.) SC'13 -1 L:;lPA._ E. Public Disclosure Authorized

LSUrSD Lic) C..L\.JI8

| YNLF Pt{FORAANCU OF LOCAL GUVBRNAENTS LI TIUE <~)(EGLOt'4: ftiF_'LC: PIUJNS £00. LIeA ECO&CE 1ITRATfUNq POIC,IU Public Disclosure Authorized

by

Douig t,oon Chlu

Kvung-iLan Kim

and

Kyu 3ik Lee Public Disclosure Authorized

November 1985

et-r Spply -m- b Deve lor.n)-etLt De p aC:ie Up.raIL`ons t-3licy Staff Thle. -iorid Barl Public Disclosure Authorized

LL- r t:C L c -eUi, ct :3 ;-;i 'I.-,1U E oLf)i.s lin n. t ; - ''.-.oip- r.....-.i id-'E ; . .-it0l¢.'', ''41. Doio. ilooni Cr!uni. Associate Prof&ssor of -conroinicu at K(,ailng, iee

UJniversity, Seoul, worked on this paper w7hiik he 1J7as a consultant at the

'lorld Bank. ry.-un';g-A{wan Kim is a Ph.D. candidate in Economrics at

Princ,aon University. Kyu Sik Lee, a :Senior E ':oiomist in the Water

Supply and Urban DeveloumeTit, The World B3ank, s rectcd tne industrial

Locatiton Policies Research Project. Kyuee-ria Pehk participated in compiling various data used. MIrs. Morallina F. George typed the manuscript.

.L\ies'-: aLCc Project No . RPo 672-91

.LK.esaeLcl Project Name: An Evaluation of Industrial Location Policies for Urban Deconcentration Abstract

This paper analyzes the avai Lable data on local finances for Seoul and its satellite cities. The paper documents the trends of revenues and expenditures for 1973-1982 to study the fiscal performance of individual local governments compared with that of Seoul. The findings indicate that the rapidly growing satellite cities outperformed Seoul in terms of their ability to generate revenues owing largely to thte increased tax bases. The distribution of transfer payments however favored Seoul, contrary to the central government's objective of deconcentrating population and employment in the region. Table of Contents

I. LNTRO UCTION ...... I

If.e LOCAL GOVERNMENT FINANCE SYSTEM IN KOREA...... * 5

1. Administrative Structure of Local Governments ...... 5 2. 'The Relationships Between the Central and Local Governments ...... e e...... e...... 5 3. The Structure of Local Government Budget...... 7 4. Local Government Revenue System * ...... ** ...... 9 (1) Tax Revenues ...... 10 (2) Non-Tax Revenues ...... 12 (3) Transfers from Hligher Level Governments ...... eo 14 5. Local Government Expenditure System...... 22 t11E. FISCAL PERFORMANCE OF LOCAL GOVERNMENTS IN 'THE SEOUL REGION ...... 26

1. Expenditures of T.1cal Governments in the Seoul Region...... o ...... 26 (1) Recent Trends of Expenditures ...... 26 (2) Expenditure Structure and Sources of Differential Growth...... 28 A. Composition of Expenditures by Account ...... 30 B. Capital Spending ...... 32 C. Expenditure Disparities: A Summary....o...... 37 2. Revenues of Local Governments in the Seoul Regini.on ..... e...... e...... ** * * e vv _v@ 383 (1) Recent Trends of Revenues ...... 38 (2) Relative Importance of Self-raised and External Revenue Sources ...... 40 (3) Differential Growth of Revenues by Sources ...... 44 A. ILocal Tax Revenues ...... 46 B. Revenues from User-Related Charges ...... 50 C. Borrowing by Local Government ...... 53 (4) Revenue Disparities: A Summnary ...... 55

IV. DISTRIBUTION OF L4TERGOVERNIMENTAL TRANSFERS AMiONG LOCAL GOVERNMENTS IN THE SEOUL REGION ...... 57

1. Recent Trends of Transfers from digher Level Governments ...... 57 2. Distribution of Local Shared Taxes and Subsidies ...... 59 *3 Education Finances and the Distribution of Education Grants ...... 63 4. Disparities in Distribution of Transfers: A Summary ...... 67@ v e ¢

V. CONCLUDING RKEMARKS ...... ft ft ft ft ft ft ft ft ft ft ft e...... 67

REFERENCES List of Tables Page

1.i Population in the Seoul Region: 1970-1982...... 2

1.2 Growth Rates of Population by City: 1973-1982 ...... 3

2.1 Composition of Revenues for All Levels of Local Government, 1982 ...... 1

2.2 Trend of Local Shared Taxes, 1972-1983...... 16

2.3 TreLad of Subsidies, 1973-1983 ...... 19

2.4 Trend of Education Grants, 1975-1980. t...... 21

3.1 Trend of Expenditure Disparities among Cities in the Seoul Region, 1973-1982...... 27

3.2 Level of Selected Local Services by City, 1978-1982...... 29

3.3 Composition of Local Expenditures, 1977 and 1981...... 31

3.4 Capital Spending as Percent of Total City Expenditures (Excluding Education), 1973-1980...... 33

3.5 Annual Growth Rates of Current and Capital

Expenditures by City, 1973-1980 ...... e.a e * ...... 35

3.6 Accummulated Capital Spending, 1973-1980...... 36

3.7 Revenue Disparities a.aong Cities in the Seoul Region, 1973-1982...... 39

3.8 Growth Rates of Revenues by Source, 1973-1982 ...... ,...... 41

3.9 Changing Composition of Revenues: Self-Raised vs. External Revenue Sources, 1973-1982...... 43

3.10 Changes in Revenue Composition of Cities in the Seoul Region, 1973-1982...... 45

3.11 Growth Rates of Revenues by Source, 1979-1982...... 47

3.12 Growth Rates of Local Tax Revenues by City, 1973-1982 ...... 48

3.13 Changes in Compositon of Local Tax Revenues by City, 1978-1982...... 49

3e14 Tax Collection Rates...... 51

3.15 Fees, Rents, and User Charges as a Local Revenue Source in the Seoul Region, 1977-1982...... 52 3.16 Borrowing as Percent of Total Local Revenue, 1973-1982...... 54

3.17 Local Debt Outstanding of Cities in the Seoul Region...... 56

4.1 Per Capita Transfers from diger Level Governments, 1973-1982 ...... o...... 58

4.2 Local Shared Taxes and Subsides by City, 1973-1982...... 60

4.3 Allocation of Local Shared 'Taxes among Cities in the Seoul Region, i977-1982...... 61

4.4 Allocation of Subsidies among Cities in the Seoul Region, 1977-1982...... 62

4.5 Per Capita Education Expenditure by City, 1973, 1977, and 1981...... 64

4.6 Growth of Education Expenditure by City, 1973-1981...... 65

4.7 Percentage of Education Expenditure Financed by Education Grants by City, 1973-1980 ...... 66

5.1 Index of Per Capita Fiscal Disparities: 1973-1982...... 69 I. INTRODUCTION

In the wake of rapid urbanization and industrialization in

Korea, the Seoul region has experienced an increasing concentration of population and economic activity. The Seoul region comprises the nation's capital city of Seoul, a direct jurisdictionL city of Incheon, small and medium sized satellite cities, and the counties in the

Gyeonggi province. As of 1982, Seoul had a population of 8.9 million, and the region as a whole 14.3 million, more than one third of the nation's population (Table 1.1). It also accounted for 47 percent of the total non-agricultural employment in Korea in the same year.

The rapid growth of population in the Seoul region, especially in the satellite cities (Table 1.2), increased the demand for basic urban services provided by the local governments, thereby creating extra pressure on their finances. This report is an attempt to analyze the fiscal performance of the local governments in the region during the

1973-1982 periQd and to derive some implications for the central government policies toward deconcentration of population and economic activity in the region.

Questions to be addressed in this study are the following: dow adequate are the revenue sources of the local governments in the region for generating sufficient funds to meet the increased fiscal needs? How has the central government been allocating responsibilities and authorities to local governments in raising financial resources and expending them? Has the level of provision of local public services been maintained or improved in the fast growing satellite cities? How -2-

Table 1.1: POPULATION IN TdE SEOUL REGION: 1970-1982 (in 1000 persons)

1970 1973 1977 1982

Seoul 5,536 6,289 7,526 8,916

All Satellite Cities 1,003 1,378 1,847 2,619

Incheon 646 714 874 1,180

Suweon 171 192 249 348

Euijeongbu 94 105 115 141

Anyang 92 111 163 214

Bucheon - 65 138 270

Seongnam - 191 308 406

Rest of Gyeonggi Province 2,294 2,292 2,449 N 2,717

Seoul Region 8,833 9,959 11,822 14,252

Whole Country 31,435 34,103 36,412 39,331

a/ From Statistical Year Book of Gyeonggi, 1982.

Sources: iAinistry oG tlome Affairs, Municipal Yearbook of Korea. Economic Planning Board, Korea Statistical Yearbook. -3-

Table 1.2: GROWTH RATES OF POPULATION BY CITY: i973-1982 (Average annual rate, %)

1973-77 1977-82 1973-82

Seoul 4.6 3.4 4.0

All Satellite Cities 7.6 7.2 7.4

Incheon 3.2 6.2 5.7

Suweon 6.7 7.0 6.8

Euijeongbu 2.4 4.1 3.3

Anyang 10.1 11.0 10.6

Bucheon 20.7 14.4 17.1

Seongnam 12.7 5.7 8.7

Rest of Gyeonggi Province 1.7 2.1 1.9

Seoul Region 4.4 3.8 4.1

Whole Country 1.65 1.55 1.60

Includes Gwangmyeong, Songtan and Dongducheon which became cities in 1981.

Sources: MAinistry of Home Affairs, Municipal Yearbook of Korea. Economic Planning Board, Korea Statistical Yearbook. -4-

do the satellite cities as a whole compare with Seoul in terms of per capita local revenue and expenditure? dow good are fiscal situations of individual cities relative to each other? flow has the central government been allocating the shared taxes and subsidies among localities and how has this affected the fiscal disparities?

Part II reviews the system of local government finances in

Korea on both revenue and expenditure sides. Part LiLI analyzes fiscal performance of local governments in the Seoul region during the 1973-82 period concentrating on the fiscal disparities between Seoul and the satellite cities as a whole, and among the individual satellite cities. Part LV attempts to find possible relationships between fiscal disparities among localities and the pattern of allocation of transfers from the higher level governments. Part V summarizes major findings and provides some implications for the deconcentration policies pursued by the Korean government.

