Analysts here said separately that the reforms, focused on introducing flexibility in state-set prices and granting workplaces and workers material incentives, largely achieved their goal of getting many idle plants operating.

"While political issues continue to dominate international discussions, North Korea's economic reforms have probably proceeded much further than what has been widely recognized," said the Citigroup report.

North Korea has made "significant progress" in improving decision-making independence for enterprises, increasing the role of free markets, liberalizing the exchange rate policy and opening the economy, it said.

"The most obvious evidence of progress in economic reform was the 'marginalization' of the State Planning Commission," it said, adding its key role shifted from detailed planning to analysing scenarios.

Managers of state-owned enterprises have gained freedom to decide on output mixes and even product prices and can also set benefits and bonuses, even though base salary grades are still set by the government.

"At some IT companies that we visited, the amounts of benefits and bonuses are well above 50 percent of base salaries," the report said.

Free markets also play an important role in allocating resources, with about 90 percent of farm surpluses going directly to them.

The 2002 reforms followed years of economic collapse and mass famine in the 1990s, with deaths estimated at between 500,000 and two million.

Apart from attempts to introduce domestic incentives, authorities also took steps to increase exports and attract foreign investment.

Citigroup said the reforms are "probably broadly comparable to those in China in the mid- to late 1980s."

The main obstacles are political since, unlike China, efforts to increase exports and investment had very limited results -- partly due to political constraints.

"It might be in the best interests of the international community to help support and facilitate economic reforms in North Korea, while carefully managing political risks," the Citigroup report said.

If products from the South Korea-invested Kaesong industrial zone were excluded from a US-South Korea free trade pact now being negotiated, this "would further discourage North Korea's integration into the international economy."

Dong Yong-Seung of the Samsung Economic Research Institute said North Korea's changes aimed to fix problems in its planned economy rather than shifting toward a market economy as China was doing.

In the past, for example, many plants remained idle because workers could not live on their wages and had to try to find extra income elsewhere.

The decision to let workers share surplus produce from their plants was aimed at luring them back to their workplaces.

However, Dong added that many changes have occurred.

The government production quota for each plant and farm was lowered significantly and workers and farmers were allowed to sell surplus produce at markets, he said.

State-set prices for goods were raised drastically to match black market prices. Wages were also increased greatly as part of efforts to introduce supply and demand to the inoperative distribution system.

"In terms of meeting their goals, the reforms were successful as they were able to cause many plants to operate again as workers, lured by material incentives, returned to their jobs," Dong said.

Professor Kim Yeon-Chul of the Asiatic Research Centre at Korea University said reforms had been "too meagre" compared to Eastern Europe.

"But from the point of the Socialist planned economy, a lot of changes have occured there, with the North shifting away from egality-based wage system to introduce more incentives," he said.

South Korea Plays Down Northern Missile Tests

Seoul (AFP) Sep 08, 2006 South Korean President Roh Moo-hyun has played down North Korea's missile tests which sparked international alarm, saying they were staged for political purposes and were not a threat.

The July tests were most likely politically motivated, with the largest projectile "too meager" to reach the United States but "too big" to be directed at South Korea, local media Friday quoted him as saying in Helsinki.

"I think the missile test was aimed at achieving political purposes rather than posing military threats," Roh said.

"However, there are many news media that regard the missile test as a real military threat instead of a political move, and this makes the issue more difficult to resolve."

Roh, speaking Thursday during a European tour, also said his country has no information on whether or when the communist North would conduct a nuclear test but that speculation would only hurt inter-Korean relations.

The North defied international warnings and fired seven ballistic missiles on US Independence Day, including its long-range Taepodong-2 believed to be capable of striking America's western seaboard.

The six short and mid-range missiles and the Taepodong landed in the Sea of Japan (East Sea). The Taepodong flew just two kilometers, according to a Japanese report.

The 15-member UN Security Council, including the North's only major ally China, unanimously adopted a resolution condemning its actions and imposing missile-related sanctions.

A US news report has said the North may now be preparing a nuclear test. It declared itself a nuclear-armed state in February last year but is not known to have tested an atomic weapon.

Asked about the possibility of further actions by the North, Roh said talking about hypothetical situations "will only make many people worried."

"It could also harm inter-Korean relations, so it's very difficult for me to answer that question," he said.

The North has boycotted six-nation talks aimed at curbing its nuclear programme since November, to protest US sanctions on a Macau-based bank accused of laundering money for the impoverished regime.

Roh's comments set the stage for a strained summit in Washington next Thursday with US President George W. Bush, who is pushing for enforcement of the missile-related sanctions and working to curb the North's missile exports.

Roh has pursued a policy of engagement with the North, an approach defended by his Prime Minister Han Myeong-Sook.

She told Britain's Financial Times newspaper the South would continue providing aid for the North despite the missile tests.

"With regard to the missile test, they were not threatening to start a war or to use force, they just want to get something out of the US through six-party talks. It was a way of addressing the negotiations and creating a more favourable environment for them," Han told the paper.

"If you look at the position of the South Korean government, we were disappointed and regret their actions but we will consistently pursue the peace and prosperity policy and will try to get North Korea to come back to the talks.

"Some people question how we can cooperate with a communist regime run by a dictator, but if we used force, that could lead to a war."

The North Friday called for an end to the US "occupation" of the South. Washington has maintained tens of thousands of troops in the South since the end of the Korean War in 1953.

"The US is neither a friendly country nor an ally of the South Korean people," said Rodong Sinmun, the ruling party newspaper.

"They should see through the gangster-like nature of the US imperialists as aggressors, plunderers and murderers and resolutely oppose the US domination and interference."

Related Links
Learn about nuclear weapons doctrine and defense at SpaceWar.com