<Preface>

Local Finance is the theory, system, and policy of financial revenues and expenditures of local governments. It cannot be interpreted from a standardized perspective because the systems and policies vary by country. A country that has different historical context and situational characteristics. The institutions and characteristics that shape local finance in Korea are complex. From the economic development system in the 1960 to the recent decentralized state fiscal system, the characteristics of the local finance system vary depending on the stage of national development.

   It is not appropriate to interpret local finance in Korea from the Western perspective. Major countries historically formed their modern capitalist state systems with local autonomy. When interpreting the systems and phenomena of self-government and decentralization or local finance, there are many “problematic” areas from the Western perspective, but in the historical context of Korea, they are part of a transition. Interpretation is more important than criticism.

   In case of local finance in South Korea, various contexts are interwoven in the process of forming the financial system of selfgoverning and decentralized local governments, starting from the frontline administrative agencies of the central government. This book describes and characterizes the local finance system in Korea. From the perspective of decentralization, Korean local finance has three distinctive features when compared to major countries.

   First, there is the complexity of central-local fiscal relations in the process of transitioning from a centralized system to a self-governing and decentralized system in a developing country. There are many aspects that are not appropriate to interpret only from the perspective of Western financial theory.

   Second, the development of local finance is the history of welfare finance since the rise of local government. The issues surrounding local welfare finance are considerable. In the framework of various local finance systems formed in local development governance during the low-income countries, there is a dual nature of the system that needs to carry out social welfare finance projects that support national growth in recent developed countries.

   Third, the duality or inconsistency between administrative decentralization and fiscal decentralization is reflected in the local finance system as the central government’s fiscal management supervision function over local governments continues to expand in the process of expanding self-government and decentralization.

   From the perspective of rational institutional design, it is possible to criticize irrationality and arbitrariness. However, local finance systems are not the domain of logical design. They are the result of historical context and social environment. There are many compatible and conflicting elements in individual schemes. It is not a realm of right and wrong. It is a general phenomenon and product of the development of local governance in developing countries.

   This book is the first booklet in Korea that explains and analyzes the system and features of Korean local finance in English. It is written as a introductory book for foreign students who are studying abroad in Korea and selecting majors in the social sciences to systematically learn about the Korean local finance system.

   The book consists into nine chapters. Chapter 1 is an overview of the comprehensive nature of local finance. Chapters 2 through 4 describe the local revenue system by revenue source. Chapter 5 describes Local Public Enterprises, and Chapter 6 describes the Local Government Finance Management System. Chapters 7 through 9 summarize representative issue topics in local finance. They are Values Budgeting System, Social Welfare Expenditure, and Fiscal Decentralization.

   The importance and role of local finance in Korea’s national development process is not well understood. A country does not develop through central government policies alone. The Central and the Local must be balanced as two wheels of the cart to drive national growth. It is expected that the Korean experience and the current local finance system will be useful for developing countries to innovate their fiscal systems.

   This book was published by the Korean Society of Local Finance with the support of C&F System. We would like to express our gratitude to CEO Jungsu Park for sponsoring the publication of this book. We would like to thank Jaehoon Jeong, President of Yoon Seong Sa, for his efforts in editing and proofreading. Finally, we would like to thank the members of the Korean Society of Local Finance who participated in the English translation of the technical terms of local finance and the explanation of the local finance system in Korea.

