[Public Voices] South Korea Must Urgently Establish a Development Finance Institution

Professor Jeong Tae-yong, Graduate School of International Studies, Yonsei University

South Korea's economy ranks among the top 10 in the world. Recently, there has been news suggesting that South Korea's per capita national income, based on purchasing power parity, may surpass that of Japan. The economic development achievements and accomplishments that South Korea has made so far are very proud, and we live in an era where many countries around the world envy South Korea. It has transformed from a country receiving aid to one providing aid. In 2021, South Korea contributed more than 2.8 billion dollars in official development assistance to the international community. This ranks it around 15th among the countries of the Organisation for Economic Co-operation and Development (OECD). However, the fact that South Korea still lacks an organization like the Development Financial Institutes (DFIs) found in Europe or North America does not match its international status. A DFI must be established quickly.

If South Korea creates a new DFI, domestically it must gain legitimacy from its citizens by demonstrating that the institution actively and effectively contributes to the international community. At the same time, internationally, it must build trust and confidence among both donor and recipient countries regarding what additional functions and roles it will perform complementing existing multilateral financial institutions such as the World Bank and the Asian Development Bank, as well as many bilateral DFIs from countries like the United States and the United Kingdom. South Korea should find areas where it outperforms other donor countries or sectors that recipient countries desire, and seek ways to contribute to the international community accordingly. For example, in the digital sector, South Korea is ahead of any other country in actually utilizing, applying, and adapting digital technologies. South Korea’s COVID-19 response policies, which were recognized internationally in public health, heavily utilized digital technology. In climate change response, South Korea applies digital technology for greenhouse gas reduction and climate change adaptation. Smart city development, which applies digital technology to urban development, is another area where South Korea excels. In education, South Korea effectively uses and applies digital technology in practice.

As a donor country, South Korea understands recipient countries better than others. The policies, companies, and private sectors’ many successes and failures experienced during South Korea’s transition from an aid recipient to a donor country, along with South Korea’s experience, knowledge, operational know-how, policies, and systems, are highly sought after by many recipient countries. If South Korea commercializes and implements the experiences and capabilities that recipient countries want, it can provide substantial help to recipient countries and cooperate effectively with existing DFIs.

To establish a new DFI, South Korea must first boldly reform its existing aid execution structure and processes. The current structure, where the Korea International Cooperation Agency (KOICA) handles grants and the Export-Import Bank of Korea manages loans, should be integrated to create a new and innovative DFI. Including grants and loans, various development finance instruments such as guarantees and equity participation necessary for development projects should be used organically and effectively to enhance South Korea’s position and status as a donor country. The DFI should be a public-private partnership that effectively creates projects and programs and transfers that experience to developing countries. Sharing diverse cases, experiences, and know-how with recipient countries is something South Korea can do better than any other donor country.

The DFI ecosystem already exists in the international community, competing and cooperating in various forms. The international community is looking forward to a new form of DFI that South Korea, as a latecomer, will demonstrate.

/ Jeong Tae-yong, Professor, Graduate School of International Studies, Yonsei University