[OUTLOOK]Foreign aid, like cash, is fungible

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[OUTLOOK]Foreign aid, like cash, is fungible

Cash is convenient since it can be used to purchase anything. A student can buy a movie ticket with the money his mother gave him to buy school supplies. He may buy a lunch with the money he was supposed to use to watch a movie. Therefore, those who furnish money sometimes provide the money to recipients with conditions, so that the donated money is used for the purpose the donor wanted.

The same applies to money exchanges among countries. A nation providing money to other nations may limit the usage of the money as a condition for providing support. The International Conference on Financing for Development was held in Monterrey, Mexico, last month to address key financial issues related to global development and projects to eradicate poverty. Major donor countries, including the United States, asserted that in order to effect change in recipient nations, more monetary support should be provided with strings attached.

Conditional monetary support may be a good method of distributing the money to sectors that contributing governments want to support. But even in such a case, the money may be used to fund projects recipient governments secretly desired, contrary to the wishes of the contributing governments. For instance, the North Korean government may distribute food provided by the Korean government for civilians and divert emergency food it had stored for civilians to the army. That is the equivalent of diverting food aid from international society for civilians to military uses, contrary to the intentions of the contributing governments. In this case, we can at least be consoled by the fact that the food we provided has been directly distributed to civilians.

There is an interesting episode concerning this issue. After World War II, a devastated Austria was struggling to rebuild with the assistance of the United States. The Austrian government set up a plan to repair its opera house, a symbol of Vienna that was demolished by bombing. The Austrian government planned to fund the project through the U.S. Marshall Plan, a scheme to revive the economies of devastated European countries by supporting infrastructure construction. The U.S. government refused the Austrian government's request to fund the building of the opera house because it felt that the funds should go to more urgent projects. But the Austrian government obtained U.S. funding by coming up with a plan to build a power generating facility. Previously, the government had drawn up plans to build a power plant through its own means.

But because it was able to receive U.S. support to build that electrical infrastructure project, the Austrian government could use the funds earmarked for the power plant for the opera house. The Austrian government ran after two rabbits and succeeded in catching them both.

This case clearly shows that although donor governments may limit the distribution of cash they contribute to certain areas, recipient governments may divert the funds to other projects, in contradiction to the expectations of the donor.

Donor countries provide financial assistance to other countries based on the premise that the recipient countries would use the money for good purposes. But at the same time, they prefer to provide aid with strings attached by restricting money to be used on certain projects or to link the project in question with other ongoing plans.

The South's financial support of North Korea as part of the sunshine policy for reconciliation with the North will be widely supported by the people if there is some tangible evidence that Seoul's support has contributed to change - directly or indirectly - in the North. The current administration's willingness to use the Inter-Korean Economic Cooperation Fund, taxpayers' money, to continue the Mount Geumgang project looks a bit unreasonable in a situation when some people have raised allegations that the profits from the project are diverted for military purposes.

Therefore, the government should assure the public that all the funding and financial assistance it has provided so far to the North, including the Mount Geumgang project, has served to improve the welfare of North Korean civilians and the long-term economic development of the North. It should also use more conditional financial assistance to assure that its money - our money - is going to projects that it supports.


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The writer is the chairman of the Institute for Global Economics.

by Sakong Il

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