Role of ODA (Aid)

Thesis for the Degree of Master of Arts in Korean Economy
The Role and Effectiveness of Official Development
Assistance in Economic Development:
Reflections from South Korea and Ethiopia
Assefa Abebe Lemu
Graduate School of Pan-Pacific International Studies
Kyung Hee University
Suwon, South Korea
August 2004

Assefa Abebe Lemu
Graduate School of Pan-Pacific International Studies
Kyung Hee University
Suwon, South Korea
August, 2004

By
Assefa Abebe Lemu
Supervised by
Professor Jae Sung Kwak, Ph.D.
Submitted to Graduate School of Pan-Pacific International Studies,
Kyung Hee University, in partial fulfillment of
the requirements for the Degree of Master of Arts in Korean Economy
Thesis Committee:
(Name and Signature)

In remembrance of my mother Nigussie Imiru

i
Acknowledgements
First of all I would like to thank my supervisor Professor Jae Sung Kwak,
PhD, who provided me with unreserved guidance and advice in the process of
writing this thesis. I would also like to acknowledge the contribution of Professor
Sharon L. Morrison in editing this thesis.
While I was in South Korea on education, all the family responsibilities were
borne by my wife Mrs. Alemitu Furgassa. So, I am indebted to her and present my
heart-felt thanks to her not only for shouldering family responsibilities by herself
alone but also for enduring loneliness for such a long time.
Last, but by no means least, I thank my daughter Nimona Assefa, 7, who with
her creativity spurred me to work hard in my education. By turning around the advice
I gave to her, she wrote me a letter on April 7, 2003, which says: “Father you are
clever. I have no doubt that you will score the best grade in your education.” I took
her words seriously and it made me to work with mettle not to fall below her
expectation and, in fact, it helped me in my academic achievement.

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Abstract
The role and effectiveness of Official Development Assistance (ODA) in economic
development is one of the points of debate among economists, political scientists,
sociologists, politicians, development workers, and business people. Some magnify
its merits and others its demerits. Nevertheless, for more than half a century ODA
has been in operation in supporting the foreign policy goals of the developed donor
countries and in filling the resource gap of the recipient developing countries. The
number of donors and recipients as well as the popularity of ODA has also been
increasing.
In this study, the writer examines the role and effectiveness of ODA in economic
development based on the experiences of South Korea and Ethiopia. Does ODA help
economic development or hinder it? Is ODA effective in solving economic and social
problems of the recipient country? What do the experiences of South Korea and
Ethiopia show us? What lessons can we draw from the experiences of these two
countries? The study seeks to answer these questions.
Up to early 1980s, South Korea was one of the recipients of ODA and up to 1970s,
ODA was one of its significant foreign financial sources. Turning to the case of
Ethiopia, Ethiopia is one of the low-income countries where ODA plays important
role in its economic activities. The experiences of these two countries reflect that
ODA plays positive role in supporting the effort of the concerned country to achieve
economic development and effective in curbing underdevelopment related problems.

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Table Of Contents
Acknowledgements i
Abstract ii
List of Tables v
List of Figures vi
Introduction 1
I Theoretical Overview of Official Development Assistance 6
1.1 Definition of ODA 6
1.2 Types of ODA 10
1.3 Target for ODA 12
1.4 Why Donors Give ODA 15
1.4.1 The Humanitarian Motive 16
1.4.2 The Economic Motive 16
1.4.3 The Political Motive 17
1.5 Why Do Recipients Receive ODA 18
1.5.1 The Saving Gap 19
1.5.2 The Foreign Exchange Gap 21
1.5.3 The Knowledge Gap 21
1.5.4 Political Reason 22
1.6 The Effectiveness of ODA 23
II The Role and Effectiveness of ODA in the Economic Development
of South Korea 29
2. 1. Sources of ODA to South Korea 30
2. 1.1 The United States of America 31
2. 1.2 Japan 34
2. 1.3 International Development Association 37
2. 1.4 United Nations Organization 38
2.2. Sources of Other Official Flows 39
2.3. The Role of ODA in Economic Development of South Korea 40
2. 3.1 The Role of ODA in Post War Reconstruction 40
2. 3.2 The Role of ODA in Imports 43
2. 3.3 The Role of ODA in Investment 44
2. 3.4 The Role of ODA in Economic Policies 46
2. 3.5 The Role of ODA in Human Resource Development 50
2.4. Effectiveness of ODA in Economic Development of South Korea 51
III The Role and Effectiveness of ODA in the Economic Development
of Ethiopia 57
3.1. Major Sources of ODA to Ethiopia 58
3. 1.1 International Development Association 59
3. 1.2 International Monetary Fund 60
3. 1.3 European Union 61
3. 1.4 UN Agencies 62
3. 1.5 The United States of America 63
3. 1.6 Japan 66

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3. 2. The Role of ODA in the Economic Development of Ethiopia 66
3.2.1 The Role of ODA in Post War Reconstruction 74
3.2.2 The Role of ODA in Economic and Political Reforms 76
3. 3. Effectiveness of ODA in Economic Development of Ethiopia 78
3.3.1 Filling Saving Gap 79
3.3.2 Filling Foreign Exchange Gap 82
3.3.3 Filling Knowledge Gap 84
3.4 Measures to Improve the Effectiveness of ODA 84
Concluding Remarks and Implications 88
Notes 92
References 95

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Table
No.
List of Tables
1.1 ODA of the DAC Countries in 2000 13
1.2 ODA of DAC Countries in 2001 14
1.3 Resource Gap of Selected Countries, 1965 and 1998 20
2.1 Summary of ODA and Other Official Flows to Korea 30
2.2 Summary of U.S. ODA to Korea, 1945-1981 32
2.3 Japanese Economic Assistance to Korea, 1966-1971 36
2.4 UN Economic Assistance to South Korea from 1950-1960 39
2.5 The Role of Foreign Aid in Imports of Goods and Services of
Korea, 1953-73 44
2.6 Share of Fertilizer from U.S. ODA Financed Commodities 52
3.1 Level of ODA to Ethiopia in Comparison with Sub-Saharan Africa
and Least Developed Countries, 1995-1998 58
3.2 The Top Ten Donors to Ethiopia in 2000-2001 59
3.3 Projects and Programs Financed by IDA Credit, 1991-2001 60
3.4 Ethiopia’s Drawings from the IMF, 1983-2003 61
3.5 Projects/Programs Supported by ODA of EU 62
3.6 Summary of ODA from Major UN Agencies to Ethiopia, 1975-01 63
3.7 Summary of U.S. ODA to Ethiopia, 1946-2001 65
3.8 Summary of Japanese ODA to Ethiopia, 1971-2001 66
3.9 ODA Receipts of Ethiopia, 1980-2001 68
3.10 Completed and Ongoing Projects Funded by Bilateral Grant ODA
as of November 2001 71
3.11 Share of Grant ODA in Capital and Recurrent Expenditures of
Ethiopia, 1985-1997 73
3.12 Gross Domestic Investment and Gross Domestic Saving As % of
GDP, 1962-2000 80
3.13 Fiscal Trend of Ethiopia, 1980-1999 81
3.14 Planned Share of ODA in Total Revenue of Ethiopia, 2003-2005 82
3.15 Ethiopia’s Exports and Imports, 2000-2002 83

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Fig.
No.
List of Figures
1.1 Trends of ODA Flow from Major Donor Countries for Selected
Years
15
2.1 Trends of U.S. ODA to South Korea, 1948-1981 34
2.2 Trends of Japanese ODA to South Korea, 1966-1971 37
3.1 Trends of ODA Flow to Ethiopia, 1980-2001 69
3.2 Share of Grant ODA in Capital and Recurrent Expenditure of
Ethiopia, 1985-1997 73

1
Introduction
Today, for the billions of the peoples of the developing countries and
governments, the highest aspiration is achieving economic development. Achieving
economic development means getting food security, access to education and health
care as well as having a job and self-respect. In short, the achievement of economic
development means achievement of a better life and improvement of the general well
being of the society.
Economic development cannot come simply by wishing. It requires practical
actions mainly in saving and investment. The saving requirement can be fulfilled
either by domestic saving or by foreign saving. Since most of the developing
countries are neither in a position to generate adequate resources by domestic saving
nor able to borrow money for their investment in international capital market at
ongoing market interest rate, grants, interest free loans, and loans at a low interest
rate from developed countries and multilateral international and regional institutions
are very important. Grants, interest free loans, loans at low interest rate, and technical
assistance from the governments of the developed countries and from international
and regional institutions to which governments are members to the governments of
developing countries with the main objective of promoting economic development
and welfare is called Official Development Assistance (ODA).
Regarding the role and effectiveness of ODA in economic development, there
are two main groups of thoughts-- those who question the importance of ODA in
economic development by arguing that ODA creates more development problems
than it will solve them (Bandaw, 1995; Vasquez, 2003) and those who support the
role and effectiveness of ODA by arguing that ODA can play crucial contributory
role in economic development where there is appropriate domestic policy
environment (World Bank, 1998).

2
The supporters of ODA argue that ODA is one of the means through which
development inputs can be provided with the main objective of achieving economic
development (the output). These inputs can come from individual countries through
bilateral channel and from groups of countries through trilateral or multilateral
channels in the form of finance (by financing projects, by cash transfer for general
budget support or debt relief) and ideas (as policy advice and technical assistance)
that fosters the emergence of good institutions and sound policies. The idea form of
ODA can be translated into financial or monetary equivalents based on its
expenditure.
The Dependentista School of development thinkers, the great majority of
whom are Latin American intellectuals, sees ODA as another instrument of
domination (Raffer & Singer, 1996, p.62) and they are pessimists about the
significance of ODA in economic development. They argue that “[f]oreign capital
and foreign ‘aid’ thus fill up the holes that they themselves created. The real value of
this aid, however, is doubtful” (Dos Santos, 1993, p.198). But, the economic success
of some of East Asian “tigers” (also called “dragons”) shows a different result.
Raffer and Singer (1996) argue that generous ODA, mainly from the United States,
was certainly one of the major starting advantages of the economic miracles of South
Korea and Taiwan (p.62-63). The communist threat from North Korea and China
made South Korea and Taiwan the two major U.S. ODA recipients in the East Asian
region during the Cold War period and this in turn contributed to their high economic
growth.
ODA was virtually the sole source of foreign capital for South Korea from
the time of its liberation from Japan in 1945 until the late 1950s and the major source
of finance to fill South Korea’s balance of payment deficit up to early 1960s. During
the period 1953-1960, more than 70 percent of South Korea’s imports were financed
by ODA (Sakong, 1993, p. 96). When South Korea’s First Five Year Plan started in
1962, nearly 80 percent of gross domestic fixed capital formation was financed by

