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Borrower to Donor in One Generation
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International finance institutions like ADB were very useful...they were helpful as an objective sounding board when I had to make tough decisions
At the Jongmyo shrine in Seoul are said to rest the spirits of the Republic of Korea (Korea)’s kings and queens dating from the Joseon dynasty. The royals would surely be impressed with the achievements of their modern-day successors, who transformed what was once known as the
"Hermit Kingdom" into one of the world’s largest economies.
Remarkably, much of the country’s economic progress was achieved in a single generation. When Korea became a founder member of ADB in 1966, it had one of the lowest per capita incomes in the world. Only 30 years later, in 1996, it joined the Organisation for Economic Co-operation and Development, dubbed the "rich nations’ club."A year later, it stumbled during the Asian financial crisis, but determinedly pursued a course of reform and today boasts a healthy financial sector and has its sights on the next goal of an annual per capita income of $20,000.
Twice in a single generation, Korea has experienced an economic transformation, and each time ADB has played a modestly catalytic role.
"International finance institutions like ADB were very useful...they were helpful as an objective sounding board when I had to make tough decisions"
Il Sakong,
Minister of Finance in the late 1980s
Significantly, its experience holds lessons for other Asian countries. One is the active role of women in the economy, especially in the growth of manufactured exports. Another is that infrastructure was a key ingredient—roads transformed a fragmented, valley economy into a national market.
The rapid rise owes much to political will, economic policy, and a little luck. After the Korean War destroyed its infrastructure and agricultural production, Koreans faced starvation without heavy external assistance. In 1953, its annual per capita income was less than $70. The national mood was one of despair and hopelessness.
Growth began to take off from the early 1960s. The Government’s efforts to concentrate political and economic forces resulted in the emergence of a Korean phenomenon—family-run conglomerates called chaebols—that spearheaded industrialization and an export drive.
"Twenty years ago, it was hard for small- and medium-sized enterprises to get foreign loans. The loan made it possible to expand our production facilities"
Dong-Hyo Song,
chairman Korea Circuits
The timing was fortunate as international conditions, including the Viet Nam conflict, favored Korea’s export drive.
Factories sprouted, filled with young women mainly from the countryside, and production lines began churning out soft goods such as shirts, shoes, wigs, dried squid, and fluffy toys.
To move up into heavy industry, however, Korea needed infrastructure, foreign exchange, and technological expertise—and that is where ADB helped.As Il Sakong, Minister of Finance in the late 1980s, recalls, "International finance institutions like ADB were very useful. They financed the physical infrastructure that paved the way for private enterprises. For policymakers such as myself, they were helpful as an objective sounding board when I had to make tough decisions. The result was that Korea industrialized, and we were able to ‘graduate’ in 1988, enabling ADB to use its limited resources to help other countries."
To ship goods overseas, Seoul needed a highway to nearby Incheon Port. In 1968, ADB’s first loan to the country for $6.8 million helped finance the Seoul-Incheon Expressway. Workers labored daily in three shifts to finish the 29-kilometer, four-lane road and its opening sparked rapid urban development, with rice fields giving way to industrial enterprises.
Expanded and upgraded over the past three decades, the original expressway is barely recognizable today. Standing on the rooftop of the Korea Highway Corporation offices, Vice-President Seung-Jin Yoon extends an arm in a sweeping gesture. "When I arrived 25 years ago, the area between Seoul and Incheon was largely farmland. Now it’s one big metropolis and even with three expressways we have traffic jams at commuting hours," he says.
Nearby, a few farmers are tending cabbages and radishes to be used for kim chee, the Korean staple of pickled vegetables.
Ultra-modern airport
Recalling the times before the expressway was built, 58-year-old farmer Ho-Ann Lee says, "The road was bad and it was hard to get goods to the market. Since the expressway, we can take more products to the market and it’s easier for us to go back and get more stock if we run out." Another major infrastructure project that ADB supported was the expansion of Incheon Port with two loans totaling $70 million. Incheon had for centuries remained little more than a fishing village as its port was ill equipped to handle tides that made it difficult for large vessels to dock. Cargo vessels had to anchor offshore and load and unload goods through lighters that plied back and forth in a time-consuming exercise.
To overcome this, the port needed an artificial harbor, with breakwaters and lock gates. It was a daunting engineering challenge, recalls Byung-Gu Yoon, Director-General of Incheon Port Construction Office. "Incheon is not a natural harbor because of the range of its tides, but the development of the port became a high- priority project. Thousands worked day and night for eight years to make the project a reality."
