Foreign aid for postwar rehabilitation and economic reconstruction

Foreign Aid for Postwar Rehabilitation and Economic Reconstruction (1949 to 1960)
 
1 Overview
 
Much of the foreign aid that Korea received between the establishment of the First Republic and the end of the 1950s consisted of emergency relief and military and economic aid from the United States, which it provided to advance its own policy interests as well as ensure security over the Korean peninsula.

Korea began to receive aid from the United States via the Economic Cooperation Administration (ECA), a federal agency set up pursuant to the Foreign Assistance Act (enacted by Congress in 1948) to support the European Recovery Program, better known as the Marshall Plan, which was established in 1948 to offer comprehensive aid to European states in the aftermath of World War II.
            
The Korean War broke out just one year after the ECA’s foreign aid program for Korea was established. The war prompted Washington to shift from a bilateral approach to a more multilateral one centered on the United Nations (UN). It thus set up the Civil Relief in Korea (CRIK) fund and the United Nations Korea Reconstruction Agency (UNKRA) to facilitate Korea’s postwar rehabilitation and reconstruction processes.

 Strategic aid came to outdo and eventually replace humanitarian aid provided by the ECA after the ceasefire agreement on the Korean War was signed, due to the geopolitical significance that Korea held for the United States in the unfolding Cold War order. As Congress enacted the Mutual Security Act (MSA) in 1951, the Foreign Operation Administration (FOA) and the International Cooperation Agency (ICA) came to handle much of the strategic and security-related aid and grants provided for Korea.

In the meantime, Congress also enacted the Agricultural Trade Development Assistance Act (Public Law 480) in 1954, which led the governments of the United States and Korea to enter into an agreement on agricultural trade in 1955. Korea began to take out public loans with which it started to import grains and other varieties of agricultural produce from the United States.

 Korea is believed to have received USD 2.521 billion in total international aid and grants during this period. The figure includes the USD 92.7 million provided as Government and Relief in Occupied Areas (GARIOA) aid in 1949. However, grants and aid from the ECA and the ICA made up the majority of the aid received during this period, amounting to USD 1.809 billion together. Add to this the USD 158-million-worth of surplus agricultural produce and grains that Korea received or imported under Public Law (PL) 480, and the figure grows to USD 1.867 billion. Multilateral aid via the CRIK and the UNKRA amounted to USD 579 million.

Although Korea received aid from both bilateral and multilateral sources (the United States and the United Nations, respectively) during this period, the United States was in effect the almost sole donor to Korea during this period, as much of the multilateral aid consisted of resources and contributions from the United States.
 

(Unit: USD 1,000,000)
 

Note: The figures include the USD 92.7 million provided as GARIOA aid.
Source: Seo, et al.
 
 
2. ECA Aid for Economic Reconstruction
 
It was the Agreement on Aid between the Republic of Korea and the United States of America[1] that began the influx of American aid into Korea in 1949. The 12-article agreement formed an extension of the European Recovery Program that the United States launched in 1948, and the ECA that was set up to handle foreign aid under that program also handled much of the aid for Korea in the early days.

The United States accordingly set up the Economic Cooperation Administration Mission in Korea in January 1949 as part of this agreement. The Mission, a standing organization, absorbed the grant and aid programs from the GARIOA and provided support for energy and technology in the name of “ECA aid.” The US and Korean governments entered into another agreement to arrange and support the ECA aid.[2]

The overarching purpose of the ECA aid was twofold. First, it aimed to help Korea secure basic defense capacity and also achieve economic stability. Unlike the GARIOA aid of the past that consisted mostly of emergency relief in the form of consumer goods, ECA aid provided not only consumer goods, but also machinery and raw materials for Korea’s industrialization. The ECA agreement imposed strict terms on the introduction, management and control, utilization, and tracking of goods provided as part of ECA aid, and obligated the Korean government to take certain actions to ensure the stability and growth of the Korean economy.

ECA aid, which began in 1949 and amounted to USD 109 million in total, ground to a halt with the outbreak of the Korean War. Nevertheless, the aid, equal parts consumer goods (e.g., food, fertilizers, etc.) and capital goods (e.g., transportation vehicles and raw materials for manufacturing), provided much needed assistance for an extremely impoverished Korea.

The majority of the goods, machinery, materials and others provided in the form of ECA aid were resold on the Korean market. The proceeds were deposited into the Counterpart Fund Account at the Bank of Korea, set up as part of the agreement with the ECA, and were spent on items decided through consultations between the Korean and US governments.

The ECA aid requirement of a Korean economic recovery plan was satisfied in the form of the First Five-Year Production Plan Initiative, decided through consultations between the Korean government and the ECA Mission, and announced by the Prime Minister in his policy address to the National Assembly in April 1949.

The ECA aid, which began with the aim of promoting the self-sufficiency and reconstruction of the Korean economy in the long run, came to an abrupt end only one year later with the outbreak of the Korean War. Replacing it were the UN Forces dispatched to Korea and the multilateral aid designed to provide wartime relief and promote postwar rehabilitation.
 

