Overview of official foreign assistance: 1980-99

Background

During the late 1970s and early 1980s, Korea's economic condition deteriorated substantially. The economy registered a negative growth rate in 1980 for the first time since the Korean War, and the inflation rate approached 30 percent per annum. Amid concerns that high inflation and overinvestment in the heavy and chemical industries might weaken the international competitiveness of Korean industries, the second oil crisis in the late 1970s precipitated the Korean economy into crisis.
 
The Korean government concluded that the crisis was not a temporary one, but rooted in structural problems that grew out of the government-led economic growth strategy adopted in the 1960s and 1970s. Thus, the Korean government attempted to revise its growth strategy, switching from a government-led to a market-led approach and adopting comprehensive policy measures for economic stabilization. These policy measures were reflected in the Fifth Five-Year Economic and Social Development Plan which began in 1982. The plan aimed to achieve optimal economic growth in harmony with stability, efficiency, and balance. Such goals were to be attained by government actions to address imbalances in terms of income, region, sector, and enterprise size. Government expenditures were curtailed sharply, small and medium enterprises were granted more assistance, and social security systems were expanded. Growth and efficiency goals were to be attained not by government-led strategy, but by market forces and liberalization policies, which permeated all sectors of the economy including trade, finance and even education, especially at the higher education level.
 
Thanks to the weak dollar, low oil prices and low international interest rates, Korea's exports increased dramatically and its economic growth rate returned to a high level. Consequently, the current account turned to surplus for the first time in history, domestic savings rates surpassed investment rates, and foreign debt began to decrease in 1986. The opening-up of Korean capital markets to foreign investors began in earnest in 1992, and when Korea joined the OECD in 1996, the liberalization policy advanced more. Consequently, with a massive volume of foreign capital flowing into Korea, the amount of foreign debt, especially short-term debt, substantially increased and left the economy vulnerable to a sudden foreign capital outflow. The bankruptcy of some major conglomerates in 1997 led to panic among foreign investors and a massive foreign capital outflow followed, resulting in the currency and financial crises that occurred in the latter part of 1997.
 
Objectives of Aid

Assistance at this time was to finance economic growth, in contrast to the rehabilitation and reconstruction focus in the aftermath of the Korean War, and as such was more similar to the aid provided in 1960s and the 1970s. But official foreign assistance in the 1980s and the 1990s also aimed beyond the objectives of the aid given in the 1960s and 1970s, by assisting in the realization of economic efficiency and equity through the promotion of liberalization, innovation, and welfare/balancing programs. It also aimed at facilitating emergency economic restructuring efforts particularly in the wake of the Asian financial crisis of 1997.
 
Scale and Type of Aid

During the development decades (1962-92), total capital inflow to Korea amounted to about $82 billion, of which public capital inflows (official foreign assistance), i.e., public development grants and public development loans, amounted to only $21 billion (or 26 percent) of total capital inflows. The rest were private capital inflows such as commercial loans, financial institution borrowings, private sector bonds, and foreign direct investment. During the first half of the development decades (1962-78), however, public capital inflows played an important role in leading Korean economic development. As the development progressed, the role of public capital inflows declined, and private capital inflows took a leading role. The share of official foreign assistance declined from 38 percent of total capital inflows during the first half of the development decades (1962-78) to 22 percent during the second half (1979-92), due to the rising portion of private capital inflows. Increasing investment financed with public capital inflows at the initial stage of development crowded in private capital inflows and investment at the later stage, a unique feature of Korean economic development.
 
In Korea’s economic development public and private loans dominated capital inflows, over foreign direct investment. Many studies assert that FDI contributes more significantly to economic growth than loans. However, in Korea’s case fast economic growth and industrialization were attained through loans, thus pointing to the greater importance of sectoral allocation and use of capital, over type of capital (i.e., whether capital inflows consisted of grants, loans or FDI), in Korea’s economic advancement.
 
