When you go to Pyongyang, the place to look for the keys to resolving the nuclear crisis is not the Ministry of Atomic Energy, the Foreign Ministry or the headquarters of the Korean People's Army. It is the Tong-Il Market, the showcase for Kim Jong Il's bold new market-based economic reforms. There some 2,200 vendors compete in a frenzy of newly released capitalist fervor, selling everything from farm produce to TV sets.

Twenty more indoor markets patterned after Tong-Il are now under construction in Pyongyang, and more are planned for other cities. Small-business start-ups, including mom and pop stalls and shops, are sprouting up with government approval. Even more important, state-owned factories no longer receive subsidies to cover their losses and are encouraged to find their own markets for products, to trade with each other and to reinvest any profits. This decentralization of economic power amounts to a "halfway house to privatization," as one resident diplomat observed, and has created a spurt of increased economic activity as well as a budding class of hustlers and would-be entrepreneurs.

What does all this have to do with the nuclear issue? Unless North Korea can get large-scale foreign aid to rebuild its infrastructure, especially its electricity, water and transportation systems, its economic problems will mount. If the economic potential of the reforms isn't realized, the net social and political effects could be destabilizing for the regime, stirring up new economic aspirations that are not fulfilled and tensions between "winners" and "losers" in the new competitive environment. Kim Jong Il is riding a tiger. He urgently needs a nuclear deal with the United States in order to open an influx of aid, trade and investment, and he wants to start negotiating one at six-nation talks in Beijing scheduled for May 12. But Kim can't afford a deal at any price. He can get military hard-liners to go along only if the deal includes significant aid commitments and clearly removes the armed forces' fears of a U.S. pre-emptive strike.

Four days of high-level conversations in Pyongyang recently made clear that Kim is not likely to accept the Bush administration's demand for the "complete, verifiable, irreversible dismantling" (CVID) of his nuclear-weapons program, all at once, without knowing what Pyongyang will get in return. What Kim wants is a step-by-step denuclearization agreement, linked with progress toward the normalization of relations with the United States. Kim Yong Nam, chairman of the Supreme People's Assembly and No. 2 to Kim Jong Il, told me that "we don't think Mr. Bush is at all serious about resolving the nuclear issue with us in a fair way, since we obviously can't accept 'CVID first.' My feeling is, he is delaying resolution of the nuclear issue due to Iraq and the presidential election. But time is not on his side. We are going to use this time 100 percent effectively to strengthen our nuclear deterrent, both quantitatively and qualitatively. Why doesn't he accept our proposal to dismantle our program completely and verifiably through simultaneous steps by both sides?"

How would a phased deal work? In step one, explained Foreign Minister Paik Nam Soon and his aides, North Korea would freeze its plutonium program in exchange for multilateral energy aid, an end to U.S. economic sanctions and the removal of North Korea from the U.S. list of terrorist states, which would open the way for World Bank and Asian Development Bank aid. The terms of the freeze, they said, would depend on what the United States is prepared to do in return. Thus, if the payoff in energy aid is big enough, inspectors could have the access necessary to confirm how much plutonium has been reprocessed, and the plutonium could then be placed under controls. Further reprocessing could be prohibited, and formal pledges not to transfer nuclear material or to test a nuclear device could be written into the agreement. North Korea has suggested that negotiations on the freeze begin in Beijing during the May 12 meeting, said Paik. But that doesn't seem likely. The United States wants the agenda restricted to CVID.

Could the United States and its allies ever be sure that a closed society like North Korea actually lives up to a denuclearization agreement? I told my North Korean interlocutors that no U.S. president could give Pyongyang the binding "no attack" pledge it has sought. To my surprise, one of them said that Pyongyang might reconsider its demand for a security guarantee if a new administration proved less hostile than the present one. After all, the presence of U.S. diplomats and businessmen in Pyongyang after the normalization of relations might be a better guarantee against a pre-emptive strike, he said, than any agreement written on paper. "If you really end your hostility, and give up the goal of regime change," he added, "the formalities will no longer be important."

Harrison, director of the Asian program at the Center for International Policy, is the author of "Korean Endgame." He recently made his eighth visit to North Korea.