chapter  9
Attracting foreign capital to spark development
WithSeung-hun Chun
Pages 24

The circumstances of development financing in Korea in its early stages of development were extremely bad: Korea suffered chronic deficits in its international balance of payments, causing unstable exchange rates; investment opportunities were scarce, as no energy and natural resources were available; and national income was among the lowest in the world. To break this situation, the government resorted to a drive for national thrift and savings, and disregarding the urgent demand for social expenditure, it tried to prime the pump to enable economic development. To attract foreign capital, the government took an exceptional measure of guaranteeing foreign loans raised by the private sector. Within this milieu, however, Korea came up with its own shopping list in introducing foreign capital, and preferred loans to foreign direct investment (FDI) to keep ownership of companies in its hands. As momentum was provided through these efforts, the inflow of foreign investments became brisk. Promotion of economic growth through high foreign investment rates contributed to the rise of the domestic savings rate itself. In turn, the latter began to surpass the former, making the financial market and public finances of Korea sustainable.