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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: 1999-2010

Background


The 1990s marked a transition period in official foreign assistance in Korea. During this decade, Korea transformed itself from a recipient of official foreign assistance to a donor to other developing countries. Korea's fast economic development forced the nation to prepare for this status shift in international development cooperation. In 1975, Korea's per capita income ($574) exceeded the threshold for graduating from the IDA, the soft loan window of the World Bank. In 1988, Korea graduated from the ADB list of borrowers and in 1992, the UNDP granted Korea a Net Contributor Country status in technical assistance. In 1995, after signing its last two loan agreements, Korea graduated from the World Bank Group list of borrowers. In 1996, Korea joined the OECD, an economic policy consultation group of advanced countries, as its 29th member. Globally, a free trade agreement was reached in 1994, and regional integration agreements proliferated. In 1996, the OECD/DAC (Development Assistance Committee) prepared the "Shaping the 21st Century: the Contribution of Development Cooperation," which laid the foundation for the Global Development Declaration at the UN Summits Meeting in the year 2000.
 
The government of Korea made a point of keeping abreast of global development. In 1986, the Economic Development Cooperation Fund (EDCF) Law was legislated, under which loans to developing countries began to be provided in 1987. In 1991, the Korea International Cooperation Agency Law was promulgated and started offering grants to developing countries.
 
Shortly after the implementation of the Seventh Five-Year Economic Development Plan was completed, the Asian financial crisis erupted (1997). Passing through the turbulent tunnel of restructuring and adjustment in the wake of the crisis, the Korean economy became more liberalized and market-based, and moved to fortify its international competitiveness. Moreover, the goals of economic growth and social welfare improvement were pursued in a more balanced way.
 
Objective of Aid


The two fundamental objectives of Korea's official foreign assistance agencies are: (i) aid in the economic and social development of developing countries; and (ii) pursue mutual exchanges and cooperative relationships between donor and recipient. These objectives are fairly consistent with the DAC definition of ODA (official development assistance). Korea's aid objectives embrace not only assisting developing countries in their economic and social improvement efforts, but also the simultaneous fostering of cooperative relationships and mutual exchanges between donor and recipient as the ultimate purpose of ODA.
 
Scale and Type of ODA


Korea's ODA has made remarkable progress in terms of scale. Although total ODA was just $58 million in 1991, it was increased to $112 million in 1993 and again to $403 million in 2004, a seven-fold increase. When Korea applied for membership with the DAC, Korea's Mid-Term ODA Plan (2008-10) stipulated that the volume of aid would increase from 0.06 percent of gross national income (GNI) in 2006 to 0.25 percent by 2015. Since 2008, Korea has pursued this goal with vigor. During the period from 2006 to 2010, total fiscal expenditure increased at 7 percent per year; however, ODA expenditure rose at 29 percent per year. In 2010, the net ODA disbursement increased sharply, reaching $1.2 billion, the equivalent of 0.12 percent of GNI. The size of ODA has scaled up by 0.03 percentage points every 2 years, i.e., 0.06 percent of GDP in 2006, to 0.09 percent in 2008, and to 0.12 percent in 2010. If this trend would have been allowed to continue, the size of ODA would have reached 0.25 percent of GNI in 2015. Unfortunately, in the aftermath of the global financial crisis, the economic growth rate subsided, and it remains to be seen whether Korea can achieve the ODA target set for 2015. In 2012, net ODA reached 0.14 percent of GNI at $1.55 billion.
 
[Figure 1]  Evolution of Korea's Net ODA: 2005-10 (Unit: US$ million in current prices)
Evolution of Korea's Net ODA: 2005-10 (Unit: US$ million in current prices)
 
