The Republic of Korea became a member of the World Bank (the Bank) in 1955 and the International Development Association (IDA) in 1961. The Bank began its operational relationship with Korea in 1962 when it completed the first Country Economic Report and approved an IDA credit of $17 million to expand and improve the Korean National Railroad. The development credit was the first step in a long-term partnership which spanned thirty years of rapid economic growth in Korea. By 1973, Korea’s economy progressed sufficiently to require no further IDA credits, and Korea became a contributor to IDA in 1977. Over the period under review, the Bank completed over 31 Sector Reports, 24 Economic Reports, and 120 Project Loans/Credits in Korea. It disbursed funds totaling over $7.8 billion to the Government of Korea (GOK) through operations in 11 sectors.
The partnership prospered due to a strong commitment by both the Bank and the GOK to fulfill the objectives set by the Government. It has been argued that the Government’s singular commitment to development and the Bank’s support were the most significant factors contributing to the success of the partnership. The high level of pride the Koreans had in their country’s development effort and the important advisory and financial role of the Bank enabled the GOK to achieve rapid industrial growth for the country.
The Bank’s relationship with Korea is a true success story. Very few countries have been able to graduate from both the IDA and the Bank in such a short period of time. Credit for the success must largely go to the Koreans themselves. Their commitment to economic growth and success propelled the country forward at an unparalleled pace. The objectives of the Government, the bureaucracy, and the workforce were largely aligned, enabling their combined efforts to achieve superior results. The Bank’s assistance can be divided into two categories: (i) the advice and guidance that provided “course corrections” in macroeconomic policy formulation and in a range of sectors, and (ii) funds that supported the country’s efforts at economic growth. Bank assistance through these two channels succeeded because the GOK addressed many of the issues that could have impeded economic growth. The success of the partnership is a tribute to the determined efforts of the Koreans and the Bank’s awareness of, and respect for, their ability to produce results.
Bank assistance to Korea was significant in the Financial, Transportation, Energy, Education, and other Social Sectors. However, changing market conditions and shifting development priorities over three decades demanded a high degree of innovation, planning, and flexibility. Investment in agriculture increased substantially in the 1970s, then declined in the 1980s as the economy shifted to a greater emphasis on industrial development. Priorities in educational investment changed as the economy demanded support for research and development (R&D) and as more skilled labor was needed for science and technology development. Finally, the development of social infrastructure (e.g. urban, water supply, sanitation, sewerage, environment) became a higher priority as the country’s Industrial Sector and Energy and Transportation Infrastructures became more developed. Emphasis was placed on achieving greater social equity through better distribution of income and wealth. Such flexibility enabled the GOK to meet the demands of the changing and often times volatile economic environment.
The pace of Financial Sector liberalization was one of the few points on which the Bank and the GOK disagreed. The Korean financial system mobilized resources and allocated funds to those sectors and activities in which growth was being promoted by the Government. This strategy was pursued through the Government’s control of interest rates, allocation of credit, and ownership of commercial banks. However, the development of the Financial Sector did not keep pace with the growth in size and complexity of Korea’s real economy. By the early 1980s, the imbalance between the financial and real sectors of the economy was obvious to policymakers. The GOK initiated several programs of financial liberalization to correct the imbalance, but the reforms were implemented partially or stalled due to external factors that caused macroeconomic shocks to the economy. In 1993, the Government introduced a financial liberalization plan in line with the recommendations of a Bank sector report (Sector Report 11373–KO), which was regarded as credible by both domestic market participants and the international community. While the GOK and the Bank both viewed Financial Sector liberalization as the ultimate objective, they were committed to different approaches and timeframes for reform. The fact that the Bank and the GOK were able to reach some consensus on a basic reform program in 1993 is a testament to the strength of the partnership.
A critical success factor in the partnership was the GOK’s responsiveness to the Bank’s macroeconomic and sector policy analysis and advice. They were also open to borrowing ideas from other countries’ experiences, which the Bank was able to provide given its comparative advantage in this area. Provided below are selected highlights of Korea’s development chronology and the Bank’s assistance from 1960 to 1994. Each section gives an overview of the country’s economic situation, the GOK’s investment priorities, and Bank assistance to the Government in each period.
Source: The World Bank. 1999. A productive partnership, 1962-1994. The World Bank and The Republic of Korea.
