Chapter 3. Financing for development
Overall ODA volume
Korea’s official development assistance (ODA) has increased steadily since it joined the OECD Development Assistance Committee (DAC), continuing a positive trajectory. However, Korea’s national targets were revised downwards in the recent 2016-20 strategy. While the new targets are arguably more realistic given the recent slowdown in national growth, this diminished level of ambition is affecting Korea’s ability to meet its international commitments. Korea could reinforce its credibility and sustain its progress to date by defining a plan and timeline for increasing its ODA volume over the next decade, while maintaining the quality of its development assistance and untying its aid to the maximum extent possible.
Korea has steadily increased its ODA in line with national targets
Korea provided USD 2.25 billion in net ODA in 2016, which represented 0.16% of its gross national income (GNI). As illustrated in Figure 3.1, this continues a steady increase in ODA, in spite of the impact of the 1997-8 financial crises, and an eight-fold increase since Korea left the DAC list of recipient countries in 2000 (OECD, 2017a, 2017b). These volumes do not include bilateral humanitarian assistance or in-kind contributions by Korea to the Democratic People’s Republic of Korea (DPRK), which are not reported as ODA.
Source: OECD (2017a), OECD International Development Statistics, Volume 2016 Issue 2, https://doi.org/10.1787/dev-v2016-2-en; OECD (2017c), “Official development assistance as a percentage of gross national income (GNI)”, in OECD International Development Statistics, https://doi.org/10.1787/dev-v2016-2-table3-en.; Publication of final 2016 ODA data forthcoming.
In its second mid-term strategy 2016-20 (GoK, 2015), Korea has committed to a goal of allocating 0.20% of its income as ODA by 2020 and has set out annual targets for achieving this in a more realistic scale-up plan than the previous 2010 target to allocate 0.25% of GNI to ODA by 2015. Korea plans to further increase its ODA, in line with international commitments, to 0.3% GNI by 2030 but does not yet have a roadmap for achieving this. A longer-term projection would help Korea’s officials and partners to plan for continued expansion and build the necessary public support for an increasing ODA budget.
Korea is on track to achieve its ODA targets but needs to plan for ODA growth
Korea’s national income grew by an average of 2.7% between 2012 and 2016. Assuming this rate of growth continues, it would need to allocate USD 3.2 billion in total net ODA by 2020 to meet its domestic target of 0.20% ODA to income – a 40% increase on 2016 levels. The challenge for Korea is to ensure that it meets these commitments while protecting the effectiveness and quality of its ODA.
Quantitative targets set out in Korea’s 2016-20 mid-term strategy are effective for focusing Korea’s efforts and are the basis for key decisions. As shown in Table 3.1, Korea is currently on track to achieve these targets.
Further progress is needed on untying aid
Korea reports that 62% of its ODA, excluding free-standing technical co-operation, was untied in 2016, with grant and loan levels of 52% and 86.5% respectively (GoK, 2017a), which leaves it on track to meet its national targets set out in Table 3.1. When free-standing technical co-operation is included (for which reporting is voluntary), Korea reports 57% untied aid in 2016. This is an improvement on 2015 when 48.7% of Korea’s total ODA, including free-standing technical co-operation, was untied, but inconsistent trends over the past three years (OECD, 2017d) make Korea’s progress on untying aid inconsistent with the Busan commitment to untie aid to the “maximum extent possible” (HLP, 2011). In addition, the percentage of Korea’s ODA that is untied in least developed countries in 2015 (45.9%) is below the average for Korea’s total ODA (48.7%) and below the DAC effort-sharing benchmark of 60% of bilateral aid to LDCs that is untied (OECD, 2014). Considering the revised DAC recommendation to untie ODA in least developed and highly-indebted poor countries to the maximum extent possible (OECD, 2014), Korea will need to make further progress on untying, particularly in least developed countries.
Korea’s ODA data reporting is timely and was rated by the DAC as “excellent” in 2015 (OECD, 2016a). Together with Korea’s ODA website and detailed annual reports from Korea’s International Cooperation Agency (KOICA) and the Economic Development Cooperation Fund (EDCF), this reporting enables Korea to communicate how its ODA budget is disbursed. These data would nonetheless be easier to analyse if project descriptions were clearer.1 OECD reporting requirements on the newly-introduced grant equivalent measure led to Korea’s reporting quality being downgraded to “fair” in 2016 (OECD, 2017e); Korea is now adapting its systems to meet these requirements. Korea has submitted timely and accurate forward-spending information to the OECD DAC survey in recent years and is sharing forward-spending projections with partner countries (Chapter 5).
