Foreign Relations of the United States, 1952–1954, Korea, Volume XV, Part 2

S/S–NSC files, lot 63 D 351, NSC 156 Series

Note by the Executive Secretary (Lay) to the National Security Council

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NSC 156

Washington, June 23, 1953.

Strengthening the Korean Economy

References:

A.

NSC Action Nos. 711 and 741¹

B.

NSC 154,² paragraph 14

C.

Memos for NSC from Executive Secretary, subject “Settlement of Republic of Korea Advances of Korean Currency (Won) to the United States Forces”, dated February 9, and March 10, 1953³

At the direction of the President the enclosed report to the President on the subject by the mission headed by Mr. Henry J. Tasca, Special Representative of the President by Korean Economic Affairs, is referred herewith for the consideration of the National Security Council.

The enclosure consists of the following parts of the complete Tasca Mission report:

Letter of Transmittal to the President

Glossary of Abbreviations

Foreword

A Synopsis of the Report

A. Achievement of U.S. Security Interests

B. Ways and Means of Strengthening the Korean Economy

Mission Recommendations

A. Amounts and Types of U.S. Assistance

B. Efficient Utilization of U.S. Assistance

C. Coordination of Economic Programs

The complete report⁴ has been furnished directly to interested agencies by Mr. Tasca. A copy of the complete report is also available for reference in this office.

Mr. Cutler will report on the proposed procedure for handling the enclosed report at the Council meeting on June 25.

James S. Lay, Jr.

[Enclosure 1]

The Special Representative for Korean Economic Affairs (Tasca) to the President

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[Washington,] June 15, 1953.

Dear Mr. President: In accordance with your letter of April 9⁵ asking me to investigate ways and means of strengthening the Korean economy in the light of the security objectives of the United States and the United Nations, I have the honor to transmit to you the attached report of my findings. The preparation of this report was only possible because of the fine cooperation of the interested agencies of the U.S. Government. General Mark W. Clark and the United Nations Command rendered invaluable assistance at every stage during my visit to the theater.

The report deals with military requirements, production, investment and consumption in relation to defense posture, imports, and external aid, the prevention of inflation, and ways and means of making U.S. aid effective at lowest cost to the U.S. The following are highlights which may be of special interest to you.

The Republic of Korea has been making a magnificent contribution to the military effort of the free world in Korea. As of the first of April the Government of the Republic of Korea had the equivalent of 14 divisions in combat status. Since then two more divisions have been activated and four more are scheduled to be activated before the end of December. As of April, ROK forces held two-thirds of the front line. Over the past year the ROKs generally have suffered over 50 percent of the casualties each month and in several months over 70 percent.

This superb military contribution of the Republic of Korea must be viewed against the economic background and the devastation and hardship which has struck that country. There are an estimated 2,500,000 refugees, 5,000,000 more destitute, and approximately 600,000 houses have been destroyed. War damages are calculated to be $1 billion, and about 1,000,000 human lives have been lost since the invasion in June 1950. Production of rice, a basic crop in Korea, last year was only two-thirds of the 1945/50 average. Per capita daily food consumption is below 1500 calories. Income per capita in the last year was about $60 compared to about $75 in 1948/49 and $90 in 1949/50. The entire visible export trade of Korea during the past year was little more than twice the value of the used clothing and similar items given to Korea by private American charities during the same period of time. There has been continuous inflation in Korea, wholesale prices having increased 20 times from June 1950 to June 1953.

It is my considered view that unless the total volume of resources available to the Republic of Korea increases substantially, it cannot maintain the present level of forces without further inflation and increased hardship. However, our present plans provide for the increase of the presently activated 16 divisions to 20 divisions during the course of the next year. Further inflation and economic hardship could undermine the morale of the civilian population. Deterioration of morale and the consequent damage to the ROK military effort could seriously affect the U.S. position in Asia.

In the light of the foregoing, I strongly recommend a new three-year integrated economic program of military support, relief and reconstruction. The amount of additional U.S. aid required for the Fiscal Year 1954 would be $300 million in addition to that already contained in the MSA (proposed $71 million for UNKRA) and Department of Defense budget ($75 million for civil relief) or a total slightly under $450 million. For the following years the comparable total is estimated at about $348 and $275 million respectively. Such an aid program would provide the necessary economic support for Korea’s military effort as well as enable that country to regain its pre-invasion standard of living. Reconstruction and recovery cannot be achieved by a series of stopgap measures.

Such a program would achieve the following objectives:

a. Support the ROK armed forces both logistically and in terms of morale.

b. Release U.S. armed forces from present assignments in Korea by substitution with ROK forces.

c. Strengthen the morale of the Korean people and increase their support of U.S. objectives.

d. Provide an example to the rest of free Asia and the free world generally that resistance to aggression will bring forth effective moral and material assistance from other nations of the free world.

e. Provide strong collateral support to the Japanese economy and Japanese economic orientation toward the free world by developing increased trade between Japan and Korea at a time when potential reduction in U.S. military procurement in Japan and continued loss of a large export market in China may tempt Japan to seek additional markets in Communist areas.

It has been a great privilege and pleasure to undertake this mission to Korea. The truly heroic quality of the Korean people in their struggle against Communist aggression will remain ever a source of inspiration to me.

