International Finance: The Politics of Post-Conflict Financial Assistance to North and

South Korea

A Paper Presented to

Dr. Rosalie Arcala Hall

Division of Social Sciences

College of Arts and Sciences

University of the Philippines Visayas

In Partial Fulfillment

of the Requirements for Political Science 177

Government and Politics Asia I (East Asia)

Amiel Ryan A. Rapista

May 2018
 I. Introduction

Political Economy of International Finance

International finance stands as a major force in integrating the modern world economy.

Since time immemorial, private capital has sustained the international economy in the form of

loans and portfolio investment such as stocks and bonds (Gilpin 1987, 306). In a more

contemporary era, foreign direct investment by multinational corporations has improved these

traditional means of capital flow. Also, governments and international organizations have also

become important sources of capital through the making of loans and especially the giving of

official aid, in particular to less developed states.

As the focus of this study, international finance has given significant role in the

development of international aid. In international relations, international aid or foreign aid is a

voluntary transfer of resources from one state to another state (Lancaster & Dusen 2005). This

can also be classified through financial assistance.

The main focus of this paper is to look on the role of international finance in the post-

conflict states. This would examine the politics of post-conflict states with the financial

assistance provided by states or governments, international financial institutions, private or

international organizations, or by private banks. North Korea and South Korea were used as

the case studies in order to answer the research problem.

The Marshall Plan

The history of international aid could also be traced back since the emergence of the

Marshall plan. The Marshall Plan was an American initiative to aid Western Europe. This is an

economic assistance to help rebuild Western European economies after the World War II

(Woods 1987, 5). The goals of the United States were to rebuild devastated regions,

remove trade barriers, and modernize industry. In simple words, US would like to make Europe
wealthy again, and prevent the spread of Communism (Maier 1990, 102). Furthermore, the

Marshall Plan required a decreasing of interstate barriers, drop some of many regulations, and

encouraged an increase in productivity and trade union membership, as well as the adoption of

modern business procedures. There is this phrase "equivalent of the Marshall Plan" which was

often used to describe a proposed large-scale economic rescue program or financial assistance

to a devastated state.

International Finance in the Financial Systems of States

International aid may also serve other functions in the financial systems of post-conflict

states. For instance, it may be given as a signal of diplomatic approval, or to strengthen

a military ally. It can also be a reward for a government for a behavior desired by the donor

state, and to extend the state’s cultural influence. It may also provide infrastructure needed by

the state for resource abstraction from the recipient state.

Humanitarian and philanthropic purposes are also at least partly responsible for the giving of

the financial assistance (Lancaster and Dusen 2005). Foreign aid through financial assistance

may also be given by states or governments, private or international organizations, international

financial institutions, or private banks (Asian Development Bank 2010). Also, there are

Financial or foreign aids that are in the form of gifts by private individuals or organizations.

This may be called "private giving" which is generally managed by charities or philanthropic

organizations who set them and then channel these to the beneficiary state (Noland 2010).

Specifically, according to Branczik (2004), international finance through financial aid

by doing humanitarian and development assistance would reduce global poverty and improving

people’s living conditions and standards .It can also support sustainable economic, social and

institutional development and help promote regional cooperation and integration.

Assistance to Post-Conflict States

Furthermore, Branczik also stressed that financial assistance provide special policies

and instruments in place to assist countries as they emerge from conflict (Branczik 2004). This

can be achieved through humanitarian aid by assisting people who have been displaced,

prevent the spread of conflict, support relief work, and prepare for rehabilitation. Also,

developmental assistance was mentioned to reconstruct a country's infrastructure, institutions,

and economy. Humanitarian and developmental assistance are often key part of the peace

accord in the aftermath of war.

II. Role of the International Finance in Post-Conflict States

Conflicts especially by war have been in the global arena since time immemorial

(Bhargava 2006). There were deliberate efforts in order to address and prevent these conflicts.

But some conflicts are inevitable. Thus, assistance were made to help these conflicted areas to

recover.

According to Panic (2008), all internal conflicts, especially civil wars, involve serious

costs: human, social and material. As protracted internal conflicts have become more common

and more deadly, the impact on civilians and the states has multiplied. Especially post-cold war

conflicts have caused over millions of casualties and devastations to different states. That is

why international finance has the biggest role in helping these conflicted areas to recover from

the damages and this is mainly through financial assistance.

According to World Bank (2014), under the International Development Association,

states qualify as post-conflict states if it is that state has suffered from a severe and long-

standing conflict. It can also be a state that has experienced a short but highly intensive conflict

or a newly sovereign state that has emerged through the violent break-up of a former entity

(World Bank 2014).