While almost all assistance provided during the 1940s and the 1950s was in the form of grants, they accounted for only half the total official development assistance during the first half of the development decades (1962-78), the other half being official development loans. Moreover, as Korea’s per capita income increased during the second half of the development decades (1979-92), no further grants were offered, and most public development loans provided during this period were OOA-type loans (with grant elements less than 25 percent). In 1975, Korea graduated from the IDA, which was the nation’s main window for soft loans (with grant elements greater than 25 percent, i.e., ODA-type loans). Since then, therefore, the OOA-type loan dominated the official development assistance.
 
Throughout the development decades (1962-92), public grants ($1.5 billion) accounted for only 1.8 percent of total capital inflows. This is another unique feature of the Korean economic development. Thus, Korea’s high economic growth and successful industrialization occurred on the shoulders of public development loans than public grants, as many studies on Korea’s economic development rightly point out. In fact, grants were rarely available during the development decades, especially in the second half (1979-92).
 
[Table 1] Capital Inflows to Korea during the Development Decades: 1962-92 (Unit: US$ million in current prices; %)
 

 
Public capital inflows can be divided into public grants and public loans, which can be further disaggregated into the ODA-type loan (with a grant element greater than 25 percent of the total loan amount) and the OOA-type loan (with a grant element less than 25 percent). Between 1960 and 1990, while public grants decreased to $2.7 billion, accounting for only 12 percent of total public capital inflows ($22.1 billion), the ODA-type loan increased sharply to $4.7 billion, accounting for 21 percent of total public capital inflows.  However, total ODA (grants plus ODA-type loans) of $7.4 billion accounted for only 33 percent of total public capital inflows, resulting in OOA-type loans of $14.6 billion dominating total public capital inflows during the same period (at 67 percent). The role of OOA-type loans became more prominent during the period between 1991 and 1999, since official foreign assistance was provided mainly for emergency structural adjustments in the wake of the Asian financial crisis and Korea’s per capita income level was already too high for public grants or ODA-type loans.
 
[Table 2]  Public Capital Inflows during the Development Decades: 1960-90 (Unit: US$ billion in current prices)
 

 
During the second half of the development decades (1979-92), total capital inflows to Korea increased sharply to $65.3 billion, compared with only $16.4 billion during the first half (1962-78). The increase was mainly in private capital inflows, especially in commercial loans and borrowings by financial institutions. Public capital inflows rose as well from $4.6 billion during the first half of the development decades to $14.8 billion during the second half. However, the increase in public capital inflows was entirely in the form of public development loans, with no public grants at all. The majority of public development loans were mostly OOA-type.
 
Traditionally, public capital inflows, especially in the forms of public grants and ODA-type loans, were for filling the gap between the total investment rate and the domestic savings rate. During the second half of the development decades (1979-92), however, the domestic savings rate rose steadily, and after 1986 savings rates were high enough to cover the total investment rate, reducing the need for public development loans. Therefore, Korea was asked to graduate from the ADB (Asian Development Bank) list of borrowers in 1988 and from the World Bank list of borrowers in 1995. The resumption of public capital inflows during the period from 1997 to 1999 was mostly for emergency economic adjustment purposes in the wake of the Asian financial crisis.
 
[Table 3]  Aid Dependence: 1960s-80s (Unit: % of GDP)
 

 
Another interesting feature of official foreign assistance during the 1980s and 1990s is that public development loans financed not only specific investment projects, but also sector investment programs. On the basis of Korea's long experience of collaboration in the execution of specific investment projects in the same sector, the donors, especially international organizations like the World Bank (IBRD), decided to adopt the sector loan approach. Under this modality, a loan financed unspecified number of specific investment projects in a sector, which would be defined during implementation in accordance with the agreed sector policy letter and investment programs. Although such sector loans took longer at the negotiation stage, they had many advantages as well. For example, they devolved a great deal of ownership to the central implementing organization in Korea, built up local capacities for planning, appraising, supervising, executing and evaluating the specific investment projects executed by many decentralized participating agencies, and channeled a large amount of development resources within a short period. Sectors such as education, science and technology, public health, regional development, metropolitan region water supply, housing finance, agricultural credits, industrial finance, the small and medium mechanical industry, and environmental protection, all benefited from this sector loan approach.
 