Respectfully yours,

Henry J. Tasca

[Here follows a glossary of abbreviations.]

[Enclosure 2]

Excerpt of Tasca Mission Report on Strengthening the Korean Economy

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[Washington, June 15, 1953.]

Foreword

Pursuant to a recommendation of the National Security Council, President Eisenhower on 9 April 1953 appointed Dr. Henry J. Tasca as Special Representative of the President for Korean Economic Affairs and requested that he head a Mission to investigate ways and means of strengthening the Korean economy in light of the security objectives of the United States and the United Nations. The President directed that the Mission’s recommendations include the amounts and types of United States assistance desirable in support of the Korean economy; proposals as to the manner in which the United States can best be assured that any resources it may contribute are utilized in the most efficient manner possible; and the formulation of measures to be adopted to ensure the coordination of all economic programs in Korea. The results of the Mission’s investigation are embodied in this report.

The Mission arrived in Korea on 17 April 1953 and headquarters were established in Pusan in the offices of the United Nations Civil Assistance Command, Korea. A series of meetings was held with United Nations Command agencies in Korea, with the United Nations Korean Reconstruction Agency, with each of the Ministries of the Republic of Korea, with the Chairmen of National Assembly Committees, and with the Korean Chamber of Commerce. Each of the above prepared extensive material on the Korean economy for consideration by the Mission. In addition, the Special Representative visited most of the important industrial plants and agricultural and mining areas in South Korea including Seoul, the capital.

The Mission is deeply indebted to General Mark W. Clark, Commander-in-Chief, United Nations Command and his staff for their cooperation and invaluable assistance. Assistance furnished by all commands including Eighth Army, Korean Communications Zone, Korean Military Advisory Group, Army Forces Far East, and especially the United Nations Civil Assistance Command is appreciatively acknowledged. The support and cooperation of the United Nations Korean Reconstruction Agency was also invaluable.

United States Ambassador Ellis O. Briggs and his staff were especially helpful in supplying political guidance at all stages in the preparation of the report.

The Mission wishes to thank all Republic of Korea Government agencies with which it came into contact for their excellent cooperation. The Mission is especially grateful for the cooperation rendered by Prime Minister Paik Too Chin.

Strengthening the Korean Economy

A Synopisis of the Report

(Sections A and B)

A. Achievement of U.S. Security Interests

The security interests of the United States require the strengthening of the economy of the Republic of Korea. An economic policy for Korea must (a) strengthen the Korean economy to provide maximum support to the military effort of Korean and United Nations forces in Korea; (b) ensure living standards for the Korean population which will make Korea safe against starvation, disease, unrest and subversion; and (c) develop the Republic of Korea into a self-defending and self-supporting nation as early as possible and to the maximum degree feasible.

The achievement of United States military plans in Korea requires the immediate expansion of the Korean armed forces by increasing the number of Army divisions from the present 16 divisions, of which two were only recently activated, to 20; and the development by the end of US FY 56 of an economic base in Korea which will provide maximum support to armed forces of the above magnitude, in addition to making possible restoration of the pre-invasion standard of living.

The above goals cannot be achieved with Korea’s own resources. The proposed number of ROK combat divisions, for example, approximates the number of combat divisions in the U.S. Army at the present time. To support armed forces of this magnitude the Republic of Korea has a population of only 21.5 million, of whom nearly a quarter are presently receiving some form of government relief and of whom approximately three million are in a refugee status. The reconstruction problem is staggering; war damage to property has exceeded $1 billion and nearly one out of every six homes has been destroyed. Further, the armed forces and the civilian population must be rebuilt on the basis of an economy of dwarf-like proportions. The total national income of Korea, for example, is smaller than the income of the population of San Francisco. The power generation capacity of all South Korea is less than that of the battleship Missouri alone. The entire visible export trade of the Republic of Korea during the past year was little more than twice the value of the used clothing and similar articles given to Korea by private charities during the same period of time. Per capita gross national product during the current year is only $60, compared with $200 in Japan, and over $2,000 in the United States. Food consumption amounts to less than 1,500 calories per person per day.

The six-fold expansion of the Korean forces since June 1950 has been largely financed by inflation, which has raised retail prices today more than twenty times their level of three years ago. In view of the enormous gap between resources available and resources required, it will patently be impossible, unless the total volume of available resources is increased substantially, to maintain even the present level of forces without further inflation and mounting hardship. Continued build-up to 20 divisions would be catastrophic from an economic point of view unless additional resources were quickly made available.

