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Overview of Korea’s development experience

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Development Overview
Official Aid General

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General

The role of foreign capital in Korea’s economic development

There was no significant foreign borrowing by Korean until 1962. Prior to that, most foreign capital inflow was in the form of official development assistance, i.e., aid or grants. With the new government of Park Chung-hee came the beginning of active and aggressive government management of the economy to attract foreign capital to launch Korea’s economic and industrial development. These development plans were introduced and implement through a series of Five Year Economic Development Plans, the first introduced in 1962.

Medium and long-term foreign capital introduced in Korea form 1962 through 1992 totalled $80.2 billion with commercial and public loans accounting for half of this amount, followed by bank loans at 21.7 percent of the total. The remaining inflow over the period is almost evenly divided between FDI, financial institutional bonds, and corporate bond issues. See (Table 1) for the relevant details.

As the table indicates, certain trends in foreign inflow emerged over the 30 year period. Public and commercial loans accounted for almost ninety percent of foreign capital inflows throughout the 1960s and into the late 1970s. By the end of 1992, this had shrunk to 32 percent.

Toward the end of the 1970s, the government’s foreign capital policies changed in order to correct the ever-increasing deficit in Korea’s balance of payments (BOP) caused mainly by the second oil crisis. Also, new policies were needed to carry out a program of debt-restructuring and to secure available foreign funds for the repayment of previous foreign borrowing. As a result of these policies, bank loans and financial institutions’ bond issues increased sharply and Korea’s source of foreign capital were significantly diversified.
 
From the mid-1980s, some adjustments in foreign capital acquisition were needed as a result of a BOP surplus arising from the ‘three lows’ – low oil prices, low interest rates and depreciation of the Won. Firstly, bank loans and commercial loans were restricted for the purpose of foreign debt reduction and to prevent inflation, whereas FDI and equity related bond issuances were encouraged. Secondly, bond issuances by financial institutions and private enterprises were preferred by the government as well as the borrowers, because Korea’s international credit rating had improved enough for bonds to be issued with favorable terms and conditions. In addition, the Seoul Olympics attracted many foreign investors, both before and after the Games.
 
 
 
[Table 1-1]                                               Foreign Capital Inflow
                                                                       1962 to 1992
(in million dollar, %)
 
  1962~65 1966~72 1973~78 1979~85 1986~92 Total
Public Loans
 
Commercial Loans
 
FDI
 
Bank Loans
 
Bonds-Financial
      Institutions
-Private
 Firms
62
(42.9)
70
(48.3)
13
(8.8)
-
-
-
-
-
-
1,130
(32.2)
1,950
(55.5)
227
(6.5)
205
(5.8)
-
-
-
-
3,431
(30.6)
5,858
(52.2)
704
(603)
1,007
(9.0)
219
(2.0)
-
-
10,105
(28.9)
7,937
(22.7)
1,157
(3.3)
11,892
(34.1)
2,989
(8.6)
834
(2.4)
4,688
(15.4)
5,206
(17.1)
5,684
(18.7)
4,318
(14.2)
5,978
(19.7)
4,515
(14.9)
19,417
(24.2)
21,022
(26.2)
7,785
(9.7)
17.422
(21.7)
9,186
(11.5)
5,349
(6.7)
Total 147
(100.0)
3,512
(100.0
11,219
(100.0)
34,914
(100.0)
30,389
(100.0)
80,181
(100.0)
Source: Ministry of Finance (MOF), Economic Planning Board (EPB), Bank of Korea (BOK)
            
Consequently, by the end of the 1980s, FDI and private bond issues increased substantially and Korea has successfully made the transition from an undeveloped, borrowing country to a self-funded one.

Source: Ministry of Strategy and Finance. Republic of Korea and The Korea Development Bank. 1993. Foreign capital and the Korean economic development. Seoul.