History of Self-help in Korea


Korean Minjok Leadership Academy
International Program
Choi, Wonho
Research Paper, AP European History Class, Fall 2008



Table of Contents


I. Introduction
II. Beginning of Self-Help
II.1 Raiffeisen Bank
II.2 Grameen Bank
II.2.1 Experimental Period (1976-1983)
II.2.2 Grameen Bank (First Phase, 1983-2002)
II.2.3 Grameen Bank (econd Phase, since 2002)
III. Institutionalization of Self-Help in Korea
III.1 Prior to Institutionalization (1960's-1980's)
III.1.1 Government efforts
III.1.2 Civil Efforts
III.2 1st Institutionalization Movement (1990-1997)
III.3 2nd Institutionalization Movement (1998-2000)
IV. Self-help Institutions in Korea
IV.1 Joyful Union
IV.2 Social Solidarity Bank
V. Conclusion
Bbliography



I. Introduction


            Poverty has coexisted with the human race since the beginning of history. With the expansion of society and the development of the economy, however, the gap between the wealthy and the poor has grown extremely large. Today, the polarization of the world has reached such a state that 94% of all capital is owned by the top 40% wealthy, and half of the world live on less than two dollars a day. Thus the importance of poverty alleviation is ever increasing.
            Poverty alleviation in the past was based on the religious concept of charity. Major religions such as Christianity and Islam emphasized the importance of helping the needy out of altruism, and even preached that it was a way into salvation. As time passed, poverty was recognized as a social problem the state needed to address, and poverty laws were made. However, the establishment of a welfare system led to moral hazard, and an alternative method was necessary; thus, the concept of self-help came into being.

II. Beginning of Self-help

II.1 Raiffeisen Bank
            Friedrich Wilhelm Raiffeisen was a German mayor of several towns. While serving as mayor, he observed farmers who suffered from loansharks due to the high interest rates they charged. He conceived the idea of cooperative self-help and founded the Flammersfelder Hülfsverein zur Unterstützung unbemittelter Landwirte (translated into "Flammersfeld Club for the support of farmers without funds"). In 1864, he systemized his ideas by establishing the Heddesdorfer Darlehnskassenverein which institutionalized the act of providing credit to poor farmers. Raiffeisen's cooperative self-help model has become the archetype for 330,000 similar institutions across the globe today

II.2 Grameen Bank

II.2.1 Experimental Period (1976-1983)
            In 1974, Bangladesh suffered from great famine. Nearly a million people lost their lives, and thousands suffered from hunger. To respond to poverty plaguing the streets, Muhammad Yunus, an economics professor at Chitagong University, decided to investigate the phenomenon and come up with a solution. His first efforts were aimed at constructing an irrigation system and increasing the agricultural productivity at the neighboring town Jobra. By digging wells and constructing a water pipe system, the townspeople of Jobra were able to cultivate on lands that were once infertile. Although Yunus succeeded in increasing the agricultural productivity of Jobra, he soon realized that his success in Jobra did little in alleviating the poverty in the streets of Bangladesh.
            While pondering on the solution for poverty, Yunus gained an unexpected lesson from a lady in Jobra. Sophia Begum was a lady who spent all day making bamboo chairs in the town of Jobra. Despite her long working hours, she had difficulty in escaping poverty. Due to the lack of initial capital, Begum had to turn to money lenders who charged her high interest rates. Yunus surveyed the people of Jobra and found out that 42 people were trapped in this vicious cycle because they lacked 27 dollars in total. As an economics professor, Yunus had been lecturing about millions and billions of dollars, but in reality a whole town was suffering from poverty because of only 27 dollars. To relieve these people from poverty, Yunus lent them 27 dollars from his own pocket ? free of interest.
            Reflecting on his experience in Jobra, Yunus attempted at persuading a nearby branch of Janata Bank to lend money to the local poor. Not surprisingly, the bank refused Yunus' proposal claiming that it was against the bank's policy to lend money to people without any collateral. Left with no option, Yunus lent money from the loan he personally received. In the following year, Yunus initiated a research project under the name Grameen Bank (meaning 'bank of the villages') to provide credit and banking services to the local poor. His experiment was a success, and soon Yunus¡¯s microcredit program started receiving attention from the central Bangaldesh Bank.
            With the support of Central Bangladesh Bank, Yunus was given an opportunity to implement his microcredit program in the Tangail District, a region deemed 'hopeless' by the central bank. By successfully executing the microcredit program, Yunus proved that microcredit was universally applicable. Despite the two-year-long successful implementation period, officials of other banks still discredited Grameen Bank. Nevertheless, Yunus continued expanding his program with the support of institutions like the Ford Foundation, and FIDA.