The root of this difficulty is the extreme, acute, and widespread shortage of food stuffs, raw materials, equipment, and technical skills, in relation to the war demands of the Republic of Korea armed forces and the minimum subsistence needs of the civilian population. Unbalanced budgets, inflationary gaps, perverse prices, miscontrols, black and barter markets, premiums on speculation to the detriment of productive effort, pervasive graft and corruption in government, shortages in transport, industry, agriculture, housing, and consumption, as well as large scale unemployment and nonutilization of natural wealth, have already derived from the fundamental shortage of material resources in general. The major deficiency of assistance programs to Korea since 1950 is the fact that all such programs combined were and are of inadequate size and scope to close the resources gap. It is imperative to narrow—rather than to widen—this basic gap between the sum of prescribed military and essential civilian requirements on the one hand and of resources made available from Korean production and external assistance on the other. Unless this gap is narrowed, the economy will be entirely incapable of sustaining both the civilian population and the proposed defense forces. The budget proposed by the ROK Government as immediately necessary to support the augmented forces, for example, would require annual expenditures of nearly two and a half times annual revenues. Further inflation of the currency and eventual economic chaos would be inevitable. The result would be to undermine the ability of the ROK to maintain a defense posture and would pave the way for subversion of the civilian population through exploitation of the inevitable disease, starvation, unrest, and lack of economic opportunity.

Such collapse of the ROK war effort and morale, with its attendant threat to the survival of the state itself, in addition to posing problems of the gravest magnitude in regard to the conduct of military operations in Korea, would seriously prejudice the U.S. position of international leadership as well. It could effectively create the belief that support of U.S. security objectives could be disastrous to countries still free to choose sides. Protracted resistance to Communist aggression is imposing acute and visible hardship on the Korean population. If the people of the free world, particularly of the Far East, were led to believe that comparable resistance to aggression might mean only similar future hardships for them, the present defense of the U.S. could be gravely affected in other parts of the world by a deterioration of the will to resist and the desire to remain free.

B. Ways and Means of Strengthening the Korean Economy

The Mission’s principal terms of instruction require recommendations as to ways and means of strengthening the Korean economy in the light of the security interests of the United States. In simplest terms, the requirement is for an economic base which will provide maximum feasible support for the build-up and maintenance of a 20 division army and modest air and naval forces for an indefinite period subsequent to February 1954; which will eventually provide maximum feasible support for a 10 division army and small air and naval forces for an indefinite period subsequent to the program period; and which will provide a standard of living high enough to ensure resistance to the blandishments of Communist subversion.

Despite Korea’s present appalling lack of visible resources, and the omnipresent possibility of an accelerated inflationary spiral, it is the judgment of the Mission that with necessary external assistance the above objectives can be met in three years.

To meet the objectives, it will be necessary to restore Korean consumption levels to those prevailing in FY 50 and to increase Korean production sufficiently to make this increase in consumption and the greater defense effort economically feasible. This means specifically that per capita consumption should increase from $50 in FY 53 to $70 in FY 56. This increase is feasible. Analysis of production possibilities indicates that during the program period food production could increase by 60 percent, mineral output by 140 percent, industrial output by 160 percent, and that the shortages of fertilizer, fuel, power and transport could be eliminated.

In order to make the Korean economy closer to viability, it will be necessary to decrease imports and to increase exports. Military imports will decline as the ROK economy begins to produce more of the requirements of the ROK Armed Forces. Civilian imports follow a downward trend as food production and fertilizer production increase. Dollar earnings from services and supplies to the UN forces will gradually decline but the increase in commercial exports will overbalance this decline.

The economic expansion implied in these goals must go together with the achievement and maintenance of internal financial stability. Although the annual defense expenditure by the Republic of Korea in dollar equivalents should rise from $90 million in FY 53 to $280 million in FY 56, the rising level of gross national product, together with improvements in tax administration, should progressively narrow the deficit in Government accounts.

The basic concept underlying the above plan is that an integrated Korean relief, reconstruction and defense program of adequate size, composition and timing, carried out with skill and vigor, and appropriately blending external assistance with internal performance by the ROK government, can lead the Korean economy out of its present state of dangerous weakness and to a position of strength great enough to enable the Republic of Korea to carry a substantial share of the necessary defense burden as well as to support its population at pre-war standards of living.

Economic progress in Korea will also permit the elimination of the refugee camps and the relief dole for the millions dislocated and made destitute by the war. These millions will be needed and will find gainful and useful employment in new and expanded production activities. The morale benefits alone of such an accomplishment will be of incalculable value.

The proposed plan also recognizes that the aggregate cost of supporting the defense effort by outside assistance will be less if part of the assistance is devoted to economic reconstruction and to investments increasing Korea’s productive resources.

In developing its plan the Mission has examined in detail the consumption requirements of the Republic of Korea and production and investment possibilities and programs in all sectors. The recommendations are grounded in large measure on a ROK five year program, which, however, has been revised to assure principal concentration on key production areas essential to a reconstruction and recovery program. The report assumes, in this connection, that an armistice will be negotiated at the beginning of the three year period, that the guerrilla threat will become negligible by the middle of the first year, and that there will be no substantial change in the current geographical area of the Republic of Korea.

The Mission’s optimism that the Korean economy can expand to the degree indicated in the program, while at the same time achieving and maintaining internal financial stability, rests on certain dominant features of the economy which may be summarized as follows:

1. A substantial number of economic problems in Korea are simple, visible, and tangible. A mine is not connected with the national railroad network. Build a short connecting link and this problem is solved. Coal is piling up at pit heads for lack of freight cars. Import freight cars and the coal can be moved. Output of minerals is low, because there are no pneumatic drills. Import these and output will increase tenfold. Priorities in any low level economy are brutal: eat more, heat less, or vice versa; have one pair of shoes a year or repair the roof, but not both. But brutal priorities have the one redeeming feature that they are simple and certain and easy and speedy to administer. And this, of course, holds true for all phases of economic life with a low degree of diversification.

