Development aid in the early part of the decades of development

Development Aid in the Early Part of the Decades of Development (1961 to 1975)
 
1. Overview
 
The conditions, nature, and mode of international development aid for Korea began to undergo significant shifts in the 1960s, the dawn of the so-called “decades of development” in Korea.

Much of the foreign aid given to Korea throughout the reconstruction process that followed the Korean War in the 1950s was geared toward providing emergency relief and rebuilding and stabilizing the country’s economy. Though the bulk of the foreign grants for Korea’s postwar rehabilitation and reconstruction originated from American sources at that time, the grants took on the form of multilateral aid coordinated by the United Nations (UN). Throughout this period, Korea remained a passive recipient, having little say over how it might direct and use the foreign grants and aid it received, the majority of which came with conditions and specific purposes attached.

The amounts of such grants and aid began to decrease when the postwar rehabilitation process was in full swing and socioeconomic disorder in the country had begun to wane somewhat. Accordingly, the amount of foreign aid, which reached USD 1.54 million in 1954, the first year following the armistice between the two Koreas, multiplied to USD 3.83 million in 1957, before abruptly falling back to USD 1.54 million in 1961.

The forms of foreign aid for Korea’s economic stabilization and reconstruction began to change significantly by the time the 1960s rolled around. President Kennedy’s new foreign aid policy, announced in 1961, ostensibly purported to support the economic development and growth of decolonized countries. In effect, however, it placed increased emphasis on the responsibility of the recipient countries, and the shift from free grants to conditional loans. The policy came as a shock to Korea, whose economy until that time was almost exclusively reliant on American aid for its functioning.

Fortunately, the Bretton Woods Agreement signed around this time ushered in a new free trade system under the auspices of the GATT regime, enabling various Western nation-states aside from the United States to provide Korea with development assistance. The development discourse that began to flourish amid the wave of decolonization finally culminated in consensus on “from North to South.” The world, in other words, was ready to promote and provide official development assistance (ODA) and other forms of international cooperation required for new development programs.

In the meantime, the Korean government officially switched to an export-oriented industrialization policy in the early 1960s, actively directing and expanding social overhead capital facilities, infrastructure, basic industries, and other programs of economic and social development by lobbying for and securing the needed investments and technologies. Despite the investments that had been made since the 1950s in economic reconstruction, infrastructure and other surrounding economic conditions remained almost nonexistent in Korea, forcing the development-zealous government to look abroad for the funding and sources it needed for Korea’s transformation.

Such atmospheric changes led to the transformation of the nature and forms of foreign aid provided to Korea, shifting the country’s status from a passive to an active recipient. While the United States remained Korea’s main donor, the portfolio of donors was diversified somewhat to also include Japan and Germany, among other nations. Moreover, Korea began to receive development cooperation loans and other forms of multilateral support from the International Bank of Reconstruction and Development (IBRD), the International Development Association (IDA), the Asia Development Bank (ADB), and others.

The period from the early 1960s to the early 1970s, preceding Korea’s so-called “decades of development,” saw international cooperation and support for Korea reach its peak. The types of international support became diversified and expanded to include free transfers of technology and conditional loans.

In particular, notwithstanding the diversification of bilateral and multilateral sources of development aid, the United States and Japan quickly became dominant providers of foreign grants and aid for Korea during this period. The United States occupied a position of absolute scale and authority during the 1950s as the almost sole donor to Korea. However, Korea’s development would not have been possible without the roles played by both the United States and Japan in the time preceding and following the decades of development. More specifically, the position of the dominant donor shifted from the United States to Japan at the end of the decades of development.

The United States occupied a dominant position in Korea’s overall foreign aid portfolio until the early phase of the decades of development after which its weight shrank noticeably. Whereas the United States accounted for 64 percent of the total amount of grants and aid that Korea received until the late 1970s, its proportion dropped to 15 percent or so in the latter part of the decade. In the meantime, Japan’s share grew from 27 percent during the early phase to 57 percent later on.
 

(Unit: USD 1 million)
 

Note: Figures in parentheses represent respective proportions.
Source: Organization for Economic Cooperation and Development-Development Assistance Committee.
 
Another important characteristic of ODA during this period is the gradual but definite decline of grants-in-aid relative to the significant increase in the amount of loans. Whereas grants-in-aid made up 51 percent of the overall ODA that Korea received during the years leading up to the decades of development, its share plummeted to 21 percent in the latter part of the development decades.

