encourage private merchants, and has loosened rules about who may do business and what may be sold, according to sources in South Korea.
The new rules were issued last month. In effect, they make official what long ago had become reality in North Korea. North Koreans have become increasingly dependent on private commerce to feed and clothe themselves in the absence of a viable public distribution system.
"Before, they were tolerating private business. Now they are encouraging it," said Cho Myong Chol, a North Korean defector who had been an economics professor at Kim Il Sung University in Pyongyang, the capital.
Cho, who remains in contact with his North Korean friends, said the regime had ordered local governments to construct buildings to be used as market halls with stalls to be rented out to merchants. Currently, most markets are just a cluster of vendors who spread out their wares on mats outdoors in schoolyards or vacant lots.
Instead of being called "farmers' markets" as they were in the past, the new markets will be known as "district markets."
The name change is being made because they are now permitted to sell almost everything but drugs and stolen goods, whereas in the past they could legally sell only food.
Foreigners also will be able to sell their products in the markets. The change reflects the fact that many of the consumer products sold in North Korea are brought across the border by Chinese traders.
Last July, North Korea scrapped its rationing system and lifted price controls. Those reforms, however, also set off rampant inflation. The newest set of reforms, North Koreans hope, will increase supplies in the marketplace and keep prices in check.
"They are experimenting with real capitalism this time," Cho said. "This is a very significant change."
The reforms come at a time when the North Korean economy is in a state of near collapse, with most factories rusted and closed and international aid rapidly dwindling in the midst of a standoff over nuclear weapons.
In typical North Korean style, the new regulations have not been published but have been communicated to officials by word of mouth from the country's leader, Kim Jong Il.
"Various workable measures have been taken to improve the livelihood of the economy and the people in an epoch-making manner," North Korea's official news agency reported last week in one of the few official commentaries on the subject.
Tony Michell, the president of Euro-Asian Business Consultancy, a firm that advises businesses interested in the communist nation, said North Korean officials informed him of the changes about three weeks ago.
"It would seem to be a mid-course correction," said Michell, adding that the biggest problem with the earlier package was that it did not boost the supply of goods and did not ease restrictions on foreigners operating in the country. "There is a need to further augment the supply and make other changes."
Inflation in North Korea is now running at an estimated 600% annually, according to economists here.
Kim Young Soo, a professor at Seoul's Sogang University who made a detailed study of the markets in the North, found that a wider range of goods was available but at prices out of reach for most North Koreans.
At one market in North Korea's North Hamgyong province, on which Kim gathered information through defectors and businessmen, typing paper -- which used to be classified as a strategic asset and thus unavailable for purchase -- was being sold in packages of 100 sheets for the equivalent of one month's wages for an average worker. The price of a pair of shoes was also one month's wages, a used rice cooker cost three months' wages, and a used bicycle was nearly a year's wages.
The average North Korean earns 2,000 won monthly, the equivalent of $3 at black-market exchange rates.
"Ironically, with the introduction of the market system, few people are starving to death, but their daily life is much harder than before," Kim said. "North Korea is undergoing an adjustment period.... Today, there is no distribution system and people have to solve problems on their own."
Kathi Zellweger, an official of the aid organization Caritas who travels frequently to North Korea, said she did not anticipate that the country would be able to do without humanitarian aid in the foreseeable future.
"Although the [economic reform] steps are commendable, there is a risk that many people will fall through an already weak safety net with the resulting development of haves and have-nots," Zellweger said.
The U.S. is trying to pressure North Korea economically with the hope that the tactic will lead to a diplomatic solution to the crisis over the communist regime's nuclear ambitions.
Among the measures contemplated are interdictions of ships carrying weapons, drugs and counterfeit currency, major sources of cash for the regime.
Secretary of State Colin L. Powell told reporters Tuesday that North Korea most likely will not be able to solve its economic problems unless it gives up its nuclear program and makes peace with its neighbors.
North Korea experimented in the mid-1980s with building markets to encourage private commerce. According to defector Cho, construction began on a large central market in front of Pyongyang's Physical Education College.
But it was stopped by North Korean authorities after the 1989 uprising at Beijing's Tiananmen Square, Cho said, because they feared that dabbling in capitalism could bring similar unrest to North Korea.
Times staff writer Robin Wright in Phnom Penh, Cambodia, and Chi Jung Nam of The Times' Seoul Bureau contributed to this report.