The information used in this study was gathered from various sources. The Financial Yearbook of Local Government, the Yearbook of

Local Tax Administration, and the Municipal Yearbook of Korea, all published annually by the Hinistry of Home Affairs, and statistical yearbooks of individual cities were the major data sources. Over the period covered in the study, there were some changes in the format of

the data that could affect the consistency of analysis. Therefore, we chose three years as reference points in presenting the data: 1973, the year in which Seongnam and Bucheon became cities; 1977, the first year the major tax reform became effective; and 1982, the most recent year with available data. -5-

IL. LOCAL GOVERNM4ENT FINANCE SYSTEL4 ILi i01ki:-A

1. Administrative Structure of Local Governments

Korea nas three levels of local governments, provinces ("Do"), cities ("Si"), and counties ("Gun"). As of 1985, there are nine provincial governments containing 46 cities and 139 counties, in addition to the special city of Seoul and three "direct jurisdiction cities" of Busan, Daegu, and Incheon. The organization of local governments is illustrated in Figure 1. Provinces (Do's) are intermediate local authorities between the central government and cities

(Si's) and counties (Gun's); they serve the function of coordinating the affairs involving the localities under their jurisdiction. Cities and counties are the basic units of local governments in Korea. Cities are urban entities with a population of 50,000 or more and are partitioned into precincts ("Dong"). Counties are subdivided into towns ("Eub") , semi-urban units, and townships ("Myeon"), rural administrative units.

Precincts, towns, and townships do not have the legal status as an autonomous local government unit. The Special City of Seoul and three direct jurisdiction cities assume the functions of both provincial and city governments. They are not under the jurisdiction of the provinces in which they are geographically located. These cities are subdivided into wards ("Gu") which are further partitioned into precincts.

2. The Relationships between the Central and Local Governments

Since the political autonomy of local governments was suspended in the early 1960's, the central government applied various policy measures to control the local administrative units in the -6-

Figure 1:. TlE ORGANILZATION OF LOCAL GOVEMMHENTS rIN 'OREA

.Central.7overnment|

|Prime HSinister|

| Mini stry l of dome Affairs

Seu Do Direct Jurisdiction Ct

Gu Si Gun |GXu

Don Dong Dong or 2iU Do ng -7-

country. The main.central authority responsible for supervising local governments is the Ministry of Home Affairs (MOHA). Lt exerts a strong influence on many important matters of local governments including personnel appointments and monitoring budgetary processes. Seoul is an exception to this practice; Seoul directly reports to the Prime

Minister and submits its budget and deve'l-opment plans to the Office of the Prime Mininster for approval.

Many central ministries other than *MOHA also play a role in various aspects of local affairs. For instance, the Ministry of

Education (MOE) is in cLiarge of administration and financing of the local education system. Local governments are required to submit their development plans on infrastructure facilities to the Ministry of

Construction (MOC). The Ministry of Finance (MOF) is involved in local

finances by indirectly affecting the size of shared tax allocation

through national tax policies. The Economic Planning Board (EPB)

influences local finances as it can adjust the local government

development plans to fit them in the national planning framework.

3. The Structure of Local Government Budget

The budget of local governments in Korea has three separate

accounts, the general account (G/A), the public enterprise and other

special accounts (S/A), and the education special account (E/A). Major

revenue and expenditure items in these accounts are as follows.

The G/A is the largest of the three in size, and it covers a

wide range of services including public works, social welfare, and

general administration. Expenditures in the G/A are financed mainly by

local taxes, fees and charges, borrowing, and subsidies from the higher

level governments. The S/A expenditures include those on the management BUDGET STRUCTURE OF LOCAL GOVERNi4ENTS

I. General Account (G/A)

Revenues Expenditures Local Tax Revenue General Administratin Expenditure Non-Tax Revenue Administration Current Non-tax Revenues Accounting Property Income Public Information Rents and Fees Social Welfare Expenditure Interest Revenue Social Services Temporary Non-Tax Revenues Industry and Economic Develqpment Revenues from Sales of Assets Expenditures Carry-over Agriculture Contributions Industrial Development Local borrowing Commerce, Industry & Transfers from Other Accounts Transportations Revenues from Previous Fiscal Forrestry Year Rural Development Others Public Utilities Expenditure Local Shared Taxes Land Development Subsidies Local Development Central Government Subsidies Civil Defense Expenditure Provincial Subsies Other Expenditures Debt Services Transfers to other Accounts Others

LI. Public Enterprises and Other Special Accounts (S/A)

Major Items Water Works Land Adjustment Schemes dousing Construction Sewage Works Relief Programs Medical Care Fund Toll Road Operations and Maintenance Transportation Construction of Subway (for Seoul and Busan only)

III. Education Special Account (E/A)

Revenues Expenditures Property Income Administration Rents and Fees School Management Education Grants Facility Services Subsidies Special Education Services Contribution Carry-over Revenues from Previous Fiscal Year Debt Services Transfers from Other Accounts Others Loans Carry-over Others -9-

of the water system and land adjustment and other projec.s, and are primarily financed by various forms of charges for local public services, borrowing, subsidies from the higher level governments, and transfers from the G/Ae The E/A is operated by the local board of education which is independent of the local government and reports directly to the Ministry of Education. The E/A expenditures are mostly financed by education grants from the central government, but fees and charges are collected from secondary and post-secondary students.

Transfers from the G/A are other important financial'sources in some cities. The expenditures in each account can be classified into current or capital components. In the case of the E/A, however, this distinction is not easily available.

'There are some difficulties in using the local government

budget for an analytical or planning purpose. First, an expenditure

icem for one activity can be scattered over various accounts. For example, the expenditure on the construction of sewage treatment facilities is included in the S/A, but their operating costs such as wages are included in the G/A. This makes it difficult to analyze local government budget by functional activities. Secondly, the budget is

prepared and executed on a yearly basis, and there is no concept of

longer-term capital budgeting in the local fiscal system.

4. Local Government Revenue System

Sources of local government revenues can be grouped into three

broad categories: local taxes, non-tax revenues, external revenues

transferred as local shared taxes, subsidies, and education grants from

the higher level governments. - 10 -

(1) Tax Revenues

The Local Tax Law stipulates 12 different kinds of taxes that can be levied by local governments: inhabitant tax, property tax, farmland tax, city planning tax, public facility tax, worksLop tax, automobile tax, butchery tax, horse-race tax, acquisition tax, registration, and licence tax. Among them, the acquisition, registration tax, and licence taxes are reserved for provincial governments, the Special City of Seoul, and three direct jurisdiction cities of Busan, Daegu, and Incheon. The remaining nine taxes are levied by all city and county governments.

In terms of taxable objects, six local taxes are viewed as property-related taxes: the acquisition and registration taxes are levied on the ownership transfers of tangible and intangible properties; the farmland tax is levied annually on agricultural land by cities and counties; the property, city planning, and public facilities taxes are levied annually on the assessed market value of various types of property. These property-related taxes are dominant revenue sources for all local governments. For provinces, Seoul, and direct jurisdiction

cities, the acquisiton and registration taxes are the most important tax

revenue sources, whereas the property tax and the farmland tax are important for cities and counties. In contrast, for the national

government, income and consumption taxes are major sources. Figure 2

illustrates the national and local tax structure in Korea as of 1983.

One important feature to note about the local tax system is

the fact that local governments have neither the power to establish and

reform the tax system nor any discretion over determining the tax items,

the rates, and exemptions. All these powers lie with the central Figure 2: KOREAi TAX SYSTEM, 1983

- Income Tax - Corporation Tax Direct Taxes - inheritance & Gift Tax - Asset Revaluation Tax Excess Profits Tax

Internal Taxes

Value-Added Tax - Special Excise Tax National Indirect - Liquor Tax Taxes Taxes - Securities Transaction Tax - Customs - Telephone Tax Duties L Stamp Ta- L Defense Surxtax

r Acquisition Tax Provincial Taxes Reaistration Tax (Provinces, Seoul, and Licence Tax Direct Jurisdiction Cities)

Inhabitant Tax - Ordinatry Local - Property Tax Taxes Taxes - Automobile Tax - Farmland Tax City & County Taxes - Butchery Tax (Cities and Counties - Horse Race Tax including Seoal and City Planning Tax -I- Earmarked Direct Jurisdiction Cities) - Public Facilities Tax | Taxes -Workshop Tax 1

Source: Ministry of Finance, Korean Taxation, 1982. - 12 -

government. The major contents of individual local taxes are summarized in Annex 11.1.

(2) Non-Tax Revenues

In addition to tax revenues, a large amount of local revenues is raised from various non-tax sources as shown in Table 2.1. In fact, non-tax revenues account for a larger share in total revenues than tax

revenues in most local governments, but this may be somewhat misl.eading

since non-tax revenues encompass a wide variety of revenue sources which

tend to be fluctuating over time. The non-tax revenue sources include

business revenues, revenues from the sale or renting of properties owned

by local governments, rent and various fees, funds carried over from the

previous fiscal year, revenues from the previous year, local borrowing,

grants and contribution. Business revenues are derived from project-

based local activities managed through the special accounts, for

example, revenues from the sale of land to recover the cost of land

adjustment projects, and user charges on water and sewage systems. Fees

are charged for various local services such as various inspections,

health care and maintenance of local market places. Local borrowing

consists of bond issues, short and long-term loans from the higher level

governments or from private financial institutions, and foreign loans.

Bond issues are the single most important means of local borrowing.

Currently local governments in Korea issue bonds to finance such self-

liquidating projects as water, sewage and subway constructions. Another

important non-tax revenue is the fund carried over from the previous

year's budget surplus. - 13 -

Table 2.1: COHIPOSITON OF REVENUES FOR ALL LEVELS OF LOCAL GOVERNMENT, 1982

Amount Share (in won) (%)

Tax Revenues 1,119 26.9

Non-Tax Revenues 1,953 46.8

Business Revenues 539 12.9

Property Income 143 3.4

Rent and Fees 108 2.6

Local Borrowing 587 14.1

Funds carried over 323 7.7

Revenues from Previous Fiscal Year 40 1.0

Others 214 5.1

Local Shared Taxes 701 16.8

Subsidies a/ 401 9.6

Total Revenues 4.173 100.00

a/ Subsidies given by provinces to cities and counties are deducted to avoid double-counting. b/ Education special account not included.