It should also be noted that the majority of the diverse ODA and international cooperation programs that Korea pursued during this period came about due to the nation’s strong plans and development initiatives. Some of the national projects that the Korean government launched in the early years of the decades of development proceeded with international support and development despite the harsh criticisms and pessimistic forecasts of the international community.

Source: Korea International Cooperation Agency. 2004. Study on Development Aid and Cooperation for South Korea: Size, Scope and Exemplary Effects. Seoul.

 

2. State-Led Development and Development Aid for Korea
 
The economic development plan, first introduced in Korea in 1961, differed dramatically from the economic policies of the past that focused solely on pursuing the reconstruction and stability of one economic sector at a time. Whereas past economic revival plans pursued balanced growth, the new government, which took over after the May 16 military coup, launched the far more ambitious Five-Year Economic Development Plan, in which it positioned itself as an active participant in efforts to lessen the capital and technology gaps between Korea and developed countries. Of course pursuing this plan, which at its most basic level aimed at overcoming poverty and achieving economic self-sufficiency for the country, required massive amounts of financial and technological investments. Thus Korea was compelled to deepen its dependency on international support.

Born amid a dearth of social and economic conditions to support it, the ambitious plan required heavy capital investments for creating and expanding infrastructure. Given Korea’s extremely low credit rating in the international community, and its lack of experience and technology, the country had to rely almost exclusively on capital and technology from international sources, particularly development aid from governments.

As the amount of grants-in-aid from the United States and the UN continued to decline significantly, and increasingly more development aid came in the forms of loans and credits, the Korean government took more care to ensure and enhance the economic feasibility of its development projects.

The First Five-Year Economic Development Plan (1962 to 1966), introduced in 1961, limited Korea’s dependency on international grants and aid, among the available resources for development, to 14.1 percent of the gross domestic product (GDP) of 1962, and sought to reduce it over time, to 6.3 percent of the GDP in 1966 at the plan’s conclusion. At the same time, the plan sought to achieve the levels of imports and exports and trade balances it desired during the five years with grants-in-aid and other development cooperation funds. In other words, it sought to compensate for the USD 1.43 billion out of a total trade deficit of USD 1.9 billion at the time with grants-in-aid and development loans. The plan also envisioned USD 683.6 million in total foreign capital investment, USD 426 million of which was to be in the form of development loans.

In fact, approximately 9.1 percent of the envisioned foreign investment (or 64 percent of the original 14.2 percent projection) derived from foreign savings between 1962 and 1965.[1] As Korea’s basis for a more self-sufficient economy began to expand under the First Five-Year Plan, the country’s dependency on foreign savings and other forms of international aid gradually decreased. Nevertheless, foreign savings formed the core basis for development during the early phase of the decades of development. Though the overall proportion of development aid may have declined significantly from the 1970s due to the relative increase in the amounts of public and commercial (both non-concessional) loans Korea had secured, the centrality of development aid at least during the early phase of Korea’s development is undeniable.
 

(Unit: %)
 

Notes: 1. Total investment/gross national product.
2. Policy Studies on a Half Century of the Korean Economy, Korea Development Institute, Oct. 1995, p. 46.
3. The figure represents the years from 1968 to 1969.
Economic Policy During the Decades of Development, Economic Planning Board, Dec. 1982, pp. 258-367.
 
The Korean government made diverse and active efforts to attract foreign capital, including grants-in-aid and loans, which was needed to fund the massive scopes of its development projects. In addition to diversifying and enhancing its political and diplomatic efforts to secure greater development aid and international development cooperation funds, the Korean government also systematized and organized institutions as means of sustaining and facilitating such efforts.

Aside from launching ambitious policy measures to establish the Five-Year Economic Development Plan step-by-step and attract increasing amounts of foreign capital and technology, the Korean government also dispatched investment envoys around the world, actively pursuing cooperation and support in the diplomatic realm as well.

In particular, the Korean government proposed and lobbied for the creation of the International Economic Consultative Group for Korea (IECOK), enlisting the participation of not only multilateral development organizations, such as the IBRD, but also the governments of major donor countries, such as the United States, Japan, and Germany. Beginning in 1966, the Korean government was able to use the IECOK to strengthen and systematize its efforts for international development cooperation.[2] The IECOK played a pivotal role in the early phase of Korea’s development, bringing together delegations of all multilateral development organizations as well as donor countries every one or two years until the early 1980s for in-depth discussions on effective measures for supporting Korea’s development.
 

 Source: Korea International Cooperation Agency. 2004. Study on Development Aid and Cooperation for South Korea: Size, Scope and Exemplary Effects. Seoul.
 

