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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

Overview of official foreign assistance: 1945-49

Background


Korea was liberated from Japanese colonial rule on August 15, 1945. This liberation, however, left the Korean peninsula in a political and economic vacuum, with the southern part of Korea being ruled for a time by the US Army Military Government in Korea (USAMGIK). Social, economic and political chaos dominated Korea after its liberation, precipitating the kinds of humanitarian crises that had already prevailed during the Japanese colonization and World War II periods. Such was the context in which foreign assistance first arrived in Korea.
 
Objectives, Donors, and Content of Assistance


The assistance provided to the Korean peninsula during 1945-49 was primarily for emergency humanitarian relief from the traumas that the country had suffered under Japanese colonization and during World War II, and for macro-economic stabilization.
 
[Table 1]  Official Foreign Assistance to Korea: 1945-52 (Unit: US$ million in current prices)
 

  US/
AMGIK
(1945-49)
US
ECA/ SEC
(1948-52)
Total
(1945-52)
$ %
Reconstruction 69.8 6.0 75.8 11
Education     7.9 1
Housing/ Health 7.9  
Food/Raw Materials 416.8 196.0 612.8 87
Technical Assistance 7.7 NA 7.7 1
Total 502.2 202.0 704.2 100

 
 
During 1945-52, official foreign assistance was provided mainly by the US Army Military Government in Korea (USAMGIK) and the Economic Cooperative Administration (ECA).
 
The US Army Military Government (USAMG) provided emergency relief and humanitarian assistance under the Government Appropriations for Relief in Occupied Areas (GARIOA) program and rehabilitation assistance under the Economic Rehabilitation (EROA) program. However, the majority of assistance was provided under the GARIOA. The GARIOA had three basic objectives: preventing widespread starvation and disease; boosting agricultural output; and overcoming shortages in basic supplies and essential consumer goods. The emergency assistance provided much needed humanitarian relief, staving off widespread starvation, disease, and social unrest through the provision of basic necessities, including food and agricultural supplies, which accounted for 35 and 24 percent, respectively, of total USAMG assistance. Indeed, the provision of grain totaled 44 percent of the total grain supply in Korea by 1947, while the large amount of fertilizer supplied to Korea led to huge increases in agricultural production. Assistance for reconstruction accounted for only 14 percent of the total aid provided by the USAMG (US $502,155) during the same period.
 
Efforts were made to implement a longer term and more sustainable economic development strategy under the Economic Cooperative Administration (ECA), a US government foreign assistance agency. In reality, the ECA essentially operated like the USAMG, focusing on the provision of essential supplies and commodities. One difference, however, was that the implementation of macro-stabilization and fiscal austerity policies was an important condition for the assistance program. In 1948 when the government of the Republic of Korea (ROK) led by Syngman Rhee was established, the policy objectives of the US aid program were formalized under the ROK-US Agreement on Aid. The United States imposed a strict set of provisions and controls to ensure that the aid funds were allocated and used efficiently to achieve policy objectives. The 12 articles of the ROK-US Agreement on Aid included the Korean government’s agreement to stabilize prices, privatize proprieties formerly owned by the Japanese, and liberalize markets, i.e., ensure a fair foreign exchange rate. The last provision on exchange rates was a cause of “often acrimonious donor-recipient conflicts over stabilization policy.” The Rhee government was intent on maximizing foreign aid receipts when in use by keeping an officially overvalued currency against the dollar.
 
The agreement also stipulated that the two governments implement mutually agreed upon fiscal measures aimed at balancing the budget, reducing fiscal expenditures, and maintaining a conservative money and credit supply. A counterpart fund account was required to be established at the central bank where the proceeds of US goods provided under the assistance program and sold in the marketplace were to be deposited. The allocation and uses of the counterpart fund had to be mutually agreed upon by both governments. The stabilization program suffered from policy inconsistencies and lack of support from the Korean government at the outset. The United States, judged that Korea was slow to institute the stabilization policies and sought to maximize the inflow of aid by maintaining an overvalued foreign exchange rate. The Korean government ultimately came to cooperate with the stabilization policies when the United States shut down all levers of aid. It should be noted that these macro-stabilization and fiscal austerity measures had real and positive effects in checking hyperinflation and shoring up Korea’s fiscal budget, and thus laying the groundwork for development. Consumer prices that had increased by as much as 86 percent in 1947 rose by only 4 percent in 1949.
 
By mid 1949, the Korean and US governments began preparations for economic reconstruction. The Korean government took the initiative by devising a 5-year reconstruction plan for industrial development centered on the manufacturing sector. The ECA and the US Congress viewed the plan as too ambitious, thus the ECA revised it to a 3-year plan to be carried out with a budget of $350 million, focusing on three basic areas of capital investment: development of coal, expansion of thermal power generating facilities, and construction of fertilizer plants. It was assumed in this plan that US assistance would end by 1953, and that any balance-of-payment deficits would be met by private foreign investment and borrowings. The US Congress, however, rejected the ECA’s plan, revising it again to a 1-year plan with a $110 million budget. The Korean War, which broke out on June 25, 1950, prevented the plan from ever being carried out.
 
Early in Korea's development, a considerable amount of assistance was directed toward the education sector, resulting in a sharp reduction in illiteracy rates. During Japanese colonial rule, learning was largely restricted to a few Koreans who received a Japanese education. Schools under the USAMG (1945-48) had clearly defined political and economic purposes: to convert Korean youth and adults to the American conception of democracy and to provide basic skills training. The USAMG established civic schools for literacy and basic education programs for older students who no longer qualified for compulsory primary education. Indeed, civic schools for adults that taught basic reading, writing and math were critical to reducing the illiteracy rate among adults within a very short time. By 1948, nearly 15,400 civic schools had been established and more than 1 million adults were enrolled. About 15 million textbooks were printed and distributed for about 3 million children enrolled in primary education. The Korean language of Hangeul was formally reintroduced into the curriculum, and all elements of Japanese education were eliminated.
 
In step with the US policy initiative on civic schools, the Education Act was passed by the newly established Korean government in December 1949, which gave civic schools legal status and outlined the objectives and activities of such schools. The Act specified that students of civic schools were required to complete a minimum of 200 hours of classes over 70 days. These classes were held during the off-seasons so that farmers could attend. Essentially, the Korean government that was established in 1948 implemented the same policy on adult education as the USAMG. From the summer of 1946, adult education began to eradicate illiteracy as well as foster citizens of a democratic nation. The Adult Education Bureau took charge of training leaders, who would visit cities and rural counties to train local leaders, who would then teach illiterate adults in neighborhoods and villages. The illiteracy rate fell from 78 percent in 1945 to 22 percent in 1949, and ultimately to below 10 percent in 1968.

Source: Written by Lee, Kye Woo(KDI School) in 2014 for K-Developedia (Revised July 2, 2014)