Major Donors of Aid

While the United States played a dominant role in terms of aid scale during the 1940s and 1950s, other multilateral and bilateral aid agencies played equally important roles during 1960 and 1999. Multilateral aid was dominated by the World Bank Group supplemented by the ADB. From 1961 to 1999, the IDA and the IBRD financed more than 120 investment projects and structural adjustment programs, granting a total of $14.9 billion in loans and credits. The ADB supplemented $5.6 billion in credits and loans.
 
By 1960, US aid, mostly in the form of grants, was declining from its peak in 1957. The United States and Japan each provided more or less the same amount of ODA (grants and ODA loans) of $3.0 billion during 1961-1990. While the United States played a much more active role (64 percent) in the first half of the development decades (1960-75), Japan came to assume a more dominant role (58 percent) in the second half (1976-90). Moreover, during the period from 1959 to 1999, when all public development loans were disbursed, Japan provided a somewhat greater portion of public development loans (a total of $6.1 billion in ODA loans and OOA-type loans) than the United States ($5.2 billion). Another major donor was France, which provided solely public development loans ($3.5 billion).
 
[Table 4]  ODA Donors: 1961-90 (Unit: US$ million in current prices; %)
 

 
During the latter half of the development decades (1976-90), Japan played a more active role in providing ODA to Korea. While during the first half of the development decades (1961-75), the United States provided 64 percent of total ODA (grants and ODA-type loans), during the second half of the development decades (1976-90) Japan offered 57 percent of the total ODA. In addition, during the second half, Japan sharply increased public development loans three times from $772 million to $2,148 million. During the 1990s, Japan provided a much greater amount of public development loans than did the United States. During the entire period from 1960 to 1999 when Korea received public development loans, Japan provided a larger amount of loans ($6,124 million) than the United States ($5,593 million). However, international organizations, especially the World Bank (IBRD), played the most dominant role during the second half of the development decades. In particular from 1991 to 1999, when international organizations provided 65 percent of total public development loans including emergency restructuring loans in the wake of the Asian Financial Crisis, Japan provided only 21 percent of the total.
 
[Table 5]  Public Loans by Donor: 1961-90 (Unit: US$ million in current prices; % in parentheses)
 

 
Sectoral Distribution of Aid

As the implementation of development plans progressed, the government strengthened its emphasis on infrastructure and the manufacturing sectors in the allocation of assistance funds. During the first half of the development decades (1962-78), infrastructure (and services) and the manufacturing sectors accounted for 73 percent of total loans, and the agricultural sector for 26 percent. The Japanese Reparation Fund was originally intended to be allocated to the agricultural sector. However, as pressure for financing manufacturing and infrastructure mounted, a significant portion of the Japanese Reparation Fund ended up being used for infrastructure investment including for the construction of roads, power plants, the POSCO steel factory, and the Seoul-Busan Expressway. Moreover, during the second half of the development decades (1979-92), economic infrastructure (and other services) and the manufacturing sectors accounted for 94 percent of the total public loans received, and the agricultural sector for only 6 percent. Thus, the high growth rates and successful industrialization in Korea could be attributed to the sectoral allocation pattern of public development loan funds. During the 1980s and 1990s public development loans for infrastructure placed emphasis on social infrastructure, such as education, health, water supply, and regional development, much more than before, in an effort to realize the goal of balanced social and economic development.
 
Moreover, such sectoral allocation of official development assistance funds during the development decades in Korea differed sharply from the average OECD/DAC members' aid fund allocation by sector. In 2010, DAC members' ODA funds were allocated on a priority basis to social and administrative infrastructure and service sectors as much as about 49 percent, and to economic infrastructure and the manufacturing sectors only by about 24 percent.
 
[Table 6]  Public Loans by Sector: 1962-92 (Unit: US$ million in current prices, % in parentheses)
 

* Information on sectoral allocation is unavailable.

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