As a young radio announcer in the North Korean city of Hyesan, Park Ju-hui used to tread gingerly through streets strewn with corpses on her way to work. Nearly 20 years since the devastating famine of the mid-1990s, life is very different.

“Women are wearing clothes – from Japan or South Korea – that show off their figure if they have some money, and cosmetics from South Korea, too,” says Ms Park, who defected to South Korea in 2012. She remains in touch with family in Hyesan thanks to a mobile phone illicitly brought from China. “Seven out of 10 homes have colour TV, and people can afford to make meat broth once a month . . . The quality of life has improved a lot.”

At first glance, her testimony might seem encouraging for Kim Jong Un, North Korea’s young leader. Since he came to power just over two years ago he has stressed a desire to strengthen the economy and “improve the people’s standard of living” – a phrase that appeared seven times in his latest new year address.

Yet Hyesan’s growing middle class is more a reflection of the North Korean government’s surrender of control over much of the real economy than a result of improved policies. It is also a window into North Korea’s struggle to foster economic development while keeping a totalitarian political system alive.

After the starvation of up to 1m people in the famine demonstrated the state’s inability to feed its people, it was forced to turn a blind eye to the informal markets that sprang up. For residents of cities such as Hyesan, near the border with China, the opportunity to engage in illicit trade with Chinese merchants has been especially lucrative.

When Mr Kim took power on his father’s death in December 2011, foreign media wondered if the Swiss-educated twenty-something would undertake the drastic changes needed to address his nation’s abject poverty and miserable human rights record, and end its diplomatic isolation.

With speeches promising higher living standards, the world’s youngest national leader has broken with the dry style of his father Kim Jong Il, who stressed a “military first” agenda and never gave a public address. State media has made the most of the youth of Mr Kim – who recently turned 31, according to his family’s former sushi chef – and his glamorous wife, Ri Sol Ju. He has been shown cheering at a pop concert, enjoying basketball matches with former NBA star Dennis Rodman and riding a rollercoaster.

But behind the gregarious image, Mr Kim has shored up his position with the most sweeping purge of senior officials since his grandfather crushed dissent in the late 1950s. Half the top 218 military and administrative officials have been replaced since he took power, according to South Korean intelligence, with the army chief changed three times in 15 months.

The purge reached a climax in December when Jang Song Thaek, Mr Kim’s most senior adviser and uncle by marriage, was executed for alleged treason. Moon Chung-in, a former South Korean presidential adviser who met Jang on three occasions, was surprised by accusations he had been trying to overthrow Mr Kim, describing Jang as prudent and unassuming. “He was always trying to be in the shadows,” he recalls.

Youthful leader: Kim Jong Un has overseen sweeping leadership purges

North Korean official media claimed that while “organising units for foreign trade and earning foreign money”, Jang sold coal and other “precious resources” cheaply or “at random”. For many observers, that pointed to tension at the highest levels of the North Korean state, as military and party officials jostle for a share of the spoils from the country’s booming trade with China.

Visitors to Pyongyang over the past two years speak of growing prosperity. There are more cars on the formerly traffic-free streets – including BMWs, despite a UN ban on luxury goods imports. Children in the city’s parks use skates, department stores are increasingly well-stocked, and a growing number of once drab shops bear hoardings with eye-catching logos.

The capital has always offered higher living standards than the rest of North Korea, serving as a home for about 3m of those considered most dependable and loyal to the regime. But the huge growth in exports to China over the past decade has vastly increased the rewards on offer to the city’s best-connected residents.

“It’s the rich who really gain from foreign trade,” says Jang Jin-sung, a former government official who defected to the South and now runs New Focus International, a news website on North Korea. “The market is controlled by the children of high-ranking officials. Lots of people have their own cars now but the gap between rich and poor is very big.”

Chinese trade with North Korea hit a record $6.6bn last year, according to the Seoul-based Korea International Trade Association – the vast majority of Pyongyang’s trade and up ninefold since 2001. Aside from helping meet Chinese demand, Andrei Lankov, a North Korea expert at Kookmin University in Seoul, says Beijing’s increased economic support for its erstwhile Korean war ally – through increased fuel exports, for example – is aimed at staving off the risk of the regime collapsing.

“The system as it once was has become a hybrid,” says Andray Abrahamian, executive director of Choson Exchange, which provides business training to young North Koreans. “Increasingly, over the last decade, people see business as the way to get ahead rather than the traditional way, which would be getting ahead in the party or the military.”

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Amid claims that China is exploiting its near-monopsony of North Korean mineral exports to pay below market rates, the country has stepped up efforts to garner foreign currency from elsewhere. “We are opening up the economy and welcome foreign companies and increased trade,” says Hyon Hak Bong, Pyongyang’s ambassador to London. “We visited Vietnam, China, Singapore, Malaysia, Switzerland to share their experience of developing the national economy.”

One focus is tourism projects, for example the newly opened Masik Pass ski resort, which South Korean intelligence estimates cost $300m. Pyongyang is also seeking foreign direct investment; in October it hosted a conference where academics, government officials and foreign experts discussed potential for special economic zones, providing preferential tax treatment to investors.

“I had no idea what a popular issue [SEZs] would be,” says Park Kyung-ae, a University of British Columbia professor who organised the conference. “But it was quite clear that the North Koreans were serious about foreign investment.” A month after the conference, North Korea announced plans for 14 new zones across the country.

