Bill Clinton called it “the scariest place on Earth”. Half an hour’s drive north from Seoul the beaches are lined with high barbed and razor wire fences and camouflaged observation posts. Large artillery guns set into the wooded hillside are manned and ready to repel forces. A two and a half mile wide “demilitarised” buffer zone separates communism from capitalism in a land mass about the size of England and Scotland, but 1.8 million soldiers - 1.1 million to the north; 700,000, including nearly 40,000 Americans, to the south- stand ready to fight at a moment’s notice.

The Cold War ended in Europe 10 years ago, but it rages on in Korea. In the centre of the demilitarised zone is a series of grey huts straddling the border line in which negotiations take place. The last ones were broken off in June because a naval gun battle off the west coast left an estimated 30 North Koreans dead.

Before you enter this zone, you are given a firm warning that you are entering a hostile area that could lead to “injury or death as a direct result of enemy action”. This is no tourist gimmick. Beyond the huts there is a Bridge of No Return which is used to swap political prisoners. On one side of the bridge is a memorial plaque to two Americans axed to death by North Korean troops in the Seventies when they tried to cut down a tree blocking the view of an observation tower. In another incident four North Korean guards and one South Korean died in a gun battle as a defector escaped to the South.

Looking across the border - where the only sign of life is a distant, almost ghost town dubbed Propaganda Village by the Americans, and the only sound is the crackling of radio propaganda through the trees, designed to turn the minds of the South Korean guards - it is hard to believe that these two states can ever become one without a war. But two factors may prove a turning point: the collapse of the economy in the South during the Asian financial crisis in 1997 and mass starvation in the isolated economy of the North, which has left it dependent on food aid from other countries since 1995 when its agricultural industry collapsed after decades of mismanagement and years of poor harvests.

Aid organisations estimate that 3.5 million people in the North died from starvation over the past four years, though North Korea puts the figure at 220,000. The aid bodies say food aid has reduced the deaths from a peak of 1.5 million in 1997 to 200,000 this year. But there remain acute health problems: tuberculosis and diarrhoea have reached “epidemic” proportions, according to US congressman the Rev Tony Hall, who has visited the North five times since 1996.

The financial collapse that swept through Asia included South Korea: “The won skyrocketed from 800 won to the dollar to 1,900 after the crisis,” says Sung-hee Jwa, president of the Korean Economic Research Institute. “The IMF said high interest rates were needed to stabilise it. But this made many firms insolvent in 1998.”

The economy has virtually recovered, but the experience brought a dose of reality to business leaders in a country where it was commonly assumed that unification would have to happen one day simply because Korea was a unified country for 1,500 years before the communists took over in the North. Businessmen now look at the problems that the strongest economy in Europe suffered when Germany took on the collapsed East German economy after unification. Having discovered in 1997 how fragile are the foundations on which the Korean economy is based, many business leaders fear economic disaster for the whole peninsula if North Korea collapses. By the same token, neither country can afford a costly war.

“We don’t want the country to crash,” says Alex Shim, a director of Hyundai, the conglomerate which produces everything from microchips to ocean going ships. “We want to keep North Korea in their own way for 20 to 50 years more. Compared with East and West Germany, the situation in the Korean peninsula is much more serious, so we don’t want to break their system.”

He says that it is a measure of how much South Korea has changed that he can express this personal opinion; 10 years ago he would have been taken away by the Korean Central Intelligence Agency on suspicion of being a communist sympathiser. Democracy only matured in South Korea in 1997, when for the first time the opposition leader was voted into office.

President Kim Dae Jung has tried to build bridges with the North by negotiating joint economic projects, such as the installation of a nuclear reactor, the establishment of a regular tourist cruise which has taken 80,000 visitors to Mount Kumgang in the past six months, and the supply of 100,000 tons of fertiliser. It is an attempt at positive engagement, dubbed the Sunshine Policy.

Whether this will pave the way to a rapprochement is questionable. In June a South Korean tourist on the cruise was detained for a week for telling North Korean officials that defectors to the South were having a good time and inviting them to see it for themselves. At the nuclear power plant, tension erupted when a South Korean worker used a newspaper that included a picture of the now late North Korean President Kim Il Sung to clean up some mess, not realising that that was not tolerated in the North’s society.

The joint projects have made Southern businesmen aware that North Korea would struggle to survive if it switched to a market economy overnight. “The productivity of their labourers is one-third that of South Koreans,” an industrialist involved in the nuclear plant said. “They are too used to being controlled, so don’t show initiative.”

And therein lies the rub. The government in control is hardline communist - army divisions run factories and collective farms - and shows no signs of wanting to switch to capitalism. Indeed, it has tried to turn its isolation to its advantage by using provocative military incidents and sales of nuclear missile technology to rogue nations as a form of leverage.

Researchers at the Korea Institute for National Unification in Seoul claim that government roads and railways in the North have almost disintegrated. One researcher, Kwan Hee Hong, says the North’s economy, though near collapse a few years ago, is able to keep going in the short term. But in the long term, the system is “sinking gradually” due to low productivity levels, he says.

What would it take to achieve unification? Sung-hee Jwa says: “First we have to ensure they don’t starve. They have been sent fertiliser, communications, cows and tourists. All are a means to survival. But the North may have to change to bring in foreign investment.”

So is unification a pipe dream? “It’s wishful thinking, maybe,” he says. “We’ll do what we can.”

Korea Institute for National Unification: http:www.ku.kinu.or.krenglish Seoul’s Window on Korea: www.kois.go.kr English-language sites on Korea: http:korea.net