II.2.2 Grameen Bank (First Phase, 1983-2002)
            On October 2nd of 1983, Grameen Bank was officially recognized as a bank by the Department of Finance despite the opposition of seven other national banks. Yunus had initially planned to distribute 60% of its shares to its members and 40% to the government; however, Grameen Bank started off vice versa. Step by step, Grameen Bank started expanding its services nationwide. In 1989, it established the Grameen Trust to provide technical and financial support to microcredit programs overseas. In 1994, it established the Grameen Fund to support domestic microcredit programs. The Grameen family continued to expand by establishing new branches such as the Grameen Phone, Grameen Fisheries, and Grameen Health Care Services. Through such efforts, Grameen Bank was able to create a surplus by the year 1993, and become financially independent by the year 1995.

II.2.3 Grameen Bank (Second Phase, since 2002)
            After becoming recognized as an official bank by the government, Grameen bank succeeded in expanding its service throughout Bangladesh. However, Grameen bank started showing problematic drawbacks despite its long period of preparation. The most crucial problem was its lack of a system to prevent members from dropping out of its program
            Bangladesh suffered from severe flooding in the year 1995. As a result, many borrowers of the bank had trouble repaying their loans and some of them chose not to show up at the regular center meetings. Likewise, Grameen Bank was at the risk of losing many of its members. Realizing the limits of its microcredit program, Grameen Bank decided to initiate a thorough reformation. Consequently, Grameen Bank entered a new phase known as Grameen II. With its new set of financial programs, such as insurances and pensions, Grameen Bank recovered from its loss of members. After its successful recovery, Grameen Bank further expanded its services throughout Bangladesh and supported overseas microcredit programs. For this accomplishment, Muhammad Yunus and Grameen Bank were awarded the Nobel Peace Prize in the year 2006.

III. Institutionalization of Self-help in Korea

III.1 Prior to Institutionalization (1960's-1980's)

III.1.1 Government Efforts
            As Korea went through rapid industrialization in the 1960¡¯s, the number of urban poor increased drastically. In response to the issue, the government announced a Livelihood Protection Law on December 30th of 1961. Under this new law people without the ability to work and were above 65 or under 18, as well as the disabled and pregnant were protected. However, the majority of the beneficiaries of the law turned out to be those dwelling in the rural area rather than the urban poor.
            On February of 1982, the government announced another set of poor protection laws. According to this plan, poor people with the ability to work were also protected. The poor were offered job education, loans, and subsidies for moving to rural areas. As a result, the concept of ¡®self-help¡¯ became part of poor protection movements. Many of the urban poor applied to be protected under this law, and there was an increase from 6% to 22% in the number of urban poor under government protection.
            However, complicated procedures hindered many of the urban poor from receiving government support. According to the criterion set by the government in 1987, "people who are highly likely to succeed in self-support, who have lived in one region for over a year, who have clear business plans, and who are diligent and not wasteful" are legible for protection. As a result, though over 1.3 million were recipients of the poor laws, only 0.1 million of those people received 'self-help' aid.

III.1.2 Civil Efforts
            In 1968, the Urban Problem Research Institute was established at Yonsei University. Reverend White tried to spread Alinsky's concept of community organizing to the urban poor. Believing that the urban poor should organize communities to act in their self-interest, White tried to educate the urban poor by living among them. Early efforts at community organization were not violent movements aimed at confronting the government, but movements aimed at responding the needs of the urban poor.
            When the government initiated plans of demolishing the shanty districts and forcing the urban poor out of their houses, the urban poor started gathering to protest against the government. As was shown in Gwang Ju on August 10th of 1971, the community organization movement of the urban poor became violent and political.

III.2 1st Institutionalization Movement (1990-1997
            One of the goals proposed by the new cabinet in 1993 was to enhance the national welfare system. In 1993, Sun Won Kwon proposed a self-help model as the nation's next welfare model. Cooperation among the government and civil movements was suggested, and officials from The House of Sharing and Urban Problem Research Institute gathered to realize the plan. However, due to opposition from experts this plan had to be abandoned.
            In 1995, the Korean Welfare Society Research Institute initiated research on self-help. Officials from the Ministry of Health and Welfare and leaders in the poverty movement participated in this research. They proposed that an active self-help center needed to be established. However, due to lack of financial support, this proposal also had to be dropped.
            In the same year, the Public Welfare Planning Department, an institute founded by the Kim Young Sam regime, suggested another plan for the establishment of a self-help center. For the first time in Korean history, activists of the poverty movement participated in a government plan. With the on-hand experience of the poverty activists, the government finally announced a plan to support the construction of a self-help center in February of 1996.

