The role of foreign aid for development: US assistance to Pakistan and South Korea

Very similar starting points despite today’s differences

Today, South Korea’s GDP per capita is more than 11 times higher than Pakistan’s. And the difference in human development is even stronger, as South Korea has extremely good scores for example in life expectancy and education and Pakistan’s scores are even low for its income level. Nonetheless, until the middle of the 20^th century both countries had a very similar industrial, economical and human development.[1] Moreover, both had been under colonial rule[2] from which they only inherited some basic infrastructure but not a well-developed industry - South Korea lost the Japanese factories to the North and the British had seen their colony more as a market than as a production site. And after their independence with its disastrous consequences, i.e. division of the country, war and immense refugee flows, they were some of the poorest countries in the world. In addition since then they had to spend large amounts on defence as there has been a constant threat of war with their neighbour.

 

The crucial role of the alliance with the United States

Both countries became independent with the beginning of the Cold war which should have a strongly influence on their economic and political development. South Korea and Pakistan became the USA’s most important allies in Asia (without Middle East) for the practically same reasons and aims:  The weak countries needed the American protection and assistance while the USA had important political, security and geostrategic interests, i.e. the containment of communism then and in today’s Pakistan the fight against the Islamist threat. As part of this alliance the USA have sent enormous sums of foreign aid that at times could make up to half of the government budget or up to 10% of the GDP.[3] Also, the composition of the aid has been very similar, i.e. a combination of substantial military and economic assistance. In both countries, security played a major role and in relative terms the USA did not particularly support the social sector.[4] [5]

 

Different preconditions for development: homogeneity vs. heterogeneity

Nevertheless Korea already had some inherent advantages that facilitated its later growth. One important difference was the political, social, linguistic and ethnic cohesion of the country. Korea had existed for centuries as an independent country and its population is composed of more than 90% Koreans. Moreover South Korea was also remarkable homogenous in terms of wealth that was further increased by the devastating war and land reform (see later).[6] Pakistan in contrast was a new artificial structure with many different often strongly opposed ethnic groups, clans etc. The differences between the poor and rural feudal/ urban business elite remained immense. In a homogenous state like South Korea an additional income or other advantages such as foreign aid are automatically better distributed through personnel interrelations (marriages, gifts, etc) and political mechanisms than in Pakistan where those in power tend to keep the money for their group. This is one reason why foreign aid has even further increased inequalities in Pakistan but not in South Korea.[7]

 

Different interests in the alliance: aid as a compensation vs. aid for development

Furthermore although in general the US assistance was the same, it had some different features.

At first, because of the political circumstances in the first few years of independence the United States interfered much stronger in South Korean domestic matters than in Pakistan and therefore had a stronger influence. A good example is the land reform, which is crucial in an agrarian state and was initiated by the Americans and then continued by the new Korean government so that eventually 90% of the families owned land.[8] In Pakistan all land reform attempts have failed, so that the feudal elite has a good income from its huge land plots without caring for the country’s development.

Secondly, in Korea the USA were more interested in real development than in Pakistan. After the war North Korea had at least as much legitimacy as South Korea; therefore a fast economic and social development was needed to prove the supremacy of the latter and to prevent another invasion. Neither South Korea, nor the USA were interested in preserving the financial aid-dependent relationship. A developed South Korea would remain an ally even without financial support as it needed the USA’s political support against North Korea. This can also be illustrated by the type of aid gradually shifting from grants to loans.[9] Additionally, the US government encouraged American and other foreign companies to invest and provide loans.[10] In the Pakistani case however both governments are interested in the mutual dependency as this is the only way to force each other to act in the desired way. Consequently, American investments and lendings to Pakistan are rather small.[11]

Thirdly, the attitude of the receiving countries towards the US assistance has also been very different. South Korea has always been conscious of existing only thanks to the United States especially as it would have lost the war against the Communist North without the immense American participation. How much they were ready to support South Korea can be seen by the number of American casualties: more than 36.000.^[12] Pakistan in contrast never got assistance in crucial moments. Pakistan’s real worry had been India but America was not interested in engaging in an Indo-Pakistani war, not even in order to save the country’s integrity (Bangladesh war). The relation has always been based on an exchange of services, US material aid for the support US interests (fight against communism/ terrorism). This could have been fruitful if they at least could rely on each other. But both distrust each other strongly and try to play a double game in order to achieve their different priorities.[13]

The US-Korean alliance however was based from the beginning on the same particularly anti-communist ideology and the same targets. Therefore the Korean government saw the US military/ economic aid as essential for its development and security while the Pakistani government felt that it was only a compensation for the caused inconvenience. This is reflected in the public opinion. If the United States are the mos t positively perceived country in South Korea, as positively as almost nowhere[14] the Anti-American ressentiments in Pakistan belong to the strongest in the world.[15] This is both the cause and the consequence of the failed aid – a vicious circle.

 

Utilization of the aid: Country ownership, leadership commitment and stability

One very important reason for the effective use of foreign aid in South Korea was the strong ownership of the Korean government in the management of aid as it did the actual delivery and disbursement from very beginning. This decreased administrative costs making more money available and above all provided training for the inexperienced government. The ownership was gradually increased by centralizing and reforming the aid management system. The Pakistani government participated much less in the foreign aid because the USA could never completely trust it. Moreover it does not necessarily have full control over parts of its country, especially with the rising problem of extremism.

However, country ownership only works if the leadership is really committed to the development of the country. The real secret of South Korea’s success is that it invested in productive and socially important sectors such as education, infrastructure and industrial development. The aid inflows made the government financially more independent from business so that it could pursue its strategy.[16] In Pakistan however this independence was used to create advantages for the rich such as the exempting the agriculture sector, which is the main income source of feudal elites, from taxes. Pakistan has one of the world’s lowest tax-to-GDP ratio.[17]

Finally a government needs some expertise in order to use the foreign aid income in an optimal way. US aid signifies a large amount of money and power for the people involved; therefore project responsible keep changing with Pakistan’s unstable rule. This is costly in terms of money and time as they have to be trained and to familiarize themselves with the new duties. South Korea in contrast has had extremely stable government, the long-time authoritarian rule ensured continuity of key responsible.