all
Following independence in 1945, Korea experienced several years of high inflation, shortages of foods, low economic growth, rapid population increase and high unemployment rates. These conditions developed because of the complete destruction of manufacturing facilities during the Korean War and a vicious cycle of poverty cause by a shortage of domestic saving. Furthermore, staring in 1957, American aid was drastically reduced.
Consequently, a series of Five Year Economic Development Plans were implemented, the first in 1962, and the government’s policies on foreign borrowing were consolidated and strengthened. The “Foreign Capital Investment Promotion Act”, which regulated tax benefits for those investing foreign capital, eliminated certain discriminatory measure aimed at foreign investors and issued guarantees for investors’ remittances of their principal and earnings, was passed in 1960 and amended in 1961. Additional government steps included the “Law for Repayment Guarantee of Foreign Borrowing” and the “Special Law to Facilitate Capital Equipment Imports on a Deferred Payment Basis” introduced in 1962. Together with these basic laws and regulations in 1961, the “Basic Principals for the Uses of Introduced Foreign Capital” were announced. The government made it clear that it intended to secure and adequate volume of foreign capital. Bona fide foreign capital would be permitted regardless of amounts or type. In addition, Korea joined international financial institutions like the IBRD, the IMF an the IDA in order to guarantee as steady source of public loans. The Korean government normalized relations with Japan, and this opened new avenues for public and commercial loans.
From 1962 to 1965, foreign borrowing totaled $147 million, 16.6 percent of the $886 in total foreign funds including borrowing and aid. Of the $147 million in foreign borrowing, public loans totaled $63 million, commercial loans $71 million and there was #13 million in FDI. This relatively low level of foreign borrowing, compared to the amount of effort to secure the foreign capital, was a result of Korea’s very low credit rating, a natural phenomena of the early states economic development.
By country, the United State was by far the largest source of both public and commercial loans, accounting for 49.6 percent, while West Germany accounted for 25. 4 percent of the total. The IDA was responsible for 22.2 percent of public loans, jointed by France and Italy with 23.9 percent of commercial loans.
[Table 1-1] Foreign Capital Flow 1962 to 1965
1945~61 | 1962 | 1963 | 1964 | 1965 | 1962~1965 | |||
Amount | Share | Amount | Share | |||||
Public Loans Commercial Loans FDI |
5 - - |
0.1 - - |
3 - 1 |
43 24 5 |
12 12 1 |
5 35 6 |
63 71 13 |
7.1 8.0 1.5 |
Sub-total | 5 | 0.1 | 4 | 72 | 25 | 46 | 147 | 16.6 |
U.S. Aid AID PL480 Other U.N. Aid |
2,537 1,745 185 607 580 |
81.3 55.9 5.9 19.4 18.6 |
232 165 67 - - |
217 120 97 - - |
158 88 70 - - |
132 72 60 - - |
739 445 294 - - |
83.4 50.2 33.2 - - |
Total Aid | 3,117 | 99.9 | 232 | 217 | 158 | 132 | 739 | 83.4 |
Total Foreign Capital |
3,121 | 100.0 | 236 | 289 | 183 | 178 | 886 | 100.0 |
1959~61 | 1962 | 1963 | 1964 | 1965 | 1962~65 | |||
Amount | Share | Amount | Share | |||||
Public Loans (Interest) Commercial Loans (Interest) |
1 - - - |
100.0 - - - |
1 (-) - (-) |
2 (1) 1 (-) |
9 (1) 3 (1) |
2 (1) 5 (1) |
8 (30 9 (2) |
47.1 (17.2) 52.9 (11.8) |
Total | 1 | 100.0 | 1 | 3 | 6 | 7 | 17 | 100.0 |
DSR (%) Total Debt Current GNP |
- 83 - |
- - |
0.7 89 2,300 |
0.9 157 2,700 |
2.6 177 2,900 |
5.0 206 3,000 |
- - - |
- - - |
Source: MOF, EPB, BOK
Repayments reached $8 million, including $3 million in interest. Commercial loan repayments were $9 million, with $2 million in interest. Considering the current GNP and the foreign exchange receipts during this period, the repayment were not an excessive burden on Korea’s economy
Source: Ministry of Strategy and Finance. Republic of Korea and The Korea Development Bank. 1993. Foreign capital and the Korean economic development. Seoul.