Policy Independence Key to Growth, Study Finds

Anis Chowdhury

The Republic of Korea (Korea), Vietnam and Bangladesh stand on different levels of the development ladder. Korea is now a member of the rich nations’ club, the Organisation for Economic Co-operation and Development (OECD), while Bangladesh remains a least developed country (LDC), and Vietnam occupies a middle position.

Despite their different outcomes, the three countries shared many similar starting conditions. All emerged from devastating wars and ranked among the world’s poorest nations until the late 1960s. They struggled to feed rapidly growing populations, with annual population growth exceeding 2.5 percent and per capita GDP below US$300 in the early 1970s. All faced the enormous task of national reconstruction and depended heavily on foreign aid.

However, relative policy independence from foreign donors played a major role in shaping their development paths. Countries that maintained greater control over their economic policies achieved stronger development outcomes despite relying heavily on aid.

Aid Dependence and Policy Independence

As some of the poorest countries in the world, all three nations relied significantly on foreign assistance. In Korea, for example, foreign aid financed around 74 percent of imports on average between 1953 and 1960. Revenue generated from aid goods, including food aid under the US PL480 “Food for Peace” programme, accounted for an average of 38.4 percent of government revenue.

US aid to Korea was massive, accounting for nearly 80 percent of all foreign aid received between 1945 and 1975. Korea received almost as much economic aid from the United States as the entire African continent during 1946-1978. At its peak, US economic aid, excluding military assistance, equalled 21 percent of Korea’s GDP and financed roughly half of government spending.

Despite this dependence, the Korean government maintained considerable policy independence. While US agencies preferred non-project aid focused on macroeconomic stabilisation, Korea redirected such assistance toward rebuilding manufacturing industries and accelerating economic growth.

Policy disputes were negotiated through the Combined Economic Board (CEB), established in 1952. Although jointly chaired by US and Korean representatives, Korea largely succeeded in defending its policy priorities.

Korea also resisted pressure from the World Bank. In 1967, when the World Bank rejected funding for the Seoul-Busan Expressway, the Korean government financed and completed the 428-kilometre highway domestically by 1970.

At the time, many donors considered the project overly ambitious for such a poor country. However, the expressway later became a major driver of economic activity and helped Korean construction firms gain experience that enabled them to secure large infrastructure projects in the Middle East.

The World Bank also criticised Korea’s Heavy and Chemical Industry (HCI) drive during 1973-1979. Korea ignored those objections and moved ahead. By the early 1980s, heavy and chemical industries had become leading export sectors, significantly transforming the country’s manufacturing base.

As a result, Korea escaped the poverty trap by the early 1970s and became a full OECD member in 1996.

Vietnam Followed Its Own Path

Vietnam’s development experience shares many similarities with Korea’s.

After launching the Đổi Mới reforms in 1986, Vietnam quickly became one of the World Bank’s largest loan recipients. However, the government maintained strong control over national policy decisions and resisted externally imposed reforms.

In 1997, the World Bank offered Vietnam US$300 million in credit in exchange for structural adjustment measures based on the Washington Consensus, including rapid privatisation and financial liberalisation. Vietnam rejected the proposal.

The World Bank returned with larger offers in 1998 and 1999, but Vietnam again refused. Planning Minister Tran Xuan Gia reportedly told World Bank officials: “You cannot buy reforms with money.”

Vietnam instead pursued its own reform path, learning from neighbouring East Asian economies as well as the successes and failures of the former Soviet Union.

The country later achieved remarkable economic growth, with GDP expanding by nearly 8 percent annually. Since the early 2000s, Vietnam has also recorded one of Asia’s fastest export growth rates, much of it driven by manufacturing.

Starting with a per capita GDP of around US$85 in 1975, Vietnam became a lower middle-income country by 2009.

Bangladesh and the Question of Confidence

Bangladesh joined the LDC category in 1975 when per capita GDP stood at around US$230 and has remained in the category for decades. Although Bangladesh is scheduled to graduate from LDC status later this year, it has sought deferment, raising questions about confidence in its economic preparedness.

In contrast, Vietnam chose not to join the LDC category despite having an even lower per capita GDP of around US$82 in 1975 and facing severe post-war reconstruction challenges.

Similarly, Korea also did not seek inclusion in the LDC category when the United Nations created it in 1971.

The article argues that both Korea and Vietnam relied on aid when necessary but maintained greater independence in policymaking. Bangladesh, while achieving important progress and becoming a lower middle-income country, could have performed even better if it had exercised stronger policy independence from donor institutions.

The author notes that Bangladesh demonstrated some policy confidence when it proceeded with the Padma Bridge project after the World Bank withdrew financing over corruption allegations.

The article concludes that successful development depends on several interconnected factors, but policy independence remains one of the most critical elements in achieving long-term economic transformation.