In addition to its comprehensive ODA reporting, Korea provides information to OECD DAC on its other official flows and non-concessional loans through KEXIM Bank, as well as Korean private flows to developing countries and funds raised privately by Korean non-government organisations (NGOs). EDCF tracks private funds associated with its loans, including private capital subscriptions. KEXIM’s officially guaranteed/insured export credits, the largest share of KEXIM’s finance, are reported to the OECD Trade and Agriculture Directorate on a confidential basis. KOICA’s new integrated project management system (Chapter 4) allows for the volume of private financing mobilised through grants to be recorded, which has allowed Korea to contribute to the OECD private sector mobilisation survey in recent years. Making this information more transparent, for example by reporting export credits in the form of insurance and finance mobilised through the private sector to the OECD DAC, would help to paint an even clearer picture of Korea’s total financial flows to developing countries.
Bilateral ODA allocations
Korea’s allocates a high share of its bilateral aid to its 24 partner countries, 6 priority themes and technical co-operation programmes. The majority of Korea’s bilateral ODA is directed to specific countries, mainly through government channels. Bilateral ODA is highly concentrated in countries most in need, particularly fragile states. An increasing proportion is allocated to Africa though a small number of grants continue to be approved for middle-income countries. On the other hand, a very small slice of the ODA budget is considered relevant to gender equality, environment and climate change, issues which Korea has identified as political and policy priorities.
Korea’s preference for direct engagement with its partner countries has an important influence on its bilateral allocations. Of all the DAC members, Korea has the largest share of ODA programmed at country level – known as country programmable aid (CPA) – standing at 80% of bilateral aid in 2015. This largely comprises stand-alone projects (78% of CPA) and technical assistance (14% of CPA).
Allocations to NGOs, public-private partnerships and programme-based approaches are starting to increase from a low base. The percentage of bilateral ODA channelled through NGOs was 2% in 2015 (USD 39 million) and pooled contributions to programmes and funds received 7% (USD 138 million) (see Annex B). The KOICA Public Private Partnership Programme (PPP) budget, available for civil society, businesses or academic bodies, increased from USD 8 million in 2010 to USD 46 million in 2015, but this remains well below the ten-fold increase envisaged in the 2010 strategic plan2 (GoK, 2010).
Korea spends most of its bilateral aid in its partner countries
In 2015, 69% of Korea’s allocable bilateral disbursements (i.e. those which can be identified by country or region) went to its priority partner countries3, with a further 23% directed to 20 non-priority partner countries. Bilateral ODA allocations are thus well concentrated on Korea’s partner countries. In the 2016-20 mid-term strategy, Korea reduced its priority partner countries from 26 to 24, responding to a 2012 peer review recommendation. The rationale for retaining 20 non-priority partner countries is not explained in the mid-term strategy and could usefully be reviewed. The remaining 8% of allocable bilateral ODA, which is not disbursed in partner countries, is thinly spread. In 2014-15, a total of 136 countries received Korean ODA. Grants in non-partner countries ranged in size from USD 2-5 million in Afghanistan to smaller technical co-operation activities of less than USD 1 000. It would be timely for Korea to consider the effectiveness and transactions costs of smaller ODA activities in non-priority countries.
Although grants and loans are getting bigger, the number of small grants remains a challenge
Korea’s loans are of significant size. Two-thirds of loans committed in 2015 were above USD 50 million – compared to a third in 2010. The average loan committed in 2015 was USD 64 million and only three loans were below USD 5 million. On the grant side, Korea’s average budget per project has doubled since 2010, but only 5% of grants in 2015 were above USD 1 million and two-thirds were below USD 100 000. Many of these small grants are awarded through the volunteers and scholarships programmes or used for technical co-operation in line with the mid-term strategy. However, a large number of small grants are also disbursed in non-priority countries for projects outside Korea’s key priority areas.
Korean ODA is focused on countries most in need
Korea’s policy commitment to increasing its support for least developed countries and fragile states is reflected in its bilateral ODA allocations (OECD, 2017a; OECD, 2017f). For example:
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Over half (54%) of Korea’s total bilateral aid went to countries most in need (land-locked, small island developing states and fragile states) in 2015, up from 51% in 2011.
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Korea allocated 42% of its total bilateral ODA in 2015 to the OECD list of fragile states, up from 37% in 2011. One quarter of Korea’s bilateral ODA in 2015 was directed to Africa, a significant increase from 16% in 2010.
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Less than 10% of Korea’s grant and loan disbursements went to upper middle-income countries in 2015, down from 11% in 2014 and in line with Korea’s targets. However, bar one concessional loan of USD 30 million to Jordan, all commitments to upper middle-income countries in 2015 were grants, while Korea’s policy indicates that its grants should be focused on least developed countries.
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In 2015, 37% of Korea’s total bilateral ODA went to least development countries, above the DAC average of 24.3% and up from 34% in 2011.
