Thursday, April 8, 2010

Cutting off Aid promotes reform and development; the case of South Korea

Here is an excerpt from a very good compilation of essays entitled "State and Society in Contemporary Korea." Although a bit dated, it was published in 1993, it presents insightful commentary on exactly what the title says.

"Since 1945, however, the strategic and economic relationship with the United States had been of much more central importance, particularly through the mid-1960s, when dependence on U.S. aid was high. Yet the dynamics of this influence are often misunderstood (my emphasis). Critics of U.S. aid have argued both that Americans wielded substantial influence through the aid relationship and that overall development policy was ineffective. A closer examination of the relationship reveals a surprising ability on the part of Syngman Rhee to evade American conditions, an interesting example of the large influence of small allies. The impending termination of aid, however, played a crucial role in economic policy, since it changed the incentive for policy reforms that increased the availability of foreign exchange (my emphasis). These included greater commercial borrowing, a more open policy toward foreign investment, but above all the strong emphasis given to exports."

William Easterly has pointed to South Korea as a country that developed largely through a "searcher" type entrepreneurial spirit free from heavy state "planner" influence. This is wrong. But he is very correct in pointing out that the threat of losing U.S. aid, and its eventual elimination, was a catalyst for Korean leaders to begin thinking seriously about how to develop their country.


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