aid, development and korea - joon-kyung kim

8/3/2019 Aid, Development and Korea - Joon-Kyung Kim

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From Aid to Development in Korea:

Ownership and Policy Innovation

October 7, 2011

Joon-Kyung Kim

KDI School of Public Policy and Management

Contents

1. Koreas Broad based Economic Transformation

2. Taking Ownership of Development Process

2.1 Anti-Corruption via Tax Reform2.2 Policy Innovations

3. Lessons from the Korean Experience


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1. Koreas Broad based Economic Transformation

Broad Based Development (1/3)

1

Koreas rapid growth was accompanied by relatively lowincome inequality.

Korea

Hong Kong

Taipei, PRC

IndonesiaThailand

SingaporeMalaysia

Brazil

ColombiaChile

Philippines

Peru

Argentina

Venezuela

Mexico

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0 1 2 3 4 5 6 7 8

Gini coefficient

Per capita GDP growth rate (%)


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8

Role and impact of foreign aid was critical, and had

profound and lasting impact on Koreas development.

After liberation from Japan in 1945, Korea suffereddepression, hyperinflation, and civil war, which can makeany country poor.

Foreign aid helped fill the financing (income) gap:

* Humanitarian role of aid was invaluable, preventingstarvation and disease.

* Aid was also critical in laying the basic foundations foreconomic growth; massive investments financed by aidhelped raise Koreas capital stock (including humancapital and physical infrastructure).

- Educated and healthy work force was bedrock ofKoreas industrialization.

Broad Based Development (2/3) 2

8

But foreign aid alone does not explain Koreas economic

development. Just as important was Koreas initial

conditions (institutional setting) before economic take-off

and sustained development.

Land reform (redistribution of land to poor) under USMilitary Government resulted in relatively flat distribution ofincome and wealth, it leveled the playing field rearranged

of Koreas institutional setting.

* Income stability in the rural sector meant farmers couldafford to send their children to school.

* Less concentration of economic and political powermeant that the state or other self-interested group couldnot be obstacle to development.

Broad Based Development (3/3)

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2. Taking Ownership of Development Process

2.1 Anti-Corruption via Tax Reform2.2 Policy Innovations

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In fact, Korea became too dependent on aid and suffered

widespread government failure.

Korean government was addicted to aid:

* Overvaluing its currency to maximize aid receipts whileprinting money to finance budgets.

This resulted in persistent high inflation and macroinstability.

Corruption and crony capitalism in government andbusiness were widespread.

Government had become an obstacle to economic reformand progress.

Aid dependent and government failure

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Tax Administration Reform was perhaps the single mostimportant government action early in Koreas development.

By early 1960s, foreign aid accounted for 50% of governmentbudget, and economic aid to Korea began to decrease andthe economy suffered high inflation as government printedmoney to meet budget needs.

At the time, Korean tax collection was poor due to corrupt tax

officials and lack of mindset and culture of paying taxesamong Koreans.

Indeed, tax collectors would show up and demand taxesarbitrarily without any records or documents while the idea ofpaying taxes was foreign to most Koreans.

Taking Ownership of Development (1/4) 5

President Park undertook systematic anti-corruptioncampaigns to clean up government bureaucracy anddismantle government-business network of crony capitalism

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Tax Administration Reform was key initiative of anti-corruption efforts.

* Korean tax system and personnel was reorganized andrestructured.

* NTS (National Tax Service) motto was Sound tax base,

Compliance, and Education

* Corrupt or incompetent tax officials were relocated,demoted or dismissed.

* Tax reporting and bookkeeping was emphasized topromote voluntary self-compliance and assessment oftaxes.

Tax Administration Reform in the mid 1960s

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15Words of encouragement to NTS

Commissioner hand written by PresidentPark:

See gold as a stone

NTS Mission Statement

1.Sound Tax RevenueBase

2.Compliance

3.Education

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Implications of Tax Administration Reform cannot be over-emphasized. It led to sound fiscal base, changedgovernment behavior and addressed government failures.