3
external resources and from the end of the Korean War until the beginning of the
1960s, ODA amounted on average to 8 percent of South Korea’s GNP each year
(Raffer & Singer, 1996, p. 63). The availability and good use of ODA resources
together with entrepreneurial ability of Korean business sector, its industrious and
disciplined labor force, its high level of literacy, and the cooperation and
interdependence of public and private sectors helped South Korea to achieve rapid
economic development.
Therefore, the experience of South Korea and Taiwan in using ODA
resources as one of the major starting advantages for their economic success attracted
the writer of this thesis to conduct study on the role and effectiveness of ODA in
economic development with special reference to the cases of South Korea and
Ethiopia. The objective of studying the experience of South Korea is not only an
academic exercise but also comparing the experiences of South Korea and Ethiopia
will draw some useful lessons for Ethiopia.
In the 1950s and early 1960s, the economic and social situations of South
Korea and Ethiopia were almost similar—both countries were saddled with all the
evils of underdevelopment. In 1962, the per capita income of Korea was only U.S.$
87 and its domestic saving was negligible. In 1967, about 41 percent of the
population of South Korea was languishing in absolute poverty (Sakong, 1993, p.8)
and in 1950s and early 1960s it had been relying on foreign aid to satisfy the basic
needs of its people.
Today, South Korea is one of the richest countries in the world. According to
the World Bank Data, in 2002 the gross national income (GNI) per capita of South
Korea in current U.S. dollars was 9, 930, almost hundred times that of Ethiopia
which was U.S. $100 for the same year and Korea’s GDP in current U.S. dollars was
476.7 billion, almost 80 times that of Ethiopia which was U.S.$ 6.0 billion in the
same year. This thesis also examines how South Korea achieved higher economic
development and analyzes the contribution of ODA to this leap. Even though its

4
name is still on the list of OECD’s aid recipient countries, South Korea graduated
from aid receiving in the early 1980s and at present, South Korea is one of the donors
of our world.
Based on the experience of South Korea and the achievements recorded in
ODA recipient countries since the Marshal Plan (1948-1951), this research assumes
that since ODA brings additional finance and ideas that fill the saving and knowledge
gap of the recipient country, it can play positive role in the economic development of
a country, provided that it is properly utilized and the internal policy environment is
sound. To prove this assumption, the role and effectiveness of ODA in the economic
development of South Korea and Ethiopia will be examined.
The body of this thesis is structured in three chapters. The first chapter
defines and introduces the concept of ODA. The second and the third chapters
examine the role and effectiveness of ODA in the economic development of South
Korea and Ethiopia respectively. Finally, some lessons are provided in conclusion.
Purpose of the Study
This study has two purposes: a general purpose and a specific purpose. The
general purpose of the study is to evaluate the role and effectiveness of ODA in
economic development and its specific purpose is to evaluate the contribution of
ODA in promoting economic development and solving economic and social
problems in South Korea and Ethiopia. The bottom line of the study is to draw some
lessons for Ethiopia in regard to how to utilize ODA resources effectively and, in the
long run, how to free itself from dependency on ODA.
Methodology of the Study
In this thesis, mixed research methods were employed. As the title implies, a
case study research method was used to analyze the role and effectiveness of official
development assistance in economic development by emphasizing on the case of

5
South Korea and Ethiopia. Regarding the case of Korea, historical research method
was employed to describe, investigate, and interpret the utilization of ODA resources
with the purpose of discovering the role played by these resources in economic
development of the country and making deductions that can be useful for Ethiopia. In
Ethiopian case, past experience and current ODA utilization of the country was
analyzed and where possible compared with the experience of South Korea. In
addition, the role of development assistance in the economic development of
Ethiopia was evaluated based on relevant data. The method of data/ information
collection/gathering includes, but not limited to, library research, which is
supplemented by Internet exploration and review of relevant mimeographs. In short,
this study relied mainly on second hand sources of data/information.

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Chapter One
THEORETICAL OVERVIEW OF OFFICIAL DEVELOPMENT
ASSISTANCE
Countries in our world cooperate in economic, political, military and other
fields. Economic cooperation can be accomplished through different mechanisms
including, Official Development Assistance (grants, concessional loans, and
technical assistance for developing countries), Official Aid (grants, concessional
loans, and technical assistance for countries and territories in transition and more
advanced developing countries), Other Official Flows (credit on favorable terms than
the ongoing capital market interest rate, official export credit, and direct investments
by governments and their official agencies), Private Flows (private export credit,
direct investment and joint ventures), and Grants (financial and the cost of technical
cooperation provided for free) by Private Voluntary Organizations/ Non-
Governmental Organizations. Of these, this thesis focuses on Official Development
Assistance (ODA). In this chapter, we will examine what ODA is and is not, why
donors give ODA and why the developing countries accept it as well as its
effectiveness.
1.1 Definition of ODA
The Development Assistance Committee (DAC), the principal body through
which the Organization for Economic Cooperation and Development (OECD) deals
with issues related to cooperation with developing countries, defines ODA as:
Grants or Loans to countries and territories on Part I of the DAC List of Aid
Recipients (developing countries) which are: (a) undertaken by the official
sector; (b) with promotion of economic development and welfare as the main
objective; (c) at concessional financial terms [if a loan, having a Grant
Element (….) of at least 25 per cent]. In addition to financial flows, Technical

7
Co-operation (...) is included in aid. Grants, Loans and credits for military
purposes are excluded. …. Transfer payments to private individuals (e.g.
pensions, reparations or insurance payouts) are in general not counted
(OECD, Development Cooperation (DAC), Glossary, n.d).
According to this definition, for a grant or loan to be classified as ODA, it has to
flow into developing countries that DAC has recognized as recipients of ODA and
included in its Part I List1
. The list of ODA recipient countries varies from time to
time based on the economic situation of the country on the list. For the purpose of
this research it will suffice to recognize the recipients of ODA by the generic name
of “developing countries”.
Flows that meet the conditions of eligibility for inclusion in ODA, but which
are to the recipients on Part II of the DAC List of aid recipients (countries in
transition) are classed Official Aid (OA). Both Official Development Assistance
(ODA) and Official Aid (OA) are called by a common name of “aid” or “assistance”.
It is also important to note that financial flows to multilateral public international
organizations such as UN agencies, to international and regional multilateral
Development Banks such as the World Bank, the Asian Development Bank (ADB),
the Africa Development Bank (AfDB), and to regional multilateral organizations
such as the Association of South-East Asian Nations (ASEAN), the African Union
(AU) are also considered ODA. Moreover, financial and technical assistance from
such multilateral institutions to developing countries also called ODA if it meets
ODA criteria. The logic behind this is that international institutions with
governmental membership will conduct all or a significant part of their activities in
favor of development and aid recipient countries.
To consider a grant or loan as ODA, the following points should be taken into
consideration. First, it has to be provided by and received by the official sector, that
is, government organs/agencies or organs of international or regional public
organizations with governmental membership or the executive agencies of these

8
public sectors. Second, the transaction of the grant or loan has to meet the following
tests: (a) Its main objective should be the promotion of the economic development
and welfare of developing countries; (b) If it is a loan, it should be concessional in
character and convey a grant element (the difference between the face value and the
present value of a loan calculated at a rate of discount of 10 percent) of at least 25
percent. Flows from official sectors to aid recipient countries that do not meet these
tests are called Other Official Flows (OOF). Third, in addition to financial flows,
technical cooperation, which is undertaken through the dispatching of experts,
consultants, advisors, teachers, project administrators and similar personnel to the aid
recipient developing countries or through grants to the nationals of such countries
receiving education or training at home or abroad, is also included in ODA.
Technical assistance provided to facilitate the implementation of a capital project is
considered part of that project and not treated separately. Grants or loans for military
purposes are excluded from ODA even if they meet some of the tests described
above. The reason why these grants or loans are excluded from ODA is to encourage
developing countries to reduce their military expenditures and to encourage the
donors to concentrate on assistance that promotes economic development. However,
some argue that forgiveness of loans that were originally extended for military
purposes should be considered as a separate transaction and should be considered as
ODA if it meets the criteria set for ODA (Raffer & Singer, 1996, p. 5). Fourth,
transfer payments to private individuals such as pensions, reparations or insurance
payouts are not included in ODA. However, reparations paid to governments can be
counted as ODA.2
The other technical terms used in the definition of ODA and require
clarifications are “concessional financial term” and “grant element”. The DAC
Glossary defines concessionality level as:
A measure of the "softness" of a credit reflecting the benefit to the borrower
compared to a loan at market rate. (…). Technically, it is calculated as the

9
difference between the nominal value of a Tied Aid Credit (…) and the
present value of the debt service as of the date of disbursement, calculated at
a discount rate applicable to the currency of the transaction and expressed as
a percentage of the nominal value (OECD, Development Cooperation (DAC),
Glossary, n.d).
Concessionality is the degree to which the terms of a loan pay back in a smaller
return to the lender than the normal return from commercial lending. Compared to
those borrowing terms attached to commercial markets, the terms of concessional
loans are more favorable to the borrower. In short, a concessional loan is a loan
obtained at below market interest rates and is also called a soft loan. The degree of
concessionality of a loan is expressed by its grant element. Regarding the grant
element, the DAC Glossary states:
GRANT ELEMENT reflects the financial terms of a commitment: interest
rate, maturity (…) and grace period (interval to first repayment of capital). It
measures the concessionality of a loan, in the form of the present value of an
interest rate below the market rate over the life of a loan. Conventionally the
market rate is taken as 10 per cent in DAC statistics. Thus, the GRANT
ELEMENT is nil for a loan carrying an interest rate of 10 percent; it is 100
per cent for a grant; and it lies between these two limits for a soft loan. If the
face value of a loan is multiplied by its GRANT ELEMENT, the result is
referred to as the grant equivalent of that loan (OECD, Development
Cooperation (DAC), Glossary, n.d).
Grant element is an indicator of the "softness" of lending conditions and measured as
the difference between the face value of a loan and the present value, calculated at a
rate of discount of 10 percent, of the service or interest payments to be made by the
borrower during the lifetime of the loan, expressed as a percentage of face value. The
date of maturity reflects the term of the loan because it is a measure of the scheduled
life of the loan. In other words, maturity is the period of time until the closing or

