노트 : This report was prepared for use within the Bank and its affiliated organizations. They do not acce!pt responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views

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7 IRS /- go s-- z- I!~(-kRESTRICTEDFILE COPY Report No. P-699This report was prepared for use within the Bank and its affiliated organizations.They do not accept responsibility for its accuracy or completeness. The report maynot be published nor may it be quoted as representing their views.INTERNATIONAL DEVELOPMENT ASSOCIATIONREPORT AND RECOMMENDATIONOF THEPRESIDENTTO THEEXECUTIVE DIRECTORSON APROPOSED CREDITTOTHE REPUBLIC OF KOREAFOR ANEDUCATION PROJECTMay 14, 1969Public Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedINTERNATIONAL DEVELOPMENT ASSOCIATIONREPORT AND RECOMMIENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS ON A PROPOSEDCREDIT TO THE REPUBLIC OF KOREA FORAN EDUCATION PROJECT1. I submit the following report and recommendation on a proposedcredit in various currencies equivalent to $14.8 million to the Republicof Korea for an education project.PART I - HISTORICAL2. In late 1967 an economic mission identified the need forincreased emphasis on technical and vocational training in Korea'seducational system. A Bank reconnaissance mission in Miarch 1968 wasfollowed by UNESCO project identification and preparation missions,which led to a request by the Government to IDA to help finance theimorovement and expansion of the country's technical and vocationaleducation facilities. The project was appraised in October/November1968.3. Progress in the industrial sector has outstripped the supplyof trained manpower required to sustain the growth of the increasinglysophisticated industries, the mainstay of the country's rapid economicprogress. The proposed project would help provide the skilled manpowerneeded for further economic expansion.4. Negotiations for the proposed loan were held in Washingtonfrom April 14 to 17. Representing Korea were: iAr. S.C. Hong, Director,Bureau of Science Education, 1'1inistry of Education; Mr. K.S. Choi,Counselor, Korean Embassy; Mr. I. Kang, Educational Attache, KoreanEmbassy; H4r. J.Y. Sun, Third Secretary, Korean Embassy.5. The proposed credit would be the fourth to Korea. A proposed$45 million Bank loan for irrigation will be presented to the ExecutiveDirectors on Hlay 15. Before the end of this fiscal year, I expect topresent for your approval a second Bank loan for the Korea DevelopmentFinance Corporation (KDFC) in an amount of $20 million. A third railwayproject for which the Government has requested a Bank loan is currentlybeing appraised.6. The following is a summary statement of Bank loans and IDAcredits to Korea as of April 30, 1969:-2-Loan or Amount (U.S. $ million)Credit No. Year Borrower Purpose Bank IDA Undisbursed25 1962 Republic of Korea Railway 13.9 Nil110 1967 Republic of Korea 2nd Railway 11.0 1.0529 1968 KDFC Industry 5.0 4.7S-4 1968 Republic of Korea HighwayStudies 3.5 3.0Total (less cancellations) now outstanding 5.0 28.4Total undisbursed 8.77. The first railway project has been completed and the otherprojects are progressing satisfactorily. Disbursements are on schedule.IFC has invested $700,000 in KDFC and is considering investmentstotalling $6 million in equity and loans for two projects in Korea, apaper plant and a silk reeling plant.PART II - DESCRIPTION OF THE PROPOSED CREDIT8. Borrower: Republic of KoreaAmount: Various currencies equivalent to $14.8 millionPurpose: To expand and improve technical andvocational educationAmortization: In fifty years including a ten year graceperiod, through semi-annual installmentsbeginning June 15, 1979 and endingDecember 15, 2018Service Charge: Three-fourths of one percent per annumPART III - THE PROJECT9. An appraisal report entitled "An Education Project in Korea"(PE-3a), dated hiay 14, 1969, is attached.10. Korea's compulsory education system has produced a literacyrate of close to 90 percent, but turns out too iany students notadequately trained to find a job after leaving school. MIost schoolsbadly lack commercial, scientific and engineering teaching equipment,and pupils completing technical courses are often unqualified to fillskilled manpower vacancies in commerce and industry. Steps to improvethese schools and so increase the proportion of good quality graduatesare urgently needed. The Government has drawn up an education plan toimprove tha systemTh so as to relate the groGwth and quality of theoutput of the schools more closely to the overall economic needs of the- 3 -country. The rate of increase in the school age population is moderate,partly as a result of a vigorous family planning program, and this willmake it possible for the Government to concentrate on the quality ofschools rather than the quantity.11. The project would not result in a substantially increasedstudent enrollment, but is designed principally to improve the qualityof existing education and training facilities. Its objective is toimprove facilities in selected specialized schools where agricultural,commercial and technical subjects are taught in order to provide asubstantial increase in