Determinants of Foreign Aid: The Case of South Korea

Article excerpt

South Korea, the newest member to join the OECD'S Development Assistance Committee, has signaled that it will become a major donor of official development assistance (ODA). Having had its own history of being a large recipient of ODA, South Korea claimed that it will provide aid from the recipient's perspective. Using panel data covering twenty-three years (1987-2009) and 154 recipient countries, we examine whether South Korea's ODA reflects the recipient nation's humanitarian needs more than the donor's interests. We ask three questions: (1) What are the major determinants of South Korea's ODA allocation? (2) Has South Korea's ODA policies changed over different time horizons--that is, years, political regimes? (3) Does South Korea exhibit different standards of allocating ODA for different groups of recipient countries? We find that South Korea provides more aid to higher-income developing countries with higher growth rates, which shows the tendency to serve the donor's economic interests. When we examine the data by time periods, we do not find significant differences over decades or political regimes. However, when we reexamine the data based on recipients" income levels, we find that the relationship between per capita income of the recipient country and ODA allocation is negative only for the middle-income or lower-middle-income group recipients and positive for the rest. This finding suggests the possibility that South Korea's ODA policy may have a dual-track structure.

KEYWORDS: ODA determinants, South Korea, emerging donor, Tobit model

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SOUTH KOREA'S EFFECTIVE USE OF FOREIGN AID TO ERADICATE EXTREME poverty and attain economic development is important in the history of foreign aid, where there are many critical studies on aid dependence and aid fatigue. South Korea declared its global role as a donor of foreign aid in 2009 when it ascended to the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD), members of which provide more than 50 percent of global official development assistance (ODA). In 2010, South Korea hosted the G-20 summit meeting and introduced the development agenda. In late 2011, it hosted the High-Level Forum on Aid Effectiveness (HLF-4), which is the premier global forum to discuss various issues related to aid. South Korea has assumed the role of promoter of poverty reduction and development at these major global forums.

The recent global financial crisis has hit the least developed countries the hardest, although it originated in a developed country, the United States. The least developed countries were faced with additional difficulties since the major donors were severely affected by the crisis and could have reduced their ODA. There is growing concern that the fallout from the global financial crisis coupled with rising food prices and climate change could jeopardize the attainment of the Millennium Development Goals of reducing the world's poverty by half by 2015 (UNDP 2011).

Fearing a reduction of ODA from traditional donors, emerging and nontraditional donors (such as China, India, and South Korea) (1) and private foundations (such as the Bill and Melinda Gates Foundation) have increased their development assistance. Although these new donors play a critical role in assisting developing nations, there are few quantitative analyses that examine in detail the determinants and impact of such assistance.

In this article, we critically examine South Korea's ODA. South Korea's history as a donor goes back to 1963, when it was asked by the United States Agency for International Development (USAID) to conduct a training session. However, it was not until the Economic Development and Cooperation Fund (EDCF) was established in 1987 to handle concessional loans and the Korea International Cooperation Agency (KOICA) was created in 1991 to handle grant aid that South Korea emerged as a donor. …