10
conclusion of a loan. The lower the interest rate and the longer the date of maturity,
the more advantageous to the borrower. Compared to the regular loans of the capital
market, concessional loans not only have a longer date of maturity but also a longer
grace period (the period at the beginning of the term of a loan during which no
amortization payments are required). For example, concessional loans from the
International Development Association (IDA) have a 10-year grace period and a
maturity period of 35 to 40 years with a less than 1 percent interest rate or service
payment.
Although non-OECD member donors and recipient countries generally accept
it, the definition of ODA, which was adopted in 1969, has been criticized by some
for being a definition adopted only by the donor group (the group of the source of
grant) and for not reflecting the views of the recipients. For instance Raffer and
Singer argue as follows:
The DAC’s present ODA definition deserves close scrutiny. Although it is
generally accepted, it must be recalled that it is a definition by one group of
donors, not by recipients. ODA figures produced by each member state are
reviewed by other DAC members. No recipient is involved in this process of
control (Raffer & Singer, 1996, p. 4).
Be that as it may, the definition of DAC/OECD has been accepted by many and is
dominant. So, in this thesis the term ODA is used in the context of the definition
given to it by DAC/OECD.
1.2 Types of ODA
Based on its source, ODA can be classified into two: bilateral ODA and
multilateral ODA. Bilateral ODA consists of bilateral grants (cash and goods or
services for which no repayment is required) and concessional loans that are
provided from one government to the other. It refers to the relationship between two
governments or countries. Whereas, multilateral ODA refers to grants and
concessional loans that come from multilateral international institutions such as the

11
World Bank, European Union and the United Nations. Sometimes, the donor
governments give aid through their embassies or other agencies directly to civil
society organizations, community groups, NGOs or associations operating in the
developing countries without signing formal bilateral agreements with a recipient
government or involving the government agencies of the recipient country. Such aid
is called unilateral aid and not considered as ODA. Even though it is not common,
two donor governments may jointly finance one project in recipient country and sign
agreement with the recipient government. This kind of aid that involves three
governments is called trilateral aid.
Based on its implementation mechanism, we can classify ODA into four
categories. These are:
(1) Financial Grants- Financial assistance that can be given from the donor to the
recipient country in the form of program assistance (cash transfer in the form of
general budget support to assist the overall development objective of a recipient
country) or in the form of project assistance (the financing of particular project in the
recipient country).
(2) Commodity Grants- The provision of ODA in the form of specified
commodities, for example, vehicles, machineries or agricultural products such as
cotton, wheat and vegetable oil. Sometimes the receiving country can raise money,
known as a counterpart fund, in local currency by sale of these commodities and used
it for financing its development efforts.
(3) Technical Assistance- Technical assistance is the provision of know-how
through training, consultancy or other forms of technical service delivery. It also
includes the dispatch of experts and volunteers to the recipient country as well as
development study to assist the recipient in the formulation of a various development
projects. Technical assistance is sometimes called technical cooperation.
(4) Concessional Loans- This is a loan that makes development funds available to
the recipient country at low interest rates and with long repayment periods.

12
Concessional loan arrangement enables the borrower country to get funds to finance
its projects including development and the improvement of its economic and social
infrastructure, which are necessary to support the sustainable economic development
of the country (Japan Bank for International Cooperation, n. d.).
Based on the quality (degree of favorable financial terms and conditions) of
ODA, we can categorize ODA as tied and untied. Tied ODA is a condition where a
recipient country is required to purchase goods and services from the donor country
or from the firms of the donor country, in the case of bilateral ODA, and from a
specified group of countries, in the case of a multilateral organization like the
European Union. In most cases, the tying of ODA is motivated by a desire to benefit
the suppliers of donor countries and is often done to prevent a recipient from
misappropriating or mismanaging ODA receipts. Tied aid limits the freedom of the
recipient country to procure goods and services at the lowest price from other
countries or regions. Therefore, since it limits choices in making the most
economical use of resources, tied ODA is costly for recipient countries. A recent
World Bank study estimates that tied ODA is 25 percent less effective than untied
ODA (World Bank, 1998, p. 6). That means tying ODA reduces the value of that
assistance by about 25 percent. Disbursement of ODA may also be tied to meeting of
certain conditionalities like political and economic reform or using the ODA resource
only for the specified type of activity.
1. 3. Target for ODA
In 1970, as part of its international development strategy, the UN General
Assembly set the target for ODA as 0.7 percent of the Gross National Product (GNP)
of the donor. For concessional loans, this is calculated after deduction of loan capital
(repayment of principal). This target was first proposed in 1969 in the Report on
International Development, led by former Canadian Prime Minister Lester Pearson.
Even though the target of 0.7 percent of GNP has been widely accepted by donor
governments as a benchmark, few donors have met this target in practicality (see

13
tables 1.1 and 1.2 below). The response to the repeated call of UN General Assembly
upon donor governments to make concrete efforts towards this target and to
effectively implement their commitments to such assistance are also not encouraging.
According to the UNDP estimate, if members of the Development Assistance
Committee of the OECD, the world’s 22 largest donors actually delivered ODA
equal to 0.7 percent of their GNP, ODA would be U.S. $165 billion a year—three
times the current level of the world’s total ODA (UNDP, 2003, p. 146).
Table 1.1: ODA of DAC Countries in 2000
2000 % Of GNP for the top
eight donor countries*Posi
tion
Country Total
($ milli)
Share
%
Growth rate
from previous
Year (%)
% of GNP
% Ran
king
1965 1991 1997
1 Japan 13, 508 25.1 -11.84 0.31 8 0.2 0.32 0.22
2 USA 9, 965 18.5 8.86 0.10 22 0.58 0.20 0.09
3 Germany 5,030 9.4 -8.79 0.24 15 0.40 0.41 0.28
4 UK 4,501 8.4 30.46 0.31 8 0.47 0.32 0.26
5 France 4,105 7.6 -27.18 0.29 10 0.76 0.62 0.45
6 Netherlands 3,135 5.8 -0.03 0.78 3 0.36 0.88 0.81
7 Sweden 1,799 3.3 10.37 0.76 4 0.19 0.92 0.79
8 Canada 1,744 3.2 2.65 0.27 12 0.19 0.45 0.34
9 Denmark 1,664 3.1 -3.98 0.97 1
10 Italy 1,376 2.6 -23.81 0.12 21
11 Spain 1,195 2.2 -12.33 0.20 19
12 Norway 1,264 2.4 -7.74 0.84 2
13 Australia 987 1.8 0.51 0.25 14
14 Switzerland 890 1.7 -9.55 0.33 6
15 Belgium 820 1.7 7.89 0.32 7
16 Austria 423 0.8 -19.73 0.21 18
17 Finland 371 0.7 -10.82 0.29 10
18 Portugal 271 0.5 -1.81 0.24 15
19 Ireland 235 0.4 -4.08 0.27 12
20 Greece 226 0.4 16.49 0.18 20
21 Luxemburg 127 0.2 6.72 0.65 5
22 New Zealand 113 0.2 -15.67 0.23 17
DAC Total 53,737 100.0 -4.79 0.22
Source: JICA (2002). Japan International Cooperation Agency annual report 2002. P.45. Retrieved
on October 7, 2003 from http://www.jica.go.jp/english/publication/annual/2002/
* Perkins, Dwight H., Radelet, Steven, Snodgrass, Donald R., Gillis, Malcolm & Roemer,
Michael. (2001). Economics of development (5th
Ed). New York: W. W. Norton & Company,
p.409.

14
Table 1.2: ODA of DAC Countries in 2001
Source: JICA (2002). Japan International Cooperation Agency annual report 2002. P.45. Retrieved
on October 7, 2003 from http://www.jica.go.jp/english/publication/annual/2002/
2001
Position Country Total
($ mill)
Share
%
Growth rate
from previous
Yea (%)
% of GNP
% Ranking
1 USA 10,884 21.2 9.33 0.11 22
2 Japan 9,678 18.8 -28.35 0.23 18
3 Germany 4,879 9.5 -3.00 0.27 13
4 UK 4,659 9.1 3.51 0.32 11
5 France 4,293 8.4 4.58 0.34 7
6 Netherlands 3,155 6.1 0.64 0.82 3
7 Spain 1,748 3.4 46.28 0.30 12
8 Denmark 1,599 3.1 -3.91 1.01 1
9 Sweden 1,576 3.1 -12.40 0.76 5
10 Canada 1,572 3.1 -9.86 0.23 18
11 Italy 1,493 2.9 8.50 0.14 21
12 Norway 1,346 2.6 6.49 0.83 2
13 Switzerland 908 1.8 2.02 0.34 7
14 Belgium 866 1.7 5.61 0.37 6
15 Australia 852 1.7 -13.68 0.25 14
16 Austria 457 0.9 8.04 0.25 14
17 Finland 389 0.8 4.85 0.33 9
18 Ireland 285 0.6 21.28 0.33 9
19 Portugal 267 0.5 -1.48 0.25 14
20 Greece 194 0.4 -14.16 0.19 20
21 Luxemburg 142 0.3 11.81 0.80 4
22 New Zealand 111 0.2 -1.77 0.25 14
DAC Total 51,354 100.0 -4.43 0.22

15
Figure 1.1: Trends of ODA Flow from Major Donor Countries for Selected Years.
Trends of ODA Flow from Major Donors
0
0.2
0.4
0.6
0.8
1 1965
1991
1997
2000
2001
Year
ShareofODAfromDonor's
GNPin%
Japan
USA
Germany
UK
France
Netherlands
Sweden
Canada
Source: See Table 1.1 and 1.2 above
1. 4. Why Do Donors Give ODA
Various bilateral and multilateral donors give official development assistance
or aid to developing countries. When seen at face value, even though the words “aid”
and “assistance” suggest the selflessness and generosity of the donor, this is not
necessarily the reality. One of the criteria for ODA, which asserts “the promotion of
the economic development and welfare of developing countries as its main
objective”, is also controversial. It is controversial not only because of differences of
opinion about the meaning of welfare or economic development but also about what
measures promote them. Furthermore, there are situations when the main objective of
the ODA may be the advancement of the donor’s foreign policy rather than
promotion of the economic development or welfare of the recipient. In this section,
the reasons why donors give ODA will be discussed briefly.
ODA is a product of the post World War II era rooted in the Marshall Plan,
the plan initially proposed by the U.S. Secretary of State George C. Marshall in his
speech at Harvard University on 5 June 1947 to rebuild Europe after World War II.

