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Country Brief

Last updated: May 2010

The World Bank and the Republic of Korea 

The Republic of Korea became a member of the World Bank in 1955 and the International Development Association (IDA), the Bank’s arm to assist the poorest countries, in 1961. The Bank began its operational relationship with Korea in 1962 when it completed the first Country Economic Report and approved an IDA credit of  US$17 million to expand and improve the Korean National Railroad.

 By 1973, Korea’s economy progressed sufficiently to require no further IDA assistance. The Bank then supported Korea through low interest loans, policy advice and technical assistance from IBRD, the International Bank for Reconstruction and Development.

Over the years, from IDA and IBRD, the Bank completed 133 credit or loan projects in Korea, disbursing funds totaling $15 billion. 

The Bank’s work in Korea evolved to match the country’s needs. In the early years, the Bank focused on lending for agriculture, irrigation, rural development, small and medium industry, transportation such as roads, ports, and railways, regional and urban development, and education.  Investment in agriculture increased substantially in the 1970s, and then declined in the 1980s as the economy shifted to a greater emphasis on industrial development. Priorities in educational investment evolved as the economy demanded more skilled labor and research and development (R&D) for science and technology.

Later, social infrastructure such as urban water supply, sanitation, sewerage, and environment became a high priority as the country’s industrial sector and energy and transportation infrastructures became more developed. During this period, heavy emphasis was placed on achieving greater social equity through a fair distribution of income and wealth.

During the financial crisis of the late 1990s, the Bank supported the Government of Korea’s reform programs in financial sector restructuring, corporate sector and labor market reforms and social safety nets through a series of adjustment loans, worth a total of $7 billion.


Highlights of Korea’s development and the Bank’s Assistance (1960 to late 1990s)

The Sixties:

  • The 1960s, which marked the beginning of Korea’s extremely rapid economic development, were characterized by a shift from agriculture to industry. Agricultural productivity declined, while the income gap between urban and rural workers widened as urban migration accelerated. To support industrial development, the government sought to increase the capacity and efficiency of the country’s road and rail transportation networks, the quality of its education system, and the productivity of its existing agricultural base.
     
  • The Bank assisted Korea in its efforts with a combination of financial and technical assistance in four sectors: agriculture, transportation, finance, and education, with particular assistance in the areas of institution building and knowledge transfer. Through it work, the Bank was able to lay the groundwork for its long-term lending relationship with Korea.

The Seventies:  

  • During the 1970s, Korea continued to grow rapidly. The government’s economic growth strategy was to target specific productive activities and provide financial support. In 1973, the focus shifted to the heavy and chemical industries, with the Government of Korea providing subsidized credits and tax concessions. The government also sought to develop new urban centers throughout the country to spread industrial activity away from the Seoul-Pusan axis and promoted agricultural development to reduce rural-urban migration. Finally the government began to invest heavily in educating its skilled workforce to encourage R&D and industrial innovation and improve Korea’s competitiveness in world market.
     
  • After the promising start, the World Bank committed to expanding its assistance to Korea. In the 1970s, the Bank produced 10 sector reports and eight economic reports, and extended $2.6 billion in loans for 46 projects in nine sectors. The  reports provided the analytical underpinning for later investment projects. The projects emphasized heavily developing the country’s infrastructure, with about 30 percent of the funds allocated to the transportation. The Bank also made loans in finance, agriculture, energy, industry, and education.

The Eighties: 

  • The 1980s were a difficult period for Korea. Inflationary pressures and a second oil crisis dealt a severe blow to the economy. In 1980, the won was devalued substantially and a flexible exchange rate policy was adopted, reestablishing the country’s competitiveness and ushering in an economic boom. The economy grew at a remarkable rate, led by exports which expanded by over 20 percent per annum from 1986 to 1988. During this period, the government continued to push infrastructure development. The main objective was to modernize and increase the capacity of the national transport system while encouraging the development of new industrial areas and housing complexes outside of Seoul and Pusan. The government also strove to improve the quality of education and research at several of its universities and key technology institutions. 
     
  • The Bank assisted the Government of Korea through the difficult years of the early 1980s with two structural adjustment loans, which aimed to revitalize the economy by restoring the competitiveness of Korean industry. This effort, along with assistance from the IMF, involved a combination of measures such as currency devaluation, trade policy reform, and energy diversification. The Bank also continued its broad multi-sector focus, providing $3.6 billion in funds and technical assistance to 42 projects in nine sectors as well as analysis and advice on policies and project design. While emphasis remained on transportation and finance sectors, the Bank also provided assistance to six urban development projects aiming to reduce inter-regional disparities and provide more affordable housing to low-income families. Lending also included project investments in industry, energy, agriculture, education, and water supply and sanitation.

The Early Nineties: 

  • Following rapid growth over the previous three decades, the Korean economy became the tenth largest economy in the world by the early 1990s. Because of the limited prospects for further expansion of labor-intensive industry, the government shifted emphasis toward more technology-intensive production. It provided incentives for increasing R&D and improving the quality of basic science education in secondary schools, colleges, and universities. The government also tried to develop a sustainable energy strategy which could insulate Korea from energy crisis. Lastly, due to the negative impact of rapid industrialization on the environment, the government sought to develop more efficient methods of production for natural resource conservation and to adopt systemic measures for improving environmental policies and programs.
     