The OECD reviewed Korea's ODA performance in 2008 and subsequently admitted Korea as the 24th member of the DAC. The DAC then encouraged Korea to soften its ODA terms since Korea provided a fair amount of development loans (about 36 percent of total bilateral ODA in 2010). A 1978 DAC agreement on improving ODA terms included three performance standards for its members: 1) that at least 86 percent of annual ODA commitments should be a grant element; 2) that annual ODA commitments should be above the ODA members’ average (0.28 percent of GNI in 2010); and 3) that ODA commitments for all least developed countries (LDCs) should contain a grant element above 90 percent annually, or that ODA commitments for each LDC should contain a grant element above 86 percent on a 3-year average basis. Korea has met the first and third standards already; however, the second standard remains unmet since Korea's ODA commitments reached only 0.20 percent of GNI. However, currently several other DAC member countries have failed to meet the ODA standards. France has failed to reach the first standard; Portugal has fallen short of the third; and Greece (0.17 percent), Italy (0.16 percent), and the United States (0.25 percent), like Korea, have failed to reach the second. But if Korea’s net ODA target for 2015 (0.25 percent of GNI) is met, this second standard will be also met. Korea's ODA budget has been growing at the fastest average annual rate (19 percent per year) of all DAC members in recent years (2009-12). The average ODA budget growth rate among DAC members was -0.25 percent per year.
 
Korea also meets the DAC recommendation on untied aid for LDCs. However, it still provides a higher proportion of total aid in the form of tied aid (64 percent in 2010), compared with other DAC donors, which provide less than 15 percent tied aid. Nevertheless, Korea made remarkable progress from the level of 96 percent tied aid in 2006.
 
Aid Policy and Administration


The OECD's review in 2008 highlighted two concerns about Korea’s ODA. The first was that the Korean ODA needs to improve its effectiveness mainly due to fragmentation: aid was administered by many ministries and other public agencies without coherent legal or policy frameworks. Korea’s bilateral ODA was divided between grants offered by the Korea International Cooperation Agency (KOICA) under the policy guidance and supervision of the Ministry of Foreign Affairs and Trade (MOFAT) and concessional loans offered by the Economic Development Cooperation Fund (EDCF) under the guidance and supervision of the Ministry of Strategy and Finance (MOSAF). In addition, some 25 percent of total bilateral grants were offered by more than 30 central and provincial governments and independent public organizations. Multilateral ODA was offered by more than 20 agencies to more than 80 inter-governmental organizations. Coordination and cooperation between the major grant and loan agencies, KOICA/MOFAT on the one hand and EDCF/MOSAF on the other, was ineffective. Moreover, coordination was lacking between these agencies/programs and more than 30 other grant-giving agencies.
 
The other concern of the OECD/DAC was Korea’s unclear criteria for selecting its ODA recipient countries and allocating its ODA fund. The ODA allocated to its recipient countries by income level was inconsistent with the ODA objectives generally agreed upon by all DAC members. A similar concern was expressed with respect to the ODA amount allocated to its recipient countries, classified by region, sector, and project.
 
As to the need for a unified and coherent aid framework encompassing all aid agencies and programs, substantial progress has been made since 2008. The Basic Law on International Development Cooperation (2010) mandated that the Korean government formulate the integrated Five-Year Aid Plan (2011-15) and the Annual Aid Implementation Plan. The Committee on International Development Cooperation, chaired by the Prime Minister, was designated as the apex agency for deliberation and coordination of all ODA-related matters, while the MOFAT and the MOSAF assumed the responsibilities for monitoring, coordinating, and supporting all grant and loan aid agencies and programs, respectively. A new list of 26 priority aid recipients, common to both grant and loan aid programs, was drawn up, and an integrated country partnership strategy was prepared for each of 26 priority recipients in consultation with all stakeholders. However, the documents contain only strategy; an integrated assistance program covering the 3-year aid activities of all grant and loan programs per country has yet to be prepared. Moreover, the link between the country partnership strategy and the Annual Aid Implementation Program, as well as the annual budget proposal, should be established and strengthened over time.
 
Selection of Recipient Countries and Aid Allocation Practices


Although clear policies and criteria for selecting aid recipient countries and allocating aid have not been announced yet, Korea has made progress toward selective (or modernized) aid allocation. Since 2008, it has allocated more aid to countries with lower per-capita income, greater needs for human development, and a larger number of poor people. However, Korea has not yet taken into account aid recipient-country’s economic policies and political institutions, such as the promotion of civil rights/political participation, and Korea’s economic and strategic interests simultaneously.
 
