South Korea Aid, Loans, and Investment
Sixty-three-story Daehan Life Insurance Building, a popular
tourist attraction and one of the tallest buildings in Asia
Courtesy Oren Hadar
Foreign economic assistance was essential to the country's
recovery from the Korean War in the 1950s and to economic growth
in the 1960s because it saved Seoul from having to devote scarce
foreign exchange to the import of food and other necessary goods,
such as cement. It also freed South Korea from the burden of
heavy international debts during the initial phase of growth and
enabled the government to allocate credit in accordance with
planning goals
(see
The Post War Economy
, ch. 1). From 1953 to
1974, when grant assistance dwindled to a negligible amount, the
nation received some US$4 billion of grant aid. About US$3
billion was received before 1968, forming an average of 60
percent of all investment in South Korea. As Park's policies took
effect, however, the dependence on foreign grant assistance
lessened. During the 1966-74 period, foreign assistance
constituted about 4.5 percent of GNP and less than 20 percent of
all investment. Before 1965 the United States was the largest
single aid contributor, but thereafter Japan and other
international sponsors played an increasingly important role.
Apart from grant assistance, other forms of aid were offered;
after 1963 South Korea received foreign capital mainly in the
form of loans at concessionary rates of interest. According to
government sources, between 1964 and 1974 such loans averaged
about 6.5 percent of all foreign borrowing. Other data suggested
a much higher figure; it seemed that most loans to the government
were concessional, at least through the early 1970s.
International Monetary Fund
(IMF--see Glossary)
data showed that
imports financed through such means as foreign export-import
loans with reduced rates of interest totaled 11.6 percent of all
imports from 1975 to 1979. The aid component of these loans was
only a fraction of their total value.
During the mid-1960s, South Korea's economy grew so rapidly
that the United States decided to phase out its aid program to
Seoul. South Korea became increasingly integrated into the
international capital market; from the late 1960s to the mid-
1980s, development was financed with a series of foreign loans,
two-thirds of which came from private banks and suppliers'
credits. Total external debt grew to a high of US$46.7 billion in
1985. Positive trade balances in the late 1980s led to a rapid
decline in foreign debt--from US$35.6 billion in 1987 to an
expected US$23 billion by 1991. Account surpluses in 1990 were
expected to enable Seoul to reduce its foreign debt from its 1987
level of about 28 percent of GNP to about l0 percent by 1991.
United States assistance ended in the early 1970s, from which
time South Korea had to meet its need for capital investment on
the competitive international market and, increasingly, from
domestic accounts. The government and private industry received
funds through commercial banks, the
World Bank (see Glossary),
and other foreign government agencies. In the mid-1980s, total
direct foreign equity investment in South Korea was well over
US$1 billion.
The fact that South Korea was so dependent on foreign trade
made it very vulnerable to international market fluctuations. The
rapid growth of South Korea's domestic market in the late 1980s,
however, began to reduce that dependence. For example, a dramatic
rise in domestic demand for automobiles in 1989 more than
compensated for a sharp drop in exports. Furthermore, while
Seoul's huge foreign debt left it vulnerable to changes in the
availability of foreign funds and in international interest
rates, Seoul's economic and debt management strategy was very
effective.
The South Korea's philosophy concerning direct foreign
investment had undergone several major changes tied to the
changing political environment. Foreign investment was not
allowed through the 1950s. In 1962 the Foreign Capital Inducement
Act established tax holidays, equal treatment with domestic
firms, and guarantees of profit remittances and withdrawal of
principal. Despite the provisions of the act, there was little
foreign investment activity until after the establishment of
diplomatic relations between South Korea and Japan in 1965.
Seoul had to mobilize both external and internal sources when
it launched its First Five-Year Economic Development Plan in
1962. The Foreign Capital Inducement Act was amended in 1966 to
encourage a greater inflow of foreign capital to make up for
insufficient domestic savings. A rapid inflow of investment
followed until 1973, when the act was changed to restrict the
flow of investments. Beginning in the late 1970s, however, the
government gradually began to remove restrictions as domestic
industries began to grow and needed to be strengthened to cope
with international competition. But until the early 1980s, South
Korea relied heavily on borrowing and maintained a somewhat
restrictive policy towards foreign direct investment.
Donald S. Macdonald has pointed out that under the
liberalization policy, restrictions on foreign direct investment
were eased in 1984 and 1985. Seoul changed its control policy on
foreign investment from a "positive list" to a "negative list"
basis, which meant that any activity not specifically restricted
or prohibited was open to investment. An automatic approval
system was introduced under which all projects meeting certain
requirements were to be immediately and automatically approved by
the Ministry of Finance.
