콘텐츠 바로가기
로그인
컨텐츠

Category Open

Development Overview

tutorial

Overview of Korea’s development experience

home

Development Overview
Official Aid General

Print

General

Broad overview of US aid in Korea

Does aid have a positive impact on development? It is as much a moral question as it is an economic and political one. Any attempt to answer this question must be done in light of these three poles. Aid was critical in averting a humanitarian crisis in the wake of World War II and the Korean War in a poor country that had just been freed of its colonial rule. Foreign aid had a huge impact on Korea’s reconstruction and development; it raised to a large extent Korea’s capital stock primarily in human capital (education and health) and basic physical infrastructure (roads, railways, power, water, and sanitation); and it provided critical loans to finance industrialization.

 

But the great geopolitical uncertainty of the Korean Peninsula right after WWII, Korea’s eventual physical partition, which culminated with a civil war, never allowed development to get traction in the early years of the republic. By the late 1950s, signs of Korea’s economy increasingly becoming aid-dependent were emerging. A large part of foreign aid was comprised of commodities, which suppressed agriculture prices and distorted the incentives of farmers. Indeed, rice production decreased from 14.7 million Sok in 1949 to 12.8 million Sok in 1956, indicating 13.3% decrease (Lee, Dae-Keun, 2002). Besides the import of US grain flooding the Korean agricultural market, agricultural production decreased since around the time of land reform due to the small scale of farming land and weak agricultural institutions for credits and fertilizer. As a result, farmers’ income, which had increased after the land reform in the late 1940s and early 1950s, fell back. Such reduction of income led to a rapid expansion of farmers’ debt as they received loans from the informal credit markets. Because the Korean economy was driven by investments and consumption of aid commodities, funded by aid resources, it can be argued that a drop in US aid could result in a drop in GDP growth. Lee (2002, p354) shows that Korean GDP began a decreasing trend from a peak of 8.7% in 1957, when the amount of the US aid also peaked, to 2.1% in 1960.12 Moreover, the Korean government had become addicted to aid, overvaluing its currency to maximize aid receipts and printing money to meet budget needs. This made the economy susceptible to persistent high inflation and any attempt to keep macro stability difficult. Possibly more detrimental to the Korean economy, the over reliance on aid had given way to corruption and crony capitalism within government and business, itself becoming an obstacle to economic reform and progress.13 As the 1960’s began, Korea’s economy was by all intents and purposes dependent on aid while the failures of the Korean government gave merit to the label of a “basket case.”

 

In the 18 years after its liberation in 1945, following World War II, Korea suffered from a depressed economy, hyper-inflation, and a civil war, any one of which could impoverish a country. After the Japanese departed,14 Korea’s economy was left a shell of its former colonial self. Korea’s trade with Japan accounted for over 80% of total trade while Japanese technical workers accounted for 82% of the total technical workers .15 But Korea’s colonial past also meant that the remnants of Japanese technology and knowledge as well as public institutions, left it the building blocks from which to build from. Besides instituting a statutory basis and a structure of government administration, the Japanese built a network of railways to transport goods and natural resources, and to connect Korea with other Japanese territories

.15 Railway network was fairly robust stretching a total of 6,362 km (South Korea: 2,642km, North Korea: 3,720km) as of 1945. The less impressive Japanese built a network of roads across the Korean Peninsula, which was better in the South. Streetcars which ran on electricity were built in Seoul, Busan and Pyungyang. There were also harbors in Busan, Inchon, Kunsan and Mokpo which were largely used to facilitate trade with Japan. Korea was also able to produce a total of 988,700 KW of electric power, in which 92% of the power produced was located in North Korea.

 

[Table 1-1] The Share of Korean Technical Workers out of Total Technical Workers

 

Total number of technical workers

(A)

Korean technical Workers (B)

B/A (%)

Mining (As of 1941)

 

 

 

Mining

5,247

1,542

29.4

Smelting

1,432

150

10.5

Sub total

6,679

1,692

25.3

Manufacturing (As of 1944)

 

 

 

Metal

1,214

133

11.0

Chemical

2,004

222

11.1

Civil engineering and Construction

2,347

551

23.5

Miscellaneous

2,911

726

24.9

Sub total

8,476

1,632

19.3

Total

15,155

3,324

21.9

Source: Lee (2002, p493)

 

[Table 1-2] Korea’s Natural Endowment and Economic Productive Capacity as of 1945

 

Unit

Total

South Korea

North Korea

Area of land

Km

220,796

93,634

127,136

Population

Person

25,917,881

17,891,699

8,026,182

Rice output

1,000 Sok

19,374

13,718

5,656

Area of forest

Chongbo

16,277,854

6,856,433

9,421,421

Manufacturing production

1,000 won

1,495,169

705,326

789,843

Anthracite (coal)

Production

%

100

2.3

97.7

Annual Power production

KW

988,700

79,500

909,200

Railroad network

Km

6,362

2,642

3,720

Road network

Km

25,550

16,241

9,309

Harbor Handling Capacity

1,000 ton

18,000

10,000

8,000

Source: Kim, Euiwon (1983), A Study of the History of Korea’s Land, p741
 
 

12 Mason et. al (1980, p204) also concluded that aid was critical to driving Korea’s economic growth, citing the study by David Cole who estimated that aid contributed as much as 1.5% of GDP growth.

13 Much has been said about the exploits of President Syngman Rhee, who as an outsider was more interested in the politics than the economics of Korea, spending most of his energy and the country’s resources soliciting political influence. The government under President Rhee was known to be inept and corrupt resulting in much rent seeking behavior.

14 During the Japanese colonization, a total of 700,000 Japanese immigrated to Korea.

15 According to economic historian Dae-Keun Lee (2002), Korea’s manufacturing accounted for less than 5% of total production in early 1900s, but the share of production in manufacturing grew rapidly to over 40% by 1940 during Japanese colonization. By this time, Korea’s manufacturing sector experienced a fairly rapid transition from light manufacturing to heavy and chemical industries, much of it in the North. During the period 1931-1940, the share of HCI manufacturing increased

 

Source: Kim, Jun-Kyung and Kim, KS. 2012. Impact of foreign aid on Korea's development. Seoul: KDI School of Public Policy and Management.