2. In a war-damaged economy completing investments of the simple repair and replacement type abound. There are innumerable instances where “for the lack of a nail the horse was lost.” Relatively small repairs and replacements will bring whole industrial aggregates back into production. A little dollar and local currency capital, together with arrangements giving individual initiative the right of way, will rapidly clear up these waste pockets in the industrial structure.

3. In the recent past, large amounts of potential production have been lost due to the interruption of, or the stretch out of, industrial production resulting from actual or anticipated lack of raw materials. Potentially substantial quantities of foodstuffs have been lost as a result of delayed arrival and insufficient quantity of fertilizer. In the early part of the program period large increases in production will result from importing fertilizer and raw materials to capacity levels and by building up stocks that enable an optimum timing and flow of production.

4. Bringing modern equipment into an undeveloped economy provokes production increases far above those normally expected in developed countries. The shift from hand methods and human power to machine methods and mechanical power goes beyond the realm of marginal increments and results in a discontinuous upsurge.

5. In the second part of the program period, the fixed installations, the construction of which was begun in the early program period, will be ready for production. Since in many important production fields, it is a matter of breaking virgin ground, production returns on investment will be high.

6. With returning monetary stability, all the innumerable sources of sloth, waste, and misapplication of human energy, labor, goods, and materials which are now prevalent as a natural consequence of the long drawn out inflation, will come to an end. The vicious spiral of universal speculation, diversion, and corruption will be arrested and a cumulative healing process will set in.

7. Manpower will be brought nearer full utilization but will not become a bottleneck during the period. In FY 56 an estimated available labor force of 9.5 million will meet a calculated manpower requirement of 9.2 million. As regards technical talent, liberal foreign exchange allowances will be made in order to acquire technical personnel from abroad and vocational training in Korea will proceed at maximum speed.

8. The known deposits of tungsten, columbite, manganese, beryl, gold, anthracite, and graphite in Korea are very valuable and a proper geological survey would probably disclose many more. Even small investments in these opportunities will show very quick and very large returns. As a matter of actual experience, for example, tungsten production in Korea expanded from 1,154 tons in 1951 to 3,789 tons in 1952 and to an annual rate of 5,050 tons in early 1953.

9. In all countries which enter into the early phases of the modernization, industrialization, and commercialization of their national life, large intangible human productivity reserves exist at the outset. These can be mobilized by experts who generate a cumulative process of imitation. No development of new technical or managerial research is needed in Korea. The vast reservoir of knowledge available in Western civilization need only be tapped. And the Koreans, like the Japanese a hundred years ago, have the will and the ability to do so, and are not inhibited by irrational traditions and institutions.

mission recommendations

Chapter VIII (Sections A, B and C)

A. Amounts and Types of United States Assistance

If the United States is to achieve the stated objective of augmentation of the ROK armed forces around an army of 20 divisions, and if the necessary economic base in support of such forces is to be developed in Korea, Korea must have additional aid and must have it immediately. It is the recommendation of the Mission that the United States institute without delay a new three year program of military support, relief, and reconstruction in Korea. The total amount of such aid represents a blending and a balancing of requirements for economic support of the ROK armed forces, for consumption, for investment in productive facilities, and for the generation of counterpart funds to meet unavoidable budgetary deficits and the local currency costs of investment projects. In consideration of all of these factors the total requirement for external economic assistance to the Republic of Korea for FY 54 is estimated at $533 million, of which $75 million would be supplied by CRIK, $118 million by UNKRA ($71 million U.S.), $300 million based on the present survey, and the balance accounted for by other voluntary and UN contributions. CRIK, the new aid program, and the U.S. share of UNKRA would amount to $446 million in FY 54. It is the estimate of the Mission that total ROK requirements for economic assistance from the U.S. in FY 55 will be $348 million out of a total proposed aid, including UNKRA, of $368 million, and in FY 56 $275 million out of a total of $280 million. The Mission believes that the assistance should be made available over a three year period as the minimum time required to achieve the investment and production goals.

The proposed assistance program is a basic supporting element in an integrated plan designed to lead to balanced development of the ROK economy. The Mission’s three year plan is based on a ROK five year plan but concentrates on the key production areas essential to a reconstruction and recovery program. The Mission’s plan emphasizes investment in agriculture, mining, industry, transportation, and power, and assumes that mining, agriculture and possibly the cottage industries are those with the greatest export potential. Stress is placed on projects which can achieve the following results: Provide for reconstruction and development of basic services and utilities; rapidly produce increased supplies and essential goods and services; contribute to the attainment of self-sufficiency in food stuffs, fuel, and consumer goods; improve and maintain public health and safety; restore minimum levels of housing and education; and make a beginning on flood control, land reclamation and reforestation. The Mission also recognizes that the long range interests of Korea will be served by establishing technical and vocational schools and using foreign advisors to train Koreans to assume the managerial and technical responsibilities formerly exercised by Japanese.

The Mission has been deeply impressed by the mineral potential of Korea and by the fact that mineral exports are and may well continue to be the greatest dollar earner in commercial trade. In addition to substantial investment in developmental and rehabilitation project, the Mission recommends initiation of a geological survey.