16
Under the Marshall Plan (April 02, 1948-June 30, 1951), the United States
transferred U.S.$17 billion to war-torn Europe (Gillis, Perkins, Roemer & Snodgrass,
1996, p. 394). Since then, ODA has been one of the main sources of external finance
for developing countries that are unable to generate sufficient domestic saving. As
discussed above, the sources of ODA are governments of high-income countries and
multilateral regional and international organizations. A number of reasons, ranging
from humanitarian to political motives, are given to justify this ‘generosity’. These
include reducing poverty and military conflicts that may threaten international
security, promoting political and economic reform for a better life, supporting
political and trade partners, expanding markets for exports and employment creation.
These humanitarian, economic, and political motives will be discussed below.
1.4.1 The Humanitarian Motive
The widening income gap, high levels of absolute poverty, and human
suffering in poor countries are morally unacceptable to the developed world. Even
though it is believed that the key to poverty reduction is sustained economic growth,
which depends far more on a country's own policies and on world trade and
international financial systems than on foreign aid, it is also believed that foreign aid
can play an important role in fighting poverty and mitigating human suffering in the
right environment. It is with this assumption that donors give humanitarian assistance
to poor developing countries.
1.4.2 The Economic Motive
ODA is one means of trade promotion and employment creation for the donor
country. By simple example, if the donor gives a machine to the recipient, the
recipient continues later buying the spare parts for the machine and may hire an
expert of the donor country for maintenance. Therefore, it is not only the moral
concern, but also the benefit it gets that makes giving ODA acceptable to the donor.
For instance, for emerging donors like South Korea, the economic motive is at the
epicenter of their ODA objectives. For South Korea humanitarian goals and the

17
maintenance of the international system have not been main objectives to be
considered in determining its ODA policy. Rather, the dominant objective of Korea’s
ODA is to serve as an instrument to facilitate the commercial opportunities for
Korea, thereby expediting its economic development (Kim, 2003, pp.11-12). The
main focus of Japanese ODA is also economic objective.
For Japanese leaders, ODA is investment, a tool for export promotion, [a]
confidence-building measure, a solution for bilateral problems, a manifestation
of economic power and global leadership, a good responsibility, a tool for
‘buying power,’ and [a] foreign policy instrument. The list of ODA
functionalities continues to increase as new international problems and
opportunities arise (Trinidad, 2003, p.70).
The economic motive of ODA can be clearly seen particularly when it is tied to the
purchase of donor country products and the recipient is obliged to spend all or part of
the sum of ODA extended to it on the goods and services of the donor.
1.4.3 The Political Motive
The history of using ODA as a foreign policy instrument in a systematic way
goes back to the Marshal Plan. As explained above, by means of the Marshal Plan,
the United States granted huge amounts of funding within a short period of time to
rebuild Europe after World War II. The aim of Marshal Plan was not merely
rebuilding Western Europe but also providing a bulwark against the expansion of
communism in the region.
During the Cold War period, the ODA of Western donors, especially that of
the United States, focused either on supporting non-communist regimes or
preventing communist takeovers. For example, in the late 1960s, South Vietnam
became the largest recipient of U.S. ODA. Then, in the 1980s, El Salvador,
Honduras, Guatemala, the Philippines, Indonesia, and Zaire were the major
beneficiaries from the U.S. ODA, all of whom were fighting leftist threats of one
kind or another (Radelet, 2003, p. 106). The main reason of U.S. ODA flow to Israel

18
and Egypt, the two signatory countries of the Camp David Accord and the largest
recipients of U.S. foreign assistance from the late 1970s until today, was politically
motivated, Middle East peace.
Even though the political motive of U.S. ODA declined for some time after
the end of Cold War, it revived once again after the September 11th
, 2001 terrorist
attack on the U.S. World Trade Center. In the post-September 11th
world, the USA is
using its ODA for the furtherance of three political objectives. These are (1) fighting
terrorism directly by supporting both frontline countries and weak states where
terrorism might breed; (2) projecting "soft power" to accompany, and sometimes
offset, its use of military power; and (3) mitigating global poverty and inequality
which is threatening U.S. security and national interests by generating hostility and
resentment toward the United States (Radelet, 2003, p. 109).
1.5 Why Do Recipients Receive ODA
The reason why the developing countries receive ODA is mainly because of
economic reasons. They receive ODA because they don’t have better alternatives to
fill their resource gaps. Because of the gaps between their needs and the availability
of resources, almost all the governments of the developing countries are eager to
accept ODA even though some of them feel that there is no “free ODA” as such, and
that they will pay for it in one way or another. In some cases the recipient countries
have to complete an arduous journey to get ODA. For example, the recipient country
has to provide a lot of information, including GDP, GNP, death rate, poverty rate,
and existing policies in the required sector, to a donor before receiving ODA. In
some cases, the recipient country is also required to give some privileges like tax
exemptions to the officials of donor agents working in the recipient country and to
meet some preconditions. By doing these, the recipient countries pay the “price” of
receiving ODA. To be specific, the major compelling reasons for accepting ODA are
saving gap, the foreign exchange gap, the knowledge gap and political reasons.
These will be discussed briefly in turn.

19
1.5.1 The Saving Gap
To achieve economic development, investments in physical and human
capital are crucial. Investments can take place if a country is able to maintain savings
at a sizable proportion of its gross domestic product. “This [saving] proportion rarely
can be much less than 15 percent and in some cases it must be as high as 25 or even
35 percent, depending on investment efficiency and the desired rate of growth, …”
(Perkins, Radelet, Snodgrass, Gillis & Roemer, 2001, p. 379). Other things being
constant, saving and investment have direct relationships.
The sources of saving are either domestic entities (households, firms, and
government) or foreigners (donors, lenders, and transnational investors). Households
and firms play an important role in domestic saving or national saving. If the
development program of a country requires greater investment than can be financed
by the level of domestic savings, and it is desired to undertake the additional
expenditure without inflation, then the excess of domestic expenditure over the
current output must be covered by external financing (Meier, 1968, p.98). The major
external financing source for most of the developing countries, which are not able to
borrow at the market interest rate from international capital markets and are unable to
attract foreign investment because of different reasons, is ODA. Generally speaking,
for a country, the total supply of available savings is simply the sum of
domestic/national and foreign saving.
Since most of the developing countries are not in a position to mobilize
adequate domestic saving to cover their investment and import needs, there is a gap
between their domestic saving and their investment requirements. Therefore, by
saving gap we are referring to the amount by which investment exceeds domestic
saving. This domestic saving gap has to be filled by foreign saving--capital inflows
in the form of foreign aid, foreign borrowing, or foreign investment. Based on the
economic performance of the country, this saving gap may be narrowed or widened.
For example, as can be seen from Table 1.3 below, the saving (resource) gap of

20
South Korea decreased from 8 in 1965 to 1 in 1998 showing an improvement in
economic performance and saving ratio. On the other hand, the resource gap of
Ethiopia widened from 1 in 1965 to 11 in 1998 requiring more foreign saving. This is
in fact not only because of a mere decline in the proportion of gross saving from 12
percent of GDP in 1965 to 9 percent in 1998, but also because of an increase in
public investment such as education, health, and road sectors with foreign saving.
Table 1.3: Resource Gap3
of Selected Countries, 1965and 1998
Country Gross Domestic
Investment (As
% of GDP)
Gross
Domestic
Saving (As %
of GDP)
Resource Gap GNP per
capita
Growth
1965-97
1965 1998 1965 1998 1965 1998 1965-97
Ethiopia 13 20 12 9 1 11 0.3
Ghana 18 23 8 13 10 10 -0.4
Kenya 14 18 15 13 -1 5 1.7
Mali 12 21 4 10 8 11 0.8
Nigeria 19 20 17 12 2 8 0.5
Senegal 12 20 8 15 4 5 -0.4
Tanzania 15 16 17 6 -2 10 0.9
Average for low income
countries a category to
which Ethiopia belongs,
excluding China and India
14 24 13 20 1 4
S. Korea 15 35 7 34 8 1 6.7
Average for Upper-
middle- income countries
a category to which Korea
Belongs
21 23 21 21 0 2
Source: Perkins, Dwight H. Radelet, Steven, Snodgrass, Donald R. Gillis, Malcolm & Roemer,
Michael (2001). Economics of Development. Fifth Edition. New York: W. W. Norton &
Company, Inc. p.379.

21
1.5.2 The Foreign Exchange Gap
According to the Two-Gap Model analysis of capital requirement, a model
developed by Hollis Chenery and Michael Bruno in 1962, the saving (resource) gap
spills over into the balance of payments and creates a foreign exchange gap. When
saving and taxes do not release sufficient resources at home, the only way to cover
investment and government expenditures is by importing goods and services. When
imports exceed exports, then the country confronts a foreign exchange gap, another
gap that has to be filled (Meier, 1995, p. 215). This foreign exchange gap can be
filled by losing foreign exchange reserves or through external financing. In the case
of poor developing countries, to the extent that foreign exchange requirements for
development imports exceed the availability of foreign exchange, the gap will have
to be filled by foreign saving (external financing), which is mainly ODA, leaving
aside any possible use of the existing foreign exchange reserve.
1.5.3 The Knowledge Gap
Economic development of some of the developing countries is held back not only
due to a lack of finance, but also due to a lack of knowledge, appropriate policy and
necessary institutions. Since ODA is the combination of money and ideas-knowledge
creation through training and advice-it can help in filling the knowledge gap of the
recipient country. If a recipient country has a good policy environment and
institutions, ODA money can have a significant impact. But, if it lacks a good policy
environment, the idea side of ODA is critical for helping to generate reform and
effectively provide public services like education, health, infrastructure and the like.
The idea side of ODA, which is given to the recipient country in the form of
technical assistance, helps the recipient to use its potential more effectively and
efficiently to achieve development.

22
What makes development happen is our ability to imagine, theorize,
conceptualize, experiment, invent, articulate, organize, manage, solve
problems, and do hundred other things with our minds and hands that
contribute to progress of the individual and of human-kind. Natural resources,
climate, geography, history, market size, governmental policies, and many
other factors influence the direction and pace of progress. But the engine is
human capacity (Harrison, 1993, p. 174).
Therefore, developing countries accept ODA to fill their knowledge gap through
technical assistance programs of the donors that help them to tap in to the creative
capacity of their citizens.
1.5.4 Political Reason
In some cases, the recipient countries use ODA as a political instrument. As
history shows us, governments promote the economic growth of their country not
only to improve the welfare of their citizens but also to increase their power and
glory. Besides channeling the ODA resources toward financing non-productive
activities such as purchasing armaments or expensive projects the economic return of
which is zero or low, the governments of developing countries use their relationship
with the donor for political motives. They consider the flow of ODA to their country
as a sign of approval for their administration. So, they try to overwhelm their
political opponents by invoking the flow of ODA as an evidence of support for their
administration and policies. It is not uncommon to use ODA agreement signing
ceremonies for propaganda purposes to influence public opinion through the media.
The infamous and undemocratic governments in the recipient countries want to
convince their people and their opponents that such powerful donor countries like the
USA or Germany are their friends and support them.

