895.50 Recovery/11–1449
The Ambassador in Korea (Muccio) to the Secretary of State
No. 725
The Ambassador has the honor to refer to Despatch No. 675, dated October 28, 1949, enclosing a copy of a letter1 from the Chief of the Economic Cooperation Administration Mission to Korea to the Prime Minister of the Government of the Republic of Korea, recommending an increase in the counterpart rate of ECA financed aid supplies.
Attached, as Enclosure No. 1, is the reply of the Prime Minister, Lee Bum Suk, dated October 31, 1949.2 In his reply, the Prime Minister indicated that the problem of periodic upward revisions of the counterpart rate, in order to pave the way for the establishment of a unitary rate of exchange, was under careful consideration by his Government.
During the past two weeks a series of almost daily conferences have been held between leaders of the Government of the Republic of Korea and officials of the Economic Cooperation Administration on the question of the counterpart rate and related aspects of the economic situation.
[Page 1097]In these conferences with Korean Government leaders, including President Rhee and Prime Minister Lee, Dr. Arthur C. Bunce and his assistants in the ECA mission have related the immediate question of the counterpart rate to the overall financial position of the Republic of Korea, which has been deteriorating in recent months under the impact of increasing deficit spending by the Government.
Enclosure No. 23 is a summary comparison of major economic indicators in the Republic of Korea, which was compiled by the Program Review Staff of the American Mission, to be used as a basis for discussion with the Korean Government officials. This comparison of major economic indicators, including prices of major commodities, wages and salaries, charges for utilities and government services, currency in circulation, and public and private finance, is designed to point up some of the basic problems which must be resolved in the immediate future so that the goals of economic recovery and stability can be achieved.
Enclosure No. 33 is a recent tabulation of won pricing of aid supplies imported into Korea, which was also distributed to Korean officials participating in the Government–ECA conferences. This tabulation indicates that, on the basis of current Office of Supply won pricing of 15 major commodities imported into Korea with ECA funds, the average won rate charged (in relation to the current landed dollar cost) equal won 553.27 per U.S. dollar.
The Korean Government officials, including two leaders in the National Assembly, initially took the position that any official changes in the counterpart rate from won 450 to $1.00 should be deferred, at least until July 1, 1950. Their position was based upon the contention that such increases at this time would be inflationary, and should be postponed until production increased further.
The Chief of the ECA Mission, in turn, made it very clear to the Korean officials that the American Mission considered the continued heavy deficit spending by the Government to be the most important inflationary factor, and that the Korean economic recovery program is being placed in jeopardy by the present unsound financial practices of the Government. Dr. Bunce presented the Korean Government with a proposed eight point program, designed to achieve greater financial stability, as follows.
- 1.
- Gradually increase counterpart rate to realistic levels, with objectives of equitable pricing of imported aid supplies, elimination of concealed subsidies, and increasing Government income through greater Counterpart Fund collections.
- 2.
- Increase Government revenues through campaigning to collect taxes already assessed and through abolition of present semi-official campaigns for “voluntary” contributions for various police, army and related “benefit” associations.
- 3.
- Increase charges for public utilities and Government services, at least to cover cost of production, with objective of reducing drain of such services on Government Treasury by eliminating present subsidies.
- 4.
- Eliminate all non-essential expenditures.
- 5.
- Adopt sound accounting and budgeting controls (correspondence on this subject between Chief of ECA Mission and Prime Minister being forwarded as separate Despatch).4
- 6.
- Expedite sale of vested properties, tying in implementation of Land Reform Law, already approved, with such sales in order to accelerate transfer of investment capital from farm land to industrial and commercial enterprises.
- 7.
- Expedite distribution of imported goods now in warehouses to end-users, to increase production and accelerate collections for Counterpart Fund.
- 8.
- Sell enough Government-held foreign exchange through Foreign Exchange Bank auctions to meet urgent import requirements.
These recent conferences appear to have impressed President Rhee and his Ministers with the apprehension and urgency with which the ECA Mission views present financial trends in Korea, and the Government is now giving top priority to consideration of these problems. In his press conference with Korean reporters on November 11, President Rhee indicated that the price of goods distributed by the Government should be gradually increased until they are in line with market prices.
At the conclusion of a conference with ECA Mission officials on November 11, Prime Minister Lee, the Minister of Finance and the Governor of the Bank of Korea agreed that the Counterpart Rate for imported aid supplies should be gradually increased, to reflect actual prices charged by the Office of Supply. Under this plan the Korean Government will institute selective increases in the won prices of aid supplies, raising the rate at which deposits are made into the Counterpart Fund to correspond to the average dollar–won rate of resale prices of the Office of Supply. Under this procedure, it is hoped the Counterpart Rate for November 1949 can be set at won 500 to $1.00, and for December 1949, at won 600 to $1.00.
Because the actual collections of won from end-users for ECA imports are actually more important in combatting inflation than the nominal counterpart deposits made into the Counterpart Fund, every effort is being made to step up counterpart collections. Enclosure No. 44 is a letter sent from the Deputy for Financial Affairs, ECA Mission, to the Director of the Office of Supply, commending him for the increased collections during the period April to September, 1949, [Page 1099] and pointing out the importance of making maximum possible collections during the coming months.
Additional information will be forwarded as developments occur.