Procurement of Commodities

Originally, FOA undertook procurement through other agencies of the United States Government, such as the General Services Administration and the Departments of Defense and Agriculture, except for certain bulk commodities like cotton, which were obtained through private commercial channels. However, a new procedure was initiated in February 1954, since the ROK Government insisted on having its own trade channels play a greater part in this operation. The new procedure is for commodities to be procured through private channels in the Republic of Korea, except for supplies required in connection with large development projects in the fields of power, railroading, and telecommunications. FOA undertakes procurement through other channels if the ROK Government determines that it can not handle specific procurement items.

The procedure is thus for the procurement authorization to be approved in Washington, transmitted to the Economic Coordinator for action, then transferred to the Procurement Office of the ROK Government, and then transmitted to the Bank of Korea, which issues the invitations to bid and makes the award. Bids are not made on a fixed dollar basis but rather in hwan on a fluctuating basis, the lowest acceptable rate being 180 hwan to the dollar. In practice, the procurement contracts are thus auctioned off to the lowest bidder for dollars. The contract for any one procurement authorization is broken down among four or more bidders, unless there are not enough bidders available.

Upon selection of the bidders, the Bank of Korea informs the Economic Coordinator and asks him to request a letter of commitment from FOA headquarters in favor of an American bank. At the same time, the Bank of Korea issues procurement subauthorizations to the successful bidders, each of whom has to deposit 25 percent of the value of his bid in the Bank of Korea at the agreed rate. Upon the receipt of the letter of commitment from Washington, the Economic Coordinator transmits it to the Bank of Korea and the procurement operation then takes its normal course. When the shipping documents are received by the Bank of Korea, together with a statement that the dollars have been paid, the importer pays to the Bank of Korea the remaining 75 percent of his bid and thus ends the transaction. In certain instances the importer has to deposit only 15 percent of the value of his bid.

This procedure was reportedly developed under serious misgivings on the part of FOA, which feared that ROK trade channels were not yet able to handle such a vast operation and that it would create confusion, an inefficient distribution of imported commodities, and possibly uncontrollable irregularities. It may well be that the existence

of such procurement procedures constitutes one of the reasons for the notable delays which have occurred in laying aid goods down in the Republic of Korea.

A number of press reports claim that pressures have been exerted by various ROK officials to divert certain of these funds to the benefit of their friends.

It has also been alleged that, even though the dollar accounts in the Bank of Korea are supposed to be blocked, some of these procurement dollars nevertheless have a tendency to slip out of normal banking channels. Certain contracts have also reportedly been canceled without the released dollars being returned to blocked accounts. If true, such leakages would result in dollars being at large in the ROK economy in the hands of private importers, well beyond the possibility of any United States control over their eventual use.

UNKRA's procurement practices have been quite different. After the Economic Coordinator has approved an UNKRA project and ROK approval has been obtained through the Combined Economic Board, UNKRA writes up the detailed specifications and transmits the procurement authorization to UNKRA headquarters at New York for execution. (The only exception is for items which are to be procured in Japan, the procurement authorization for which is sent to the UNKRA branch office at Tokyo.) UNKRA headquarters is assisted in making the actual purchases by the procurement agencies of the several countries which have contributed to UNKRA, particularly those of the United States, Canada, the United Kingdom, and the other Commonwealth countries. A few selected items are procured through U. N. agencies, and commercial channels are used in emergencies.

Preparations for Fiscal 1955

During the preparation of the budget for fiscal 1955, the projected level of economic and military assistance to the Republic of Korea was set at about $600 million. While the economic funds were part of the budget for the mutual security program, the military funds were included in the regular budget of the Department of Defense, being earmarked to defray the cost of military hardware and of direct logistical support for the ROK Armed Forces.

President Rhee came to Washington in July 1954 and discussions were started immediately to establish the conditions under which the United States would make such massive economic and military aid available during fiscal 1955. It soon became apparent that agreement would not be reached during President Rhee's visit and his staff remained in Washington to continue discussions, which were transferred to Seoul in September 1954.

The principal issues involved were the level of economic and military aid, the size of the ROK Armed Forces to be supported, the hwan-dollar conversion rate, realistic exchange rate, the inclusion of Japan among the sources of procurement for certain commodities, and the guarantee of effective cooperation by the Republic of Korea in programing the use of aid funds. Another issue was added in October 1954 when the ROK Government cut off hwan advances to the United States Armed Forces as a result of United States insistence that these advances be repaid in accordance with existing agreements at the rate of 254 to 1, rather than at 180 to 1. It was the United States position in this matter that the lower rate was directly inflationary and would rob United States taxpayers, channel dollars to the black market, and cause a flight of capital from the country.