3. Bilateral Development Cooperation in the Early Part of the Decades of Development
 
The United States served as the most substantial source of grants and aid, bilateral and multilateral alike, for Korea throughout the 1950s until the early 1960s. As Korea needed to diversify its development aid sources, and other Western states were poised to offer development support, Korea’s bilateral development cooperation relations eventually broadened to include Germany, Japan, and France, among others.

The economic dialogue between Korea and West Germany, held in December 1961, culminated in an agreement on a long-term development loan of USD 37.5 million from Berlin. As the dispute over property claims between Korea and Japan had found a dramatic settlement in December 1962, Japan also agreed to provide Korea with up to USD 300 million in free grants, and up to USD 200 million in conditional loans. Another agreement was forged between Korea and France in July 1964, on the latter providing USD 10 million in development aid to support the construction of a hydro power plant in Paldang, Korea.[1]

The United States, which had been the dominant donor to Korea, began to leave behind its policy of free grants for Korea in the late 1950s, switching an increasing portion of the development aid it provided to conditional loans and grants.[2]

The United States set up the Development Loan Fund (DLF) in January 1958, setting aside USD 500 million in 1958 and another USD 750 million in 1959 and 1960 each, thus providing USD 2 billion in total conditional development loans through the fund.

 Korea applied for a total of USD 87 million for nine development projects as of 1958, and received USD 12.74 million in 1959, for four projects, including the expansion of Dongyang Cement’s Samcheok plant.[3] The DLF was vital for Korea’s development in and after 1960, aiding the construction and expansion of such key infrastructure as the Korea Electric Power Corporation’s fossil fuel power plant in Gamcheon (Busan) and hydro power plant in Soyang, and a fertilizer plant in Chungju.

John F. Kennedy’s presidency significantly altered Washington’s development aid policy in the early 1960s. In his special message to Congress in March 1961 on foreign aid, President Kennedy delineated the new direction and core of Washington’s foreign aid policy, emphasizing the need to enhance support for the economic development of recipient countries in the long run through cooperation with other advanced Western states, and the need for developing countries to reinforce their own sense of responsibility for development. The message outlined the key principles for a more efficient and effective foreign aid system.

Accordingly, Congress enacted the Foreign Assistance Act in September 1961, replacing the Mutual Security Act that had governed Washington’s foreign aid since 1954. Congress also created the Agency for International Development (US AID) by bringing together the International Cooperation Agency (ICA) and the DLF in December 1961.

The new US foreign aid policy, and the urgency with which Korea applied itself to the project of national development, conspired to bring about the peak of development cooperation between the two countries that ushered in the decades of development. As international attention on development and cooperation increased significantly, and the pattern of donations from the North to the South became established, the United States provided Korea with an unprecedented, and possibly unsurpassable, level of grants and aid. From 1961, when US AID was first established, to 1975, when Korea finally graduated from its dependency on US AID, Korea had received grants and aid worth USD 2.506 billion in total.

Korea’s experience with bilateral development cooperation with Japan can be roughly divided into two parts. Bilateral cooperation between the two countries began when diplomatic channels re-opened in 1965, after the two countries had reached a settlement on property and reparation claims in 1962.[4]

First, Tokyo set up the Japanese Reparation Fund for Korea as a compensatory measure for the losses Korea suffered (in terms of property damages, conscripted soldiers and manpower) under Japan’s colonial rule. The fund included USD 300 million of free loans and grants, and USD 200 million of conditional loans, as well as USD 300 million of other forms of commercial loans. The 500 million or so provided via the fund as grants and conditional loans went to the construction and expansion of key features of Korea’s infrastructure, including facilities for agriculture, forestry, mining, research and development, and other forms of social overhead capital. The capital from Japan provided the impetus for the implementation of major national projects throughout the 1960s, such as the construction of Pohang Steel Mill and the Gyeongbu National Expressway, and also facilitated the introduction of new equipment and technology into Korea.

However, beginning in the 1970s Japan’s more general Bilateral Assistance Fund came to replace the Reparation Fund that served particular (compensatory) purposes. The amount of grants and aid received from Japan increased significantly from the early 1970s onwards relative to the continuously shrinking amount of grants and aid received from the United States during the same time period. Between 1965 and 1975, for example, Korea received from Japan USD 335 million in grants and USD 745 million in conditional loans (for a total of USD 1.08 billion), making Japan the second most important source of development aid for Korea, next only to the United States.