23
1. 6. The Effectiveness of ODA
The term effectiveness of ODA is referring to the extent to which ODA attains
its objectives or the positive changes or impacts achieved as a result of ODA
resource inflow to the recipient country. As discussed in the preceding pages, one of
the criteria that distinguishes ODA from other official flows is that its main objective
should be the promotion of the economic development and welfare of the recipient
country. Therefore, in evaluating the effectiveness of ODA, it is useful to consider to
what extent the objectives of ODA were achieved, the role played by ODA in solving
the development problems of the recipient country, the major factors that influenced
the achievements or non-achievement of its objectives, as well as the real difference
brought to the recipient country. ODA is said to be effective if it achieves its
objective, which is the promotion or stimulation of economic development.
Even though ODA has played an important role in the economic development
of the recipient countries and the great majority of studies conducted in this area
have proved its effectiveness, the issue of its effectiveness continues to be fraught
with disagreement4
. Some argue that ODA is a crucial and essential ingredient in the
economic development process and cite its success in the rebuilding of Europe after
World War II and its contributions to the economic successes achieved by countries
like Botswana, Taiwan, Israel and South Korea.
Supporters of the effectiveness of ODA argue that without ODA, it is
improbable that the poor countries that are currently languishing in extreme poverty
will overcome it by their own efforts. That is why the world community is repeatedly
requesting that rich countries increase the volume of aid, at least to reach the aid
target of 0.7 percent of their gross national product. International multilateral public
organizations such as UN organs, the World Bank and the OECD subscribe to this
idea and argue in favor of ODA. For example, in its Human Development Report
2003, UNDP argues as follows:

24
Indeed…countries that have the steepest slopes to climb…will need large
injections of donor financing to invest much more heavily in health, education,
agriculture, water, sanitation and key infrastructure. They cannot wait until
economic growth generates enough domestic savings and raises household
incomes. Indeed, these core investments lay the foundation for economic
growth (UNDP, 2003, p.145).
According to the UNDP, ODA plays significant role in infrastructure development,
economic growth and raising the income of the household in the recipient countries.
It is true that ODA is serving as catalyst for economic development and
helping the poor people in recipient developing countries to increase their income,
and to live longer, healthier, and more productive lives. But, it is difficult to
conclude that the story of ODA is full of success. It is a mixed story of success and
failure—about effectiveness and non-effectiveness. ODA, which played significant
role in the improvement of food production in South Asian countries and contributed
to a rise in per capita income in most recipient countries, had not been fortunate
enough in some of Sub-Saharan Africa like Zaire (now Democratic Republic of
Congo) under Mobutu Sese Seko (1965-1997), one of the most dictatorial and
corrupt leaders. Because of this, the effectiveness of ODA that was seen in most
recipient countries was overshadowed by the focus on countries in which vast
amounts of ODA had achieved little. 5
In short, though it is not possible to say that ODA is effective on every count,
most extensive studies done on the contribution of ODA concluded that in most
cases, ODA is effective in achieving its developmental objectives. Its effectiveness
varies by country, by sector and by project. Its effectiveness also improves with
experience. Moreover, the end of the Cold War has reduced the politicization of
bilateral ODA and increased its chance of focusing on economic development. To
make ODA more effective, good governance, sound macroeconomic policy,

25
ownership of the recipient and involvement of stakeholders, as well as untying aid
and donor coordination are important.
When we turn to the side of those who have gloomy view about the
effectiveness of ODA, they argue that ODA is not effective in curbing the
development problems. They claim that many countries receiving ODA are more
impoverished than they were before they received it and that the few who achieved
economic development achieved it in spite of, not because of, ODA (Bandow, 1995,
p.1). Furthermore, they argue that ODA delays self-reliance on the part of the
recipient country, substitutes for domestic saving, fosters economic planning and
control by the government, allows the postponement of needed policy reform,
perpetuates dependence, props up authoritarian and repressive regimes and prevents
domestic development (Meier, 1995, p. 224).
Roger LeRoy Miller is one of those who have pessimist view about the
effectiveness of ODA. He argues that since the recipient developing countries do not
have the necessary human capital of an experienced industrial workforce that post
World War II Europe had, and since there are many barriers to economic growth in
developing countries, including being unreceptive to change, ODA cannot be
expected ODA to bring same result as that brought to Europe for its reconstruction
after World War II (Miller, 1997, p. 787).
Here, one important question to be raised and answered is that if ODA is
effective in the majority of cases and its effectiveness can be further improved by
taking some policy and implementation measures both on the donor and recipient
sides, why do some groups of people or writers oppose it? The reasons for opposing
ODA include, but are not limited to, political stance, preference of international trade
over ODA, and the idea of substitutability of ODA for domestic saving.
Like supporting and giving ODA, opposing and refusing ODA is also
influenced by one’s political stance. Even the Marshal Plan, which was praised for its
effectiveness, was nicknamed as “Operation Rat-Hole” by people who opposed ODA

26
on the basis of political motives (Radelet, 2003, p.107). Some U.S. politicians like
Senator Jesse Helms often boasted of not supporting ODA and used the objection as
something of a badge of honor. For instance, in his press conference held in
November 1994, Senator Helms declared,
The foreign aid program has spent an estimated $2 trillion of the American
taxpayers’ money, much of it going down foreign rat-holes, to countries that
constantly oppose us in the United Nations, and many which rejected
concepts of freedom. We must stop this stupid business of giving away the
taxpayers’ money willy-nilly (Cited in Bandaw, 1995, p. 7).
Supporters of this stance also argue that the reason for existing for ODA ended with
the end of the Cold War.
The justification of this group for opposing ODA is more of politics than
economics. But it should not be forgotten that ODA is also effective in achieving
political objectives. After all, ODA contributed to containing the spread of
communism and enabled the United States to win the Cold War. It has also played an
important role in making Israel and Egypt remain at peace with one another since the
Camp David Accords of September 17, 1978. Therefore, ODA is by no means
throwing money down rat holes. Even if we say that ODA failed to benefit the
recipient country, it may benefit the donor in one way or another. But as the name
implies, the primary objective of ODA should be the economic development of the
recipient country not politics.
The second group of opponents of ODA is the conservative economists who
prefer trade to ODA. Conservative economists oppose the idea of ODA and
recommend international trade and the market mechanism as an alternative for
solving the economic problems of developing countries. Some studies conducted by
the OECD also share this opinion (Cited in Raffer & Singer, 1996, p.32). The OECD
study shows that the cost of tariff and non-tariff barriers imposed by developed
countries on the products of the developing countries, which are higher than those

27
imposed on products of the developed countries, are estimated to exceed the value of
ODA flows to developing countries. This second group further argues that these
trade barriers discourage the developing countries from choosing an export-oriented
industrialization strategy.
But currently, with the intention of assisting the economic development of
the third world countries through international trade, major donor countries are
showing a willingness to further open their markets to the products of the developing
countries. In this regard, since May 18, 2000, the U.S. government put in place the
African Growth and Opportunity Act (AGOA), which provided Sub-Saharan African
countries with the most liberal access to the U.S. market, to offer tangible incentives
for African exports. Since February 28, 2001, the Council of the European Union has
also adopted the “Everything But Arms” Regulation (EBA), which grants duty-free
access to imports of all products of least developed countries except arms. AGOA
and EBA give more opportunity for developing countries to increase their
participation in international trade by expanding their exports.
The third group of opponents of ODA is that which advocate for private
enterprise and argues that the flow of resources in the form of ODA from the rich
countries to the poor developing countries discourage the recipient governments
from taking measures to attract private investments and raise domestic saving
through taxation, which in turn delays the attainment of self-reliant economic
growth. However, empirical research has shown that ODA and private investment
are more complimentary than substitutes for one another. As seen from the
experiences of South Korea and Taiwan, very heavy concentrations of ODA have
helped lay the base for burgeoning economic expansion (Meier, 1995, p. 224). The
physical and social infrastructure built with ODA resources is inevitably used for the
attraction and expansion of private investment.
In sum, in countries that have good institutions, efficient and competent
bureaucracy, rule of law, absence of corruption, respect for property rights, sound

28
macroeconomic and financial policies, ODA is effective. In some cases ODA also
has an ability to secure these necessary institutions and policies through
conditionalities. According to the World Bank study, the gain of ODA, particularly if
focused on poor countries with good policies, would be very large. The study of the
Bank estimates U.S. $10 billion in new ODA lifts 7 million people per year out of
poverty. If only focused on poor countries with good policies, it would lift nearly
four times as many, that is 25 million people. It should be stressed that this is a
permanent poverty reduction from a one-time contribution of aid (World Bank, 1998,
p.46). So, in good policy environments, ODA is a high-return investment that
permanently raises the income of the people in the recipient country and promotes
economic development.

29
Chapter Two
THE ROLE AND EFFECTIVENESS OF ODA IN THE ECONOMIC
DEVELOPMENT OF SOUTH KOREA
As in other newly industrialized East Asian countries/regions—Singapore,
Hong Kong and Taiwan—high investment in human and physical capital has been an
important causal factor of South Korea’s economic development. It was mainly this
investment that enabled it to develop the required skills, new ways of thinking, good
organization and management of the economy. In other words, it was the high
investment in human and physical capital that pushed the economic development of
South Korea forward and helped it to break the vicious circle of poverty and all
forms of economic underdevelopment within relatively a short period of time. Up to
the 1970s, Korea was not in a position to cover its required investment expenditures
in the development of human and physical capital or to cover other public
expenditures. Therefore, parts of these public expenditures were to be covered by
funds obtained from external sources—grants, concessional/soft loans, and
commercial loans. Yoon Je Cho (1998) explains the contribution of foreign resources
in the economic development of South Korea as follows:
Many observers overlook the importance of foreign aid and loans in shaping
Korean economic policies (…) and its push toward economic development.
From 1946 to 1976, the United States provided $12.6 billion in economic and
military aid to Korea (…); Japan contributed an additional $1 billion, and
Korea borrowed $2 billion from multilateral financial institutions. For a
country with a population of 25 million (at midpoint 1960), the total of more
than $15 billion gives a per capita assistance figure of $600 for three decades.
No other country in the world received such large per capita sums, with
exception of Israel and South Vietnam (…). The total of $6 billion U.S.

30
“economic” grants and loans to Korea during 1946-78 compares with $6.89
billion for all of Africa, and $14.89 billion for all of Latin America (…)(Cho,
1998, p. 7).
From this we can easily see that the availability and good use of foreign resources
were among the contributing factors to the rapid economic development of Korea. In
this regard, this chapter examines the role and effectiveness of ODA in the economic
development of South Korea.
2.1 Sources of ODA to South Korea
During its initial development stage, South Korea received a significant amount of
development assistance from bilateral and multilateral sources and used them to
finance its development activities. The ODA receipts of South Korea are summarized
in table 2.1 below. However, it should be kept in mind that these figures are by no
means exhaustive and have not captured all the development assistance received by
Korea. For instance, Korea has received official development assistance from
countries like the United Kingdom (Department for International Development/DFID
(n.d) but they are not included here.
Table 2.1: Summary of ODA Receipts of South Korea
Donor/Lender Type of Financial Flow Period Unit Value Amount
USAa
Grant 1945-1981 US$ billions 4.6
Cocessional Loan 1946-1981 ,, 1.5
Total 1945- 1981 ,, 6.1
Japanb
Grant 1966-1979 Yen billions 106
Concessional Loan 1966-1990 ,, 848
Total 1966- 1990 ,, 954
UNc
Grant 1950- 1960 US$ million 579.2
World Bankc
IDA Concessional Loan 1962-1991 US$ millions 115.6
Sources: a
USAID (n.d). Country Data. U.S. Overseas Loans & Grants [Green Book Online]. Retrieved
on August 15, 2003 from: http://qesdb.cdie.org/gbk/index.html
b
JICA (1999). Reviewing Japan's Assistance to the Republic of Korea. Bringing an End to
Cooperation to Korea: New Era in Japan Korea Cooperation. JICA Network/Special Report.
July 13, 1999. Retrieved on August 15,2003 from:
http://www.jica.go.jp/english/news/2000/publication/network/1999/net_9907-13/02.html
c
Il Sakong (1993). Korea in the World Economy. January 1993, pp.134 &135.