At 0.14% of GNI, Korea’s total ODA volume is still relatively low with the result that even its high allocation to least developed countries represents only one third of the UN target of 0.15% of national income. As Korea expands its aid programme, therefore, it will be important that it maintains its strong focus on fragile states and least developed countries if it intends to improve its performance against internationally agreed targets.
Korea focuses its ODA on its sectoral priorities while key cross-cutting themes are underfunded
Despite the fact that Korea’s policy documents do not define any targets for sectoral allocations, Korea’s funding for education, health and transport infrastructure over 2014-15 represented 11%, 12% and 30% respectively of all bilateral allocable ODA commitments, which is consistent with its policy.4 In contrast, Korea’s 2014-15 humanitarian assistance budget of USD 57 million (3% of bilateral allocable ODA) takes it only half way to its self-imposed 6% target, and is lower than in 2014.
In 2015, only one tenth of Korea’s bilateral allocable ODA (USD 219 million) supported gender equality, which is a decrease from 2014 levels and inconsistent with Korea’s policy focus on gender equality. Almost all projects which targeted gender equality in 2015 were related to sexual and reproductive health (OECD, 2017f), suggesting missed opportunities in other sectors.
In line with its political leadership on green growth and climate change, Korea has committed to increasing its environment-relevant ODA to 30% by 2020. In 2015, USD 392 million (17%) of bilateral ODA supported the environment and USD 301 million (13%) focused specifically on climate change. Korea is aware that these levels are well below the DAC averages of 33% and 26% respectively and is committed to improving the integration of environment and climate change into its programme (OECD, 2017f).
Korea invests significant funds in sharing its development experience and deploying volunteers
Korea is aware of the value which developing countries place on learning about its development experience and, in 2015, disbursed 11% of its gross ODA (USD 211 million) on experts and other technical assistance and 4% (USD 70 million) on scholarships (Annex B; Table B.2). These investments are consistent with Korea’s objectives and strategy but, as discussed in Chapters 5 and 6, the large number of small transactions with unclear results present an important opportunity cost for Korea.
Multilateral ODA allocations
Korea’s multilateral ODA allocations reflect the good practice set out in its new multilateral strategy. Most of Korea’s multilateral budget goes to multilateral development banks. The remaining funding is highly focused on five priority UN agencies chosen for their competence in Korea’s focus areas. As Korea’s ODA expands, it will need to consider which funding channels will allow it to achieve its objectives most effectively.
Korea’s multilateral allocations are consistent with its new strategy and are increasingly provided as multi-annual core funding, reflecting good donor practice. In total, multilateral aid amounted to 22% of the overall budget in 2015 (USD 447 million). In addition, an estimated 12% of the bilateral budget is channelled through the multilateral system for specific projects, themes or countries (USD 182 million in 2015). These levels have been relatively consistent since 2010.
Korea’s core multilateral funding was concentrated on a select number of organisations between 2011 and 2015: 43% went to the World Bank, 22% to the Asian and African development banks and 22% to UN agencies. A quarter of Korea’s core funding to the UN system and three-quarters of its non-core funding was allocated to Korea’s five priority UN agencies (UNDP, UNHCR, UNICEF, WFP and WHO). Korea made a voluntary pledge of USD 100 million to the first replenishment of the Green Climate Fund and has disbursed USD 35 million to date, USD 21 million of which was reported as ODA. As a founding member of the Asian Infrastructure Investment Bank (AIIB), Korea has to date committed USD 8 million to a special project fund and USD 748 million to a capital subscription fund. These allocations all demonstrate a strong alignment between the mid-term strategy and Korea’s multilateral allocations.
Financing for development
A significant volume of Korean public and private finance is directed towards developing countries and the government is starting to use public funds to bring on board additional investment from the private sector. This work is not yet underpinned by a clear strategy to maximise the development impact of these resources.
Korea is an important source of private finance for developing countries
Korea’s 2016-20 mid-term strategy underplays the measures which the Korean government has taken to attract finance to developing countries. Non-ODA finance from Korea – a combination of private investment, non-concessional lending and remittances – represents six to eight times the volume of its ODA (Figure 3.2). Private funds raised by Korean development and humanitarian NGOs, estimated at USD 400 million in 2015, represent ten times the funding that these organisations receive from the government’s ODA budget and are eligible for tax credits.
Source: OECD (2017f), "Korea", in Development Co-operation Report 2017: Data for Development, https://doi.org/10.1787/dcr-2017-29-en.
Korea is preparing its small and medium enterprises to invest in developing countries
Korea has developed a number of ODA grant instruments to help its small and medium-sized companies to develop technology and services for developing countries (OECD, 2017g; Chapter 5). Such initiatives have an important role in building public support for public-private partnerships and are designed to encourage investment by these firms in the future.