With respect to agriculture, the Mission supports the general recommendations of a FAO team which recently completed a study of Korean agriculture. Principal recommendations included a sharp increase in the application of fertilizer and pesticides; acceleration of the repair and extension of the irrigation systems; a shift in land use so as to increase the production of potatoes and sweet potatoes with a reduction of rice acreage on land not suited to rice; and increased emphasis on land reclamation. In the administration of the economic assistance program, the Mission recommends that domestic grain collections and grain imports be pooled so that cross hauling and local shortages can be avoided.

Imports of consumption goods, added to domestic production, will provide consumption levels by FY 56 approximately equal to those of 1949–50. Grain imports will remain at a fairly high level during FY 54 to enable the Government to meet its grain obligations and replenish stock levels. Grain imports will drop sharply in FY 55 and cease entirely in FY 56, at which time the ROK should have achieved a precarious self-sufficiency in staple foods. There will remain, however, continuing requirements for certain types of food to supplement the Korean diet, deficient in fats and proteins. Certain U.S. surplus commodities, notably butter, dried skim milk, cotton seed oil, and peas and beans, are admirably suited to fill this deficiency. The recommended FY 54 assistance program, therefore, includes U.S. surplus butter, cheese, dried skim milk, cotton seed oil, and peas and beans, valued at $29,000,000, for utilization by ROK armed forces, by institutions and for relief distribution.

Against the cost of the proposed economic assistance program must be measured the substantial reduction in U.S. support of the ROK armed forces which would be effectuated during the same period of time estimated as a reduction in U.S. military assistance from $1,655 million in FY 53 to $660 million in FY 56. Additional savings to the U.S. will accrue from the replacement of U.S. divisions in Korea by ROK divisions. On the basis of present combat support arrangements, the annual saving to the U.S. for each U.S. division replaced by a ROK division is in the magnitude of $100 million. U.S. plans call for withdrawal of a substantial number of U.S. troops in the near future and their replacement with ROK personnel. Pay, allowance, and personnel costs for each increment of 100,000 U.S. troops are in the magnitude of $375 million annually and in a ratio of approximately 8–1 to comparable ROK costs under the new ROK armed forces pay bill approved in April.

With respect to types of U.S. assistance, the Mission recommends continuation of present U.S. appropriations for CRIK and UNKRA, as well as initiation of a new appropriation to accelerate recovery and reconstruction and to provide additional economic support to Korea’s defense effort.

The requirement of a Theater Commander for funds for emergency civilian relief in support of his military mission is a recognized aspect of modern military operations, and it is the judgment of the Mission that the CRIK concept should be continued until termination of hostilities permits the elimination of such a peculiarly emergency funding requirement.

Although the military situation in Korea has not eventuated as anticipated at the time of UNKRA’s establishment, the Mission does not recommend that UNKRA be phased out of the Korean picture at the present time. The war is based on collective UN action and the concept of rehabilitation has been grounded on the assumption of a UN effort; a move to make the economic assistance program a unilateral U.S. program would undermine the whole concept of collective action. In the long run it would also require the U.S. to assume one hundred percent of the expenditures now borne by UNKRA as opposed to the sixty-five percent to which the U.S. is pledged at present. Furthermore, if there is to be assumed a continuance of the cold war in the future, there must be recognized the serious disadvantage of creating a precedent in Korea which might then require unilateral action by the U.S. in similar situations in the future. Overall, however, it should be noted that although the CRIK, UNKRA, and new economic defense support programs are considered separately, in view of their diverse funding sources, in economic terms they should be considered to represent a single integrated program of economic assistance to Korea.

The Mission has given serious consideration to the question of assimilation of the military assistance program with the economic aid program, as for example, is done in MDAP countries. It has concluded, however, that while such accommodation is undoubtedly desirable, and should be initiated when feasible, substantial additional examination of the matter would be necessary before it could be deemed practicable during the current period of military operations, since potential combat exigencies require the fullest possible flexibility with regard to the extent of direct logistic support furnished the ROK armed forces, including the right to commit from military stocks whatever support is deemed necessary by the combat commander.

It is the opinion of the Mission, in view of the comparability of the proposed new aid program to defense support programs elsewhere, that appropriations for the new program should be sought through MSA and that funds for the UNKRA should be requested through MSA as a part of the same appropriation. It is further the view of the Mission that as long as the military situation continues to require that the Theater Commander have immediate access to funds for emergency civilian relief, funds for CRIK should continue to be requested, as at present, from the military budget.

With regard to requisite appropriation language, it is believed that the CRIK language should remain substantially as at present. Language for the proposed economic defense support program should be designed to provide the greatest possible flexibility in the use of funds, language such as that authorizing European aid programs being considered appropriate. It is believed that the U.S. contribution to UNKRA should be appropriated as part of the economic defense support appropriation, with the legislative language providing for transfer of funds to UNKRA to meet the U.S. pledge to UNKRA. It would also be desirable for the language to permit transfer of funds to UNKRA additional to those actually pledged to date by the U.S. This would serve not only to avoid duplications of personnel and effort in the reconstruction field but could also serve to solicit further contributions to UNKRA from other nations on the basis of the existing 65/35 sharing of UNKRA costs between the U.S. and other nations.