suitably qualified manpower.12. This, the first education project in Korea financed by theBank Group, would provide for the expansion and equipment of twenty-seven technical high schools, five post secondary technical schools, andfour university teacher training departments. It would also include twenty-six -;rn-years of technical assistance, twenty man-years of overseasfellowshlips to support developments in agricultural and technical educationand assist educational planning and the services of consultant architects.13. To implement the proposed project a Project Unit would be setup at the iiinistry of Education, headed by a Project Director, acceptableto the Association. It would include a qualified architect, acoordinator of the technical assistance teams and an experiencedaccountant. An overseas team of vocational teachers and educationalplanners would support the Project Unit. Furthermore, an overseasarchitectural firm acceptable to the Association with special experiencein school building and school furniture, would be appointed to establishspace, construction and costing standards applicable to all the schoolsin the project.1. The total cost of the project is $26.8 million. The proposedcredi t, covering 55 percent of thle total cost, would fin-nce allex-;enditures on equipment and furniture, 35 percent (the es-Cimated foreignexchange component) of the civil works,and the foreign costs ofconsultants and fellowships. International competitive bidding wouldbe used for the supply of all equipment and furniture, and for theconstruction of the schools. For furniture and equipment localsuppliers will be allowed the usual preference of 15 percent or theprevailing customs duty, whichever is lower. As domestic contractingfirms are competitive and well qualified, it is expected thatconstruction work will be awarded to local contractors. 'T)ualifiedlocal suppliers may win the contracts for furniture and some of thecontracts for equipment,in which case about $2 million of the creditwould finance local currency expenditures.15. Korea has rniade remarkable development efforts and its savingsperformance has increased considerably, being presently about 1 percentof GNP. But there is nevertheless a resource gap which cannot be metentirely by financing only the foreign exchange costs of projectssuitable for Bank Group consideration. Many projects having a highforeign exchange component, particularly in the industrial sector, arefinanced with private and official capital from abroad. In thesecircumstances, financing of same local expenditures on high priorityprojects is justified.16. The proposed project is of high priority and is urgentlyneeded if Korea is to have the skilled manpower needed for continuedindustrial development. The Ministry of Education, with the help ofthe consultants provided under the proposed credit, will be capableof efficient project implementation.PART IV - LEGAL INSTRUMIENTS AND AUTHORITY17. The draft Development Credit Agreement between the Republicof Korea and the Association, the Recommendation of the Committeeprovided for in Article V, Section l(d) of the Articles of Agreenentand the text o` a Resolution approving the proposed Credit are beingdistributed to the Executive Directors separately. The draft Develop-ment Credit Agreement generally follows the pattern of DevelopmentCredit Agreements for education projects.PART V - THE ECONaOmY18. An economic report entitled "Current Economic Position andProspects of the Republic of Korea!" (EAP-4a) was circulated to theExecutive Directors on March 19, 1969. The growth performance of theKorean economy continues to be outstanding. In spite of successivedroughts GNP in real terrns grew by 9 percent in 1967 and 13 percent in1968. This is well above the plan target. The rate of populationgrowth has slowed down from 3 percent to 2.3 percent in the last decadeand per capita GNP was about US$170 equivalent in 1968.19. Agricultural performance in the last two years has beendisappointing; 1968 output remained at the low level of 1967 which was6 percent below; 1966. W4hile poor weather undoubtedly was the majorreason, there was also a slowdown in land development and the use ofcurrent agricultural inputs. The Government is determined to speed upagricultural development.20. Output in manufacturing rose by 23 percent in 1967 and almost29 percent in 1963. Further industrialization is emphasized in theGovernment's development strategy. However, both agriculture andindustry, besides bottlenecks in physical infrastructure, are facedwith a shortage of skilled manpower.21. Merchandise exports increased from an average level of lessthan US$90 million in 1962-6 4 to US$320 million in 1967 and to almostU5$490 million in 1968. However, especially in the last two years,imports grew even more than exports in absolute terms as a result ofthe economic expansion, trade liberalization, and large imports offoodgrains. The deficit on goods and services increased to almostUS$680 million in 1968 fran US$415 million in 1967 and US$220 rnillionin 1964. Net foreign assets of the banking system amounting toUS$320 million at the end of February 1969 were equivalent to almost3 