The Agreed Minute

President Rhee appears to have been impressed by the firm position taken by the United States during these negotiations and on November 17, 1954, signed an agreed minute. According to this agreed minute, the United States was to provide economic and military assistance to the Republic of Korea amounting to $700 million during fiscal 1955, $420 million to be for military assistance and $280 million for economic aid. The Republic of Korea in turn agreed to maintain under arms a specified number of troops principally assigned to 21 active ROK Army divisions and enough ready reserves to provide 10 divisions in case of emergency. The Republic of Korea further agreed to adopt several corrective enonomic policies and certain measures calculated to effect savings in the ROK Military Establishment.

The acceptance of the agreed minute by the ROK Government should not be taken as indicating that it has abandoned either its aspirations for uneconomical industrial development or its methods of attempting to achieve these aspirations. There is every appearance that the ROK Government acquiesced largely because it was convinced that the program for fiscal 1955 could not otherwise have gone forward. However, whatever be the reason behind such ROK acquiescence, the agreed minute seems to be definitely in line with United States policy towards achieving a position of military and economic strength in the Republic of Korea.

Programing for Fiscal 1955

The $280 million for economic aid to the Republic of Korea has been funded from a number of sources. $205 million was appropriated by the United States Congress and is administered directly

by FOA. $16.2 million is a reappropriated carryover from United States Army funds for civilian relief. $19 million is the United States contribution to UNKRA. The remaining $39.8 million has been transferred by FOA for economic assistance to the Republic of Korea from the unused appropriation for Southeast Asia.

The protracted negotiations leading to the agreed minute caused a virtual standstill in advance planning, programing, and procurement during the first five months of fiscal 1955. Because of this delay, it was at first believed impossible to obligate the funds available for this fiscal year and that there would soon be a serious gap in the pipeline of deliveries. By December 1, 1954, all of the funds had been "programed for obligation" as follows:

Agriculture and natural resources_

Industry and mining-.

Transportation__-_

Health and sanitation____

Education____.

Public administration___

Community development, social welfare, and housing.

Maintenance of civilian supply (commodities) –

FOA payroll‒‒‒‒‒

Counterinflation reserve (commodities) ---

United States contribution to UNKRA.

Total programed_.

$8, 204, 000

16, 130, 000

34, 445, 000

2, 430, 000

1,500,000 5,825,000 34, 066, 000 113, 347, 000

3,753, 000

41, 300, 000

19, 000, 000

280, 000, 000

Obligations as of March 15 under this program amount to $141.9 million. Deliveries have been negligible, and only $17.8 million was actually expended by January 31, 1955, including $10.4 million transferred to UNKRA.

Projects for the obligation of the remaining $138.1 million are in various stages of development and review. Although FOA officials are confident that all of the funds will be obligated before the end of this fiscal year, it is feared that it will be virtually impossible to do so other than on the basis of generalized estimates rather than of valid and detailed specifications.

FOA places great emphasis on the importation of saleable commodities to combat inflation, and the entire program is divided about equally between consumer goods and investment projects.

This has been a highly controversial subject since the start of the program. Certain officials in both the United States and ROK Governments have suggested that it might be advisable to give more. consideration to projects for industrial development, provided they are based on sound surveys and overall requirements of the ROK economy and kept within the absorptive capacity of the country. According to this point of view, the importation of consumer salables should continue, but to a lesser degree than at present.

Another criticism has been that the economic aid program merely aims at being self-balancing by keeping a general 50-50 ratio between. consumer goods and capital investments within itself, whereas it should rather be designed to achieve overall stability by offsetting the inflationary effect of the military build-up without regard to ratios.

Procurement of Cotton

The only item which has actually been delivered and paid for out of funds for fiscal 1955 is raw cotton. A total of 50,600 metric tons of raw cotton were to be procured at a cost of approximately $29 million. The first increment of 9,600 metric tons costing $7.6 million has already been delivered. The second increment in the same amount and at the same cost is presently under way.

The cotton is to be used by the 21 cotton-spinning mills in the Republic of Korea. Because of a shortfall in the planned installation of spindles in these mills, production targets were not met during the early part of fiscal 1955, so that the original requirement of 50,600 metric tons has now been reduced to 40,000 metric tons.

These production difficulties were encountered in spite of such favorable circumstances for the mills as being able to acquire raw materials and mechanical equipment either as aid-program commodities or at favorable foreign-exchange rates. There is therefore serious question as to how the industry will react to increased costs and less favorable circumstances. Consideration might therefore be given to improving its operational efficiency rather than expanding its facilities still further. This development points up the constant problem inherent in any expansion of ROK industrial capacity at other than a gradually progressive rate.

Military Assistance in Fiscal 1955

Four hundred and twenty million dollars was appropriated to the Department of Defense for military assistance to the Republic of Korea in fiscal 1955, about $270 million being for end-items and training and about $150 million for other items delivered for the direct support of the ROK Armed Forces. These funds represent the dollar value of the military supplies delivered to ROK units in the field as though they are part of the United States Military Establishment. The dollars themselves remain in the United States.

More significant, perhaps, from the economic point of view, is the understanding reached in the Agreed Minute that the pay of the ROK Armed Forces would be raised and their rations increased without any increase in ROK expenditures, since the United States was to