To date, the main potential for mobilising additional private investment and finance has been in Korea’s large business groups or “chaebols”, but the government is now under political pressure to support its smaller domestic enterprises. Like many DAC members, Korea finds it difficult to identify enough viable projects and has been proactive in approaching global platforms and multilateral agencies such as the G20, Asia Infrastructure Investment Bank, World Bank and Asian Development Bank with a view to creating combined loans (Chapter 5). The first such project – a hydropower station in the Solomon Islands, in collaboration with the World Bank and the Green Climate Fund – is funded through a concessional loan. Although not yet mobilising additional resources, pursuing combined loans is nonetheless an encouraging new departure for Korea, with potential both for mobilising private finance and reducing pressure on KEXIM to meet its concessional lending targets.
An example of Korea’s work on innovative financing is the International Disease Eradication Fund, which is financed by air ticket levies. First introduced in 2007, the fund is managed by KOICA and provides additional funding5 for humanitarian and development activities on disease eradication in Africa. In 2016, USD 23 million were collected through this levy (GoK, 2017b).
Other initiatives to leverage finance for development are being tested by KEXIM, including:
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an EDCF guarantee programme introduced in 2013 to catalyse private sector investment in infrastructure for developing countries;
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preferential interest rates for projects which involve investment in clean technology;
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a pilot interest rate subsidy mechanism to allow KEXIM Bank to borrow off the market for onward lending to developing countries at more favourable interest rates; lending from the market to private companies is also being considered.
Korea could do more to support domestic resource mobilisation
Finally, while Korea recognises the importance of taxation and revenue generation in developing countries, and is a founding member of the Addis Tax Initiative, to date it has provided very limited ODA for capacity building of tax administrations in developing countries (USD 0.35 million) and Korea could step up its ambition in supporting domestic resource mobilisation.
Bibliography
Government sources
GoK (2017a), “Memorandum of Korea”, OECD DAC Peer Review 2017, Government of Korea, Seoul (unpublished).
GoK (2017b), “Air ticket solidarity levy”, Government of Korea, Seoul, www.odakorea.go.kr/eng.etc.AirTicketSolidarityLevy.do.
GoK (2015a), “Mid-term strategy for development cooperation 2016-2020”, Government of Korea, Seoul.
Other sources
HLP (2011), “Busan Partnership for Effective Development”, 4th High-Level meeting on Aid Effectiveness, www.oecd.org/dac/effectiveness/49650173.pdf.
OECD (2017a), International Development Statistics, Volume 2016, Issue 2, OECD Publishing, Paris, https://doi.org/10.1787/dev-v2016-2-en
OECD (2017c), “Official development assistance as a percentage of gross national income (GNI)”, in OECD International Development Statistics, OECD Publishing, Paris, https://doi.org/10.1787/dev-v2016-2-table3-en.
OECD (2017b), “History of DAC lists of aid recipient countries”, (unpublished) OECD, Paris www.oecd.org/dac/stats/historyofdaclistsofaidrecipientcountries.htm#Chronology
OECD (2017d), OECD DAC Creditor reporting system data www.oecd.org/dac/stats, accessed 25/10/2017.
OECD (2017e), “DAC statistical reporting issues in 2016”, Working Party on Development Finance Statistics (WP-STAT), (unpublished), OECD, Paris.
OECD (2017f), Development Co-operation Report 2017: Data for Development, OECD Publishing, Paris, https://doi.org/10.1787/dcr-2017-en.
OECD (2017g), “Survey on blended finance activities of DAC members - Korea’s response”, (unpublished), OECD, Paris.
OECD (2016a), “DAC statistical reporting issues in 2015”, Working Party on Development Finance Statistics (WP-STAT), (unpublished), OECD, Paris.
OECD (2014), “Revised DAC Recommendation on Untying ODA to the Least Developed Countries and Heavily Indebted Poor Countries”, Annex I, OECD Publishing, Paris.
Notes
← 1. For example, it is difficult to identify the implementing partner in many KOICA grants reported through the OECD Creditor Reporting System (CRS).
← 2. Page 83 of the Korean version of the 2010 Strategic Plan (GoK, 2010) includes a commitment to develop a detailed plan by the Ministry of Foreign Affairs to strengthen co-operation with NGOs and corporations within which the public-private partnership budget would be increased ten-fold by 2015, from KRW 9 billion in 2010 to KRW 90 billion.
← 3. The list of priority partner countries identified in the 2011-15 mid-term strategy has been used for the purposes of analysing Korea’s 2015 disbursements
← 4. Korea’s 2016-20 mid-term strategy identifies six themes and three cross-cutting issues as the focus of its ODA (GoK, 2015). The six themes are education, health, women’s empowerment, science and technology, rural development and economic infrastructure. The three cross-cutting issues are climate change/environment, gender and disability.
← 5. Funding is disbursed through Korean and international NGOs; the Global Alliance for Vaccines and Immunisation, the Global Fund for Aids, TB and Malaria; UNICEF and Unitaid.