Source: Ministry of dome Affairs, Financial Yearbook of Local Government, 1983. - 14 -

As already mentioned, most of these non-tax revenue sources tend to be unstable. Even in the case of more reliable sources such as user-related charges, fees, and rents, the flexibility of local revenue sources has seldom been allowed because of the severe central government control over the choice of eligible services and the determuination of rates. Local borrowing tends to be limited for a similar reason; the amount of borrowing, the rate structure, and repayment sources must be approved by GIOHA.

(3) Transfers from digher Level Governments

The financial arrangements between the central and local governments in Korea are governed by the Local Finance Law. The law specifies the types of assistance from the central to local governments, i.e., local shared taxes, project-tied subsidies, and education grants. Cities and counties receive subsidies from the provincial governments as well. Although there have been some changes in the arrangement, fiscal assistance from higher level of governments has continued to play an important role in local public finances during the last two decades.

Local Shared Taxes

Local shared taxes are general purpose grants from the central government to local governments for the purpose of mitigating the fiscal imbalances among localities. Under the present system the total amount to be allocated is determined as a fixed proportion of the internal tax revenues defined as the total national tax revenue less revenues from defense surtax, custom duties, and monopoly profits. Prior to 1972 a total sum equal to 17.6% of the internal tax revenue was distributed to local governments each year.- During 1974-1982 period, the amount of - 15 -

allocation was set in each year based upon the financial situations of the central government, as the Presidential Economic Emergency Decree of

1972 abolished the previous system. Table 2.2 shows actual shared tax allocations as percent of the internal tax revenue during the period; it stayed at around 11 percent, a much lower level than in the previous years. Since 1982 a larger proportion of internal tax revenue was allocated to local governments.

Under the present system, there are two types of shared taxes, ordinary and speical. The ordinary shared taxes are designed to fill the local government financial needs, while the special shared taxes are allocated as financial assistance in the event of natural disasters, unexpected revenue losses, and other extraordinary circumstances. The ordinary shared taxes account about 90 percent of the total shared tax allocation and the special shared taxes the remaining portion. The amount of ordinary shared tax allocation is determined based on the notion of "fiscal need," i.e., the difference between the fiscal demand

(expenditure requirement) and the fiscal ability (revenue potential) of individual local governments. The definitions of demand and ability are given by a decree. The expenditure requirement is computed as a sum of the number of units of each service item to be provided times its unit cost over a set of 31 service items selected by the central government. The list includes items sucht as bridges, road pavement, land improvement, irrigatlion, and urban planning. The unit costs are also set by the central government for three categories, cities, provinces, and counties, and uniform rates apply to all localities within each category. The fiscal ability is defined as 80% of estimated local tax revenues using the standard tax rates. Although the ordinary 16 -

Table 2.2: TREND) OF LOCAL Sk{ARED TAXES, 1972-1983

Local Shared Taxes Percentage of Incernal Year (in billion won) Tax Revenue (X)

1972 67.3 17 .60

1973 71.9 16.67

1974 81.4 11.34

1975 117.7 11.87

1976 151.4 11.24

1977 183.4 10.73

1978 246.9 11.26

1979 331.3 11.31

1980 410.0 11.22

1981 520.0 11.35

1982 700.9 13.42

1983 857.9 14.20

Source: Economic Planning Board, Supplementary Material for National Budget, 1983e - 17 -

shared taxes are designed to fill the gap between thte de,aind and the ability of local governments, each locality does not receive full

compensation for its need. This happens because the total snared tax

allocation amount ususally falls short of the total need. iLOdA makes

the downward adjustments depending on the total shared tax amount

derived from the national internal tax revenue.

The Korean system is well designed in the sense that the

allocation formula treats the expenditure requirement and the revenue

generating ability of a local government as being equally important. In

most advanced countries the expenditure side receives less attention in

formulating a grant allotment scheme. There are, however, some problems

in the Korean system regarding the selection of the criteria for

measuring the expenditure needs. First, the local service items chosen

by the central government are mostly recurrent ones and the regional

differences in capital expenditure are not addressed adequately.

Therefore, local governments in rapidly growing areas such as those of

the satellite cities in the Seoul region tend to receive insufficient

amounts for their needs. Second, since uniform unit costs of local

services are applied within each category of local governments, the

system does not reflect the differences in local characteristics such as

population size and location in calculating expenditure needs. Besides

these defects in the allotment scheme, local governments are informed of

the shared tax allotment for them at the beginning of the fiscal year

and are not given enough time to incorporate the assistance into their

own fiscal planning. - 18 -

Subsidies

In addition to local shared taxes, local governments rely heavily upon subsidies on various projects administered by the central ministries. Unlike the shared taxes given to local governments as general purpose grants, subsidies are tied to particular projects of significant national interest. The Local Finance Law and the Subsidy

Administration Law state that the central government may provide local governments with subsidies when both the central and local governments

have common interest in specific projects or when such subsidies are needed to carry out certain national policies. The laws also address

the issue of cost-sharing between the central and local governments for

the subsidized projects but not in a precise way. In most cases, the

central government requires that the recipient governments share a

fraction of the cost of the projects. This matching fund requirement

often imposes a severe constraint upon the autonomy in local finances;

in some instances, it may leave virtually no local resources to finance

investment projects of their own choice. The problem is even more

serious in many county governments heavily dependent upon external

sources as their own revenues are insufficient for current expenditures

for general administration. Table 2.3 shows the trend of the local

burden for the subsidized projects during the period of 1973-1983.

There are some further problems wi-th the present subsidy

system. First, there is no explicit principle in distributing the costs

of subsidized projects between the central ministries and the recipient

localities. In fact, the central government tends to shift a heavier

burden to local governments, thereby imposing an extra financial burden - 19 -

'Table 22.'_';TREND OF SUBSIDIES, 1973-1983

Total Cost of Ratio of Local Burden Subsidies Subsidized Projects to Project Cost Year (in billion won) (in billion won) (X)

1973 33.9 46.1 24.3

1974 50.0 69.7 28.5

1975 82.2 109.1 24.4

1976 80.4 119.7 31.4

1977 99.8 145.1 31.2

1978 123.8 203.3 37.3

1979 242.2 341.9 *29.2

1980 214.3 357.0 37.8

1981 225.4 358.0 35.2

1982 308.9 546.5 41.1

1983 348.7 595.4 39.6

Source: Ainistry of dome Affairs, Summary of Local Government Budget, 1983. - 20 -

on them. Moreover, the local governments' financing requicements on

similar projects vary over localities depending upon which ceintral ministry is subsidizing the project. Finally, the system is too much

fragmented to ensure efficient allocation and monitoring of resources at

either the local or national level.

Educations Grants

Education grants by the central government to local

governments are intended to achieve a balanced level of education among

localities. Local governments in Korea provide primary and secondary

eduation. The administrative responsibility lies with the autonomous

local board of education. Revenues that enter the education special

account (E/A) are derived from tuition, transfers from the G/A, and

education grants. Education grants are the most important revenue

source in E/A as shown in Table 2.4.

The format of the education grant system is similar to that of

the local shared tax system. There are two types of educational grants,

ordinary and special. The total amount of the grants to be allocated is

also set as a fixed proportion of the total internal tax revenue; the

current shares between ordinary and special grants are 11.8 percent and

1.2 percent, respectively. The ordinary grants are allocated to defray

the total salaries for primary school teachers and about a half of the

wage bill of middle and high school teachers. The special grants are

provided to cope with the special financial needs due to unexpected

revenue losses or natural disasters, or to finance the construction or

expansion of educational facilities. - 21 -

Table 2.4: Ti(tND OF EDUCAT10 G&ANTfS, 1975-1980

Total Revenues in Education Special Education Account (A) Grants (B) B/A Year (in billion won) (in billion won) (%)

1975 334.6 277.0 82.8

1976 557.1 468.3 84.1

1977 732.1 616.1 84.2

1978 888.2 727.7 81.9

1979 1,155.2 970.1 84.0

1980 1,587.9 1,340.4 84.4

Source: iAinistry of dome Affairs, Financial Yearbook of Local Government, 1976-1981. - 22 -

5. Local Government Expenditure System

Local goverments in Korea are responsible for providing a variety of public services ranging from water supply, sewage, refuse disposal, and waste treatment, to health, welfare, and education. They are also involved in the provision of low income housing, site preparation, roads, and other infrastructures. Some of these responsibilities overlap with those of the central government and confusion arises due to the lack of clear legal statements as to the division of labor between the central and local governments, especially in the case of local projects subsidized by the central ministries.

Expenditures of local governments are divided into three distinct accounts as in the case of revenues. The G/A expenditures cover general administration, social welfare, industry and economic development, public utilities and civil defense. The local public enterprise and other non-education S/A expenditures are classified into operating, non-operating, and contingency expenditures. The education

S/A expenditures are operated by local board of education as explained earlier in this chapter. -23-

AnnexlI.I: CoNTSOF WCALMAKES (As of 1983)

Taxes Tax Bases and Tax Rates Notes

Property Tax: (a) Land: Dwelling lots; 0.3%- 5% of assessed value Five times the normal according to lot size (5 brackets). rates for factories located Land for villas, golf courses, and other enter- in certain large city tainnent purposes; 5%. areas since 1977. Idle land or land for non-business use owned. by coporations; 5 - 10% according to the holding period. Plant sites and other uses; 0.3%.

(b) Buildings: Houses; 0.3%- 5% of assessed value (5 brackets). Villas, golf courses, and other entertainmert facilities; 5%. Other buildings; 0.3% (factories are included).

(c) Ships Luxiry ships; 5% of assessed value. Other ships; 0.3% of assessed value.

(d) Mines; 50 won per hectare.

Lnhabitant Tax: (a) Cities with populations over 5 mi;ion; This tax was newly esta- 4,000 won per capita, biished in 1973. 40,000 won per corporation. Cities with populations over 500,000; 2,500 won per capita, 25,000 won per corporation. Other cities; 1,500 won per capita, 15,000 won per corporation. Counties; 800 won per capita, 8,000 won per corporation. (b) 7.5% of personal income tax, corporate income tax, and farmaland land tax.

Horse Race Tax: 10% of value of sale of horse race tickets.

Butchery Tax: M4a snimof 1% of current price of taxable pigs or cowS. - 24 -

Taxes Tax Bases and Tax Rates Notes

Workshop Tax: (a) 500 won per pyeong (3.3m2 ) of work area. Introduced in 1976. (b) 0.5% of total payroll. No tax on establishmants with less than 50 employees or with work area smaller than 10O pyeongs. Until 1978, this tax was levied only by cities, but expanded to include counties in 1979.

