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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

The start of economic development and investment of foreign capital policies

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

 (in million dollar, %)                             
  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
Source: MOF, EPB, BOK
              
There were striking changes in the import and investment patterns during this period and this greatly contribute to the expansion of Korea’s industrial base. For example, the ratio of imported capital goods increased sharply compare with consumer material goods, over the prior period. In addition, the capital goods related to the infrastructure project in electric power, telecommunications and transportation were purchased with public loans. Commercial loans, for the most part, were invested in the fertilizer, cement, and fabric & apparel industries.
 
Not surprisingly, some problems occurred during this period, with regard to the introduction of foreign capital. Firstly, some foreign capital was obtained without regard to technical and economic feasibility. Some amounts were wasted because of inferior technical skills and lack of competent management. In some case, the shortage of domestic capital became an obstacle in launching foreign-funded project. The more desirable foreign capital inflows, FDI and technology transfer, were neglected-there were only 4 to 5 cases per year during this period. On the other hand, foreign loan payments totalled $17 million. Of this, public loan
 
[Table 1-2]  Repayment of Foreign Borrowing and Debt-Servicing Capacity 1962 to 1965
 (in million dollar, %)                                
  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.