Fiscal Autonomy of Korean Local Governments and Intergovernmental Relations in the 1990s

Article excerpt

ABSTRACT. This paper reviews Korean intergovernmental relations in the 1990s with an emphasis on fiscal relations among the different levels of the government. In the 1990s, Korea reinvigorated its system of local autonomy first established in the sixties. A major issue in the implementation of this system is the presence of vertical and horizontal disparities in local fiscal capacity. Although some efforts have been made to transfer tax sources from central government to local governments or establish local transfer (block grants), fiscal autonomy still remains below expectation, jeopardizing the realization of full local autonomy. This paper is an effort to look into these issues and search for solutions.

INTRODUCTION

Local autonomy was introduced in 1949 by President Syngman Rhee (1948-1960), but was eliminated by the military coup in 1961. The local council was abolished until 1992 and all heads of local authorities were then appointed by the central government until 1995. In 1992 local autonomy was reestablished with elections for council members started as part of a move to democracy in Korea. Now, each local authority (city, county, metropolitan city district, metropolitan city, and province) has a local council and head of each local authority elected by the residents every four years.

So in the 1990s, the local autonomy system started to be reinvigorated after a long suspension. Although intergovernmental relations are still at the early stage, an institutional framework for local autonomy is now in place.

Local elections and the ensuing reforms revived and strengthened democracy in the Korean localities with mixed results. Positive developments include local democracy, enhanced local government responsiveness to citizens, and citizens' recognition of their rights in local affairs including issues such as regional development and general welfare. After the local elections, some negative conflicts such as self-centered mismanagement also attracted national attention. Neither the elected officials nor the public bureaucracy were fully capable of solving all the problems in their jurisdictions because, for a long period of time in the past, local government officials had been accustomed to being dependent on central government's guidelines.

Fiscal dependency of local authorities on higher levels of government is not unique in Korea, but such dependency is more severe in Korea than in other industrialized countries. For instance, over 50% of Korean local governments are not able to pay employee salaries with their own tax revenues. Their financial independence indicators are very low. In several rural areas, local governments can generate only around 10% of their revenues from taxes. In other words, the Korean central government still dominantly controls the revenue resources, leaving only a few taxes for local governments to collect (city and county governments collect resident tax, property tax, car tax, cigarette tax, agricultural income tax, butchery tax, and urban planning tax). As of 2000, the proportion of local taxes was still less than 20% of overall tax revenues in Korea. Fiscal stress and intergovernmental relationships remain the most pressing issues Korean local governments face in the implementation of the concept of local autonomy.

This paper examines these issues. It will begin with a brief review of the theoretical debates on fiscal decentralization, then discuss the changing context of Korea's system of local autonomy, and proceed to review Korea's system of intergovernmental finance, followed by the authors' discussions and conclusions.

DEBATES ON FISCAL DECENTRALIZATION

While there are several dimensions of governmental decentralization, such as the extent of delegation of powers, of legal responsibilities, and of authority over personnel and organizations, fiscal decentralization seems to be the one that calls for the most attention. As Deil Wright (1988, p. …