Farmland Tax: (a) Category A (rice paddy fields) 6%7of standard harvest 8% of standard harvest 10% of standard harvest (b) Category B (other designated land) 10% of standard harvest 15% of standard harvest 20% of standard harvest

Automobile Tax: (a) Automobile with 4 cylinder or mDre; Replaced the surtax in business use: 40,00 - 84,000 won, existence up to 1977. non-business use: 816,000-1,980,000 won depending on the length of wheel base and the number of cylinders. (b) Automobile with less 4 cylinders; business use: 21,200 - 30,400 won. nonr-business use: 125,000 - 374,400 won depending on the anxunt of displacement. (c) Other small passenger cars; business use: 16,8W0 won, non-business use: 67,00 won. (d) Buses; business use: 21,000 - 32,000 won, non-business use: 44,000 - 77,000 won depending on the size. (e) Trucks; business use: 4,400 - 36,000 won, nonr-business use: 19,000 - 126,000 won depending on the loading capacity.

City Planning Tax: 0.2 % of assessed value of land or buildings.

Public Facilities 0.06 % - 0.16% of assessed value Tax: of buildings and ships (6 brackets). - 25-

Taxes Tax Bases and Tax Rates N\otes

Licence Tax 6 categories of licences Provincial tax; 20 % of revenue distributed to cities and Cities with counties since 1977 popalation over 500,000 Other cities Counties 1: 27,000 18,003 10,800 2: 21,000 13,500 7,200 3: 16,200 9,000 4,800 4: 10,800 6,000 3,60 5: 7,200 3,000 1,8 0 6: 3,600 1,500 600

Registration Tax: From 0.1% to 3.0% of reported value, Provincial tax; 20% of revenue payable when property rights are registered. distributed to cities and Tax base is the same as that for the acquisition counties since 1977. tax.

Acquisition Tax: 2%of acquisition price of real estate, Five times the normal rates for motor vehicles, ships, mining & fishery factories located in certain licenses, heavy equipment, and forestry large city areas since 1977. and fruit trees. Provincial tax; 30% of revenue 6% on luxury properties. distributed to cities and counties since 1977. - 26 -

III. FISCAL PERFOILAANCE OF LOCAL GOVERSIN'NS

IN THE SEOUL REGION

In this chapter, for the 1973-1982 period we analyze how the local governments in the Seoul region raised and expended financial resources. Our attention will be focused on the fiscal disparities between Seoul and the satellite cities, and also among the individual satellite cities.

1. Expenditures of Local Governments in the Seoul Region

(1) Recent Trends of Expenditures

The cities in the Seoul region are responsible for the pr,ovision of all the basic urban services mentioned in the previous section. Seoul is different from others in that it has further responsibilities in developing urban transportation systems. Seoul is in charge of financing and operating the large subway system as well as running several bus companies, while in the other cities urban

transportation systems are operated by the private sector.

Table 3.1 shows local expenditures by Seoul and its satellite

cities during 1973-1982. First, we find that the level of per capita

expenditure was substantially higher in Seoul than in any other

satellite city throughout the period. This pattern holds when the

expenditures on E/A are included. Second, the gap in per capita

expenditure between Seoul and the satellite cities was reduced since

1977. The per capita expenditure of the satellite cities was, on the

average, only 53 percent of that of Seoul in 1977, but it became 65

percent in 1982, as the per capita expenditure of those cities as a Table 3.1: TREND) OF EXPELIDfITUJRE DISPARPIUES AMAVG CUIES LN 'E SEOL REGION, 1973-1982

Total Expenditures a! Per Capita Expenditure Average AnnuaL Growtli Rates (%) (in million won) (in won) Total Expeniditure Per Capita Expenditure 1973 1917 1982 1973 1977 1982 1973-77 1977-82 1973-77 1977-82

Seoul 72,941 272,758 1,039,873 11,597 36,244 116,624 39.1 30.7 33.0 26.3

AlL Satellite Cities 10,121 35,138 198,845 7,347 19,029 75,927 36.5 41.4 26.9 31.9

Incheon 5,391 16,135 106,727 /,548 18,462 90,481 31.5 45.9 25.1 37.4

SLweon 1,659 4,434 22,236 8,655 17,838 63,867 27.9 38.1 19.8 29.1

Euijeongbu 575 1,804 8,696 5,478 15,637 61,610 33.1 37.0 30.0 31.6

Anyang 281 5,466 14,10Y4 2,530 33,549 51,457 110.0 20.9 90.8 8.9

Bucheon 3)3 2,145 23,222 4,656 15,537 85,988 63.1 61.0 35.2 40.8

Seongnam 1,912 5,154 23,80 10,033 16,752 58,787 29.1 35.9 13.7 28.5

Rest of Gyeonggi b/ 11,826 47,629 173,365 5,159 19,445 63,563 41.7 .29.5 39.3 26.7

a/ The expenditure is the sum of Genleral Account and Special Account expenditures. Education Special Account not included. b/ The figures for 1982 include the expenditures of (wangmyeong, Songtan, and Dongduchieon which were promoted to city in 1981; total expenditures for these cities in 1982 are 21,868 million won.

Source: Mlinistry of ilone Affairs, Financial Yearbook of Local Governmnent, 1974, 1978, 1983. 28 -

whole grew much faster than that of Seoul. Third, large variations are observed among the individual satellite cities. For example, Anyang and

Bucheon showed a very different pattern of growth in per capita expenditure. Bucheon's position changed from the second lowest to the second highest during the period; in contrast, Anyang stayed as the lowest throughout the period.

It is significant to note that for all satellite cities taken together, their per capita expenditure grew much faster in the second subperiod than the first, while the reverse was true for Seoul. This trend suggests an improvement of local services in the satellite cities

(with the exception of Anyang) relative to Seoul -in tandem with their rapid growth in recent years. The counties in Gyeonggi, however, experienced a decline in the growth rate during the period. Care should be taken in relating the level of per capita local expenditure to the level of public services provided in different cities since the costs of providing such services may vary among them, especially between small and large cities. For this reason we present in Table 3.2 the level of some local public services in Seoul and in the satellite cities for the

1978-1982 period. The figures on the provision of road, water supply, sewerage, garbage and night soil colleciton reveal the pattern consistent with that of per capita expenditure figures above. On thle average the level of most of these services in the satellite cities fell short of Lhose of Seoul throughout the period, but the gap substantially narrowed in all items in all cities.

(2) Expenditure Structure and Sources of Differential Growth

In this section we shall attempt to identify the sources of differential expenditure growth patterns by examining the composition Table 3.2: LEVEL OF S1ELECED LOCAL SERVIQ(S BY CfTY, 1978-1982

Seoul Satellite Cities Total Lncheon Suweon Euijeongbu AnLyang uicheon Seongnam 1978 1982 1978 1982 1978 1982 1978 1982 1918 1982 1978 1982 1978 1982 1978 1982

Roads Road area to Urban Land Area a' 13.7 15.5 9.5 11.9 13.9 12.3 2.3 6.0 2.4 6.5 6.4 15.6 8.1 14.2 18.4 18.7 Total Road Lengt[h (Km) 6,328 6,738 1,453 1,770 612 632 121 155 34 99 112 250 298 342 276 292 area (Km2) 51.3 58.0 18.6 22.9 11.0 12.1 1.0 1.7 0.3 0.8 1.2 3.2 2.3 2.8 2.8 3.3 % of Paved 63 71 39 62 39 53 56 74 83 63 32 88 27 40 43 62 Iocal and City Road Length (Km) 6,191 6,548 1,322 1,597 555 575 97 124 19 74 102 235 283 318 266 271 2 Area (Kn ) 47.5 51.6 16.2 19.7 10.0 11.1. 0.7 1.2 0.1 0.5 1.0 2.9 1.8 2.2 2.6 2.8 X of Paved 60 67 33 57 36 50 39 63 75 52 19 87 11 27 39 56

Water Supply Per Capita Water Use Per day (liters) 335 436 186 241 247 310 125 183 187 181 141 182 /9 172 85 162 % of population with piped water 92 95 &) 85 93 93 69 78 49 65 67 77 49 76 84 87 Length of water pipes (Km) 12,416 14,930 3,208 4,983 2,318 3,045 636 807 53 64 59 448 84 480 108 139

Sewage % of area with sewage system to total city area 57 69 44 68 53 53 51 75 3) 83 20 79 21 94 65 90

Garbage Collection % of collection to total discharged per day 100 100 92 96 95 95 89 100 100 97 95 96 95 98 76 95

Night Soil Collection %of collection to total discharged per day 98 100 39 33 33 3) 34 28 56 48 41 27 66 33 44 49

Housing Number of housing units as percent of the nLuber of households () 61 61 61 63 64 62 54 58 64 69 57 56 56 54 a/ Roads of width less than 4m are not included. Source: Ministry of dome Affairs, Municipal Yearbooki of Korea, 1979, 1983. - 30 -

of expenditures and the changes in the relative importance of various expenditure items.

A. Composition of Expenditures by Account

Table 3.3 provides the composition of local expenditures in the general account (G/A) and the non-education special accounts (S/A) for 1977 and 1981. We find that the share of the G/A in total expenditure significantly dropped for both Seoul and the satellite cities. This was mainly due to a decline in the share of public utility expenditures. In contrast, the share of the S/A rose for all cities in the region. Nevertheless, the reverse trends for both accounts were true for the rest of Gyeonggi.

Within the G/A expenditures, public utilities accounted for the largest share for all cities. The share ranged from 17 percent to

31 percent in 1977, and from 16 percent to 21 percent in 1981. The decline in the share was most noticeable in Seoul and Seongnam. The table also indicates that the satellite cities had a much larger proportion of expenditures on general administraiton than Seoul. The gap was even much larger between Seoul and the counties in the region.

Such a large share of mainly recurrent spending on general administration would not allow much flexibility for satellite cities and counties to finance their programs. Also, social welfare spending accounted for 10 to 13 percent for the satellite cities, much higher

than Seoul.

