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Development Overview

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Overview of Korea’s development experience

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Development Overview
Official Aid General

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General

Development path of EDCF

1. Laying the Foundation of the EDCF (1987-1992)

Commencing the operation
Soon after obtaining the government’s funding of KRW 15 billion, the EDCF received loan requests from eight developing countries through the Ministry of Foreign Affairs of Korea on 15 projects amounting to USD 120 million in 1987. Among them, the EDCF decided to support the Padang By-pass Project in Indonesia and the Passenger Coach Purchase Project in Nigeria in December of the same year. The projects amounted to USD 13 million and USD 10 million, respectively.

Demand for EDCF assistance began to rise after 1990, but the lack of structured research and studies on recipient countries’ development strategies made it difficult for the EDCF to find the most effective means of development assistance that were in harmony with the recipient’s strategies. As a result, there were some challenges in identifying the appropriate projects to support.

The early stages of development assistance
After the loan commitment of KRW 18 billion (USD 23 million) was made in 1987, the EDCF kept a low profile for three years until 1990 as the trade balance worsened and the Korean government’s will for ODA weakened. However, as another ODA agency, the Korea International Cooperation Agency (KOICA), entered the scene to provide bilateral grant and technical assistance in 1991, national awareness on the necessity of ODA improved. Although the assistance commitment amount was small at the time, prospects to expand EDCF operations began to gain greater recognition.

From 1987 to 1990, 34.6% of the EDCF’s loan commitments went to Asia, followed by Eastern Europe (29.1%), and Africa (25.9%), showing a relatively even distribution among regions except for Latin America, where no assistance was made during this period. By sector, economic infrastructure projects took up 53.9%, more than half of the assistance.
 
2. Expansion of the EDCF (1993-1996)

The shifting global economic order and the EDCF
With the advent of the World Trade Organization (WTO) and other changes in the global economic environment in the early 1990s, Korea began to pursue neo-liberalism: striving to ease regulations, open up its trade market, and join globalization. In an effort to tune its economic framework in line with the changing global environment, Korea also entered the Organization for Economic Co-operation and Development (OECD). Korea’s joining of the OECD brought dramatic changes to EDCF operations since tied aid practice was put under the tight regulation of the OECD Arrangement.

In 1993, the new government announced its outward policy to strengthen partnership with developing countries in parallel with the entering of the OECD. The government’s ODA policy focused on increasing Korea’s ODA volume to 0.2% of the GNP by the end of the 1990s, which was the minimum level set by the OECD Development Assistance Committee (DAC) at the time. Supported by the government’s strong ODA drive, the amount of EDCF loan commitments skyrocketed to a record KRW 303 billion in 1996.

Meanwhile, the Soviet Union’s collapse at the end of 1991 contributed to strengthening Korea’s relationship with socialist countries making a transition into market economy. Until the end of 1996, KRW 79 billion was committed to Viet Nam and KRW 74 billion to China, making them the second and third largest EDCF recipient country, respectively. By the end of 1996, the EDCF assisted seven countries that transformed into market economies. The total loan amount to these countries reached KRW 304 billion, constituting 43% of the EDCF’s total accumulated commitment, and these countries emerged as new partner countries for the EDCF.

[Picture 2-1] The National Assembly Agrees to Ratify Korea’s Entering of the OECD in 1996
[Picture 2-1] The National Assembly Agrees to Ratify Koreas Entering of the OECD in 1996
 
Reforming the EDCF operation procedures
In order to reinvigorate EDCF operations, the Korean government drafted a comprehensive reform plan in April 1995. First, the number of priority partner countries was reduced from eight to five. Second, the EDCF’s support projects were categorized into three business sectors. Third, a goal was set to reduce the time consumed in going through the stage of receiving loan requests to the stage of providing loan commitments, from 30 months down to 18 months. Various measures were hence introduced to simplify the loan procedures.