III.3 2nd Institutionalization Movement (1998~2000)
            The 2nd Institutionalization Movement involved the expansion of the self-help movement, and its process of becoming officially recognized. However, the movement was more than a period of mere expansion. It also involved the government¡¯s reaction to the economy crisis of 1997 and its policies concerning the poor.
            In the year 1997, the government implemented a policy of unemployment insurance. Between the year 1998 and 1999, the government initiated economic programs to give work to the unemployed. The set of policies similar to the New Deal of the United States were unforeseen efforts by the government. The government also reformed its Livelihood Protection Laws in the year 1999 to include the concept of self-help.

IV. Self-help Institutions in Korea
            Despite the series of efforts introduced by the government, the development of self-help in Korea was rather slow. Furthermore, the Livelihood Protection Law introduced by the government resulted in a moral hazard, since the unemployed were less willing to work after being provided monthly subsidies. Consequently, self-help was spotlighted as a solution to these problems. However, it was not the government, but individual institutions that brought significant development to spreading self-help in Korea.
            The development of self-help institutions are attributed to two causes: increase of interest in self-help, and the credit crisis. As discussed above, self-help regained attention as it was deemed a solution to the moral hazard resulting from government policies. Another crucial factor was the credit crisis. The financial collapse of thousands of people resulting from factors such as the overuse of credit cards brought a major credit crisis. The problem of this new social phenomenon was that the people were unable to get loans from banks, meaning that their chances of escaping poverty were thin. Thus the need for an institution where loans could be acquired without collaterals arose, and independent self-help institutions were introduced in Korea.

IV.1 Joyful Union
            The origin of the Joyful Union, the first microcredit institution of Korea, traces back to the Grameen Bank. Myoung Ki Jeong, the founder of the Joyful Union, participated in an education program provided by the Grameen Trust, a branch that aids the establishment of foreign microcredit institutions. Upon his arrival back to Korea, he launched the Joyful Union.
            The Joyful Union is a Korean version of the Grameen Bank. It is a microcredit institution aimed at empowering the rural poor. Its programs are based on loans for small groups, like the Grameen Bank, and the initial funds for founding the institutions were borrowed from the Grameen Bank in Bangladesh. Despite the tremendous success of the Grameen Bank in Bangladesh, the Joyful Union did not become as popular as Grameen Bank due to the urbanized society of Korea.

IV.2 Social Solidarity Bank
            The Social Solidarity Bank is currently the largest microcredit self-help institution in Korea. The institution was founded in an attempt to establish a microcredit institution that fitted the Korean society. The significance of the microcredit provided by the Social Solidarity Bank lies in its thorough application process and its RM (Relation Management) program. Unlike the Joyful Union which aims at aiding the rural poor in their farming, the Social Solidarity Bank aims at helping clients start small businesses in the city. Also, the institution provides support such as professional mentoring to help borrowers who are unfamiliar with business. With such programs, the Social Solidarity Bank has outgrown the Joyful Union and is today the most influential self-help institution in Korea. .

V. Conclusion
            The first step in the development of self-help in Korea can be traced back to Raiffeisen of Germany. Being the first self-help movement in the world, the Raiffeisen Bank influenced various countries. However, the self-help movement which influenced Korea the most was the Grameen Bank of Bangladesh. Before the Grameen Bank influenced Korea, however, the concept of self-help was introduced by American missionaries. With the introduction of self-help from America, efforts to establish self-help in Korea were made by the government and civil institutions. However, the development of self-help was rather slow.
            The most significant leap in the development of self-help occurred when the first microcredit self-help institution, the Joyful Union, was established. The founder of the Joyful Union not only received education from Grameen, but also received initial funds from the Grameen Bank, meaning that the first self-help institution was directly related to the Grameen Bank. However, the Grameen model was not as successful as it was in Bangladesh, and the Social Solidarity Bank developed its urban model as an alternative solution.
            Though the Social Solidarity Bank has proposed a Korean self-help model, self-help in Korea still has many areas of improvement. Many Koreans are still unaware of self-help, and an effective civil-government relationship still has to be developed. Also, supposing that the two Koreas will one day unify, a self-help model for the unified Korea has yet to be developed.


Bibliography

Note : websites quoted below were visited in November/December 2008.
1.      Cha, Sang Min. "Institutionalization of Self-help." Sung Kong Hoe University, 2008 (in Korean)
2.      Article : Friedrich Wilhelm Raiffeisen, from Wikipedia. German edition .
3.      History of Joyful Union. Joyful Union. . in Korean
4.      Institution History. Social Solidarity Bank.
5.      Article : Saul Alinsky, from Wikipedia. .
6.      Yunus, Muhammad. Banker to the Poor. USA: Penguin Books, 2007