In 1966, when NTS was established, tax revenues increased by67% from 1965. In 1967, 1968, and 1969 tax revenues increasedby 48%, 51%, and 39%, respectively.

Tax burden ratio (tax revenue/GNP) :1964 (7.3%) 1970 (14.6%)

Expanded tax revenues meant fiscal soundness, which led to:

* Macro stability and manageable inflation.

* Foreign borrowings could be secured to finance exportbased industrialization.

* Government could coordinate and implement social andeconomic policies for broad based development (i.e. ruraldevelopment policies).

Taking Ownership of Development (2/4)

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Implications of Fiscal Soundness9

Revenue

Expenditure

< Government revenue, expenditure, and fiscal surplus>

(% of GDP)

8

Foreign borrowings (savings) was critical to Koreas rapidindustrialization. Korea had to rely on foreign borrowingsdue to low domestic savings, and lack of foreign receiptsand foreign currency reserve.

Early on, Korean businessmen could not secure foreignborrowings to finance capital investments, to buy foreignequipment.

Not even the governments Foreign Loan RepaymentGuarantee Act in 1962 did much to induce foreignborrowings.

Against fierce opposition, President Park normalizedrelations with Japan in 1965 to get access to foreign capital,technology and know-how.


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53~59 62~66 67~71 72~76 77~81 82~84 85~91

Investment/GNP 13.1 16.3 25.4 29.0 31.0 28.2 32.7

DomesticSaving/GNP

3.7 8.0 15.1 20.4 25.5 24.8 34.8

Foreign Saving/GNP 9.4 8.3 10.3 8.6 5.5 3.4 -2.1

ForeignSaving/investment

71.7 50.9 40.6 29.7 18.1 12.1 -6.4

1951~60 1961~70 1971~80 1981~90 1991

Investment/GNP 16.1 21.9 30.5 22.3 22.2

DomesticSaving/GNP

14.9 21.1 31.9 33.3 29.5

Foreign Saving/GNP 1.2 0.8 -1.4 -11.0 -7.3

ForeignSaving/investment

7.5 3.7 -4.6 -49.3 -32.8

< Investment and Savings in Korea (%)>

< Investment and Savings in Taipei, PRC(%)>

Source: Cho and Kim (1997), Lee Dae-Geun (2002)

Comparison of Korea and Taipei, PRC:11

8

As part of normalization, Japan committed to US$ 800 millionof foreign assistance (colonial reparations): US$ 300 million

in grants, and US$ 200 million in concessionary loans and

US$ 300 million in commercial loans.

Japanese aid (reparations) were allocated with efficiency andownership.

To prevent misuse of funds for political purposes, the Law ofOperation and Management of Japanese Reparations" was

established.* Most serious offense was punishable by death. This law provedeffective in deterring corruption and misuse of the funds.

Key implications:

* Japanese aid was critical is building POSCO, centerpiece ofKoreas industrialization.

* Repayment of aid loans allowed Korea to build a track recordas a creditor, which allowed it to induce future foreign loans.


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POSCO (Pohang Iron and Steel Co.)

217Gyeongbu [Seoul-Busan] Express Way


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Japanese aid (reparations) allocated with efficiency and ownership.

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Project Amount ($ Mil) Ratio (%)

Agriculture (irrigation and agricultural production expansion program) 39 7.8

Fishery (fisheries promotion and fishing boat construction) 27 5.4

Manufacturing 278 55.6

Construction ofPOSCO

Purchase of raw materials (textiles, fertilizers, chemicals, etc)

Promotion of SMEs

119

133

22

23.9

26.5

4.5

Science and Technology

Equipments for practical training for the vocational schools

Equipments/facilities at KIST

20 4.0

6

3

1.2

0.6

Social Infrastructure

Construction ofSoyang-River Dam

Gyeongbu Expressway

Improvement of Railway system

Construction of Yongdong Thermal Powerhouse

Expansion of Waterworks (Kwangju City, Taejeon City, Cheongju City)