One western diplomat in Seoul reports a small but growing volume of inquiries about doing business in North Korea. “We tell these people not to do it. We can’t help them if things go wrong,” he says, noting North Korea’s poor reputation for transparency and consistency.

Yet some companies believe the returns outweigh the risks. Orascom, the Egyptian telecoms operator, runs North Korea’s monopoly mobile phone service, with 2m subscribers, although there are restrictions on repatriation of profits. SRE Minerals, a holding company backed by anonymous investors, has a joint venture with the North Korean government to develop what it says could be the world’s biggest resource of rare earth metals, vital to modern electronic devices.

“Our agreements are watertight, signed at sovereign government level,” says Louis Schurmann, a veteran mining geologist and executive director of SRE Minerals. “I’d rather invest in North Korea before I touch countries like Mongolia, Myanmar, Congo – those countries are more unstable than North Korea.”

But the execution of Jang was seen as a bad sign for foreign investment, particularly at the existing Rason SEZ in the country’s northeast, with which he was strongly associated. Even before his death, Ms Park says, experts warned “attracting FDI will not be easy without any investment precedent, overcoming political obstacles, like sanctions. It’s very difficult to move money into that country”.

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The majority of North Koreans still endure grinding poverty that contrasts sharply with the lifestyles of the smugglers of Hyesan, let alone the Pyongyang elite. A study last October by the World Food Programme estimated only 16 per cent of households had “acceptable food consumption”. In the northern province of Ryanggang, 40 per cent of children under five were stunted. It found no evidence of substantial reforms in collectivised agriculture, despite talk in 2012 of sweeping changes to allow smaller “family-sized” teams to keep and sell 30 per cent of everything they produced.

Some analysts argue that such reforms are slowly being introduced, along with radical changes to industrial production, offering far higher wages to factory workers and greater autonomy for managers.

But the government has reason to hold back from wholesale economic reforms, Mr Abrahamian notes. “They are locked in competition with the South Korean state and I think they worry that if they get it wrong, the balance of legitimacy could swing towards Seoul,” he says. “The common analysis is that North Korean people would say: if we are an economy-first country, if this is our main focus, why aren’t we competing more closely with South Korea?”

In fact, the state has already lost its erstwhile ideological hold over its people, says Jang Hae-seong, a former North Korean state television producer who now chairs a centre for exiled North Korean writers. “The key is complete control of information,” he says. “The common people used to believe the propaganda, but not any more. There is an extreme difference with when I was there.”

Among the consumer goods flowing over the border from China are cheap electronics that have destroyed the North Korean state’s monopoly on information: radios that can be tuned to foreign Korean-language broadcasts, mobile phones to call relatives in the South, and DVDs and flash drives offering South Korean television shows. Rights groups say a crackdown on these items is under way – part of a new drive by Mr Kim, who called last month for an “ideological campaign . . . to sweep away alien ideological trends and lifestyles”.

FT archive video North Korea warns on US-South Korea military exercise Feb 11 2014: North Korea warns that the annual US-South Korean war games scheduled for February may increase tensions on the peninsula. Simon Mundy reports from Seoul.

Yet it may prove too late to restore enthusiasm for communism among people already seduced by market principles. Chongjin, North Korea’s third-biggest city, is home to one of its most feared camps for political prisoners. That has not deterred about two-thirds of its people from watching the glamorous South Korean soap operas that have taken much of Asia by storm, says Joo Yang, who fled the city in October 2010.

“In the past, people left North Korea to escape starvation or poverty but today there are many more who flee because they want to be free,” says Ms Joo, 22. “We risked our lives to watch those dramas, we used to share them around. We were so hungry for freedom that even watching it on a screen, we could fantasise that we too could live like that.”

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International relations: Rights and nuclear concerns limit links

North Korea’s domestic economy has undergone important changes in the past 15 years but the country remains mired in a diplomatic impasse, despite recent efforts to revive dialogue with South Korea and the US.

Pyongyang has produced several nuclear weapons and is believed to be working on more, having restarted its Yongbyon plutonium reactor last year. Pyongyang claims to need nuclear weapons to fend off the threat of US invasion and in 2012 amended its constitution to declare itself a “nuclear state”.

North Korea’s nuclear bomb tests and long-range rocket launches have resulted in UN sanctions. While its key ally China has consistently fought to limit their scope, it appears to have strengthened its own enforcement of them. After North Korea’s nuclear test last February, Bank of China closed an account held by the country’s main foreign exchange bank and Beijing issued a 236-page list of items with potential military uses, prohibiting their export to North Korea.

Growing pressure from Beijing may have contributed to Pyongyang’s efforts this year to improve relations with Seoul. It issued a series of statements stressing its desire to calm tensions on the peninsula, and hosted the first reunion of separated Korean families since 2010.

Park Geun-hye, president of South Korea, has heavily promoted her “trust-building” strategy with the North, but most analysts say dialogue will eventually founder on Seoul’s demand that Pyongyang surrender its nuclear weapons.

Pyongyang has also made overtures to the US aimed at restarting multilateral talks but Washington says North Korea must first take steps towards denuclearisation, amid calls from conservative analysts for tighter sanctions that would exclude Pyongyang more fully from the global financial system.

International pressure is also mounting on North Korea over its notorious human rights violations. Last month a UN investigation called for a referral to the International Criminal Court as it documented crimes of stunning brutality– most shockingly in the prison camps that host tens of thousands of people, with abuses ranging from torture to infanticide.