In the case of S/A expenditures, expenditures on the water

system and land adjustment projects comprised over 80 percent for most Table 3.3: CIXAPOSITiON OF LOCAL EXPNED1TJRES, 1917 AND 1981 (in percent)

Rest of Seoul Satellite Cities Gyeonggi All Lncheon SLweoa Euijeongbu Anyang Bucheon Seongnam 1977 1981 19/7 1981 1977 1981 19/7 1981 1977 1981 1977 1961 1977 1981 1977 1981 1977 1981 1. General Account (G/A) a. General Admini- strative Expen- ditures 13.9 14.6 23.5 23.2 23.9 23.7 25.3 21.1 34.3 31.0 16.0 17.7 30.6 17.4 21.9 31.2 33.5 36.9 b. Public Utility Expenditures 30.8 16.4 27.2 18.2 23.1 17.7 28.5 20.8 17.8 13.7 37.7 17.4 22.1 19.7 33.4 19.1 22.6 25.5 (Construction) (29.2) (10.2) (25.0) (16.1) (21.9) (17.1) (24.5) (13.5) (17.7) (13.5) (35.4) (14.6) (21.9) (19.7) (27,7) (14.4) (22.5) (25.1) (City Planning) (1.3) (1.8) (2.2) (1.8) (1.1) (0.5) (3.9) (5.4) (0.1) (0.2) (2.3) (2.8) (0.1) (0.0) (5.7) (4.7) (-) (0.0) (Transport & Safety) (0.3) (4.3) (0.1) (0.3) (0.1) (0.0) (0.0) (1.9) (-) (0.0) (-) (-) (-) (0.0) (0.1) (0.4) c. Industry and Economic Deve. Expenditures 3.3 4.7 4.1 2.4 3.0 2.1 4.2 2.8 2.3 1.6 5.8 1.7 5.3 2.4 5.9 3.8 16.5 15.6 d. Social welfare Expenditures 6.9 3.2 10.5 13.1 11.1 12.4 10.8 11.4 12.5 14.5 10.1 12.7 8.2 3.6 9.2 18.2 9.5 0.9 e. Others 12.8 14.2 5.2 5.3 3.0 5.1 14.5 6.2 3.4 4.4 5.8 4.4 4.8 9.6 4.2 2.7 5.2 1.8 Subtocal 67.7 61.1 70.6 62.2 64.0 61.0 83.4 62.3 10.4 65.3 75.4 53.8 71.0 67.7 74.d 70.0 87.3 89.4 2. Nionreducacion Special Account (S/A) a. Water Works 12.6 20.8 11.8 20.5 .4.3 16.4 6.1 19.1 18.8 18.8 b. Housing 3.5 4.4 1.7 t.3 2.1 0.6 2.3 0.2 3.2 8.1 c. Land Adjustment 3.0 13.2 2.2 13.5 17.9 28.9 20.0 10.4 - 1.4 d. Others 19.8 0.6 0.9 2.4 0.3 0.4 0.6 0.5 2.2 1.1 (Subway) (17.0) Subcotal 32.3 38.9 29.4 37.8 36.0 39.0 16.6 37.7 29.6 34.7 24.6 46.2 29.0 32.3 25.2 30.0 12./ 10.6 3. 'TotalExpenr- diture (1 + 2) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 40.o 100.0 100.0 100.0 4. Expenditures on Public Works (1.b +2) 63.1 55.3 56.6 56.0 59.1 56.7 45.1 58.5 47.4 48.4 62.3 63.6 51.1 52.0 58.6 49.1 35.3 36.1

Source: Ministry of Howe Affairs, Financial Yearbook of Local Governmnnt, 1978, 1982 - 32 -

satellite cities, whereas Seoul had the largest portion an subway construction in 1981. The E/A expenditures will be discussed in Chapter

IV.

B. Capital Spending

The trend of local government expenditures can be examined by capital and recurrent components. The trend of capital expenditures should reflect increasing capital investment requirements to accommodate rapidly growing population and industries in the region during the past decade.

Table 3.4 provides the share of capital expenditure as percent of the total spending for each city. Captial spending includes purchase

of land and other physical assets, new construction, net capital

lending, and capital transfers to the private sector. The total share

increased for both Seoul and the satellite cities, but there were a good

deal of variations among individual cities. Euijeongbu, a northern city

with the lowest growth rate of population, kept a constant share of

about 40 percent, the lowest of all. A similar pattern was observed in

two other old cities, Incheon and Suweon. On the other hand, the two

fast growing industrial cities, Bucheon and Anyang, experienced a

dramatic rise in the total share from 47 to 64 percent, and from 35 to

63 percent, respectively during the period. In 1980, the share of

capital expenditure for Anyang, Bucheon, and Seongnam reached the

Seoul's level of 63 percent. Seongnam recorded the largest share of 64

percent in 1973 when it was created as a settlement for squatter

dwellers from Seoul, and the share remained high throughout.

The growth of current and capital expenditures during the

period of 1973-1980 are presented in Table 3.5. The table shows that Table 3.4: CAPI[TAL SPENDING AS PEiCENT OF TOTAL CITY EXPENDITURES (EXCLUDING EDUCATION), 1973-1980 (in percent)

Seoul Satellite Cities Account/Year Total Incheon Suuweon Euijeongbu Anyang Bucheon Seongnam

1. General Account 1973 40.4 46.5 45.4 53.6 34.9 42.6 23.6 50.0 19/4 37.9 38.2 32.9 33.4 32.1 47.5 28.0 50.4 1975 56.7 45.5 44.8 33.0 40.7 47.2 34.3 58.2 1976 55.9 44.6 41.1 46.3 42.6 48.3 42.5 51.4 1977 56.7 52.7 47.9 55.3 36.4 66.7 37.4 59.6 1918 57.9 50.0 52.2 50.6 30.5 43.0 46.2 55.9 1979 59.9 50.3 47.9 56.6 39.5 47.4 58.4 50.0 1980 51.3 54.7 56.2 51.9 36.3 50.9 59.3 58.2 1981 41.3 45.3 45.8 44.7 34.2 42.8 50.2 46.9 1982 41.3 47.6 49.3 41.8 44.7 60.5 39.8 56.3

2. Non-education Special Accounts 1973 71.8 64.6 56.4 /0.0 71.6 81.3 44.7 91.7 1974 64.6 66.5 63.5 69.3 64.1 86.0 51.2 69.8 1975 64.3 64.0 51.5 74.8 83.4 64.3 70.9 79.2 1976 62.2 59.0 56.3 56.5 36.5 81.7 61.1 60.1 1977 69.6 60.1 54.1 58.5 48.7 74.8 68.2 73.5 1978 /9.9 63.2 54.5 61.4 64.2 74.4 80.3 74.3 1979 80.7 59.7 49.8 74.9 41.4 71.8 77.3 65.6 1980 78.0 64.5 57.1 63.9 54.2 80.4 68.3 75.4

3. Total (1+2) 1973 53.9 52.8 49.8 57.9 42.3 47.0 34.7 b3.8 1974 47.5 49.4 46.8 42.6 38.3 64.7 40.4 56.8 1975 59.6 52.1 47.4 47.7 56.6 52.0 49.0 65.2 1976 58.1 49.3 47.2 48.1 41.2 59.3 48.1 53.5 1977 60.8 54.9 50.1 55.9 40.0 68.7 46.3 63.1 1978 65.4 54.3 :2.9 53.1 39.9 55.4 59.5 60.8 1979 68.1 53.3 48.6 61.6 40.1 56.7 63.7 54.3 1980 62.5 57.9 56.5 55.0 42.1 64.0 62.5 62.6

Source: Ministry of dome Affairs, Financial Yearbook of Local Government, 1974-83. - 34 -

the total capital expenditure for the satellite cities as a whole grew

at about the same rate as that of Seoul. Among individual cities,

however, Anyang and Bucheon registered a much higher growth rate, about

twice that of Seoul. Other satellite cities experienced slower rates than Seoul.

It should be noted that the growth rates between the two end years of a period may not accurately reflect the actual trend of capital accummulation, since capital, spending is discretionary and tends to fluctuate year after year unlike recurrent expenditures. Table 3.6 shows the total accummulated capital spending in constant prices over

the period of 1973-1980 for each city in ti'le region. On a per capita basis the satellite cities as a whole spent less than a half of the sum spent by Seoul on capital expenditure items. One obvious reason for such a big discrepancy is that Seoul spent a large sum on the construction of subways since 1971. Calculations excluding the subway and related expenditures should lead tG a much smaller gap in infrastructure investment between Seoul and the satellite cities.

As to the composition, capital spending covers public utility expenditures in the G/A and most of the S/A expenditures. As mentioned in the previous section, public utility spending accounted for a decreasing share in the G/A expenditures in all the cities in the region between 1977 and 1981, In the case of the S/A, the share of spending on water works went up in most satellite cities during the period, and it tripled or quadrupled in Anyang and Bucheon. The share of spending on land adjustment projects rose for all the satellite cities except Table 3.5: ANNUAL GROWTH RATES OF CURRENT AND CAPITAL EXPENiITURES BY CITY, 1973-1980 (in percent)

Seoul Satellite Cities Expenditures Total Lncheon Suweon Euijeongbu Anyang Bucheon. Seongnam

1. General Account Capital Expenditures 42.8 43.0 43.1 33.5 34.0 65.9 96.7 86.6 Current Expenditures 34.1 36.5 34.5 34.8 32.8 58.1 57.6 30.3

2. Non-education Special Accounts Capital Expenditures 39.1 38.4 34.5 31.7 40.3 1 0 6 65.4 23.2 Current Expenditures 32.7 38.6 33.9 37.0 56.3 111.3 43.8 48.2 1

3. Total Expenditure (1+2) tn Capital Expenditures 40.7 41.2 37.6 32.9 36.3 80.7 79.4 31.3 1 Current Expenditures 33.7 37.0 34.3 35.2 36.5 63.6 52.4 32.2

Source: LKinistry of Rome Affairs, Financial Yearbook of Local Government, 19/4, 1981. Table 3.6: ACCUM.ULATED CAPITAL SPENDING, 1973-1980 (in constant 1980 price)

Total Capital Spending .!' Per Capita Capital Spending Per Capita Capital Spending 1973-80 1973-80 Index (in billion won) (in won) (Seoul=100)

Seoul 2,498.6 329,859 100.0

All Satellite Cities 290.6 153,281 46.5

Incheon 130.6 144,057 43.7

Suweon 39.3 153,562 46.6

Euijeongbu 12.4 106,149 32.2

Anyang 36.1 203 ,895 61.8

Bucheon 23.2 149,375 45.3

Seongnam 49.1 171,618 52.0

a/ Sum of capital expenditures in the General and the Non-education Special Acounts,

Source: Ministry of dome Affairs, Financial Yearbook of Local Government, 1974-81. - 37 -

for Bucheon. dousing ck cupied a very small share throug'lout the period with an exception of Seongnam. Moreover, the share declined over the

period.