His colleague, director Hee-Sun Moon, adds that "ADB provided loans when the economy was going through difficult times. It helped build the breakwaters and some facilities that made the port operational."
The completion of the inner harbor in 1974 opened the gates for a flood of exports—ships, steel, and consumer goods, followed by cars, computers, and microchips.
As foreign trade soared from $100 million in 1964 to $10 billion by 1977, Incheon became the country’s second biggest international port after Pusan.
Affluent heritage
Incheon Mayor Sang-Soo Ahn recalls that, when he was growing up in the port, it was customary for many parents to send their children to school in Seoul. He says, "In the 1960s, I would have a 2½ hour train ride from Incheon to high school in Seoul. Now we have several expressways and the drive takes about 45 minutes. We also have a modern port and an international airport. We have become a logistical hub for northeast Asia."
Between 1968 and 1988, ADB provided Korea with 79 loans totaling $2.33 billion, two thirds of which supported the industrialization process through industry, development banks, energy, and transport.
Many still remember ADB’s support for small and medium industries. In a Seoul suburb, Dong-Hyo Song, Chairman of Korea Circuits Company, which manufactures printed circuit boards, recalls his company received an ADB loan equivalent to 50 million won in 1982.
Highway for exports
"Twenty years ago, it was hard for small- and medium-sized enterprises to get foreign loans," he says. "The loan made it possible for us to expand our production facilities and since then our sales and profits have multiplied 150-fold."
Aside from low-interest loans, Korea needed technological skills. Among the activities ADB financed to support this was a $33 million loan in 1978 to promote research and development, including setting up the Korea Institute of Machinery and Metals (KIMM).
These days, KIMM, based in Daejung, is involved in fields such as cyber engineering, microrobotics, and biomachinery. But manager Sa-Il Lee says, "The institute was founded to transfer technology through cooperation with international partners to strengthen Korea’s machinery technology. In earlier times, one industry that we helped was shipbuilding, for which we developed more efficient propellers and diesel engines."
With strong domestic savings and a balance-of-payments surplus, Korea ceased borrowing from ADB after 1988 but wanted to continue cooperation in other ways. In 1983, it had made its first contribution to ADB’s concessional window, the Asian Development Fund, and has since contributed over $137 million toward helping Asia’s poorest countries.
A printed circuit board manufacturer thrived with the help of an ADB loan
Ironically, however, in the 1990s the system of relationships between the Government, banks, and chaebols that had fueled its economic "miracle" now revealed serious weaknesses. Excess investment and capacity piled up, sending Korean debt into the stratosphere.
By 1997, some realized that Korea had to change into a more market-oriented economy as well as shift from export-based growth to a broader-based model. But by late 1997, after the Asian financial crisis had struck Southeast Asia, foreign investors and banks withdrew from the Korean stock market and pulled short-term loans. Banks failed and the won plummeted.
The International Monetary Fund and multilateral development banks were asked to provide an assistance package of $58 billion. An ADB team went to Seoul to discuss a $4 billion Financial Sector Program to reform the sector.
Recalls David Edwards, ADB mission leader at the time, "We arrived in Seoul and were looking at doing something in the financial sector when someone asked if we had seen this document. It was a blueprint produced by a presidential commission for turning a relationship-based system into a decentralized, market-based economy. It was just what we were looking for.
Skilled workers at the plant
"The economy had become so large and complex that the relationship-based system wouldn’t work anymore. Korea needed a decentralized, arm’s-length, market-based economy to take part in the modern world. Korea also needed a legal, regulatory, and institutional framework—and that’s what our financial sector program supported."
A new government ushered in an era of democracy that included social as well as economic and political restructuring.
By the end of its first year, the Government had liquidated 144 smaller financial institutions and nationalized two big banks in preparation for selling them to foreigners. It also oversaw the merger of 48 institutions and suspended the licenses for 59 others. Oversight was toughened and the chaebol were ordered to restructure along market lines and with lower debt ratios.
A year after the crisis, thousands of newly formed companies outnumbered bankruptcies in some cities.
Since then, Korea has been among the most serious in implementing reforms and has drastically reduced its nonperforming loans.
Remarkably, while Korea has virtually no natural resources—70% of the peninsula is mountainous and barren—it owes its success to the determination of its people. "There are many reasons why Korea’s economic development has been so rapid," observes Byung-Nak Song, Professor of Economics at Seoul National University. "One is that Koreans place great value on education. We have one of the highest proportions of university students in the world. Secondly, Koreans have resilience and risk-taking capacity after much hardship. Thirdly, we are a homogenous people and this helps us work as a team to achieve national goals. Lastly, we are flexible due to having to deal with different climates and geographical conditions."
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