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South Korea in the Fast LaneEconomic Development and Capital Formation$

Young-Iob Chung

Print publication date: 2007

Print ISBN-13: 9780195325454

Published to Oxford Scholarship Online: September 2007

DOI: 10.1093/acprof:oso/9780195325454.001.0001

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(p.392) Appendix 9.1: The Value of Foreign Aid

(p.392) Appendix 9.1: The Value of Foreign Aid

South Korea in the Fast Lane
Oxford University Press

Some observers believe that the real value of foreign aid was understated in South Korean currency. This point is especially important when one is comparing the contribution of foreign aid to domestic investment and GNP in South Korean currency (won). There is at least one reason to believe that the actual ratios of U.S. economic aid to GNP in the early years, especially before 1961, were significantly higher than those based on the official statistics. The reason is that the official exchange rates valued the dollar considerably below market levels. This situation led to calculating the value of U.S. aid in Korean currency at lower levels, thereby depressing the ratios. In 1956, for instance, on the basis of the official exchange rate of 500 won to $1, the ratio of foreign aid to GNP was 13.4 percent. But on the basis of a realistic free‐market exchange rate of 800 won to $1, the ratio is about 20 percent. Soon after 1961, however, this type of bias was minimized as a result of the setting of the official exchange rate nearly at the market rate.

Since economic aid figures are available only in U.S. dollars, not in Korean currency, and national income figures for Korea from the early years are reported in Korean currency, it is necessary to convert economic aid values into Korean won. Since the exchange rates of South Korean currency were overvalued while U.S. dollars were underrated, especially in the 1950s and the 1960s, the real value of a large share of the foreign aid in South Korean currency was obviously understated. The tendency to “down‐value” foreign aid in relation to GNP was probably offset to a considerable degree, though not to the full extent, by the overvaluing tendencies of economic aid. When adjustments are made, the relative contribution of foreign aid to the Korean economy before 1961 was still greater than the figures shown in the calculations based on the official data.

Other observers believe that the “real” worth of foreign aid was overstated by applying higher prices in evaluating tie‐in‐aid goods instead of applying their (p.393) prevailing market prices. Most of the goods and services imported, probably over 90 percent, were the tie‐in‐aid goods from the United States, while most of the other relatively small amount was purchased from Japan. The importation of goods and services from the United States was mandated by the provisions of aid‐in‐kind and tie‐in aid. It seems clear that the prices applied to these imported aid goods and services were higher than those that prevailed in the international market (Joong Ahng Ilbo, August 10, 1967).

Tie‐in aid, which was based on the “buy‐and‐ship‐American” policy of the grantor country, not only limited the recipient country's choice as to the most suitable sources of supply but also forced it to buy almost exclusively from the United States, especially after 1961, at prices higher than those in the world market (Controller General Joseph Campbell's report in the New York Times, June 26, 1957, 10). The value in dollars of surplus commodities transferred under the aid program of Public Law (PL) 480, for example, is generally thought to have been substantially above the “real” export market value of the commodities. It has been estimated that, on average, South Korea paid 10 to 25 percent higher prices for U.S. goods and services (Nihon Keizai Chosa Kyogikai 1964: 207–8; R. E. Asher 1961: 59). Some have suggested that the tying of aid may have increased costs by as much as 20 to 40 percent, and in extreme instances may have even resulted in price differentials of 100 percent or more (R. M. Stern 1966: 16–17).

The second factor that caused the dollar value of economic aid to be higher than real worth was that a part of the proceeds from the sale of commodities given to South Korea under PL 480 was taken by the United States to cover its administrative costs and other expenses that would ordinarily have required expenditures in Korean currency. To the extent that the proceeds were spent by the United States for its own purposes, they should not be considered aid to South Korea. It is generally believed that about 5 percent of the proceeds were used by the United States for this purpose. Third, the real worth or present discounted value of any long‐term loans would be less than the present value of grants.

Finally, some have alleged that foreign aid was not efficiently nor effectively carried out. It has been argued that there was a “significant” amount of waste (Nihon Keizai Chosa Kyogikai 1964: 207–8; R. E. Asher 1961: 59; Controller General Joseph Campbell's report in the New York Times, June 26, 1957, 10). One report, for instance, observed that “in Korea tens of millions of dollars of aid money are being wasted outright.” One of the causes of the waste was “the simple failure to apply common sense business methods” (U.S. Congress 1958: 734). U.S. government officials complained that there were “inefficiencies” and “deficiencies” in American handling of the program and that exports of U.S. goods to South Korea had suffered from the ineffective use of aid dollars. Among others, two reports may be cited: Controller General Joseph Campbell (New York Times, June 26, 1957, 10); and Walter P. McConaughy, Assistant Secretary of State for Far Eastern Affairs (U.S. Congress 1960: 552–53).

Another area of alleged waste was related to U.S. aid missions. All parties connected with the economic aid programs, both the grantor and grantee countries, expressed their dissatisfaction in that the aid programs were too heavily staffed with the expensive grantor country's personnel (U.S. Congress 1961: 200; U.S. Senate (p.394) 1963b: 14; South Korean President S. Rhee's statement to the press, New York Times, December 15, 1953, 2). Some Korean officials protested that aid was always accompanied by a large influx of American advisers and experts (W. D. Reeve 1963: 123). The South Korean government also chided the aid missions for their excessive travel and administrative expenditures.

It is difficult to corroborate all of these allegations, particularly the latter, but subsequent policy changes intended to ameliorate these concerns seem to bear out to some degree the validity of these charges. In 1962, for instance, a new, economy‐minded aid mission head slashed the number of U.S. staff from 297 to 144 “without any serious handicap to the mission's operations” (U.S. Congress 1963b: 52). Some fragmentary data available also tend to support the above contention. Money spent for foreign technicians in 1960, for example, was reported to have been equivalent to 31 percent of project investments supported by the economic aid program. This would have come to represent over $25,000 per person, when the annual salary of a technician with the same qualifications in the United States probably commanded no more than $10,000 per year.

Another aspect of the ineffectiveness of the aid programs was corruption and illegal practices. The failure to enforce the “elementary rules of honest administration” is thought to have been one of the causes. The most frequent criticism is that many funds were siphoned off by corrupt officials (U.S. Congress 1957: 734; A. M. Rosenthall, “U.S. Acts to Tighten Efficiency of South Korean Aid Program,” New York Times, March 26, 1961. Although there are no accurate data available, undoubtedly some small fortunes were made out of the aid programs, as demonstrated by the high standards of living maintained by some officials supposedly receiving below‐subsistence‐level salaries. In all fairness, however, the corrupt practices involved with the aid programs cannot be said to have differed much from ordinary business practices in the United States. It is possible and probable that the mass media exaggerated the extent of the corruption. To date there has been no evidence proving that many officials amassed enormous personal fortunes. A rumor widely circulated as truth involving the former president Syngman Rhee, for instance, can be cited as a case in point. It was generally believed in the 1950s that President Rhee and his wife accumulated a huge fortune through bribes received from businessmen and that they deposited many millions of dollars in a Swiss bank. But all the evidence seems to indicate that they had no tangible assets other than a house at the time that they were exiled to Hawaii when his regime was overthrown. As a matter of fact, the Austrian‐born Mrs. Rhee was left penniless and had to return to live with her adopted son in Korea a few years later, according to press stories.