3. UN Aid for Refugees and Postwar Rehabilitation
 
The UN Security Council following emergency meetings held at the outbreak of the Korean War and at the request of the United States passed three resolutions up to July 7, 1950. The first was its pledge to repulse North Korea’s attack; the second, its promise to dispatch international forces to the Korean peninsula to restore peace and stability; and the third, its pledge to provide the grants and aid required during and after the war.[1]

It was against the backdrop of these resolutions that the UN set up the Commission for the Reunification and Rehabilitation of Korea (UNCURK) in October 1950 to decide emergency relief to be provided during the war as well as measures for postwar reconstruction.

In the meantime, the Civil Relief in Korea (CRIK), an emergency relief organization, was set up with contributions from UN member-states and various international organizations. Thirty-six countries, including the United States, as well as nine international organizations, including the World Health Organization (WHO), the UN International Children’s Emergency Fund (UNICEF), the Red Cross, and the World Church Volunteers Corps, provided aid through the CRIK.

CRIK aid was funded by Sundry UN (SUN) aid which received financial contributions from UN member-states and international organizations, and by Supply for Korea Organization (SKO) aid which received financial support from the US Army. The UN Civil Assistance Command in Korea (UNCACK) handled the provision of aid based on the CRIK scheme. Korea received aid worth USD 457.4 million in total from the CRIK between 1951 and 1956, much of which was funded by the SKO.
CRIK aid consisted solely of goods for emergency relief, with 40.3 and 24.4 percent taken up by food and clothing, respectively. The aid also included a wide range of pharmaceutical products, farming equipment, and building materials.[2]

In order to provide refugee relief and aid postwar rehabilitation and reconstruction processes in both Koreas, the UN set up the UN Commission for the Unification and Rehabilitation of Korea (UNCURK) in October 1950, dispatching the UN Civil Affairs Team to the North. The UN also expanded the UN Public Health Department in the South into the UNCACK in December 1950.

 Moreover, the UN organized the UN Korean Reconstruction Agency (UNKRA)[3] early in the Korean War in case the war drew to an early conclusion and it became necessary to prepare for postwar rehabilitation and economic reconstruction. However, as the war dragged on, the UN focused more on providing emergency relief for civilians via the UNCACK.

Although the UNKRA was originally supposed to support the reconstruction of Korea’s industrial facilities and economy with USD 25 million earmarked for this purpose, serious reconstruction efforts did not begin until 1953, when the war officially ended in a ceasefire agreement. The Korean government also entered into the Agreement for a Program of Economic Assistance for Korea with the UN in May 1954, which became the grounds for, and directed, the reconstruction aid received from the UN afterward.[4]

Furthermore, the UN and other affiliated organizations prompted the South Korean government to establish the Five-Year Plan for Agriculture in Korea (Food and Agriculture Organization (FAO)), the Five-Year Plan for Health in Korea (WHO), and the Five-Year Plan for Education in Korea (UNESCO), among others. The UN then contracted Nathan Associates of the United States to conduct a far-reaching fact-finding investigation into the Korean economy and develop a long-term reconstruction plan based on its findings. The recovery plan eventually put forth by Nathan Associates spanned a five-year period starting in the fiscal year of 1953-54 and ending in the fiscal year of 1958-59. Nathan Associates published its preliminary report, titled “Korean Economic Reconstruction Plan,” in December 1952, and submitted its final report to the UN in February 1954, thus paving the way for agreement and cooperation between the Korean government and the UNKRA on various projects of aid and rehabilitation.

The UNKRA ended up providing much less aid than what it originally envisioned, as other UN member-states showed little interest in providing emergency relief via the CRIK, and the United States, by far the largest contributor, began to focus more on providing bilateral grants and aid through its ICA and FOA once the ceasefire agreement was signed. Nevertheless, UNKRA aid was of significant help to Korea during its postwar rehabilitation and reconstruction efforts.

Much of UNKRA aid went to supporting Korea’s long-term recovery, providing as it did a wide range of support for the energy, manufacturing, mining, forestry, fishery, education, and housing sectors. The proportion of capital goods to consumer goods provided under UNKRA aid was maintained at a 7:3 ratio to facilitate the reconstruction of Korea’s industrial base. In particular, the UNKRA provided special care and support for small and medium businesses in Korea, signing the Agreement on the Fund for Loans to Private Small and Medium Businesses and the Agreement on the Fund for Loans to Private Small and Medium Mining Operators with the Korean government in September 1953, thus helping Korean businesses to set up and restore their war-torn facilities and purchase raw materials for production.[5]
 
<UNKRA Aid by Sector>
(Unit: USD 1,000,000)
 

Notes: 1. Refers to grains, fertilizers, raw rubber, tires, paper, fur, iron and steel, building materials, etc.
2. Including USD 224,000, carried over into 1960.
Source: Lee, op. cit., pp. 323-325.
 
