The Military Government is endeavoring to encourage such trade as will reduce the area’s dependence upon American funds. Credits realized from South Korea exports, unless balanced in kind by imports approved as essential, are to be used to purchase commodities similar to those making up the Civilian Supply list and certified for import by the Military Government. On July 15, 1947, Korea was declared open to small numbers of foreign businessmen, who might desire to develop trade possibilities within the framework established by the military authorities. Meanwhile, trade has been undertaken with Hong Kong and Macao, and some critically needed materials have been obtained by barter in exchange for Korean surpluses. Recent negotiations with the Egyptian government have led to an agreement to exchange 730 tons of tungsten concentrates for 3,000 bales of long-staple Egyptian cotton.

All dealings with Japan are restricted to a governmental level, and China has imposed conditions which make legitimate trade virtually out of the question. Actually, a growing smuggling trade is going on both with Japan and China, and via Hong Kong and Macao. An essential step for promoting Korea’s trade on a sound basis would be development of an efficient customs service.

United States Investment in Rehabilitation

There is one basic policy question which overhangs all financial and economic programs for Korea: How long will the occupation of South Korea continue on a unilateral basis? Until this question is answered in terms of months or years, no satisfactory decision can be made on United States financial or developmental programs for the area. The characteristics of the South Korean economy are such that there is no compromise which provides effective utilization of dollars, and at the same time leaves open the decision concerning the duration of the occupation. If a serious decline in the living standard, and possibly economic disintegration are to be avoided, South Korea must have (a) unification with North Korea, or (b) substantial relief supplies, or (c) relief and rehabilitation supplies of $200 to $300 million a year for several years. The third alternative would provide a possible basis for an indefinite continuance of occupation. The capital investment in a permanently separate South Korea would be wasteful, and the likelihood of a stable economy resulting therefrom would be in doubt for some years. South Korea is a depleted and eroded country with no minerals worth mentioning; an agriculture dependent on nitrate input, and a backward people. In terms of the needs of the East Asia area, an investment in rehabilitation and industrialization, which would permit South Korea to subsist on its own industrial output at its standards of the past 10 years with a minimum of relief, could be justified only by political and strategic consideration of the highest order.

A consideration affecting the duration of the occupation of Korea, and hence the type of economic program, is the estimated length of the occupation in Japan. General MacArthur has indicated his desire for a United Nations, or other international administration to take responsibility in Japan soon after the peace treaty is signed. There would be obvious difficulties in any long-term occupation and rehabilitation program for South Korea, initiated at a time when the occupation of Japan was about to be relinquished by the United States. Apart from the problem of tactical forces in Japan to back up the Korean occupation, there would be communication and supply problems. There might he political objection to the occupation of liberated Korea after the termination of occupation in defeated Japan.

The United States Military Government in Korea has recommended a five-year rehabilitation program starting in July, 1948, and requiring U. S. financing for a deficit of $647 million. The estimates indicate that the proposed rehabilitation of the Korean economy would cost more per year for the first three years, than the relief program of $137 million which was tentatively approved for fiscal 1948, but reduced in July, 1947, to $92.7 million.

A feature of the proposed rehabilitation program is an expenditure of $35 million to provide a chemical fertilizer industry and the supporting power installations, roughly duplicating the installations in North Korea which formerly supplied the fertilizer needs of South Korea. An additional amount of approximately $85 million is included in the five-year rehabilitation program to cover the cost of fertilizer imports, pending the completion of the plants. Other items in the program are investment in coal mining to provide low-grade anthracite for briquetting, and to provide for the development and reconstruction of the transportation, textile and fisheries industries. There is no assurance, however, that (a) $35 million fertilizer industry would meet the estimated requirements, or reach capacity production in the time allotted. The suitability of low-grade anthracite dust as the basic energy source for a considerable industrial establishment in South Korea has not been tested, and (b) there are no reliable estimates of the reserves of this fuel, and no evidence of this fuel, and no evidence that the mines and railroads could be developed to fit the prescribed time schedule.

In the event that it is decided to continue a one-nation occupation of South Korea for some years, the least costly program would be one designed to provide, not capital goods, but raw materials and fertilizer in sufficient quantity to stabilize the economy at a satisfactory standard of living as measured by a prewar Japanese and potential North Korean living standards. In this way, the risk of an experiment in industrialization without resources would be avoided.

A relief program of the type envisaged might cost the United States about $150 million a year, in addition to the present military occupation costs which are in the neighborhood of $200 million a year. It would be necessary frankly to recognize this as a relief program which held no prospect of financial return, and no prospect of making South Korea a self sufficient economy.

Industrial Survey