 States emerging from conflict have suffered violence to their population and damage to

their economic and social capital. These conflicts often lead to unsustainable financial and

economic imbalances. Conflict-affected states need substantial support for economic and social

recovery, in parallel with the continued provision of humanitarian and developmental

assistance to meet urgent and long-term needs (World Bank and IMF 2001). Thus, international

finance through financial assistance has important roles in many post-conflict recovery efforts

in supporting the political and security framework required for humanitarian, reconstruction

and development aid to be effective.

There are certain policies and instruments that were used by states and governments,

International Financial Institutions, International organization, and private banks, in order to

assist post-conflict states. For instance, the World Bank and the International Monetary Fund

have enhanced their policies and instruments to better provide financial assistance to these

conflicted areas. According to their report in 2001, a policy for partnership recovery stresses

the role of United Nations in recovery efforts. Effective UN peacekeeping operations have

provided the stability and confidence necessary to begin the process of demobilization and

reintegration. UN agencies sometimes are the only substantial international presence on the

ground during and in the immediate aftermath of conflict.

Furthermore, the role of the World Bank and IMF are to help the states restore

macroeconomic stability and the basis for sustainable growth, and to support economic and

social recovery and sustainable development through financial support and policy advice, with

particular attention to human security and to the needs of war-affected populations.

III. Case Studies

Korean War

On June 25, 1950, the Korean War started when officers from the North Korean

People's Army poured over the 38th parallel, the limit between the Soviet-backed Democratic
People's Republic of Korea toward the north and the pro-Western Republic of Korea toward

the south. This attack was the main military activity of the Cold War. American troops had

entered the war for South Korea's sake. Then, American authorities worked tensely to form

some kind of truce with the North Koreans. At long last, the Korean War arrived at an end.

Taking all things together, millions warriors and regular people lost their lives amid the war

(Korean War 2009). At the end of the imperial Japanese rule, the division of Korea took place-

the North Korea and the South Korea. The division of Korea amongst North and South Korea

was the after effect of the Allied triumph in World War II in 1945, concluding the Empire of

Japan's 35-year run of Korea. The United States and the Soviet Union involved the nation, with

the limit between their zones of control along the 38th parallel (Appleman 1998). Moreover,

with the onset of the Cold War, arrangements between the United States and the Soviet Union

neglected to prompt an independent, unified Korea. There is the foundation of the Republic of

Korea in South Korea, which was instantly followed by the establishment of the Democratic

People's Republic of Korea in North Korea. The United States upheld the South, and the Soviet

Union bolstered the North, and every administration guaranteed sovereignty over the entire

Korean peninsula. Thus, somehow leading to the factors following the Korean War.

Financial Assistance to South Korea

According to a number of articles, it is the United States which have been consistent in

providing financial aid to South Korea after the Korean War (Whyte 2015). Thus, South Korea

became a model for United States Foreign Assistance. South Korea also made its own financial

aiding system because of its progressive economic development with the help of United States.

The financial assistance through aid was essential for the country's recovery from the Korean

War in the 1950s and to economic growth in the 1960s because it the state from having to

devote scarce foreign exchange to the import of goods and services (Hadar 1990). It also freed

South Korea from the burden of substantial international debts through the initial phase of
economic growth and enabled the government to allocate credit in accordance with planning

goals. From 1953 to 1974, South Korea received around $4 billion US dollars of grant aid.

About US$3 billion was received and utilized before 1968, forming an average of 60 percent

of all investment in South Korea that time (Hadar 1990). During the 1966-1974 period, foreign

assistance constituted about 4.5 percent of Gross National Product and less than 20 percent of

all investment (Hadar 1990). Before 1965 the United States was the largest single aid

contributor in South Korea.

American economic investment and humanitarian aid produced considerable surpluses

by helping to build the foundation for the economic transformation of South Korea. U.S.

foreign assistance not only helped South Korea’s transformation into America’s trading partner

but also it has made South Korea itself a donor of foreign assistance (Lee 2017). United States

assistance concluded in the early 1970s, from which time South Korea had to meet its need for

capital investment on the competitive international market and, increasingly, from domestic

accounts. The government and the private industry received funds from the World Bank and

other foreign government agencies.

After the ceasefire in 1953, the Korean peninsula was left war-torn, divided and in utter

destruction. South Korea suffered massive social and economic damage; civilian causalities
totaled nearly 1.5 million while the destruction of properties were estimated to be about US$3.1

billion, leaving nearly 43% of residential homes and 42-43% of industrial facilities damaged

compared to pre-war levels. To help with reconstruction efforts, Korea received massive

amounts of US economic aid totaling about US$3 billion. Moreover, military assistance as a

share of total US bilateral aid began to increase after the Korean War, when military assistance

comprised more than half of total US aid to Korea in the 1960s as seen above.

