The role of aid in the development of Korea and Taiwan

Stephen SmithPartnerDeloitte Access Economics

February 2014

Introduction

South Korea and Taiwan are aid graduates and economic success stories.

Yet a number of previous studies have concluded that aid was irrelevant in the transition process or was detrimental.

This paper re-assesses the importance of aid relative to domestic economic policies and other factors.

This research undertakes a qualitative analytical assessment of the timing, volume and key principles of ODA to Korea and Taiwan. Aid is examined through a broad lens of political economy and policy reform.

Did aid stifle growth and delay the transition?

“Scarcity of resources…is good for reform. One of the pieces of conventional wisdom about the Republic of Korea and Taiwan reforms of the 1960s is that these reforms took place in large measure because US aid, which had been plentiful during the 1950s, was coming to an end.”

Dani Rodrik (1995)

South Korea: Aid receipts and economic growth

Taiwan: Aid receipts and economic growth

Net ODA and major donors

Net ODA receipts, South Korea$US, millions (2011 prices) 1960-64 1965-69 1970-74 1975-79 1980-84

United States 6,600 4,952 3,061 1,073 -5 Japan 81 3,091 4,557 1,214 877 Other DAC 233 361 301 471 336 Multilateral 123 155 470 519 114 Non-DAC - 142 - 167 -11Total (Net ODA) 7,037 8,700 8,389 3,443 1,312

Net ODA receipts, Taiwan$US, millions (2011 prices) 1960-64 1965-69 1970-74 1975-79 1980-84

United States 2,612 703 -95 -129 -84 Japan 6 862 -49 -225 -10 Other DAC 24 54 26 45 51 Multilateral -120 172 105 0 -5 Non-DAC 0 151 0 227 102Total (Net ODA) 2,522 1,941 -13 -82 55

Source: OECD (DAC)

Summary of main points

Aid was vital for the survival of South Korea and Taiwan after WWII and the Korean War. Aid influenced domestic policies at the margin, but in neither country was aid withdrawal the key impetus for reform.

In South Korea, the resignation of Syngman Rhee, the successful coup led by Park Chung Hee, and the political situation facing Park (including his desire for domestic credibility and autonomy from the US) provided much of the impetus for reform.

In Taiwan, the withdrawal of US aid was timed to coincide with the Nineteen Point reform program. However reforms had begun years before, and continued well after US aid declined.

Importantly, in neither country did the decline in US aid mean the decline in aid overall.

Some implications

Successful progression beyond ODA offers an opportunity to explore lessons for the aid world today.

Relevant to the current aid context for a number of reasons:

• Negative bias: As more countries have successfully graduated from aid, there has been a tendency to focus on the (lack of) impact aid has had in countries which remain aid recipients.

• Breathing space: Aid did not transform Korea or Taiwan, but it did provide support to allow the countries to implement stronger domestic policies. This is a useful way of thinking about the role of aid in fragile states.

• Leverage: Aid may provide leverage and opportunities to influence the domestic policy agenda. This can be a good thing, and had a positive impact at times in Korea and Taiwan.

• Positive discontent: A country is typically not happy being an aid recipient. As a result, aid can spur countries toward policies which increase growth and reduce aid dependency.

Thank you

Stephen Smith

Partner

Deloitte Access Economics

stephensmith1@deloitte.com.au