Also, the EDCF exerted coordinated efforts with KOICA in supporting development projects. To enable a seamless connection in the process leading from KOICA’s feasibility studies or engineering works to the EDCF’s loan commitment, the two ODA agencies closely cooperated from the project preparation stage of initial project identification. These efforts allowed the elimination of possible causes for project delay, and helped the projects to proceed smoothly.

In the meantime, the Korean government decided to ease the terms and conditions of the EDCF loan in April 1996. The previous interest rate of 2.0-5.0% was decreased to the advanced donor level of 1.0-5.0%, while the repayment period of 10-25 years including a grace period of 5-7 years was extended to 10-30 years with a 5-10 year grace period. Furthermore, the EDCF provided preferential terms and conditions for strategic countries.

One more feature during this period was the beginning of the EDCF Workshop. The first EDCF workshop was held in October 1995. Government officials from partner countries were invited and had the opportunity to enhance their understanding of Korea’s ODA and EDCF policy and to share knowledge on Korea’s development path.

Lastly, the annual consultation meeting with MDBs was strengthened. In 1995, a total of 28 co-financing projects in seven countries were reviewed together with the ADB, IBRD, and AfDB. Furthermore, the first mixed credit was approved in December 1996 for the Laguindingan Airport Development Project in the Philippines, under the cooperation of the export financing division of Korea Eximbank and Nordic Investment Bank. This opened a newchapter for the EDCF as its source of funding was diversified compared to the previous cases where the lack of adequate funding limited the support of large-scale infrastructure projects.
 
3. Contraction of EDCF Operations (1997-2002)

The Asian financial crisis and suspension of government funding
The overall Korean economy in 1997 struggled as a large number of Korean firms recorded low profits and went bankrupt as a result of their excessive investment and overly aggressive business practices. In addition, as the current account balance continued to record a minus level, international credit rating agencies degraded Korea’s credit rating, fostering a foreign capital exodus from Korea and resulting in a national liquidity crisis. The incident nearly led Korea to a moratorium but the nation was able to avoid it with the USD 10 billion emergency capital injection from the IMF and G8. Consequently, the government capital subscription to the EDCF was suspended for five years from 1998 to 2002.

Temporary setbacks in EDCF operations
The EDCF loan commitment was drastically decreased due to the suspension of the government’s capital subscription. To make matters worse, the exchange rate hike caused the Korean won denominated EDCF loan to face project cost overrun. As a result, many partner countries who could not bear the counter funding back then, called for the modification of project scope or loan cancellation.

The aggregate commitment volume showed large fluctuations as it peaked to KRW 303 billion in 1996, drastically dropped to KRW 95 billion in 1997, hiked up to KRW 243 billion in 2000 and then decreased again to KRW 145 billion in 2002. The accumulated commitment amount between 1997 and 2002 was KRW 908 billion, averaging down to approximately KRW 151 billion on an annual basis, which was higher than the annual average amount of KRW 135 billion recorded during the period between 1993 and 1996.

By region, Asia benefited the most between 1997 and 2002, taking KRW 651 billion, 71.7% of the accumulated total, and a relatively even distribution was witnessed among Eastern Europe, Africa, and Latin America, constituting 8.8%, 9.2%, and 9.4%, respectively. By sector, transport & storage topped the list with 27.6%, followed by energy 11.9%, and communications 9.5%. It is noted that assistance to overall economic infrastructure projects diminished to 49% during this period while support for the social infrastructure sector increased with the health sector representing 21.0%, water supply & sanitation 12.8%, and education 8.3%. Meanwhile, the accumulated loan disbursement increased to KRW 813 billion despite unfavorable external factors. In the year 2000, the disbursement amount exceeded KRW 200 billion for the first time since the EDCF’s foundation.
 
4. Making a Great Leap Forward (2003-2007)

Scaling up the assistance volume
The United Nations International Conference on Financing for Development, better known as the 2002 Monterey Conference held in March 2002 declared that advanced nations will expand the ODA level up to 0.7% of the GNP in order to meet the Millennium Development Goals (MDGs). Furthermore, in May 2005, the DAC High Level Meeting of OECD stated through the Paris Declaration that every endeavor will be made to enhance aid effectiveness.