November 2023

All authors

<Table of Contents>

Chapter 1 Introduction

Section 1 Significance of Local Finance

 1. Significance of Local Finance 

 2. Local Finance-related Laws 

 3. The New Normal Transition and Changing Environment 

Section 2 Size and Composition of Local Finance

 1. National Finance and Local Finance 

 2. Local Government Revenue 

 3. Local Government Expenditure 

Section 3 Key Fiscal Indicators for Local Finance

 1. Significance of Key Indicators in Local Finance 

 2. Fiscal Independence Index and Fiscal Autonomy Index 

 3. Fiscal Capacity Index 

Chapter 2 Local Revenue and Own-Source

Section 1 The System and Status of Local Taxes

 1. Significance of Local Taxes 

 2. System and Classification of Local Taxes 

 3. Size and Regional Distribution of Local Taxes 

Section 2 Issues and Policy Challenges of Local Taxation

 1. Structure of National Tax-Local Tax Revenue Share 

 2. Tax Price Principle and Taxation Sovereignty 

 3. Local Tax Non-Local Resources 

Section 3 Local Non-Tax Revenue

 1. Significance of Local Non-Tax Revenue 

 2. Categories of Local Non-Tax Revenue 

 3. Current Status of Local Non-Tax Revenue 

Chapter 3 Local Revenue and Dependent Financial Resources

Section 1 Local Share Tax

 1. The Purpose of the Local Share Tax 

 2. Composition and Funding of the Local Share Tax

 3. General Share Tax and Adjustments 

 4. Policy Goals of Local Share Tax System 

Section 2 Adjustment Grant and Regional Coexistent Development Fund

 1. City & County Adjustment Grant 

 2. Autonomous District Adjustment Grants 

 3. Regional Coexistent Development Fund 

 4. Policy Goals of AG & RCDF 

Section 3 Subsidy

 1. The Purpose of Subsidy 

 2. National Subsidy Trends

 3. The Rates of Subsidies in National Subsidy Projects 

 4. Balanced Regional Development Special Account 

 5. Policy Agenda in the Subsidy System 

Chapter 4 Local Bond

Section 1 Definition and Types of Local Bonds

 1. Definition of Local Bonds 

 2. Types of Local Bonds based on the Purposes 

 3. Types of Local Bonds with Bond Issuance Method 

Section 2 Local Bond Management System

 1. Management of Local Bonds by MOIS 

 2. Local Bond Management by Local Governments

Section 3 Future Tasks for Local Bond Management

 1. Enhancing the Utilization Strategies of Local Bonds 

 2. Adoption of Specialized Techniques for Management 

 3. Governmental Support by the Central Government 

 4. Establishment of a Specialized Network 

Chapter 5 Local Fiscal Management System

Section 1 The Purpose of a Fiscal Management System

 1. Budget Management Process of Local Governments 

 2. Decentralization and Local Fiscal Management 

Section 2 Pre-Budget System

 1. The Mid-term Local Finance Plan 

 2. Feasibility Study and Local Financial Impact Assessment 

 3. Local Finance Investment Review 

Section 3 Post-Fiscal Management

 1. Local Finance Analysis System 

 2. Financial Crisis Management 

Section 4 Subsidy and Local Fiscal Management

 1. Political Economy of Subsidies 

 2. Management of National Subsidies by MOIS 

 3. Evaluation of Subsidy Project System 

Chapter 6 Local Public Enterprises

Section 1 The Meaning of Local Public Enterprises

 1. Significance of Local Public Enterprises

 2. Types and Businesses of Local Public Enterprises 

Section 2 Financial Situations of Local Public Enterprises

 1. Financial Scale of Local Public Enterprises 

 2. Financial Soundness of the Local Public Enterprises 

 3. Political Economy of Debt and Public Fees 

Section 3 Management of Local Public Enterprises

 1. Local Public Enterprises Management Evaluation 

 2. Management Innovation Issues 

Chapter 7 Value Budgeting and Financial Management

Section 1 Participatory Budgeting

 1. Significance of Participatory Budgeting 

 2. Introduction of Participatory Budgeting 

 3. Issues of Participatory Budgeting 

Section 2 Local Government Gender Budget System

 1. Significance of the Gender Budget System 

 2. Main Contents of the Gender Budget Statement 

 3. Issues of the Gender Budget System 

Section 3 Local Grant Budget Management

 1. Significance of Local Grant 

 2. Local Grant Budget and Management 

 3. Issues in Managing the Local Grant Budget 

Chapter 8 Social Welfare and Local Finance

Section 1 Welfare Decentralization and Local Finance

 1. Local Finance and Social Welfare Expenditure

 2. Local Finance as the Main Player in Welfare Policy 

 3. Welfare Decentralization and Local Finance 

Section 2 Issues of Local Social Welfare Expenditure

 1. Status of Welfare Expenditure in Local Finance 

 2. Issues in and Inter-Governmental Welfare Finance 

Section 3 Reform Tasks for Welfare Finance

 1. Guaranteeing Local General Revenue 

 2. Reorganization of the Standard Subsidy Rate 

 3. Establishment of the Next-Generation System 

Chapter 9 Fiscal Decentralization and Intergovernmental Relations

Section 1 Significance of Fiscal Decentralization

 1. Meaning of Decentralization and Fiscal Decentralization 

 2. Three Theoris about Fiscal Decentralization 

 3. Own-Sourcism and General Resourcism 

 4. History of Fiscal Decentralization 

Section 2 Decentralization Share Tax

 1. Significance of the Decentralization Share Tax System

 2. Funding and Allocation Method for DST 

 3. Key Issues Regarding the DST 

Section 3 Balanced Regional Development Special Account(BRD-SA)

 1. Significance of the BRD-SA 

 2. Operational Framework 

 3. Implications of the BRD-SA and Fiscal Decentralization 

Section 4 The Transfer of National Tax to Local Tax 

 1. The Moon Jae-in Administration’s Decentralization Initiative 

 2. Two-Stage Fiscal Decentralization 

 3. Characteristics and Policy Implications 

<About the Authors>

B. Shine Cho

Professor, Konkuk University, Department of Public Administration

Hyungjo Hur

Professor, Dankook University, Department of Public Administration

Jaewon Lee

Professor, Pukyong National University, Division of Public Administration and Social Welfare