  • By 1990, Korea was ready to graduate from the World Bank. During the lending phasedown (1991-94), the priority area for Bank operations, in line with the government’s preferences, were the social sectors, small and medium industry, and environmental improvement. Korea graduated from borrowing in 1994 on the terms that the 1994 graduation could be reversed if economic conditions deteriorated seriously or political reunification of the peninsula took place. From 1990 to 1994, the Bank completed five sector reports and one economic report, and it committed US$ 1.2 billion for 21 projects in eight different sectors. The government followed through on its financial sector reforms, with the Bank assisting with completion of its comprehensive financial sector study in late 1992. This study became a key input to the reform program announced in 1993 as well as a Bank sector loan in 1993. The reforms were well-received by the international financial community. During the early 1990s, the Bank was active in helping Korea meet its requirements for skilled scientific technical manpower, environmental research and development, and education research. The Bank also supported investments in science and vocational education, science and technology research at the university level, and library computerization on a national scale. These improvements were designed to help Korea develop high-technology products that would be competitive in world markets. The Bank also provided assistance in the urban development, transportation, water supply and sanitation, and social sectors.


The Late Nineties: 

  • After enjoying one of the highest growth performances in the world for more than three decades, Korea suffered its most serious setback in the financial crisis that erupted in 1997. Although government intervention enabled Korea to grow rapidly and become an advanced industrial economy, it also protected an inefficient financial sector as well as a highly leveraged and concentrated corporate sector. In response, the Government of Korea aggressively undertook a set of wide-range of reforms to meet the challenges of technological advancement, globalization, and intensifying international competition. As a result of its vigorous and comprehensive reforms since the crisis, Korea has been successful not only in restoring financial stability, but also in engineering an early rebound in economic activity. Nevertheless, the social costs were been high. GDP growth fell to negative 5.8 percent in 1998 and the unemployment rate rose sharply, peaking at 8.7 percent in 1999, while real wages also declined substantially by close to 20 percent. 
     
  • The Bank actively assisted Korea’s structural reform program through its adjustment operation during the financial crisis. A $3 billion Economic Reconstruction Loan was made in December 1997, followed by a $2 billion Structural Adjustment Loan in March 1998. An additional $2 billion Second Structural Adjustment Loan was approved in October 1998. The Bank’s program focused on three areas: (i) financial sector reform, including the resolution of weak financial institutions, strengthening of prudential regulation and supervision, and capital market development; (ii) corporate sector reform, including corporate debt restructuring, reform of corporate governance and competition policies, and reform and privatization of state-owned corporations; and (iii) labor market reform and strengthening of social safety nets. The Bank’s program aimed to assist Korea in the restoration of financial stability while mitigating the social impact of the crisis and support structural reforms to address the root causes of the crisis, laying the basis for Korea’s return to strong and sustainable growth. 

Development Progress in Korea 

Korea has experienced remarkable success in combining rapid economic growth with significant reductions in poverty. Government of Korea policies resulted in real GDP growth averaging 10 percent annually between 1962 and 1994, with a corresponding rise in per capita income from under $100 to over $10,000. This spectacular performance was fueled by annual export growth of 20 percent in real terms, while saving and investment rose sharply above 30 percent of GDP.

The Government of Korea began contributing to IDA in 1977. And as Korea positioned itself for an enhanced international role, the Government increased its contributions to IDA, entered into a co-financing framework agreement with the Bank, and created a number of trust funds.

Korea is the first former aid recipient to become a member of  the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD). Korea acceded to the DAC in November 2009. Korea also took the chairmanship of the G-20 summit in 2010.

Bank’s Relationship with Korea

The Bank’s relationship with Korea is a true success story. A critical success factor in the partnership was Korea’s openness to drawing macroeconomic and sector policy analysis and advice from other countries, with the support of the Bank. The country has quickly become a "newly industrialized economy," and is now able to transfer its lessons learned from its experience of developing into a knowledge-based economy to other countries. Korea's relationship now with the World Bank is one of collaboration on policies and projects, with the aim to assist and support other countries in the region and elsewhere.

The Bank played its role in Korea’s development effort, not only through its economic and sector analysis and policy advice but also through a diversified lending program which responded to the changing needs of the fast-growing economy. In the early years, the Bank focused on lending for agriculture, irrigation, rural development, small and medium industry, transportation (roads, ports, and railways), regional and urban development, and education. In later days, priority was given to social sectors (education, health) and social infrastructure (housing, water supply and sanitation, and sewerage), as well as to improving technology, R&D, and environmental protection. The Bank paid particular attention to institutional strengthening and the coordination of sector strategies, area in which the Korean authorities requested the Bank’s advice and valuable cross-country experience.

At the same time, the Bank had the unique opportunity to learn from the Korean development experience. The Bank gained lessons from Korea in areas such as : (i) planning and investment for scientific and technological excellence in the education sector; (ii) industrial sector restructuring; (iii) technology acquisition, financial development, and commercialization using an institutional framework aimed primarily building an indigenous technological capacity; and (iv) small-and medium size industry sub–contracting and development. The Bank also gained from intensifying its collaboration with Korea’s concessional loan program to obtain benefits for other borrowing countries through co-financing and technical assistance in sectors of Korean expertise (e.g. construction, R&D, small and medium industries, science, and technology manpower).

Contributions on both sides have helped prolong a long and constructive relationship and brought major benefits to all concerned.

 




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