1. Role of Foreign Aids in Economic Development3
Role of Foreign Aids in Economic Development

2. 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)

3. 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

4. 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%

5. Relation of Economic Growth and Aid Type

6. 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

7. 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 

8. 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

9. 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

10. 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

11. 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

12. 4
Concluding Remarks

13. 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

14. 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

15. Thank you