Foreign aid and the development of the Republic of Korea : the effectiveness of concessional assistance

The author believes that although some reasons for the recovery, e.g., linguistic unity, are exclusively Korean, the Korean experience offers some general lessons in achieving sustainable economic growth. At first, Korea pursued a policy of import substitution, discouraging exports and stressing donor support, chiefly from the United States. After 1961, however, the government recognized import substitution's failure to ensure long-term economic growth and initiated an export promotion program while shifting the focus of donor support away from excessive reliance on the United States. The government used its administrative, political, and social power to control the economy by allocating institutional credit, setting and enforcing export targets, and promoting foreign investment. The Korean GNP, exports, overseas construction earnings, and manufacturing capacity grew accordingly, despite rising energy prices, a worldwide recession, and a large defense burden. The creation of employment opportunities - a process aided significantly by donors, especially via training and human resource development - has lowered the poverty percentage from 40% to 10% and greatly enhanced equity. Nevertheless, notable rural and urban income disparities and regional income differences still exist, and women are denied equal status in the development process. This is largely due to the elimination of pricing subsidies and to the government's control of institutional credit, which limits marketplace access to major industrial and trading conglomerates. While Korea could not have experienced even moderate economic growth after 1953 without substantial donor support, a successful export program, commercial lending, and foreign investment have lessened the amount of concessional aid. Donor policy advice was generally followed if it was seen as serving Korean interests and supporting national directions already determined by the government. While multilateral donors have greater prestige and flexibility than bilateral donors, both types have their limitations.