Moreover, contrary to the earlier period between 2005 and 2007, grant aid tends to focus on the least developed or lower income countries, while loan aid focuses more on middle income countries. However, a coordination challenge between grants and loans still remains in allocating aid by country and sector. The challenge of clarifying the criteria for division of labor or specialization by sector at each recipient country level still remains among more than 30 grant aid agencies. Moreover, Korea continues in its practice of spreading a small amount of total aid too thinly across some 130 developing countries. The total number of recipient countries may not be easily reduced for political and economic reasons. However, major aid agencies like KOICA and EDCF should concentrate mainly on delivering aid to some 50 to 60 priority and ordinary recipient countries, and aid for the remaining countries should be relegated to other public aid agencies, as well as to private sector aid agencies like corporations and NGOs. Even for the priority and ordinary recipient countries, a challenge remains in reflecting the “Busan Partnership for Effective Development Cooperation” in the relationship between public aid agencies and private sector organizations.
 
The Five-Year Aid Plan (2011-15) emphasizes the need to tackle remaining issues and challenges, but does not provide specific policies or programs. The Committee on International Development Cooperation and the monitoring agencies such as the MOFAT and the MOSF, should show leadership and work harder with other stakeholders to fill that void.
 
Korea’s ODA allocation by country, region, and sector is summarized in the following tables by major aid agencies, KOICA and EDCF. Compared with ODA allocations by the average DAC member, Korea’s aid allocation by country is still highlighted by a higher proportion of ODA for the lower middle income countries. Korea’s aid allocation by region is featured by a concentration on the Asian region, and the aid allocation by sector is characterized by a heavy focus on infrastructure.
 

[Table 1] Korea and DAC: Aid Allocation by Recipient Income Level, 2008-10 (net ODA in current prices)
 Countries Korean ODA Average (2008-10)* DAC average
(2008-10)*
KOICA EDCF Total    
US$ (million) % US$ (million) % US$ (million) % US$ (million) %
Least Developed 112 33.4 90 32.3 202 32.9 41,398 32.2
    55   45   100    
Other Low Income 54 16.2 8 2.8 62 10.1 13,753 10.7
    87   13   100    
Lower Middle Income 118 34.9 135 48.2 252 41.0 28,028 21.8
    47   53   100    
Upper Middle Income 6 1.7 42 15.0 48 7.7 7,832 6.1
    12   88   100    
Unallocated 47 13.9 5 1.7 51 8.3 37,646 29.2
Total 336 100.0 279 100.0 616 100.0 128,657 100.0

 
 
 

 
[Table 2]  Korea and DAC: Aid Allocation by Region, 2008-10 (net ODA in current prices)
 
 Region Korean ODA Average (2008-10) DAC average
(2008-10)
KOICA EDCF Total    
US$ (million) % US$ (million) % US$ (million) % US$ (million) %
Africa 59 17.4 34 12.2 93 15.0 46,971 36.5
    63   37   100    
Asia 157 46.6 183 65.4 339 55.1 26,437 20.5
    46   54   100    
Latin America 36 10.8 24 8.7 61 9.8 9,707 7.5
    59   41   100    
Middle East 19 5.8 5 1.9 25 4.0 13,263 10.3
    23   77   100    
Oceania - - - - - - 1,704 1.3
                 
Europe
 
19 5.6 28 10.1 47 7.7 5,608 4.5
  40   60   100    
Unallocated 47 13.8 5 1.7 51 8.3 24,967 19.4
Total 336 100.0 279 100.0 616 100.0 128,657 100
                 

 

 

[Table 3]  Korea and DAC: Aid Allocation by Sector, 2008-10 (net bilateral ODA in current prices)
Sector Korean ODA Average (2008-10)* DAC average (2008-10)*
KOICA EDCF Total    
US$ (million) % US$ (million) % US$ (million) % US$ (million) %
Social-Administrative Infrastructure 147 43.8 110 39.5 258 41.9 49,469 38.45
    57   43   100    
Economic Infrastructure 60 17.9 136 48.5 196 31.8 21,550 16.75
    31   69   100    
Production 30 9.1 27 9.5 57 9.3 9,135 7.1
    53   47   100    
Multi-sector 60 17.9 2 0.6 62 10.1 11,836 9.2
    97   3   100    
Program - -   - - - 5,403 4.2
                 
Humanitarian 14 4.0 - - 14 2.2 10,679 8.3
    100       100    
Others
(debt service, administration, other)
24 7.2 5 1.9 30 4.8 20,585 16
  80   20   100    
Total 336 100.0 279 100.0 616 100.0 128,657 100.0
                 


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