B. Efficient Utilization of United States Assistance

The Government of Korea necessarily has sovereign authority over all economic matters in Korea. However, it does not have command over sufficient resources to meet the minimum requirements of the civilian population, let alone the needs for larger military forces or for reconstruction. United Nations agencies have no sovereign or occupational authority in Korea, but they do possess, or can be provided with, sufficient resources to meet the above requirements. Solution of Korea’s economic problems, therefore, demands not only proper coordination between United Nations agencies and the ROK but binding assurances by the Government of Korea that it will take such steps as are necessary to guarantee the most effective use of resources made available under external assistance programs.

UNC economic coordination with the Republic of Korea is presently achieved through the Combined Economic Board. Although the provisions of the UC–ROK Economic Coordination Agreement provide that the Board will consider all pertinent aspects of the economy of Korea, in practice the Board’s actions during the past year have been limited to matters specifically involving United Nations Command economic relationships with the Republic of Korea, e.g., pricing of CRIK aid goods, repayment for United Nations hwan drawings, determination of a new military conversion rate, etc. It is the considered judgment of the Mission that the Combined Economic Board should devote a far more substantial proportion of its time than at present to the development of internal financial and economic policies in Korea which will strengthen the economic structure of the Republic of Korea and its capacity for self-support and self-defense. A new aid agreement between the United States and the Republic of Korea, or basic amendments to the existing Agreement on Economic Coordination, will be required as a means of assuring positive ROK action on necessary economic and financial measures. The initiation of a defense support program which will sharply change the emphasis from furnishing aid to prevent disease and unrest to furnishing aid to stabilize, rehabilitate and develop the economy requires significant modifications in the Agreement. Furthermore, the existing agreement, as do ECA/MSA Agreements, describes in general terms the economic policies to be followed. Experience has shown that such agreed generalities are not effective in obtaining the decisive economic action required in Korea. Specific policies of the following nature to be added to the more general policies now in the Agreement are therefore recommended:

1. These establishment of a single valid exchange rate as soon as practicable which would be applicable to all transactions between hwan and foreign currencies.

2. The pricing of imported goods into the economy at the single valid exchange rate, except as may be agreed by the Board in special circumstances and for a temporary period.

3. The development of a comprehensive plan for promoting the sale or long-term leasing of state-owned industries and other productive enterprises to private buyers and the encouragement of private enterprise. The transfer of foreign trade from governmental to private channels having due regard to ROK constitutional requirements.

4. The adjustment of the price structure, i.e., the rate of exchange, prices and wages, to monetize income and make unnecessary hidden subsidies.

5. The coordination of economic and financial policies in the Combined Economic Board including particularly those concerning budgetary, tax, investment and credit policies.

It would be possible to achieve all the necessary modifications described above by an amendment to the Agreement on Economic Coordination. This would have the advantage of avoiding possible difficulties in renegotiating an agreement already in force. The amendments, however, would be so numerous that the Mission recommends the recasting of the existing agreement plus modifications in a new aid agreement. In this connection, however, it should be noted that in ROK eyes the development of a 20 division army is the Korean quid pro quo for the proposed assistance program. Since the Republic of Korea even prior to receiving any formal assurance of additional U.S. aid has already begun the augmentation of its armed forces in accordance with U.S. desires, the Government may well take the position that the U.S. assistance is being granted only with unwarranted conditions, whereas the ROK share of the compact is being carried out freely and unconditionally.

In addition, it would be highly useful to provide that the new agreement will become effective upon ratification by the ROK Assembly. The Agreement on Economic Coordination was not ratified by the Assembly and the Government has been hampered, especially in the pricing field, by actions taken by the Assembly which prevent full compliance with the agreement.

Later implementation of the agreement will require that the Republic of Korea take a number of politically unpalatable but nevertheless imperative steps to normalize the country’s financial structure. These include but are not limited to:

1. Strenuous efforts to balance the Government’s budget notwithstanding the military build-up, including reduction in proposed FY 53/54 government expenditures to the extent noted in this report. Development of a phased schedule of government expenditures consistent with revenue income.

2. Stringent credit policies, particularly with respect to loans to governments and government-sponsored enterprises.

3. Use of counterpart funds to promote monetary stability and recommended investment programs, within the framework of the general efforts of the Republic of Korea to avoid inflation.

4. Initiation of a study of the existing system of controlled prices with a view to moving as rapidly as possible to a free market price basis.

The Mission finds that the financial weakness of the Republic of Korea represents a most serious threat to the accomplishment of U.S. objectives in Korea. Without additional external assistance the outlook is for more inflation in Korea. Even additional external assistance will not be fully effective unless the ROK Government modifies current financial policies and operations. Some changes may require legislative action but much of the work can be accomplished through the machinery of the Combined Economic Board where the joint nature of the decisions will provide desirable support to ROK actions. The United States member should also be enabled to lend the necessary technical experts available in the United States—tax experts, administrative specialists, accountants, etc.