The last row of Table 3.3 presents the share including the

spending on public utility, water system, housing, land adjustment and

others. The share remained stable in most satellite cities except for

Suweon and Seongnam. The share for the satellite cities as a whole was

about 56 percent throughout the period, while it declined from 63 to 55

percent in Seoul. As a result, the satellite cities as a whole spent

about the same proportion of their budget on all public work programs -/

as did Seoul in 1981.

C. Expenditure Disparities: A Summary

Throughout the period of our analysis the level of local

spending has been much higLer in Seoul than in any of its satellite

cities. Moreover, the growth rate was also higher in Seoul until the

mid-seventies. Since then, however, the growth trend has reversed in

terms of both total and per capita amounts. As a result, the disparity

in per capita expenditure between Seoul and the satellite cities has

been significantly reduced. An analysis of the indicators of the level

of provision of some major local services confirmed this. It should be

noted, htowever, that a substantial gap still exists among the individual

cities, as well as between Seoul and the satellite cities.

A major contribution to the reduced expenditure disparity

during the 1977-1982 period was made by the fast growth of capital

spending by the the satellite cities, especially for public utility

1/ Spending on sewage and night soil collection is classified as social welfare expenditures and hence not included here. - 38 -

spending in G/A and for the water system and land adjustnirnt projects in

S/A.

2. Revenues of Local Governments in the Seoul Region

(1) Recent Trends of Revenues

Table 3.7 shows total and per capita revenues for Seoul and the satellite cities for the 1973-1982 period. The revenue figures cover all sources of revenues in both the G/A and the S/A either locally raised or transferred from the higher level governments. The general trend of local government revenue is consistent with the pattern of expenditure observed earlier. The revenues for satellite cities grew rapidly in per capita as well as in total amount. It is significant to note that even though the per capita revenue was substantially higher for Seoul than the satellite cities throughout the entire period, the gap significantly narrowed in the latter subperiod; the per capita revenue of the satellite cities as a whole as percent of Seoul's figure rose from 60 to 70 percent. During this subperiod only Anyang and

Suijeongbu registered a lower rate of growth in per capita revenue than

Seoul.

Although a major tax reform was implemented in 1977, the reduction in revenue disparities seems to have nothing to do with it.

If at all, the reform would have weakened the revenue base of the satellite cities relative to Seoul, because Seoul was authorized to levy acquisition, license and registration taxes, all very powerful revenue sources whereas the satellite cities were given no access to these sources. However, using the data for other years, it was confirmed that the ratio of the per capita revenue for satellite cities to that of

Seoul in 1976 was 59 percent, about the same as 60 percent in 1977. Table 3.7: R,VENUE DISPARITIES AM CITIES IN 'lIE SEOUL, REGION, 1973-1982

Total Revenues•J Per Capita Revenues Average Annual Growth Rates (%) (in million won) (in won) Total Revenues Per Capita Revenues 1973 1977 1982 1973 1977 1982 1973-77 1977-82 1973-77 1977-82

Seoul 733830 296,330 1,159,819 11,739 39,376 130,076 41.5 31.4 35.3 27.0

All Satellite Cities 10,985 43,716 238,741 7,974 23,674 91,1h1 41.2 40.4 31.3 31.0

Incheon 5,646 19,068 121,435 7,905 21,818 102,950 35.6 44.8 28.9 36.4

Sem 1,789 4,971 26,388 9,333 19,3998 81,537 29.1 41.7 21.0 32.5

Euijeongbu 612 2,555 9,863 5,830 22,147 69,378 42.9 31.0 39.6 25.8

Anyang 336 6,776 19,401 3,025 41,589 70,783 111.9 23.4 92. 6 11.2

Bucheon 486 3,688 27,293 7,468 26,713 101,062 66.o 49.2 37.5 30.5

Seongram 2,115 6,642 32,361 11,098 21,588 79,731 33.1 37.3 18.1 29.9

Rest of Gyeonggi Province (Guns) b/ 11,980 51,586 191,611 5,226 21,061 70,253 44.1 30.0 41.7 27.2

a/ Sum of general and nonr-education special account revenues; transfers between the General and Special Accounts have been netted out. bI The figures for 1982 include the revenues of Gwangnyeong, Songtan, and Dongducheon, which were promoted to cities in 1981.

Source: Ministry of dome Affairs, Financial Yearbook of Local Government, 1974, 1978, 1983. - 40 -

As was the case in the expenditure growth pattern, lable 3.7 shows a large variance in the revenue performance amona the individual satellite cities. The contrast is most strong between Seongnam and

Anyang. During 1973-1977 Anyang recorded a remarkably high growth rate in both total and pef capita revenue, but since 1977 the pace of growth has slowed down markedly. The average annual growth rate of per capita

revenue for the latter subperiod was only 11 percent, the lowest among

the satellite cities, and even much lower than the average annual

inflation rate of 18 percent during the period. On the other hand,

Seongnam's per capita revenue growth rate rose from 18 to 30 percent

between the two subperiods.

(2) Relative Importance of Self-raised and External Revenue Sources

Table 3.8 presents revenue statistics for individual cities by

two major sources, self-raised revenues and external revenues. Self-

raised revenues include all items generated within the locality

including both the G/A and the S/A. External revenues include the local

shared taxes, subsidies from the higher level governments, and local

borrowing. It is significant to observe that per capita self-raised

revenue of the satellite cities as a whole grew more rapidly than that

of Seoul during the latter subperiod, while the opposite was true during

the earlier period. During 1977-1982, Seoul's annual growth rate (23

percent) was two thirds of that of satellite cities (33 percent). This

resulte& in a significant reduction in the revenue gap between them; the

per capita revenue of satellite cities as percent of Seoul's figure rose Table 3.8: GROWTH RATES OF-REVENUES BY SOURCE, 1973-1982

Rest of Seoul Satellite Cities Gyeonggi Total Incheon Suweon Euijeongbu Anyang Bucheon Seongnam Self-raised Revenues -'J Total (million won) 1973 64,758 7,755 4,445 947 310 280 406 1,367 4,430 1977 284,438 31,436 15,655 3,081 1,694 4,010 2,837 4,159 22,630 1982 946,541 186,844 93,912 21,444 6,060 17,566 24,522 23,340 79,418 Average Growth Rate (%) 1973-77 44.8 41.9 37.0 34.3 52.9 94.5 62.6 32.1 50.3 1977-82 27.2 42.8 43.1 47.4 29.0 34.4 53.9 41.2 28.5

Per Capita (won) 1973 10,296 5,629 6,223 4,941 2,953 2,521 6,238 7,173 1,933 1977 37,796 17,024 17,913 12,395 14,684 23,612 20,549 13,518 9,239 1982 106,156 71,345 79,616 61,592 42,934 64,088 90,801 57,505 32,906 Average Growth Rate (%) 1973-77 38.4 31.9 30.3 25.9 49.3 76.8 34.7 17.2 47.9 1977-82 22.9 33.2 34.8 37.8 23.9 21.1 34.6 33.6 28.9

Revenues from External Sources b/ Total (million won) 1973 8,772 3,189 1,200 815 300 59 89 726 7,529 1-977 11,186 12,171 3,333 1,887 857 2,764 849 2,481 28,956 1982 213,278 51,897 27,523 6,944 3,803 1,835 2,771 9,021 87,298 Average Growth Rate (%) 1973-77 6.3 39.8 29.1 23.4 30.0 161.6 75.7 36.0 40.0 19/7-82 80.3 33.6 52.5 29.8 34.7 -7.9 26.7 29.5 24.7

Per Capita (won) 1973 1,395 2,315 1,680 4,252 2,858 531 1,368 3,809 3,285 1977 1,486 6,591 3,814 7,591 7,429 16,965 6,149 3,064 11,822 1982 23,920 19.816 23,333 19,945 26,944 6,695 10,261 22,265 36,171 Average Growth Rate (%) 1973-77 1.6 29.9 22.7 15.6 27.0 137.7 45.6 20.6 37.7 1977-82 74.3 24.6 43.7 21.3 29.4 -17.0 10.8 22.5 25.1 a/ Tax revenues and rents, fees, and user charges in the non-educationa special acounts. Carried-over and revenues from previous fiscal years also included. b/ Local borrowing and transfers from the central and provincial governments. Source: Ministry of Home Affairs, Financial Yearbook of Local Government, 1974, 1978, 1983. - 42 -

from 45 to 67 percent. It is noteworthy that Bucheon's per capita revenue came close to Seoul's in 1982. It is striking to find that county governments in the region performed better than Seoul throughout the 1973-1982 period in terms of per capita self-raised revenue growth although the rate of growth slowed down markedly in the latter half of the period.

Turning to revenues form external sources, we find that the growth patterns of external revenues among cities in the region were opposite to those of self-raised revenues during the period (Table

3.8). The annual growth rate of per capita revenue from external sources for the satellite cities declined from 30 to 25 percent between the two subperiods, while that of Seoul rose from 2 to 74 percent. The data also indicate that revenues from the external sources grew at a slower'pace than the self-raised revenues for most satellite cities.

Anyang experienced a decline in per capita revenues from the external sources during the latter subperiod.

This strong contrast between the growth trends of self-raised and external revenues for local governments in the region is relfected in changes in the composition of revenues as shown in Table 3.9; on the whole, self-raised sources became increasingly important for the satellite cities during the period. This was also true for the county governments in the region even though their shares of self-raised revenues were much lower than those of the city governments. In sum, the increasing importance of local revenue sources in recent years for the local governments outside Seoul, especially for the satellite cities, was mainly attributable to the rapid gorwth of fiscal bases in Table 3.9: CHANGING COMPOSITION OF REVENUES: SELF-RAISED VS. EXTER.NAL REVENUE SORUCES, 1973-1982

Rest of Seoul Satellite Cities Gyeonggi Total Incheon Suweon Euijeongbu Anyang Bucheon Seongnam

1. Self-raised Revenues 1973 88.1 70.9 78.7 5307 50.8 82.6 82.0 65.3 37.0 1977 96.2 12.1 82.4 62.0 66.4 59.2 77.0 62.6 43.9 1982 81.6 78.3 77.3 75.5 61.4 90.5 89.8. 72.1 47.6

2. Revenues from External Sources 1973 11.9 29.1 21.3 46.3 49.2 17.4 18.0 34.7 63.0 1977 3.8 27.9 17.6 38.0 33.6 40o.8 23.0 37.4 56.1 1982 18.4 21.7 22.7 24.5 38.6 9.5 10.2 27.9 52.4

3. Total Revenues (1+2) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: Ministry of Hiome Affairs, Financial Yearbook. of Local Government, 1974-83. - 44 -

recent years. This can be interpreted as an indication of increasing self-sufficiency in local finances in the region.

