Role of Foreign Aids in Economic Development 3 Role of Foreign Aids in Economic Development

Foreign Aids and Development (1) ● Aid’s final Goal is Poverty Reduction ● Poverty Reduction is achieved by Economic Growth ● Economic Growth Factors : Labor, Capital, Total Factor Productivity (Education, Technology, infrastructure etc)

Foreign Aids and Development (2) ● So Foreign Aids’ Goal is Helping Developing Countries to Increase Capital Stock and to Improve Total Factor Productivity ● Aids’ Final Goal is that a Country Get to the Stage of Self Sustainable Growth ● Some Empirical Studies Show Foreign Aids are helpful to Raise Economic Growth Rate and Increase Investment ● But necessary Conditions to Get the Foreign Aids’ goal are Recipient’s Political Stability and Government’s Morality

History of Foreign Aid Inflow to Korea ● Since Liberation, Foreign Aids Increased to $1.6billions in 1980, after then Aids were Reduced gradually ● Since middle 1960s, Loan/Total Aid Ratio was Increasing by 95%

Relation of Economic Growth and Aid Type

Grant’s Role in Economic Growth : 1950s (1) ● Grants stabilized the economy by supplying necessary goods (food, energy etc) ● But Financial Supports for Formation of Capital Stock were insufficient Grant/GDP Ratio   1953 1954 1955 1956 1957 1958 1959 1960 Grant ($ million) 19.4 15.3 23.7 32.7 38.3 32.1 22.2 24.9 Grant/Import(%) 56.3 63.3 69.3 84.6 86.6 85.0 73.1 72.6 Grant/GDP(%) 7.3 4.2 10.3 10.8 9.8 7.8 5.1 6.4

Grant’s Role in Economic Growth : 1950s (2) Composition of Grants   1954 1955 1956 1957 1958 1959 1960 Agriculture Resource and Non Project Support(%) 92.5  83.7  81.6  70.4  71.8  70.8  74.3  Industry and Mining(%) 5.6  4.2  6.4  8.0  9.3  9.1  12.1  Transportation(%) 1.4  10.9  10.4  16.9  12.4  13.4  5.0  Labor(%) 0.0  Health and Sanitation(%) 0.4  0.9  0.3  1.3  1.8  Education(%) 0.1  1.1  1.2  1.7  1.9  Public Administration(%) 0.2  0.5  0.7  0.8  Community Development(%) Infra, Industry Support Subtotal(%) 7.4 16.2 17.9 28.6 26.6 27.2 23.3 Tech. Support(%) 1.6  Etc(%) 0.0 Total 100 

Loan’s Role in Economic Development : 1960~1970s (1) ● In 1960s, Korean Economy Faced the Shortage of Capital for Economic Development ● Foreign Official Development Loans Played important Roles in Establishing the Economic Infrastructure and Industrial facilities Loan/Fixed Capital Ratio   1962 1965 1968 1970 1972 1973 1975 1980 Loan/Fixed Capital Ratio(%) 18.6 19.1 6.5 9.4 24.1 16.3 7.6 6.1 Project Aid/Fixed Capital Ratio(%) 16.9 3.2 4.7 14.5 11.1 5.9 5.2

Loan’s Role in Economic Development : 1960~1970s (2) Composition of Loans ~1960 1961~65 1966~70 1971~75 1976~80 Economic Infrastructure Transportation 0.0  17.1  19.5  15.5  17.8 Power Supply 19.7  10.0  1.4  3.2 Communication 41.1  18.5  0.5  2.6  9.4 Sub Total 55.2  30.1  30.4 Production Sector Industry, Mining  58.9  13.4  18.4  27.7  23.4 Agriculture 24.5  0.4  7.8  6.7 37.9  18.8  35.5  30.1 Social Infrastructure Education 1.9  3.0  5.6 Health & Population 4.3  0.2  1.7 Water Supply 0.9  4.9  7.0  8.5 11.1  10.3  15.8 Multi Sector “Saemaul” 1.0  5.7  4.5  10.7 Environment 0.6 6.1  4.7  11.4 ETC 5.0  33.8  30.0  12.4 Loan Amount($ Million) 198.9 785.2 2,423.6 4,124.0

Commercial Loan’s variation Empirical Test of Relationship between Aids and Growth in Korea (1) ● Empirical Test Shows Foreign Loans Contributed to Economic Growth Variable   1955~1978 1955~1960* 1961~1978 Loan’s variation coefficient 3.61 - 3.47  T-value (2.93) (2.31) Grant’s variation -8.65 2.31 -10.63 -1.26 (4.48) -1.19 Commercial Loan’s variation 2.01 2.14 1.39 1.22 Saving 1.08 -1.16 1.07 (2.17) -2.69 1.77 c 41.83 17.67 54.75 0.77 (3.72) 0.68 R2 0.98 0.96

Commercial Loan’s variation Empirical Test of Relationship between Aids and Growth in Korea (2) ● Empirical Test Shows Loans Contributed to Investment Increasing, Grants helped to Consumption’s Growth in 1950s Variable   Investment Consumption 1955~1978 1955~1960* Loan’s variation coefficient 1.78 1.16 -  T-value (2.89) 1.22 Grant’s variation -3.64 3.12 3.04 -1.06 0.45 (6.19) Commercial Loan’s variation 3.66 (5.06) Saving 1.23 (4.92) c 24.80 31.44 17.53 0.92 0.56 (3.60) R2 0.97 0.94 0.93

4 Concluding Remarks

Conclusion ● Korea is a Good Case of Achieving the Economic Development from a “Vicious Circle of Poverty” Successfully ● Korea’s Strategy of Economic Development is Outward-Looking Development Strategy under powerful government control and leadership ● Foreign Aids were very Helpful in Economic Development Plan’s Practices in 1960~70s - Foreign Financial Support Played Key Roles in Formation of Fixed Capital and Economic Infrastructures

Foreign Aids (Loan) Foreign Aids Foreign Capital Inducement (Economic Aids External Debt) Economic Growth Reproduction Export Promotion Manufacturing Processing Private Enterprises Capital Good Imports Foreign Aids Raw Material Imports Technology Development Foreign Technology Imports Well-educated Labor force

Thank you