 
4. Aid for Postwar Reconstruction
 
The UN and the United States, the two main sources of emergency relief and rehabilitation for Korea during the Korean War, had begun to contemplate measures to ensure the reconstruction, stability, and long-term growth of the Korean economy even before the ceasefire agreement that halted the Korean War.

While providing emergency relief for war refugees via the CRIK and the UNKRA, the UN also contracted Nathan Associates, a consulting firm based in the United States, to research measures that could ensure the recovery and growth of the Korean economy. The firm’s interim report, submitted in December 1952, listed the dearth of basic resources, the difficulty maintaining a proper trade balance, the explosive growth of domestic demand associated with the postwar baby boom, the absence of administrative and economic expertise and skills, and hyperinflation as the core problems facing Korea at the time. The firm finally produced a five-year economic reconstruction plan, spanning from 1953-54 to 1958-59, with the goal of enabling Korea to recover from war damage as soon as possible and develop the basis for economic self-sufficiency.[6]

The plan envisioned increasing the gross domestic product (GDP) by 40 percent during the five-year period, as well as creating three additional power plants and providing housing for 600,000 households. The plan estimated that achieving these goals would require an investment of USD 1.9 billion in total, and USD 1.24 billion in foreign aid to meet the investment and import needs that could not be satisfied with domestic resources alone.[7]

Korea and the United States then entered into the Agreement on Economic Coordination, also known as the “Meyer Agreement,” so as to ensure effective implementation of the UN Security Council’s resolutions.[8] The two countries, accordingly, set up the Combined Economic Board (CEB) and other institutions to facilitate efficient use of US aid.

The United States for its part had by June 1952 also begun to seek measures to ensure the economic stability of Korea, commissioning economist Arthur Bloomfield to conduct a fact-finding mission into the state of Korea’s finance, with particular focus on monetary control and financial stability. President Eisenhower also dispatched his economic advisor, Henry J. Tasca, to Korea in April 1953, shortly before the Korean War’s conclusion, to perform a comprehensive investigation and analysis of the Korean economy. The resulting “Tasca Report” served as the theoretical framework for Washington’s foreign aid policy on economic reconstruction in Korea.

In particular, the Tasca Report proposed a new approach to aid for Korea based on various financial and fiscal reforms, introducing, in particular, defense assistance for security and project assistance for economic reconstruction. The report estimated that the reconstruction of the Korean economy for three years from 1954 would require USD 883 million in total aid, and asserted the need for establishing a standing organization specifically for handling aid for Korea and for a phased aid plan. The first phase of such a plan, according to the report, should involve creating the basis for the supply of consumer goods; the second, enhancing the general state of culture and social services; and the third, rationalizing industries and reining in inflation.[9]

The aid that Washington provided for Korea during the Korean War underwent profound changes in nature and purpose later as the Korean War came to an end and the Cold War ensued and escalated. Specifically, the emphasis shifted from the economic nature of aid (provided by the ECA), to the security and defense implications of aid (provided by the CRIK under the MSA).[10] In other words, economic reconstruction, which had been the main objective of aid prior to the Korean War, was no longer the sole concern: defense support had become equally important.[11]

 The FOA was set up in 1953 to replace the ECA and reflect this new concern. In the immediate aftermath of the Korean War, Washington approved of an aid program worth USD 200 million, executed by the FOA. Washington also led the CEB, set up according to the Agreement on Economic Coordination in May 1952, to establish a spending plan for the financial aid provided by the US government. After several in-depth consultations, the governments of Korea and the United States finally agreed upon a comprehensive economic reconstruction plan for Korea in October 1953 based on a wide range of American aid programs. In the following December, the two governments entered the Combined Economic Board Agreement for a Program of Economic Reconstruction and Financial Stabilization to ensure the efficient operation of the CEB.[12]

Also known as the “Paek-Wood Treaty” or the “CEB Treaty,” the agreement holds a particularly important place in the postwar process of Korea’s economic reconstruction and growth. The agreement centralized the various aid projects that had formerly been handled by multiple agencies (such as the UNKRA, the CRIK and the FOA), thus improving the systematization and coordination of those projects. This paved the way for the effective implementation of the UNKRA’s Five-Year Economic Reconstruction Plan devised in October 1953.

The UNKRA plan spurred much controversy between Korea and the United States regarding its basic aims and goals. It entailed an investment plan amounting to USD 628 million in aid, requiring USD 223 million from the FOA, USD 58 million from the CRIK, USD 117 million from the UNKRA, and USD 112 million from the Korea Foreign Exchange (based mostly on the Counterpart Fund). These resources were to be allocated toward creating and restoring industrial facilities for economic reconstruction (31.3 percent); supplying consumer goods (38.8 percent); ensuring defense capability (21.0 percent); and purchasing goods for emergency relief (8.8 percent).[13]

The dispute between the two countries arose over the relative priority of two possibly conflicting goals: namely, economic reconstruction and economic stabilization. Although Korea stressed the greater priority of the latter, the plan reflected the American preference for the former. Nevertheless, the plan provided a systematic framework based on which Korea could pursue economic reconstruction and stabilization alike, with the help of well-planned investments.