(3) Differential Growth of Revenues by Sources

Table 3.10 documents changes in the relative importance of various revenue sources of the local governments in the region between

1977 and 1982. During the period the share of the G/A in total revenue fell in all cases except for Euijeongbu. Within the G/A, the share of local tax revenues continuously rose for the satelllite cities during the period of 1977-1982, but the share declined dramatically for Seoul, from 51 to 39 percent. For the satellite cities as a whole the share rose from 22 to 28 percent. It is remarkable to find that for the satellite cities as a whole transfers from higher level governments dropped dramatically from 25 percent in 1977 to 8 percent in 1982, while in the case of Seoul this share rose from 2 to 7 percent during the period. The share of non-tax revenues declined for both Seoul and the satellite cities as a whole due to a large drop in the case of Inchoen, but this share increased for other individual satellite cities and counties.

In sum, the G/A revenues became less important for both Seoul and the satellite cities during 1977-1982. In the case of Seoul, this resulted from the declining share of local tax revenues, while in the case of the satellite cities it was due to the declining share of transfers from higher level aovernments.

Turning to the special accounts, we find that the share of S/A revenues rose considerably for all local goverments in the region during the 1977-1982 period except for Euijeongbu. Over the period the share rose from 28 to 42 percent for Seoul, and from 33 to 46 percent for the Table 3.10: QIANGES IN RUWENLE OCI14SIT1WN OF Clr1ES IN TIlE SF0JL RE-GION, 1973-1982

Rest of Satellite CitiesCegi Seoul Seonguam Total- Incheon Saweon Fuijeongb.t Anyang Bucheon Revenue Source 1982 1973 1977 1982 1973 1977 1982 1983 1977 1982 1973 1977 1982 1973 1977 1982 1973 1977 1982 1973 1977 1982 1973 1977 1982 1973 1977

1. General Account 21.1 16.7 14.7 29.2 16.3 29.7 9.3 17.6 17.8 4.2 14.7 12.3 20.3 21.1 19.6 Tax Revenues 43.7 50.7 39.4 19.7 22.1 27.5 25.7 27.5 36.1 19.9 25.0 20.1 23.5 10.9 10.8 25.6 33.6 9.9 19.1 5.6 15.8 13.5 51.0 32.8 41.3 9.2 16.1 18.7 None-tax Revenued ~ 15.2 19.7 16.4 23.3 19.3 18.5 17.3 19.2 11.7 16.8 21.6

Transfer frcap Higher Level 16.4 47.7 33.6 32.5 17.6 39.9 5.4 17.7 22.7 2.8 24.3 30.6 11.3 59.4 53.0 46.1 Coverrnmantsb( 3.3 1.9 7.3 24.6 25.2 8.4 19.0 14.2 5.6 38.3 37,5 84.5 84.2 60.0 79.6 61.2 72.8 80.4 66.2 54.2 32.9 56.1 34.1 79.4 78.0 65.0 89.0 90.2 * Suibtotal 62.2 72.2 58.1 67.6 66.6 54.4 61.9 61.0 53.4 75.1

C)2. Non-Education Special Accexnts 16.5 18.8 12.9 19.6 26.4 29.3 57.7 35.6 50.9 10.5 10.7 14.2 5.3 4.1 6.7 Business Revenue 25.4 18.2 20.2 25.2 22.7 2.5.2 30.6 26.4 23.3 20.7 11.6 22.6 2.8 2.6 3.9 1.3 - 2.8 - 0.7 3.3 0.2 - 3.8 10.1 4.7 15.4 Borrowing 8.4 1.3 12.2 3.5 1.0 11.5 2.3 2.8 16.2 1.7 0.5 2.9

Ci Carried-Over & Revenues 4.1 1.2 4' 7.1 3.3 -2.9 7.4 Fran Previous FY 6.8 5.1 4.8

l~evel Ci Transfers from Hig'hr - 3.3 2.1 1.1 0.5 0.5 2.7 - - 0.9 - - 2.1 - 0.2 0.7 0.4 Goverrents c/ 0.2 0.1 2.0 - 0.7 1.& 0.7 0.4 1.0 6.5 6.1 - 9.6 0.5 0.2 C) Others 0.7 2.8 1.9 20.4 38.8 27.2 19.6 33.8 45.8 67.1 43.9 65.9 20.6 22.0 35.0 11.0 9.8 15.5 Subtotal 37.8 27.8 41.9 32.4 33.4 45.6 38.1 39.0 46.6 24.9 15.8 40.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 3. Total Revenues (1+2) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

year. a./ Thcledes rents, fees, local borroKlog, carry-over, and the -revenue froma the p-revious fiscal Ž( Local shiared taxes and subsidies. C. / Subsidies. Source; Ministry of tone Affairs, Financial Yearbook of local Covernment. 1974, 1978, 1983.

CD - 46 -

satellite cities as a whole. The share went up by more than 20 percentage points in the case of Bucheon. Within the S/A, business revenues, mostly derived from user charges, accounted for the largest share, but the share itself stayed constant during the period for the satellite cities as a whole. The data indicate tnat local borrowing was the contributing factor to the rising share of S/A revenues. The share of borrowing in the S/A jumped up ten folds from 1977 to 1982. She growth rates of revenues from various sources are presented in Table

3.11 for the 1977-1982 period; they confirm the changes in revenue composition discussed above.

A. Local Tax Revenues

Table 3.12 provides the growth rates of individual local tax revenues for the 1978-1982 period. It is significant to note that tthe total tax revenue of the satellite cities grew faster than that of

Seoul. Also, the growth rate of revenues from the property-reiated

taxes for the satellite cities was much higher than that of Seoul; this was achieved with only four types of taxes (property tax, farmland tax,

city planning tax, and public facilities tax) allowed for the satellite

cities to collect. Seoul had additional revenues from acquisition and

registration taxes. Property-related taxes occupy a large portion of

total revenues in all local governments. Table 3.13 shows that their

share rose sharply for the satellite cities while it stayed about the

same for Seoul during 1978-1982. The sharp increase for the satellite

cities however was largely due to Incheon's ability to collect

acquisition and registration taxes after it became a direct jurisdiction

city. Table 3.11: GRtWllI RATES OF REVENIUES BY SOURCE, 1977 - 1982 (in percent)

Rest: of Satellite Cicies Gyeonggi Revenue Source Seoul Total lIncheon Saveon Euijeongbu Anyang Bucheon Seongnam

1. General Account 27.8 39.1 49.6 32.6 28.2 rax Revenues 25.0 46.7 52.9 35.6 55.5 40.8 44.6 43.8 34.0 Nort-Tax Revenues a/ 26.7 39.2 31.1 44.1 30.1 -17.3 -1.6 12.5 26.4 Transfers from IIigher Level Governments 37.6 12.8 20.1 AL. 35.6 18.6 35.1 32.3 28.3 Subtotal 25.9 34.9 41.1 32.4

2. Non-education Special tc-counts 21.4 26.1 60.3 45.4 43.3 Business Revenues 34.2 43.4 41.2 62.0 - 69.1 - 74.1 40.6 Borrowing 107.1 97.1 105.2 104.3 -49.6 104.1 24.7 0.9 Carried-over & revenues from previous FY 34.3 44.8 94.6 5.3 -20.6 - 55.9 133.7 20.7 81.2 Transfers from Higherr Level Governaments c/ 148.3 49.6 25.9 - 12.8 40.7 48.9 36.1 23.5 Others 27.5 40.9 136.7 83.2 20.4 29.5 62.4 49.7 34.6 Subtotal 41.0 49.3 50.9 67.5 31.0 23.5 49.2 37.3 30.0 3. 'rotal Revenues (1+2) 31.4 40.5 44.9 41.7

a/ Borrowing in G/A is included together with rents and fees in S/A. b/ Sum of shared taxes and G/A subsidies. c/ S/A subsidies. 1983. Source: Ministry of donTe Affairs, financial Yearbook of Local Governm?t, 1978, Table 3.12: C'0WTH.RATES OF LOCAL TAX REVENUES BY CITY, 1978-1982 (Annual growth rate in percent)

Seoul SateliVte Cities Total Incheon Suweon Euijeongbu Anyang Bucheon Seongnam

*Acquisition tax 10.6 (78 2)0.6(1 8 2)al 1./-

- - *Registration tax 23.3 (125.6)!/ (1 25 .6 )a/ - -

- - License tax 6.2 (355.o).1! (3 5 5 .6 )a'/ - - 31.2 28.3 Inhabitant tax 22.6 28.4 27.6 30.7 17.1 30.5 44.7 45.3 42.0 Automobile tax 24.9 33.5 3.6 31.0 30.9

- 53 .1 Butcliery tax 63.1 54.3 41.5 63.3 49.1 65.2 - - Horse-race tax 27.9 - - - - - o61.5 45.3 *Property tax 36.8 47.6 44.2 49.1 40.3 54.1 6.3 15.5 21.0 *Farmland tax 5.2 13.0 9.4 11.0 16.9 49.5 57.1 52.2 *City planning tax 36.6 45.0 40.6 47.0 41.1 52.8 68.0 42.6 *Public facilities tax 38.4 50.0 48.7 49.3 47.4 1'2.2 19.4 21.4 19.4 Workshop tax 19.1 18.1 16.3 23.3 90.b 21.5 Revenue from previous fiscal year 22.5 61.6 62.0 60.5 24.5 81.7 40.5 44.2 .3' *6 Total tax revenue 22.1 50.7 58.9 37.7 29.9 51.6 57.1 45.9 *Property-related taxes 22.4 70.9 84.7 46.2 33.4

a/ Growth rate between 1981 and 1982. 1982, 1983. Source: Ministry of dome Affairs, Financial Yearbook of Local Government, 1979, 'Table 3.13: CHAIES IN (XOMSITION OF LOCAL TAX REVENQES BY ClIY, 1978-1982 (in percent)