Construction ofNamhae Bridge

Rehabilitation of Han-river Bridge

Power Distribution facilities

Expansion of out-of-town Telephone lines

90 18.0

22

7

20

2

4

2

1

4

4

4.4

1.4

4.2

0.4

0.8

0.4

0.2

0.7

0.8

Total (Reparation funds in the form of grant and public loans) 500 100.0

Source: EPB (1976), White Book on Reparations Fund pp. 378-381

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Allocation of Japanese Reparations Fund15

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With the fiscal soundness and addressing govt failure, thegovt could play a coordinating role by undertaking a set ofdeep and wide complementary interventions and reforms.

Policy Innovation (1/2)

One of the important government policy innovations that led tobroad based and sustainable development was its ruraldevelopment policy via Saemaul(New Village) Movement.

By 1970, urban income was 60% higher than rural income, and

50% of the population still lived in rural areas.

To improve rural living standards, the government initiated theSaemaul Movementbased on the basic principles ofcooperation, self-help and self-reliance.

It was important to improving living standards(roads, bridges,electricity, water, sanitation) but also building social capital(trust, leadership).

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SaemaulMovement was a community and a merit-basedApproach of rewarding performance.

Policy Innovation (2/2)

At first, all villages were given resources (cement, etc.) free ofcharge by the govt to make use for community project. Then,

only villages that volunteered, worked together to improve theirvillages were designated as self-help villages and rewarded bybeing given additional resources.

Electricity was provided to villages that showed positiveoutcomes. In less than 10 years, 97% of the villages had securedaccess to electricity.

To widen access roads to villages, private land owners voluntarily

donated some of their land to widen the roads after long anddifficult process. Once the first land owner donated land, whowas usually the most wealthy in the village, others werepersuaded to follow by doing the same.

Then villagers volunteered their own time to help widen the roads.

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The Saemaul Movement

1. Village access roads2. Old bridges3. Village roads4. Sewage system5. Thatched roofs6. Old fence of farm house

7. Traditional Wells8. Village halls9. Banks of brook10. Feeder roads11. Rural electrification12. Village owned telephone

13. Village owned hot bath14. Childrens playground15. Cloth washing place16. Planting of trees

Priority of Saemaul Projects18


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Villagers cooperated and volunteered labor in buildingroads, bridges, and making composts


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Public list to show villagers that donated landfor village access road

The village access road captured President Parks vision ofbringing social and economic transformation In 1970, President Park remarked: is there a hope in a villagewhere villagers should walk carrying things on their back whenthey enter the village, because they do not have a villageaccess road for a truck?


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1


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2161825 Parasite Infection Rate in Korea 25

0

10

20

30

40

50

60

70

80

90

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Parasite Infection Rate in Korea (%)

3. Lessons from the Korean Experience


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8Lessons from Koreas Experience (1/2)Broad based development means ensuring that growth in amarket economy is accompanied with broad social benefits.Growth policies also need to ensure poverty reduction, socialequity, environmental quality, factors that make a more openand tolerable society (more sustainable).

Koreas experience shows the importance of taking ownership ofthe development process, which as defined under the DACprinciples means Developing countries set their own

development strategies, improve their institutions and tacklecorruption.

There is no better example than the Korean government taking

ownership of tax administration reform, the importance andimplications of which cannot be over emphasized.

Productive allocation of Japanese aid (reparations) also showthe importance of taking ownership and the invaluable role thataid play in assisting developing countries.

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8Lessons from Koreas Experience (2/2)

But undertaking transformational change is not only about

the level of activities (more or less investment) but alsoabout the kinds of behaviors (beliefs) and institutions thatindividuals adopt (Hoff 2000).

The anti-corruption campaign and performance-basedprograms of the SaemaulMovement illustrate the potential

role in policy interventions as a way to coordinate betteroutcomes.

As in Koreas case, development requires a set ofcomplementary changes across multiple sectors.

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aid, development and korea - joon-kyung kim

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