The US aid administrators insisted on pursuing stabilization first, then development,

placing priority on reining in hyperinflation caused by the expansion of debt to finance the war,

and on securing a bare subsistence level of living. The imperative was securing macroeconomic

stability and a self-sustainable path to development to reduce Korea’s dependence on foreign

aid. United States and the South Korean government sought not only to secure as much aid as

possible but also to allocate as much of the aid as possible to increase investment (Krueger,

1974).

Financial Assistance to North Korea

North Korea, even more devastated than the South and suffering as well from a labor

shortage caused by the population hemorrhage of the war, had far fewer resources with which

to rebuild itself (Kim 2014). Yet through a combination of tremendous work and sacrifice on

the part of the North Korean people, generous economic and technical assistance from the

“fraternal” socialist countries, and the advantage of a pre-war industrial infrastructure more

developed than that of South Korea, the DPRK soon achieved economic growth rates that far

surpassed South Korea’s into the 1970s. North Korea had been virtually destroyed as an

industrial society, and the first priority of the DPRK leadership was to re-build industry.

“Fraternal” aid to the DPRK began during the Korean War. The great bulk of direct

military assistance came from the USSR and China, but the East European “People’s

Democracies” also contributed to the war effort with logistical support, technical aid, medical
supplies and the like. Among the most poignant forms of assistance was the taking in of

thousands of Korean War orphans. Romania sheltered children, who were returned to the

DPRK with the completion of North Korea’s 1957 – 1961 Five-Year Plan.

As shown in table above, the Soviet Union began to provide aid to North Korea in 1945

after the Japanese defeat in World War II, mainly to stabilize the region. The North Korean

regime used the Soviet aid to implement various stabilization projects, including land reform,

rehabilitation of the industrial facilities destroyed by the Japanese, and development of the

agricultural sector. However, it was not until the armistice of the two Koreas after the Korean

War in 1953 that the Soviet Union, China, and other socialist countries began to actively

provide foreign aid to North Korea. As indicated in table, a significant portion of these aid

funds was delivered in grant form. During the post–Korean War era, North Korea depended

heavily on foreign aid. For instance, in 1954 33.6% of North Korean government income was

financed via aid, and between 1954 and 1956 foreign aid from socialist countries accounted for

more than 80% of North Korea’s total imports (Shin 2000). In particular, a large proportion of

these aid funds were invested in the construction of the industrial sector, and of the total

industrial investment, 81% was invested in the heavy industrial sector (Shin 2000)
 IV. Analysis

For North Korea being a country having a communist ideology, generous economic and

technical assistance came from the “fraternal” socialist countries but the era of this close

“fraternal cooperation” had come to an end in 1990s. North Korea had been rebuilt, and from

this point onward would chart its own distinct course of political and economic development,

connected but never subordinated to the broader socialist community of nations.

For South Korea, U.S. foreign assistance not only helped the country’s transformation into

America’s trading partner— South Korea is now itself a donor of foreign assistance.

International organization such the United Nations Korea Reconstruction Agency (UNKRA)

also played a role in delivering the assistance to South Korea. They played as a third party

entity in conveying United States assistance to the country.

In general, foreign aid in this early period was successfully and effectively used in

rebuilding the country from the devastation of war, and aid played a role in establishing basic

infrastructure for further industrialization of the country.

V. Conclusion

International finance has given significant role in the development of international aid.

Since the emergence of the Marshall Plan, financial aid gained its reputation. Perhaps, there is

this phrase "equivalent of the Marshall Plan" which was often used to describe a proposed

large-scale economic rescue program or financial assistance to a post-conflict state.

Also, international finance through financial aid by doing humanitarian and

development assistance would reduce global poverty and improving people’s living conditions

and standards .It can also support sustainable economic, social and institutional development

and help promote regional cooperation and integration. There is also a policy for partnership

recovery from the World Bank and the IMF that stresses the role of United Nations in recovery

efforts. Effective UN peacekeeping operations have provided the stability and confidence
necessary to begin the process of demobilization and reintegration. UN agencies sometimes are

the only substantial international presence on the ground during and in the immediate aftermath

of conflict.

Furthermore, it is mainly the states or countries that are capable enough to finance

other states after emerging from a conflict. States provide financial assistance in order to help

rebuild devastated economies of other states. These states support the political and security

framework required for states in order to materialize humanitarian aid, reconstruction and

development aid. After the Korean War, it is largely the United States which provided the

financial aid for South Korea. While in North Korea, it is the USSR along with other socialist

countries were able to assist the country.

Lastly, after the conflicted areas rebuilt its economy, they tend to also a donor of foreign

assistance to other states that were either underdeveloped or just emerged from conflict.

Somehow financial assistance became a cycle in the international finance.

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