Seoul twice revised the negative list system after its
initial introduction--first in September 1985 and again in April
1987--to open more industrial sectors to foreign investors. In
1984 there were 339 items, or 34 percent of the 999 items on the
Korean Standard Industrial Classification, on the negative list.
As of July 1987, there were 788 industrial sectors open to
foreign investment. In the manufacturing sector, 97.5 percent of
all industries (509 out of 522) were open to foreign investment.
In December 1987, Seoul announced a policy to liberalize the
domestic capital market by 1992. The program called for
liberalizing foreigners' investment funds, offering domestic
enterprises rights on overseas stock markets, and consolidating
fair transaction orders. Seoul planned to allow direct foreign
investment in its stock market in 1992.
Of the total direct investment in South Korea from 1962 to
1986, which amounted to US$3.631 billion, Japan accounted for
52.2 percent and the United States for 29.6 percent. In 1987
Japan invested US$494 million, or 47 percent of the total foreign
investment of US$1.1 billion. Japan invested mainly in hotels and
tourism, followed by the electric and electronics sector. Direct
investment from the United States showed a remarkable increase
since the early 1980s, accounting for 54.4 percent of the 1982-86
total investment. The United States invested a total of about
US$255 million, or approximately 24 percent of the 1987
investment. Cumulative United States investment was about US$1.4
billion by 1988.
There was a dramatic rise in foreign investment in the late
1980s. Approvals of foreign equity investments reached an all-
time high of US$1.283 billion in 1988, a 21 percent increase over
1987. As in previous years, approvals for Japanese investments
were the dominant factor; they totaled US$696 million (up 41
percent from 1987), followed by United States investors with
US$284 million (up 11 percent), and West European sources, US$240
million (up 14 percent). Investment approvals in the service
sector doubled in 1988 to US$561 million, which included two
large Japanese hotel projects totaling US$344 million. Investment
approvals in the manufacturing sector, however, declined from
US$775 million in 1987 to US$710 million in 1988.
South Koreans began investing abroad in the 1980s. Before
1967 there was virtually no South Korean investment overseas, but
thereafter there was a slow growth because of Seoul's need to
develop export markets and procure natural resources abroad. In
the 1970s, South Koreans invested in trading, manufacturing,
forestry, and construction industries. By the early 1980s, a
sharp reduction in development projects in the Middle East led to
a decline in South Korean investment there. Mining and
manufacturing investments continued to grow throughout the
decade. In 1987, out of a total South Korean overseas investment
of US$1,195 million (745 projects), US$574 million was invested
in developed countries and the remaining US$621 was invested in
developing countries.
One of the most noticeable economic achievements in the 1980s
was Seoul's reversal of the balance of payments deficit to a
surplus. This improvement was largely attributable to strong
overseas demand for South Korean products and to the reduction in
expenditures for oil imports. In addition, the "invisible" trade
account (monies from tourism and funds sent home by nationals)
had improved considerably in the late 1980s because of temporary
increases in revenue from tourism, receipts from overseas
construction, and structural decreases in interest payments (see
table 5, Appendix).
South Korea's success in achieving a balance of payments
surplus, however, was not without some drawbacks. It led to harsh
trade disputes with the United States and other developed
nations, as well as to inflationary pressures. To cope with these
problems, Seoul had to modify its enthusiastic promotion of
exports in favor of a policy restraining trade surpluses within
reasonable limits.
An important measure restraining the growing foreign trade
imbalance between South Korea and the United States was Seoul's
decision to revalue the won against the United States dollar. A
stronger won made American imports cheaper, increased the cost of
South Korean exports to the United States, and slowed, but did
not reverse, the growth in the South Korea-United States trade
deficit as of 1989. The United States pressed for further
appreciation of the won in 1989. In April 1989, the United States
Department of the Treasury accused South Korea of continued
"manipulation" of the South Korean currency to retain an
artificial trade advantage. South Korean officials and
businesspeople, however, complained that the already rapid
appreciation of the won was slowing economic growth and
threatening exports. In May 1989, South Korea avoided being
called an unfair trader by the United States and forestalled
possible United States trade sanctions, but the nation paid a
high price by promising to open up its agricultural market, ease
investment by foreigners, and remove many import restrictions
(see
table 6, Appendix).
Data as of June 1990
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