31
2.1.1 The United States of America
The U.S.-South Korean economic relationship goes back to the period of the
end of the Second World War. The Second World War was formally ended on
September 2, 1945 with the formal surrender of Japanese military to the U.S. army.
The United States Military Administration began officially operating in South Korea
on September 9, 1945 and continued holding authority in South Korea until August
15, 1948, the date on which the Republic of Korea was officially established. Soon
after taking over the responsibility of administering South Korea, the U.S. Military
Administration started supplying relief and other essential goods to South Korea
through U.S. Government Appropriations for Relief In Occupied Areas (GARIOA).
From 1945 through 1949, the U.S. government granted U.S.$ 502,108 to South
Korea under the GARIOA program. The main objectives of this grant were to
prevent starvation and disease, to increase agricultural output, and to provide
essential consumer goods (Sakong, 1993, p. 96). Even though the export of Korea’s
rice to Japan was suspended after 1945, decreased domestic production combined
with increased population caused a serious food shortage, making it inevitable for
South Korea to rely on food relief provided by the U.S. Military Administration
(Kim & Kim, 1997, p. 9).
Since 1949, the United States has focused on helping South Korea to become
less dependent on foreign aid in the long run. Therefore, after 1949, U.S. aid put
great emphasis on capital development programs rather than relief programs
(Sakong, 1993, p. 97). Unfortunately, the outbreak of the Korean War in June 1950
disturbed this program and forced the U.S. to focus once again on relief activities.
Following the cease-fire agreement between North and South Korea in July 1953, the
USA began to play an important role in the post war reconstruction, economic and
human resource development of South Korea. This U.S. role continued up to 1981.
As shown in Table 2.2 below, from 1945 to 1981, total U.S. ODA to South Korea
was U.S.$ 6.1 billion1
.

32
Table 2.2: Summary of U.S. ODA to Korea, 1945-19812
Unit Value: In millions US$
Year USA Year USA
Grant Loan Total Grant Loan Total
1945 4.9a
0 4.9 1964 192.5 29.7 222.2
1946 5.6 0 5.6 1965 136.6 49.2 185.8
1947 50.6 24.9 75.5 1966 181.3 80.5 261.8
1948 100.1 0 100.1 1967 114.3 63.5 177.8
1949 141.8 0 141.8 1968 137.1 34.7 171.8
1950 98.1 0 98.1 1969 121.9 113.5 235.4
1951 87.6 0 87.6 1970 76.6 64.1 140.7
1952 158.1 0 158.1 1971 47.0 122.9 169.9
1953 179.9 0 179.9 1972 21.5 230.7 252.2
1954 299.6 0 299.6 1973 17.2 171.3 188.5
1955 315.0 0 315.0 1974 12.1 25.0 37.1
1956 385.5 0 385.5 1975 9.5 27.2 36.7
1957 348.9 0 348.9 1976 3.4 135.1 138.5
1958 282.9 7.4 290.3 1977 2.3 75.1 77.4
1959 261.4 12.1 273.5 1978 2.3 56.3 58.6
1960 214.8 1.1 215.9 1979 3.0 38.0 41.0
1961 263.6 6.8 270.4 1980 2.3 28.5 30.8
1962 176.7 25.4 202.1 1981 2.0 25.6 27.6
1963 170.4 30.9 201.3 Total 4, 628.3 1,479.6 6,107.9
SOURCE: USAID (n.d). Country Data. U.S. overseas loans & grants [Green Book Online]. Retrieved
on August 15, 2003 from: http://qesdb.cdie.org/gbk/index.html
a
Sakong, Il (1993). Korea in the World Economy. p. 257

33
The USA was the largest donor to South Korea and its assistance can be
classified into four categories. These are:
1. Non-Project Assistance (NPA)---the type of assistance that provided
finance to import commodities, other than U.S. surplus agricultural
commodities, that are not attached to the project;
2. Project Assistance (PA)---financial and non financial assistance which
could generally be used for investment projects;
3. Technical Assistance (TA)--- the type of assistance that contributed to
human resource and institutional developments. This was done
through inviting U.S. experts and technicians to Korea and the
overseas training of Koreans; and
4. Public Law (PL) 480 funds--- financial assistance for importing U.S.
surplus agricultural commodities (Kim & Kim, 1997, p. 14).
Even though some argue that the import of U.S. surplus agricultural
commodities under the Public Law (PL) 480 program had no contribution to
economic development since it was food aid, others argue that it had played
important role in solving food shortage of Korea which was caused by the decline in
grain production and contributed to stabilization of both general price level of the
country and the living costs of the urban consumers (Kim, 2002, p.10). Particularly,
relief aid that were made during the Korean War and following years contributed to
the prevention of disease, starvation and unrest in the civilian population (Krueger,
1979, p.3). This stabilization role was an indirect contribution of ODA to the
economic development. Despite the fact that the information sources from United
States Agency for International Development (USAID) indicate the transfer of U.S.
economic assistance to South Korea in years 1994, 1996 and 1997 (USAID, Green
Book Online), the U.S. ODA to South Korea had virtually ended by 1981.

34
Figure 2.1: Trends of U.S. ODA to South Korea, 1948-1981
Trends of U.S. ODA to South Korea
0
50
100
150
200
250
300
350
1948-52
1953-57
1958-62
1963-67
1968-72
1973-77
1978-81
Years
MillionsofU.S.Dollars
Millions US$
Source: See Table 2.2 above.
2.1.2 Japan
After the liberation, the Japanese role in the economic development of Korea
began in 1965 with the signing of the “Japan and the Republic of Korea Basic
Relations Treaty” to normalize the relations between the two countries. President
Park Chung Hee, whose government received a cautionary notice from the U.S.
government that U.S. aid would be cut and whose country had faced a decline of
grant aid flows from USA since 1962, felt that Japan would play a critical role in the
economic development of Korea and had, therefore, decided to normalize diplomatic
relations with Japan. The normalization treaty of 1965 laid a foundation for Korea-
Japan economic cooperation and paved the way for Japanese contribution in the later
economic development of Korea. It helped Korea to get both public and commercial

35
capital in the form of reparation, grants, soft and commercial loans and direct
investment to capital formation and to the expansion of trade.
With the signing of the treaty, Japan began pouring loan assistance into the
country, not as war reparations, but as “quasi”-reparations (assistance based
on yen loan). These loans were instrumental in building infrastructure needed
for such enterprises as heavy chemical industry projects (symbolized by the
Po hang Ironworks) and the construction of roads, harbors, and dams. This
activity formed the basis for an economic relationship between Japan and
Korea from which trade and Japanese business activity in the country could
begin (Watanabe, 1999).
During the signing of the normalization treaty, the Japanese government agreed to
pay U.S.$ 300 million for what is known as “properties and claims” (PAC)
(reparation) 3
, to provide U.S.$ 200 million in soft loans and to facilitate U.S.$ 300
million in commercial loans over a ten years period between 1965-1975. All these
promised funds were received by Korea except for time lags between the approval
and disbursement (Choo, 1972, p.4).
In the second five-year plan (1967-71), when the government of Korea
decided to promote selected key industries such as textiles, chemicals, metal, and
machinery, it was Japan that assisted Korea in constructing the Pohang Steel Mill
Company (POSCO), the heavy industry which was considered as a base for the
future development of other heavy industries of Korea, in 1969.
The Japanese government agreed to provide a total U.S.$ 123.7 million,
including $73.7 million to be financed out of the Korea’s Claim Fund against
Japan ($30.8 million of grant and $42.9 million of long-term loans), and $50
million of loans from the Japanese Export-Import Bank (…). Total foreign
capital requirements for the project [construction of Pohang Steel Mill],
however, amounted to $164.5 million, exceeding the amount provided by the
Japanese government (Kim, 1994, p.39).

36
The total ODA of Japan given to Korea from 1966 to 1971 was U.S.$267 million and
the annual breakdown was shown in Table 2.3 below.
Table 2.3: Japanese ODA to Korea, 1966-1971
Unit Value: In US$ Millions
Type of ODA 1966 1967 1968 1969 1970 1971 Total
Grant (including PAC) 29.7 30.2 33.6 31.1 24.5 13.6 162.7
Cocessional Loan 12.1 25.4 16.2 21.4 12.5 16.7 104.3
Total 41.8 55.6 49.8 52.5 37.0 30.3 267.0
Source: USAID, Summary of U.S. Economic Aid to Korea, 1972. Cited in Hak Chung Choo (1972),
Effects on the Viet Nam War and the Normalization of the Korean-Japanese Relations on the
Korean Economic Development in 1960s. Working Paper 7201, Korea development Institute,
June 23. p. 5
As the Korean economy achieved growth, the scale of Japanese soft loans and
grants diminished. In January 1983, the then Prime Minister of Japan, Nakasone, on
his visit to Korea, pledged to supply further loans, amounting to U.S.$ 1.85 billion
over seven years, to Korea. The exchange of notes for these loans was carried out in
1990. With that, in view of the successful development of the Korean economy, the
provision of soft loans from Japanese government was brought to an end.
The total amount of loan assistance, consisting of quasi-reparations and yen
loans, provided to Korea over 25 years [1965-1990] has come to 848 billion
yen.
As for the grant aid portion of quasi-reparations, it was decided to provide
102 billion yen over the 10 years between 1965-1975, and this was used to
implement projects for boosting agricultural production, and to supply
equipment for promotion of fisheries, shipbuilding and construction of

37
comprehensive iron works… The total amount of grant aid including that
furnished under quasi reparations has come to 106 billion yen (JICA, 1999).
Based on the judgment that Korea had outgrown the grant aid supply criteria, grant
aid has not been provided from Japan to South Korea since 1979, except for
emergency assistance (JICA, 1999).
Figure 2.2: Trends of Japanese ODA to South Korea, 1966-1971
Trends of Japanese ODA to S. Korea
0
10
20
30
40
50
60
1966
1967
1968
1969
1970
1971
Year
MillionsofU.S.Dollars
Millions U.S.$
Source: See Table 2.3 Above.
2.1.3 International Development Association (IDA)
IDA was established in 1960 to provide concessional loans to countries that
are too poor to borrow at the commercial interest rate. Next to the International Bank
for Reconstruction and Development (IBRD), IDA is the second lending arm of the
World Bank. IDA loans, usually called “IDA Credits”, are considered interest free-
loans. Borrowers pay a fee of less than 1 percent of the loan to cover administrative