In connection with Government spending, the Mission finds that proposed FY 1953/54 budgetary expenditures can be safely reduced without damage to the objectives of military strength and economic recovery. The Mission recommends that the ROK Government adopt as a working figure the suggested amount in this report and further that an exhaustive reexamination of the budget be undertaken as soon as possible with a view toward achieving more economies in expenditures. The Mission is convinced that vigorous efforts in the tax collections field will yield substantial increases in government receipts and recommends a tax investigation under CEB auspices. Where U.S. and UN military and civilian establishments can assist tax efforts, as by income tax deduction from salaries, such arrangements should be instituted without delay. Although it regards adequate government pay scales as indispensable for efficient government operation the Mission urges postponement of pay increases and other deferrable expenditures until significant improvement in the government’s financial position is achieved. Finally, the Mission recommends that the closest coordination be achieved between government disbursements and aid arrivals.

The Mission finds that in principle existing credit controls provide adequate machinery for limiting expansion of the money supply through bank lending but that the controls are ineffective in practice because of the Monetary Board’s inability to limit borrowing by Government and Government-sponsored enterprises. The Board must be strengthened and given greater authority in making and controlling implementation of monetary and credit policy. The Mission believes that great progress can be made in this direction by arranging for Board members to participate in CEB deliberations as representatives of the monetary policy authority of the Republic of Korea, since credit policy is of strategic importance on questions affecting the control of the money supply. The mission further recommends that the Monetary Board engage an experienced banking and monetary advisor to be made available by the U.S. Government to render policy and technical assistance to the Board in decisions affecting loans and credit policy.

The Mission finds that the existing extensive government ownership and control of industry has acted as an obstacle to developing a healthy economy. Government enterprises are financially weak, poorly managed and suffer from government restrictions, red tape and arbitrary price policies. The Mission recommends the development of a comprehensive plan to promote the sale or long-term leasing of vested properties to private buyers.

The operating losses of the large Government enterprises constitute a continuing pressure for bank loans to cover the losses. The Mission recommends that CEB direct an investigation into the financial position of these enterprises. The Mission further recommends that such an examination include study of Government monopoly operations and transportation with the view toward increasing revenue derived by the government from these activities.

The Mission believes that the United States Government should assist Korea in determining the feasibility of establishing banking facilities to mobilize domestic capital for long term investment purposes and should use a portion of counterpart derived from the aid program to support this purpose. The Mission further recommends that the Republic of Korea Government be urged to implement the General Banking Act to give the Monetary Board greater supervisory authority over the bank institutions of the country.

With regard to the use of foreign exchange resources of the Republic of Korea, the Mission finds that present regulations and procedures governing exchange transactions prevent the most effective use of available exchange. The Mission feels that full control in determining foreign exchange policy should be shifted from the Ministry of Finance to the Monetary Board to permit the Board better to integrate the use of available exchange with fiscal and credit policies. The Mission recommends that the CEB request the Monetary Board and Bank of Korea to develop recommendations designed to simplify existing foreign trade and foreign exchange procedures including steps to permit authorized commercial banks to deal in foreign exchange. The Mission further recommends a foreign exchange budget be developed in consultation with the CEB to coordinate foreign exchange policy with external assistance.

The Mission has found that the existing system of controlled prices has proved to be ineffective in treating the economic problems of the country and regards the system as an obstacle to economic recovery. The Mission recommends that the CEB direct a study of the existing system and recommend changes in the direction of moving as rapidly as possible to a free market price basis. The Mission urges that adjustment of prices and wages be made not later than six months after the aid program. The Mission also feels that the Government should accept as an objective the monetization of incomes and the elimination of payments in kind as rapidly as possible.

The Mission recommends a devaluation of the official rate of exchange to a level established in consultation with the CEB. The Mission feels that agreement by the Republic of Korea to the military conversion rate of 180–1 provides a basis for consultation leading to the establishment of a single rate of exchange. The exchange rate adjustment and the price wage adjustment referred to above must be made together and the Republic of Korea Government should accept as an objective the establishment of a new rate not later than six months after the initiation of the recommended aid program. In the interim period the Mission recommends that ROK agreement be sought on a policy of pricing aid goods at free market prices.

Korean membership in both the International Monetary Fund and the International Bank for Reconstruction and Development should be supported by the United States Government. The Mission further recommends that the United States Government encourage the Republic of Korea to consult with and seek technical assistance on its financial problems from the Fund and the Bank.

Rationalization of the price structure and development of a valid exchange rate will be of extreme importance in opening the way to Korean participation in the U.S. offshore procurement program. Offshore procurement in Korea of small arms, ammunition, vehicle maintenance, etc. will serve to stimulate defense industries and provide a source of dollar earnings. Further, permitting Korean bidding for items now normally purchased in Japan would have a stimulating and rehabilitating effect on Korea out of all proportion to the amount involved. It would have the further healthy effect of exposing segments of Korean industry to international competition.

An important aspect of the proposed new assistance program would be greater Korean participation at all levels than is true with respect to present programs. It is recognized that possibly the most serious factor limiting ROK economic development may well turn out to be a shortage of professional and technical skills, which can only be overcome step by step. As rapidly as possible, however, it is proposed to increase Korean participation in programming and procurement for all aid programs, supporting such participation as necessary, with foreign advisors employed and paid by the ROK Governments and industry.