Meanwhile, the Korean government finally proclaimed in late 2002 that Korea was officially over with the financial crisis. Despite the downward trend of international trade conditions, Korea maintained an annual 10% export growth rate since 2003 and became the world’s 13th largest trading country in 2004.

As Korea’s status in the international community enhanced over time, there were increasing voices, both domestically and internationally, to reshape its ODA strategy and policies in proportion to its economic size, mainly regarding the scale up of ODA volume. In 2004, Korea’s ODA/GNI was 0.06%, only a quarter of the OECD DAC average of 0.26%, which was below the level of Portugal and Greece whose per capita income was similar to Korea’s. The increasing public awareness on ODA gained momentum with the occurrence of two catastrophic events, which took place consecutively: Tsunami in 2004 and the massive earthquake in Pakistan in 2005. Triggered by the numerous NGOs advocating the expansion of Korea’s ODA, the Korean government, led by the Sustainable Development Committee, an advisory group to the President, started to seriously look into this issue from 2003 as the ODA funding sources became available in line with the continued current account surplus.

Later in October 2005, a comprehensive ODA reform plan prepared by the Office of Government Policy Coordination was revealed. The plan aimed to increase the ODA volume significantly and to utilize the ODA strategically to enhance Korea’s status in the international community, and strengthen economic cooperation with developing countries.

Since the 2002 Monterey Conference, the accumulated EDCF loan commitment continued to expand, reflecting the international community’s strong will to boost up aid. The amount recorded KRW 172 billion between 2003 and 2006. During this period, the portion of commitment to Asia slightly dropped to 58.1%, easing the uneven distribution among regions, while the support to Latin America increased to 12.9% due to the summit meeting between Korea and Latin America in 2005 and the Korean president’s state visit.

Loan disbursements peaked in 2002 with the amount of KRW 205 billion but then slipped to an annual average of KRW 150 billion between 2003 and 2006. Contrary to the gradual increase in loan commitments, in 2006, the disbursement record remained low due to the prolonged project implementation period caused by the introduction of mandatory competitive bidding procedures which aimed to enhance transparency of procurement procedures.
 
Establishment of advanced development assistance system
The EDCF has initiated various reform measures, one of which was a proactive project identification mechanism. The mechanism includes regular policy dialogues with counterpart governments, especially those of priority countries, to identify prospective projects and prepare project formation. Since 2003, a total of 57 policy dialogues were held in 26 partner countries and as a result, 35 projects in 13 countries were identified and assisted.

In the end of 2005, the EDCF also introduced the Country Cooperation Strategy and Program (CCSP) with the intention of expanding its commitment amount to priority countries of high development cooperation prospects such as Viet Nam and Indonesia. Meanwhile, projects with high development prospects but little preparation were identified and given technical assistance such as conducting feasibility studies or project design.

In the meantime, the EDCF tried to enhance project efficiency by simplifying the operation process. In this context, the EDCF Information System was established, which sets a standard time limit for each operational step and connects its electronic system with the government’s, making it possible for the relevant authority to check the status of the project in real time.

In January 2006, the Korean government founded the Medium Term EDCF Operation Strategy and Plan 2006-2009 in order to enhance aid effectiveness and improve its operation. It basically lays out major objectives and targets on improving Korea’s image and establishing a long-term stable relationship with key developing countries.

The operation principles are to strengthen the ownership of developing countries in line with the EDCF’s strategies to meet the MDGs. In terms of project evaluation, the EDCF made it mandatory to conduct ex-post evaluation for all loan projects, starting from 2007. It will contribute to improving the aid effectiveness, transparency, and accountability by providing the results and lessons learned to the interest parties.

Source: The Export-Import Bank of Korea. 2008. EDCF Your development partner 1987-2007, History book. Seoul.