38
costs and are required to repay in 35-40 years with a 10-year grace period (World
Bank, 2003a).
Korea joined the World Bank in 1955 and as of March 1991, Korea had
received a loan amounting U.S.$115.6 million from IDA credit (Sakong, 1993,
p.135). Korea received the first IDA credit on August 17, 1962 for Railway Project
and the last IDA credit in 1973. In 1995, Korea had become the 26th
country to
graduate from the World Bank borrowing and the first for having progressed from
being a purely concessional IDA borrower to being a donor (World Bank, 2003b).
2.1.4. United Nations Organization (UN)
To help in the reconstruction of the war ravaged economy of South Korea,
the UN established the United Nations Korea Reconstruction Agency (UNKRA)
with a UN General Assembly resolution of December 1950. The UN provided
rehabilitation supplies such as transportation and other supplies for the reconstruction
of social overhead capitals through the UNKRA program and relief assistance to
Korea through Civil Relief In Korea (CRIK). Out of the total CRIK aid of U.S.$ 457
million, 92 percent was contributed by USA (Sakong, 1993, p.98). The UN also gave
technical assistance to Korea through its affiliate organizations and specialized
agencies like United Nations Development Program (UNDP) (Sakong, 1993, p.136).
In addition, Korea benefited from the sale of its overvalued currency (Won) and
services to the UN forces, both of which helped it to get the most desired foreign
exchange (Koo & Park, n.d, p. 80).

39
Table 2.4: UN Economic Assistance to South Korea from 1950-1960
(In U.S.$ thousands)
Year
UN
CRIK UNKRA UN Total
1950 9,376 9,376
1951 74,448 122 74,570
1952 155,334 1,969 157,303
1953 158,787 29,580 188,367
1954 50,191 21,297 71,488
1955 8,711 22,181 30,892
1956 311 22,370 22,681
1957 14,103 14,103
1958 7,747 7,747
1959 2,471 2,471
1960 244 244
Total 457,158 122,084 579,242
Source: Sakong, Il. (1993). Korea in the world economy. Washington, D.C.: Institute
for International Economics. p.257
2.2 Sources of Other Official Flows
International Bank for Reconstruction and Development (IBRD) —
IBRD was established in 1945 and provides loans to middle-income and
creditworthy poorer member countries to promote sustainable development. IBRD’s
lending has an interest rate, which is less than the commercial lending (capital
market) but which reflects the cost of borrowing. Compared with that of the capital
market, borrowing from IBRD is said to be low-cost borrowing. Its repayment period
is 15 to 20 years and has a 3 to 5 year grace period before repayment of the principal

40
begins. As of March 1991, Korea had borrowed U.S.$ 6.6 billion from IBRD
(Sakong, 1993, p. 135).
Asian Development Bank (ADB)—ADB is a regional multilateral
development finance institution owned by 61 members; 44 from Asia and the Pacific
and 17 from other parts of the globe. ADB’s principal tools are loans, grants, and
technical assistance, which it mainly provides to governments for specific projects
and programs. ADB was established in 1966 and South Korea was one of its 31
founding members. As a member, South Korea contributes to and benefits from
ADB. As of 31 December 2002, the cumulative ADB lending to South Korea was
U.S.$ 6.3 billion (ADB, 2002).
International Monetary Fund (IMF)—The IMF came into official
existence on December 27, 1945. The IMF normally extends its lending facility to a
member country that has a problem of balance of payments to help that country to
adjust and reform its policies to correct the underlying macroeconomic problems.
Korea joined the IMF in 1955 and as member enjoyed the financial and technical
assistance of the IMF. As of 31 May 2003, Korea’s total borrowing from the IMF
was Special Drawing Rights4
(SDRs) 15.1 billion (IMF, 2003). Korea’s borrowings
from the IMF facilities were on market related interest rates.
2.3 The Role of ODA in the Economic Development of South Korea
2.3.1 The Role of ODA in Post War Reconstruction
Two years after its establishment, South Korea faced the Korean War (1950-53).
The war that had begun in June 1950 with the aggression of North Korea continued
for over three years until armistice was signed on July 27, 1953, damaged both the
human and physical assets of South Korea. Because of this, South Korea was forced

41
to continue relying on foreign aid/ODA to reconstruct its economy. Cho and Kim
(1991) explain the role of ODA in the post war reconstruction of Korea as follows:
…[D]during the period 1953-1961 the economy [of South Korea] was alive
largely by massive economic and military assistance from the United
States….
The subsequent growth process was doubtless made easier by the
massive influx of foreign exchange during this critical period of development,
which held the country together and prevented massive starvation and
economic dislocation. During the entire period 1945-83, aid or assistance
from all sources to Korea is estimated at over US $ 26 billion (…). Much of
this was in the form of grants or concessions. About one-third of the total was
military assistance, much of which was given during and just after the Korean
War. By expediting postwar reconstruction and the recovery of the economy,
these forms of assistance helped to lay the foundations for the subsequent
development during the 1960s (Cho & Kim, 1991, p.13).
In 1953, when the post war reconstruction began, about 90 percent of gross
fixed capital formation (fixed investment) had been financed by foreign saving,
which was equivalent to 6.6 percent of the GNP of the same year (Kim & Kim, 1994,
p.11). There is no doubt that the source of foreign saving of that period was ODA.
“Both the reconstruction and the stabilization programs undertaken during this period
could not be carried out if there had not been massive aid from the U.S. and the UN”
(Kim and Kim, 1994, p. 12). During the post Korean War reconstruction period
(1953-57), it was the mass inflow of aid (annually on average about 10 percent of the
then Korea’s GNP) from the USA, other friendly countries and international
organizations that enabled the Korean economy to recover from the damage of
Korean War within a short period of time. By 1957, the Korean economy had largely
recovered (Economic Planning Board/EPB 1962, pp. 9, 26-27). As can be seen from

42
Table 2.2 above, from 1953 to 1973, for twenty-one years, the average annual inflow
of ODA to South Korea from USA alone was U.S.$ 238 million.
For the eight-year period (1953-1960) following the end of the Korean War,
on average 57.6 percent of Korea’s gross capital formation had been financed by a
foreign aid program.
During the eight years period between 1953 and 1960, government and private
consumption expenditure was equivalent to 94.4 per cent of the gross national
product, gross capital formation to 13.2 per cent. That portion of national
expenditure 7.6 per cent in excess of the gross national product was covered by
a corresponding import surplus financed by foreign aid programs (EPB, 1962,
pp. 26-27).
Even during the pro “self-sustained economic growth” period of president Park
Chung Hee (1961-1979), Korea didn’t deny the importance of foreign ODA in its
economic development. The primary objective of President Park’s government was
to find an external means of escaping the vicious circle of underdevelopment
(Sakong, 1993,p. 95). This objective was manifested in Korea’s First Five Year Plan
(1962-1966). Out of the total funds required for investment for the First Five Year
Plan period, 47 percent was to come from foreign donation, mostly from the United
States; about 19 percent from foreign borrowing in the form of intergovernmental
(concessional) or private loans or private foreign direct investment, and the
remaining 34 percent was to come from domestic saving (Nam, 1997, p. 23). Not
only in area of investment but also in the area of required foreign exchange for
imports, which included consumption and necessary inputs for production, the
emphasis was put on the foreign donation for the First Five Year period. During the
period between 1963-1966, more than 38 percent (about US$1.8 billion) of the
foreign exchange required for the Korea’s imports of goods and services was to come
from foreign donation and only 15 percent from domestic sources (Nam, 1997, p.
23).

43
2.3.2 The Role of ODA in Imports
The financing of imports was one of the major contributions of ODA to
Korean’s economic development. ODA, which was mostly provided in the form of
grants, financed more than 70 percent of the Korea’s imports during 1953-1960
(Sakong, 1993, p. 96). These imports provided a large number of items that would
otherwise have been unavailable or extremely scarce in Korea during that time. The
composition of ODA financed imported commodities during the period of 1953-1960
included, but is not limited to, machinery, transport equipment, basic metal products,
coal and petroleum products, basic chemicals, minerals, fertilizers and cement
(Krueger, 1979, pp. 69-70). It should be recalled that before 1950, Korea also
received foreign aid financed imports which included automotives, building
materials, chemicals and dyestuffs, communications, education supports, fishing
industry supplies, highway and railway construction equipment, and power and light
related equipment.
In addition, the counterpart funds that were generated from the selling of aid
financed imported commodities in the domestic market financed over half of the total
general government expenditures during 1953-1960 (Kim & Kim, 1994,p.13-14).
This means that in the 1950s, the domestic regular sources of government revenues
were not developed in Korea and the government relied heavily upon ODA to
finance most of its expenditures. In 1957, for instance, counterpart funds constituted
53 percent of government revenues, whereas domestic regular sources, mostly taxes,
constituted only about 34 percent of these revenues (Krueger, 1979, p.75). In 1960s
also, counterpart funds continued to be used to provide the domestic component of
financing development projects. Since the decision of allocating a counterpart fund
naturally involves the donor, it does not give a free hand to a recipient government.
The case of South Korea was not an exception to this general fact; the American

44
government participated in decisions as to how counterpart funds should be
expended.
Table 2.5: The Role of ODA in Imports of Goods and Services of Korea, 1953-73
Unit Value: US$ millions
Year Total
Imports
Aid Financed
Imports
Total
Imports
as share
of GNP
Year Total
Imports
Aid Financed
Imports
Total
Imports
as share
of GNP
Total % Total %
1953 354.4 191.8 54.1 9.8 1964 404.4 42.6 35.3 13.5
1954 243.3 149.4 61.5 7.4 1965 463.4 135.5 29.2 15.9
1955 341.4 232.8 68.2 10.0 1966 716.4 143.6 20.0 20.3
1956 386.1 319.9 82.9 13.2 1967 996.2 119.2 12.0 22.4
1957 442.2 374.0 84.6 12.0 1968 1,462.9 125.7 8.6 25.9
1958 378.2 311.0 82.2 10.8 1969 1,823.0 120.5 6.6 26.0
1959 303.8 210.7 69.4 10.3 1970 1,984.0 161.2 8.1 24.0
1960 343.5 231.9 67.5 12.7 1971 2,394.3 105.6 4.4 26.5
1961 316.1 196.8 62.9 14.9 1972 2,522.0 21.7 0.9 25.6
1962 421.8 218.5 51.8 16.6 1973 4,240.3 0.0 0.0 33.5
1963 560.9 232.6 41.5 15.8 Total 21,096.6 3,645.0 17.3
Source: Sakong, Il. (1993)., Korea in the World Economy, Washington, DC: Institute for International
Economics. pp.100 -101.
2.3.3 The Role of ODA in Investment
Korea received a great deal of its total foreign aid, more than 70 percent,
between 1945 and 1960 (Sakong, 1993, p.96). With its ODA receipts Korea made
substantial investments in important sectors such as coal mining, glass, cement,
fertilizer, and electric power generation and transmission, in reconstruction of
educational and medical facilities as well as in other basic industries and
infrastructure (Sakong, 1993, p.99). Sohn, Yang and Yim (1998) state that the total