The political importance of such measures can hardly be overestimated. Considerable resentment exists in the ROK Government regarding the UNKRA method of procurement which excludes the ROK from operational participation. Desire to be treated as an equal partner is one of the strongest factors in Korean morale, fully understandable in view of the political subjugation of Korea in recent times. Furthermore, as a practical matter, it is desirable that the U.S. pursue a policy of permitting the Koreans to stand on their own feet in such matters as these as soon as possible. Finally, in view of the Government’s greater familiarity with Korean needs and conditions, a primary Korean role in procurement is deemed essential to assure the most effective use of U.S. aid in meeting basic Korean requirements.

The development in the CEB of the annual investment program will naturally involve judicious consideration of dollar and hwan costs and availability for investment programs and will probably require some revision of the current concepts under which UNKRA funds are considered to be available only for UNKRA sponsored projects and CRIK only for U.S. sponsored projects.

The Mission further recommends that as soon as practicable discussions leading to a comprehensive civil affairs agreement be initiated. The stability of the military situation no longer justifies the continuation of the emergency arrangements under which U.S. Forces now obtain the use of facilities and services. An agreement independent of the aid agreement is preferable because of the nature of the subject matter and of the time element; the civil affairs agreement negotiation will be lengthy, and it is necessary to initiate an expanded aid program with as little loss of time as is possible.

C. Coordination of Economic Programs

The absence of central authority for economic assistance to Korea cannot be corrected absolutely, because of the division of responsibility which must inevitably persist between the Republic of Korea and the US/UN. There must, however, be complete coordination on the US/UN side and it is imperative that all external economic assistance to the Republic of Korea, including relief, rehabilitation, and assistance for defense support be coordinated, integrated, and implemented under one head now and in the post-hostilities period for all economic activities in Korea, as has been done in the military field, including positive operational control over UNKRA. Such delegation of over-all economic responsibility to the UC and UNC would only recognize facts based on the needs of the situation, for there can be only one effective and authoritative voice for all United Nations economic activities in Korea.

It would further be anticipated that subject only to overriding military consideration UNC operational responsibilities in the economic field would in effect be concentrated in a special U.S. representative with headquarters in Korea, who would represent both the President and CINCUNC, who would serve as the CINCUNC Representative on the Combined Economic Board, and who would direct and coordinate the over-all economic assistance program. This would not only provide the necessary program integration but would also ensure Korean support of the UNKRA program in a measure that has been and is conspicuously lacking. In addition it would provide a bridge to the post-hostilities period in anticipation of the eventual phasing out of the UNC.

It is anticipated that the internal organization of the UNKRA Mission in Korea could be maintained substantially as at present except that certain general functions common to all aid programs would be transferred to the Office of the Special Representative. UNKRA responsibilities would be essentially those of project development and implementation in the rehabilitation and reconstruction fields with funds available to that agency, or with such other funds as might be made available. It is also anticipated that UNKRA would be assigned such other responsibilities as appropriate and that UNKRA personnel would be freely seconded to KCAC, as is true at the present time, and to the Office of the Special Representative. By and large it is considered that KCAC will continue most of its present responsibilities with regard to the operational aspects of civilian relief programs and will also assume such operational responsibilities with regard to other aid programs as experience may indicate to be desirable.

To assure appropriate consideration in the Combined Economic Board of all aspects of the over-all assistance program, it is recommended that both the Commanding General of KCAC and the UNKRA Mission Chief in Korea be appointed Deputy CINCUNC representatives on the Combined Economic Board.

A program of the nature herein proposed is also of concern to several of the departments and agencies of the United States Government, including the Departments of Defense, State, and Treasury, the Mutual Security Agency, and the Bureau of the Budget.

Over-all responsibility for economic assistance to Korea should be assigned to the Director of Mutual Security or his successor, who would finalize annual programs, justify them to Congress, and direct the expenditure of funds. This would not necessarily preclude the administration of CRIK funds by the Department of the Army or of funds appropriated to UNKRA by appropriate UNKRA officials, but would assure that all available funds were expended as part of a single over-all program.

In view of the diversity of interests involved during the continuance of hostilities, it is also believed that it will be necessary to continue to maintain a forum for inter-departmental cooperation at a senior and policy-making level. To assure this, it is recommended that the present National Security Council Subcommittee on Korea be continued in existence. In the event that this is not feasible, it is considered essential that there be established a committee of senior departmental and agency representatives outside of the National Security Council framework to provide the necessary forum.

1. For NSC Action No. 711, see the memorandum of discussion at the 131st meeting of the NSC, Feb. 11, p. 769; in NSC Action No. 741, the Council noted an oral summary of a memorandum by Humphrey, dated Mar. 20, 1953, which reported on the activities of the committee established pursuant to NSC Action No. 711. A record copy of NSC Action No. 741 can be found in S/S–NSC (Miscellaneous) files, lot 66 D 95. For the memorandum by Humphrey, Mar. 10, see p. 813.
2. Dated June 15, p. 1170.
3. Neither printed, but see footnotes 1, pp. 747 and 813.
4. A copy of the complete report can be found in FE files, lot 60 D 330.
5. Not printed. (FE files, lot 60 D 330, Tasca Report)