months' imports.22. Public savings rose substantially in the last three or fouryears owing to sharp increases in tax revenue, following a tax reformand continuing improvement of tax administration. Total gross domesticsavings are expected to go up from 13 percent of GNP in 1968 to about15 percent in 1969.23. Since gross capital formation amounted to about 24.5 percentof GNP in 1968 the resource gap, which has been widening since 1966,reached close to 11.5 percent of GNP in 1968. It is expected to stayat abou.t this percentage of GNP through 1971 but to increase inabsolute amount. Gross investment is expected to reach a level ofclose to Won 500 billion (US$1.8 billion) in 1969 or almost 26 percentof GNP. This would result in a resource gap of roughly US$700-750million to be financed by the inflow of capital from abroad.24. During the last two years Korea has incurred a rather largea,ount of short- and medium-term debt. The debt service ratio is stillmodest but it increased from 2.6 percent in 1966 to 7.4 percent in 1968.If items now on order are delivered on schedule, service on public andprivate debt will reach 20 percent or more of exports of goods andservices in 1970, not counting any provision for the service on newobligations. Korea cannot realistically expect to fill the estimatedresource gap based on her present plans with borrowings on conventionaland concessionary terms. Therefore the planned level of investmentswill have to be reconsidered to avoid an excessive debt burden. Apossible slower growth of exports and decline of receipts from Vietnammay also accentuate the problem.25. At the third meeting of the Consultative Group in Paris onApril 17/18 the Korean Deputy Prime Iinister assured the meeting of hisGovernment's determination to control the inflow of short- and medium-term debt and to keep the debt service burden within reasonable limits.In its recent standby agreement with the Fund, the Korean Governmentagreed, for the current calendar year, to limit the contracting of newdebt with maturities of between three and ten years to *$295 millionand to limit new short-term credit with maturities between one and threeyears to the financing of essential grain and cotton imports of$h0 million. This represents a modest step towards reducing thedisproportionate amount of debt on short- and medium-term. The Depu.tyPrime i-Iinister also described other measures the Goovernment is under-taking. All foreign loans are required to go through the Government'sscreening process, commercial banks are required to obtain clearancefrom the Hinistry of Finance before they can guarantee foreign loans,and potential borrowers are required to obtain the Government'spermission before they can start to negotiate with foreign suppliers.The Government intends to carry out a careful review of the investmentprogram, in particular large capital-intensive projects, to determinewhich of the projects can be postponed or scaled down. The Deputy PrimeM1inister also stated that export promotion will be strengthened further,that the export targets for 1969 to 1971 will be raised, and that thelarge repayments of sihort-term debts in 1970 and 1971 will berescheduled so as to reduce the debt hump for these two years. Heassured the members of the Consultative Group that the service ofexternal debts with maturities of thiree years and ovler would not beallowed to exceed 15 percent of foreign exchange earnings. The Govern-ment also intends to slow down the increase of the money supply and keepprice rises at the same or even lower rates than those in 1968:6 percent increase in wholesale prices and 10 percent increase inconsumer's prices.26. During recent years, the Korean economy has grown rapidly,stimulated by a substantial inflow of capital, at the cost of incurringa considerable amount of short- and medium-term debt. The Goverrnentis noU reviewing investment priorities, restricting foreign borrowing,and is actively promoting exports and discouraging imports by requiringadvance deposits against letters of credit. In these circumstances andgiven the underlying strength of the economy, Korea can be regarded ascreditworthy for the Bank lending at present planned. At the same time,Korea's per capita income is low, and considering that Korea will haveto rely heavily on borrowing- abroad for development, it would be bothprudent and justified to provide part of the Bank Group's assistanceon concessional terms.PART VI - COiPfLTANCE WITHi ARTICLES OF AGREEiENT27. I am satisfied that the proposed development credit wouldcomply with the Articles of Agreement of the Association.PART VII - RECOIViENDATION28. I recom-mend that the Executive Directors approve the proposeddevelopment credit.Attachment Robert S. McNamaraPresidentby J. Burke Knapp!siay 14, 1969

Report and recommendation of the president to the executive directors on a proposed credit to the republic of Korea for an education project

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Report and recommendation of the president to the executive directors on a proposed credit to the republic of Korea for an education project

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