45
amount of aid funds used for the reconstruction of industrial infrastructure, social
overhead capital, and production facilities from 1953 to 1960 was U.S. $1.8 billion
(p.15).
Foreign aid and other sources of foreign capital continued to play important
role in Korea’s economic development during its rapid economic growth period,
notably in 1960s and 1970s. Yoon Je Cho (1998) summarized this as follows:
Economic growth averaged 8.2 percent during 1962-1982. Had investment
depended totally on domestic saving, it is estimated that the average growth
rate during the same period might have been only 4.9 percent, with remaining
3.3 percent coming from foreign capital (…). Thus, Korean economic
development was predicated heavily on foreign saving (p.7).
However, as the conditions of the economy and the living standards of the Korean
people improved through time and as domestic saving increased, the gap between
saving and investment had continued to narrow, the role of foreign capital, especially
the role of ODA in Korea’s investment, dwindled. For instance, when we see the
inflows of foreign capital in general, for a period between 1962 and 1990, the
amount was less than 10 percent of gross fixed capital formation (OECD, 1996, p. 4).
In 1960s and 1970s, even though the Korean domestic saving rate showed a
significant increase from 3 percent of GNP in 1962 to 28 percent of GNP in 1979
(investment also increased from 13 percent of GNP in 1962 to 36 percent of GNP in
1979) (Nam, 1997, p.2-3), this couldn’t undermine the role of ODA in the economic
development of Korea. In short, it can be said that foreign saving helped Korea’s
economic growth, particularly during its initial stage of the economic development
and contributed to the take-off and fast growth of the economic development of the
country. ODA, commercial loans and direct investment together financed about 41.8
percent of the gross domestic capital formation of South Korea during the period of
1965-1970(Choo, 1972, p. 18).

46
2.3.4 The Role of ODA in Economic Policies
Besides financing economic development activities and human resource
development, the contribution of ODA to Korea was influencing Korean economic
policies in a variety of ways. According to the bilateral agreement signed on
December 10, 1948 between the governments of South Korea and the United States
concerning the provision of aid, the U.S. government agreed to give aid in the areas
of finance, resources, and technology to South Korea upon its request. In return, for
receiving aid, the South Korean government agreed to adhere to eight general
principles. These eight general principles were, policies such as reduction of
expenditures and increase of revenues to have balanced budget. Out of these eight
general principles, fifteen subsidiary principles for economic stabilization came out
with the mutual consent of both governments and these subsidiary principles focused
on fiscal, financial, and monetary stabilization (Kim & Whang, 1997, p.241).
The Korean political and economic policies during the 1950s and 1960s were
highly influenced by the ideologies and attitudes of its donors, mainly by its single
most important donor, the United States. The U.S. officials influenced the decisions
of the Korean government by threatening that they would reassess the economic
assistance to Korea unless required measures were taken. For instance, in April 1950,
the then U.S. Secretary of State, Dean Acheson, sent a formal memorandum to the
government of South Korea advising that the U.S. economic assistance would be
reassessed unless measures were taken to control inflation (Krueger, 1979, p. 27).
In addition to shaping the political and economic system of Korea through its
advisors, the U.S. also tightly monitored their implementation through its aid mission
in Korea.
In fact, all major economic policy measures for the country [Korea],
regardless of their direct relationship to the U.S. assistance, were jointly
determined by both the Korean government and the U.S. aid mission during
this period [1953-1960]. The Combined Economic Board created in

47
accordance with the “Agreement between the Republic of Korea
Government and the Unified Command Concerning Economic
Coordinating”(signed in May 1952) provided the channel for regular policy
debates between the two sides and joint decision-making. Accordingly it is
really not clear which parts of the policies adopted during this period
reflected the position of the Korean government (Kim & Kim, 1994, p.15).
The American policy advisory assistance gave a chance to Korean policy makers to
borrow American liberal policy lessons and mix them with the lessons they borrowed
from prewar Japan, which encouraged the strong government involvement in the
economy. This helped Korean policy makers to balance these two ideologies and use
them for the eventual economic development of the country (Cho, 1998, p.5).
Up to January 1962, a time when Korea launched its first economic
development plan, Korea had no clear economic policy and implementation strategy
for building a self-reliant economy. Rather, the focus of the government was to
maximize foreign aid by taking ad hoc measures.
In the first 15 years following the liberation, the country was not endowed
with the basic preconditions on which its development strategies and policies
might be formulated and implemented for a self-supporting economic growth.
Accordingly, it did not have any clear strategy of development in those years.
It was only important for the country to maximize the volume of foreign aid
recipients for subsistence, the reconstruction of war damage, and the
enhancement of a self-defense to prevent any new aggression from the North.
Having almost completed the postwar reconstruction with the help of massive
U.S aid by the early 1960s, however, the country adopted development
strategies and policies suitable for the economy and has consistently followed
them over time. As a result, it has achieved a sustained growth and structural
change since the early 1960s, showing some unique pattern of development
(Kim & Kim, 1994, pp.50-51).

48
The military government’s assumption of power in 1961 in Korea coincided
with U.S. decision to give more economic development loan assistance (concessional
loan) rather than more grant assistance to Korea, based upon the U.S. Foreign
Assistance Act of 1961. Furthermore, the U.S. government threatened the military
government of Korea to reduce aid if the generals in power in Korea did not move
back toward democratization. Those developments made the Korean leadership think
about making hard decisions about its continuing dependence on U.S. aid and finding
alternative sources of foreign exchange—mainly foreign borrowing. “The U.S.
government decided to rely on development loans than on grant-in-aid. This change
in U.S. aid policy and the realization that U.S. aid would gradually decline must have
contributed toward Korea’s adoption of a new, outward-looking development
strategy and a policy of greater reliance on foreign borrowing” (Sakong, 1993, p.
102). Kwang Suk Kim also confirms the influence of decision taken by the U.S.
government regarding aid to Korea on the economic policy of Korea.
The military government [of Korea] started… to take positive measures to
induce foreign capital inflows. This change in government policy was
attributable to three factors: (1) the U.S. government’s announced policy to
reduce its grant-aid to Korea after 1960, (2) the U.S. aid policy to increase the
share of development loans in its aid package, and (3) the increased foreign
capital requirements for the ambitious development projects stipulated in the
first-year plan (Kim, 1994, pp. 10-11).
The U.S. development agencies called Korea a “bottomless pit”(Cho, 1998,
p.6) and were not willing to continue giving ODA funds of free grants, but wanted to
concentrate on concessional development loans. Therefore, the Korean government
had no other alternative except adjusting its position according to the situation.
Accordingly, the Korean government introduced the Law for Payment Guarantee of
Foreign Borrowing in July 1962 to facilitate foreign borrowing by enhancing the
solvency of Korean borrowers in international financial markets. It also streamlined

49
relevant programs and institutions to promote and to allocate borrowing rights more
efficiently. As a result, the Bank of Korea (BOK) began to provide repayment
guarantees for foreign loans (Nam & Kim, 1997, p.148). This shows how donors
influence the policy of the recipient country not only by giving aid but also by
reducing, freezing and ceasing aid assistance. When the Korean government shifted
its focus from maximizing foreign aid to getting foreign borrowing, its main lenders
were the USA and Japan-the two countries that have had a special relationship with
Korea and had given it ready access to foreign finance. The influence and
participation of U.S. government in major policies of Korea reduced, if difficult to
say totally halted, with a reduction and final closure of U.S. economic aid to Korea.
The influence of the USAID on Korea’s major economic policy decisions
continued into the 1960s. At times, AID served as a source of ideas or influence
and proposed important policy changes. Major economic policies were usually
discussed with AID officials before being adopted, and they participated in
policy making. …. The influence naturally diminished as U.S. aid itself was
reduced (Sakong, 1993, p.99).
In the early stages of Korea’s development, policy advice from its donors and
lenders had contributed to important government decisions and policies. During that
period “…Korean bureaucrats felt compelled to produce results or to deliver
outcomes in terms of good economic performance. As a result, valuable outside
advice was never wasted, regardless of whether it was from private or public, or from
multilateral or bilateral sources” (Sakong, 1993, p.137). One example of major
decisions taken based on the policy advice of donors was the financial sector reform
of 1965, which increased interest rates to control inflation that was running at 25
percent in 1963-64 and to raise the very low savings rate that averaged only 10
percent of GDP in 1963-64. These financial reform measures were taken mainly
because of the pressure made by United States Operations Mission (USOM) on
Korean government to control inflation (Perkins, 1997, p.78). This external advice

50
helped Korea in its macroeconomic management and structural adjustments. The
Korean government used this advice, particularly those from multilateral institutions,
as a kind of sounding board for its ideas to persuade the public to accept painful
economic adjustments (Sakong, 1993, p.137).
2.3.5 Role of ODA in Human Resource Development
ODA played an important role not only in Korea’s import and investment but
also in knowledge transfer and human resource development. Between 1951 and
1972 alone, the U.S. government sent approximately 1, 900 experts to Korea and
gave a training opportunities in the U.S. for more than 4, 000 Koreans, by covering
all the necessary expenses (Sakong, 1993, p. 128).
During its HCI promotion period of 1970s, Korea was one of the top five
recipients of Japan's technical assistance (JICA, 1999). During that time, the
Japanese government had borne all costs for dispatch of Japanese experts to Korea
and for accepting of Korean trainees to Japan. This technical assistance contributed
to solving the shortage of skilled manpower of Korea, which had been one of the
constraints during the HCI Drive and to laying a base for industrialization.
Korea also benefited from human resource development programs of UN
agencies. From 1951 to 1982, about 15,000 Koreans participated in UN agencies
sponsored training programs and approximately 2,300 foreign experts were sent to
Korea through different UN agencies’ programs (Sakong, 1993, p. 128). This
technical assistance must have contributed to the economic development of Korea. In
addition to this, South Korea is an example of a country that, with ODA support,
built both pillars of economic development: it invested heavily in education and
human development while also greatly improving the environment for economic
growth and entrepreneurship (Goldin, Rogers & Stern, 2002, p. xvii).

Role of ODA (Aid)

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