Face to face with the world's most repressive regime

David McNeill, travelling under cover, infiltrates an illegal market in Pyongyang before falling foul of North Korea's authorities

Pyongyang is the showcase capital for a Stalinist experiment gone horribly wrong.

Like the embalmed face of the nation's founder, Kim Il-sung, lying in a glass coffin in his mausoleum in the Kumsusan Memorial Palace, the city at night has an eerie waxy pallor that can't disguise its slow decomposition. From the 40th floor of the Yanggakdo hotel, the dim illumination from street lamps and low-watt bulbs in apartment buildings is a telltale sign of the city's lack of fuel and creaking electricity grid. The brightest lights shine on the architectural baubles, idolatrous murals and giant statues of Kim dotted all around the city.

But off the wide, main boulevards, stories abound of poverty and malnutrition following a botched currency revaluation last year. Food prices, which rose 10-fold after the revaluation, have reportedly fallen back to about twice their old level, bringing enormous hardship to an already crippled economy.

The guides treat visitors like antibodies around a virus, hustling them from one approved site to the next and isolating them in the hotel – dubbed Alcatraz because it's built on an island a mile south-east of the city centre.

Delegates have already begun gathering for the first conference of the ruling Workers' Party in decades. From tomorrow, they will meet in Mansudae Assembly Hall to discuss a successor to Kim's son, Kim Jong-il, who is recovering from a stroke suffered in 2008.

But our guides in Pyongyang, who surely know these facts, stay tight-lipped, swatting away questions about the transition or what it could mean for this crippled nation. "We are not politicians, only ordinary people," says one. The only way to see beyond the facade was to give the guides the slip by leaving the hotel at dawn, walking quickly across the bridge from Yanggak Island and ignoring the quizzical looks of North Koreans in probably the world's most isolated capital.

Many were just starting their day, going to work on foot, by bicycle or in the city's rusting electric tram system. Women crimped their hair as they hurried to the tram; men walked their daughters to school. A typical morning anywhere, except this is modern life stripped bare: no iPods, jeans, T-shirts or sneakers, which are banned as foreign affectations. Mobile phones are as rare as sparrows in winter.

As we walked into the backstreets, the mask began to slip. Here the roads were potholed, the people scruffier and more sullen and some appeared to live in slum-like conditions. Rounding a street we came across a group of maybe 200 huddled around a makeshift street market, our first concrete sign that even here, in North Korea's carefully cultivated Potemkin Village, the country's state-controlled distribution system is shot to pieces.

The crowd eyed us nervously – markets such as this are illegal because, among other things, they strike at the heart of the official claim that the Kim Jong-il dictatorship will provide all. And they allow people one of the few places outside official gatherings to meet and talk. Women on haunches rolled out slabs of meat, vegetables, apples, even underwear – a prized commodity here – ready to disperse at the first sign of trouble. As I raised my camera to take a picture, the crowd began furiously yelling and pointing, and several came for us.

A man in a scruffy army uniform demanded our cameras. We tried to walk away as our bags were violently tugged. My colleague, Richard Lloyd Parry of The Times stumbled and fell. We realised we simply had no choice if we were going to safely escape. We surrendered our cameras. Our interrogator then tried to march us to what looked like a police station and we shook him off, before making a wrong turn and walking straight into a phalanx of green uniforms – a local guard-post.

Foreign journalists have been locked up here before. US citizens Euna Lee and Laura Ling were accused of espionage after being captured reporting along the border, held for months and only freed after a rescue mission by Bill Clinton. Luckily for us, we aren't Americans, but we mentally rehearsed the possible consequences. The further that news of our excursion went up the chain of command, the more likely we would be subjected to a full background check. We had both come in disguised as ordinary tourists. Back in my hotel room were my press ID from Japan, business cards and a laptop with articles I'd written on Kim, including one called "Schooldays of a Tyrant". If the trouble stayed within this neighbourhood goon squad, we might get away with a ticking off from our guides. If not, who knows?

In broken English, we began explaining that we were in town as delegates to the Pyongyang International Film Festival and had simply gone for a stroll. As we talked, an army vehicle drove up and a soldier came in carrying our cameras, which he'd retrieved from the crowd. The men fiddled awkwardly with the unfamiliar technology before giving up and demanding we show our pictures.

My memory card didn't work, probably damaged in the melee. Richard's showed only a single blurred photo of the market and several dozen of his blonde, one-year-old daughter. When the men saw her, they softened. They asked her age and swopped cigarettes. A group of more senior solders drew up and we watched as they mimed the story of how the two six-foot foreigners had been mugged of cameras and money by the much shorter Koreans, drawing laughter all around.

We were ordered into a van and driven back to the hotel where our guide, Mr Cha, was waiting for us. His face registered shock as they told him the news. In this rigidly hierarchical society, he was responsible for us and shared the consequences. Our journalist colleagues, three Scandinavians, a Frenchman and an American – also posing as tourists – would suffer the collective punishment: a makeshift tribunal, chaired by the boss of the travel company, was hastily put together.

In the gravely voiced tones of a chain smoker, the boss intoned that our actions had put a "black stain" on improving relations between his country and Britain – it wasn't the time to point out that I was Irish. We would be confined to our hotel and write a letter of apology "from our hearts". The letter was read out, the boss pronounced himself satisfied but our camera memory cards, containing four days' worth of photos, would be kept.

It was better than the alternative. A tearful Mr Cha later allowed us to leave the hotel to attend the closing ceremony of the film festival. Over a final drink, he toasted us. But the memory cards stayed confiscated, all except a handful of anodyne photos. "I hope you understand our country better and will come back," he said later over a beer. "We want people to like and respect our country."