Seoul Satellite Cities 'Total Incheon SU%.eon Euijeongbu Anyang Bucheon Seongnam 1978 1982 1978 1982 1978 1982 1978 1982 1978 1982 1978 1982 1978 1982 1978 1982

*Acquisition tax 26.8 18.1 16.7 25.0

*Rgistration tax 26.5 27.5 15.3 22.9

License tax 4.0 2.3 1.5 2.3

nlhabitant tax 15.9 16.1 27.7 14.6 27.3 11.3 27.3 22.2 28.0 18.5 31.9 23.7 26.2 18.0 26.4 14.4

Autoobile tax 7.0 7.7 9.3 5.7 9.1 4.1 15.5 12.7 11.9 12.3 5.9 6.6 8.0 8.2 6.6 5.4

Butchery tax 0.1 0.4 1.3 1.4 1.1 0.7 1.2 2.4 3.1 5.4 2.1 4.0 - 1.4 1.2 1.4

Hlorse-race tax 0.7 0.9 ------

*Property tax 8.6 13.6 23.0 21.2 22.8 15.5 21.7 29.9 24.9 33.8 22.4 32.4 22.5 35.3 26.1 23.4

*Farmland tax 0.1 0.0 2.2 0.7 1.3 0.3 3.5 1.5 5.9 3.9 1.2 0.4 4.8 2.0 2.4 1.1

'*City planning tax 4.7 7.4 12.6 10.8 13.2 8.1 12.7 16.5 9.6 13.3 12.6 16.1 11.6 16.3 11.3 12.3

*Public facilities tax 1.2 2.0 3.3 3.2 3.4 2.6 3.3 4.6 2.7 4.5 3.0 4.2 2.3 4.3 3.8 3.1

Workshop tax 3.3 3.0 19.7 7.4 20.5 5.9 14.1 9.0 13.1 7.3 20.1 10.5 23.7 11.9 20.6 d.4

Revenues fron previous fiscal year 1.0 1.0 1.1 1.4 1.2 1.3 0.7 1.3 1.0 0.8 0.7 1.9 0.9 2.7 1.5 0.8

Total tax revenue 100.00 100.00 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

*Property-related taxes 67.9 68.6 41.1 67.9 40.7 74.4 41.2 52.5 43.1 55.5 39.2 53.1 41.2 57.9 42.6 39.9

So Aini,stry of doue Afftarirs, Finarznci,aL Yearbok of Local Goverrments, 1979, 19831 - 50 -

How can we explain the superior tax revenue performance of the

satellite cities relative to Seoul? The property-related taxes are

under the national system of uniform tax rates across cities.

Differences in colleciton efficiency do not seem to be the reason

either. Table 3.14 shows that there were no sigificant changes in the

collection performance between the satellite cities and Seoul during

1977-1982. The performance measure, collection as percent of levies, declined slightly over the.years for both, but it declined more in the case of satellite cities. Since the market values of taxable properties change reflecting the conditions of the market, the method of assessment as well as the timing and frequency could create variations in the effeccive tax rates despite of the uniform legal rates. All local governments in Korea, however, assess property values at the same time every year using the same mechod. This seems to leave only one possible explanation, i.e., appreciation of the value of existing properties and expanding tax base. The rapid increase in population and economic activity in the satellite cities must have accompanied an increasing volume of taxable properties. Also, information on value of land suggests that property values appreciated more rapidly in the satellite cities than in Seoul.

B. Revenues from User-Related Charges

Table 3.15 presents revenues from rents, fees and user charges on local services during the 1977-1982 period. Their share as percent of total local revenue for the satellite cities as a whole was larger than that of Seoul. These revenues grew more rapidly in the satellite cities in terms of both the total and per capita amounts. The per capita revenue for the satellite cities as a w:i le was about 70 percent Table 3.14: TAX COLLECTION RATE / (in percent)

Seoul Satellite Cities Total Incheon Suweon Euijeongbu Anyang Bucheon Seongnam

1973 89.5 95.1 97.1 92.5 97.1 92.7 98.4 87.7

1974 9ut)4 94.5 95.9 93.9 95.8 90.9 100.0 88.2

1975 91.0 92.7 94.5 93.9 94.1 89.9 98.7 81.9

1976 91.9 95.4 97.3 95.5 95.6 94.6 98.7 85.4

1977 94.4 AF 97.9 97.5 95.4 95.2 98.3 94.0

1978 94.4 96.9 ,. 96.6 96.7 96.4 98.4 93.6

1979 87.4 94.4 98.7 89.8 90.5 89.3 97.4 83.3

1980 85.0 91.7 96.7 90.0 87.6 91.0 92.8 82.5

1981 87.6 87.9 93.9 96.0 97.2 93.0 94.0 93.2

1982 88.5 87.2 94.4 88.3 90.9 87.7 86.5 82.7

Mean Annual Change (X)t/ 1977-1982 -0.7 -0.8 -1.0 -0.3 -0.1 -0.6 -1.9 -0.1 a/ Collection as a percentage of levies. Revenue from previous fiscal year not included. b/ The mean annual percentage change calculated based on the average figure of 1978-79 and 1981-82 as the two end points.

Source: Ministry of Home Affairs, Yearbook of Local Tax Administration, 1982, 1983. Table 3.15: FEES, REITWS, AND USER &iARGES AS A LODAL REV&IIJUE SOURCE IN 'IlE SEOUL REGION, 1977-1982

Rest of Seoul SateIlite Cities Gueongi Total Incheon SL.eon Euijeongbu Anyang Buchleon Songnam

Fees, rents, and user charges Nl as % of total local revenue 1977 21.2 24.9 39.5 13.4 21.0 27.6 36.9 12.1 5.3 1982 22.4 27.6 25.6 25.2 16.5 32.5 52.6 16.4 8.7 Per capita revenue from fees, rents and user chiarges (Won) 1971 8,351 5,869 6,405 2,687 4,655 11,471 9,858 2,607 1,113 1982 29,089 25,116 26,391 20,539 11,534 23,040 53,203 13,098 6,134 Annual Growth Rate Total 32.8 43.5 40.9 60.7 24.8 27.6 6O.2 46.0 43.7 Per Capita 28.4 33.8 32.7 50.2 19.9 15.0 40.1 38.1 40.7

a/ Inc-Ludes rents arid fees in G/A and business revenues in S/A.

Source: Ministry of Home Affairs, Financial Yearbook of Lecal Government, 1978, 1983. - 53 -

of that of Seoul in 1977 but the ratio rose to 86 perceti in 1982.

Considering the tight control by the central government over the determination of the level of fees, we can attribute the fast growth of revenues from these sources for the satellite cities to increases in local services provided by them. Despite the impressive performance by the satellite cities as a whole, the rate of growth varied widely among the individual cities. Suijeonbu and Anyang experienced much slower growth than other cities and counties.

C. Borrowing by Local Government

The scope for borrowing by local governments is severely limited in Korea due to a tight control by the central government. In the case of bond issues, the total amount, sales method, interest rate, payment scheme, and financial resources for repayment must be approved by the Minister of dome Affairs,( by the Prime Minister in the case of

Seoul). Loans from financial institutions in excess of one billion won must be consulted with the Minister of Finance. Foreign loans are subject to approval by the Economic Planning Board, and are practically non-existent in most local governments except for Seoul. Bonds are the most popular debt instruments in Korea; local governments issue bonds to

raise funds for water and sewage work, roads, housing, nightsoil

facilities, and subway constructions.

Table 3.16 reveals the importance of borrowing in the total

revenue of local governments in the Seoul region. The figures include

borrowing from all sources in both the G/A and S/A, i.e., bond issues,

loans from the central government and financial institutions, and

foreign loans. The importance of local borrowing varied considerably

from year to year, and from city to city. We can still observe that Table 3.16: BORROWING AS PERCENT OF TOTAL LOCAL REVJENUE 1973-1982

Seoul Satellite Cities Total incheon Suweon Euijeongbu Anyang Bucheon Seongnam

1973 8.4 4.4 2.3 7.0 1.3 - 0.2 8.8 (8.4) (3.5) 1974 1.3 9.3 - - - - (1.3) (9.3) 1975 5.9 8.9 6.3 10.4 23.9 6.6 4.0 10.8 (5.9) (8.8) 1976 3.0 5.5 7.4 9.9 1.2 4.5 0.3)n (2.8) (4.4) 1977 1.7 2.1 2.8 0.5 - 0.7 4.7 (1.3) (2.1) 1978 7.2 3.5 3.0 L. 7 0.4 - 7.3 (7.2) (3.5) 1979 7.3 3.5 2.9 9.0 - 4.3 1.8 2.3 (7.3) (3.5) 1980 8.5 4.0 5.4 2.4 2.1 3.7 2.3 2.5 (8.5) (2.8) 1981 10.6 3.8 2.6 4.3 8.7 4.1 1.9 6.6 (9.1) (3.5) 1982 14.0 12.3 16.4 7.1 4.0 3.3 3.9 15.3 (12e.3) (11.5) a/ Figures in parentheses are the shares of Special Account borrowing in the total local revenue. -/ Data for individual satellite cities not available for 1974.

Source: Mrlinistry of llome Affairs, Financial Yearbook of Local Government, 1974-1983. - 55 -

from 1974 until 1977 the share of borrowing in the total Local revenue for the satellite cities as a whole was significantly higher than that of Seoul, but from 1978 this trend was reversed. With no significant increase in the share for the satellite cities as a whole until 1982,

Seoul's share rose steadily. As to the composition, borrowing was generally in the S/A rather than in the G/A for all local governments in the region, since most long-term large scale infrastructure investments were undertaken as S/A.

Table 3.17 presents the debt outstanding due to bond issues by city and by item. During the period, the total bond issues outstanding scared by more than 19 times for Seoul, and by six times for the satellite cities as a whole. Bond issues were heavily concentrated in housing and water supply works in the case of all satellite cities except for Suweon, while they were concentrated in the constru':t-:,n of public facilities, mainly subways, in the case of Seoul.

(4) Revenue Disparities: A Summary

The trend in revenue disparities is consistent with that of expenditure disparities. During the 1973-1982 period, Seoul raised substantially more revenue than any of the satellite cities in per capita terms, but the revenue gap was significantly reduced since

1977, Improvement in the finances of the satellite cities relative to

Seoul was mainly a result of the rapid growth in self-raised revenues.

The largest contribution to the impressive performance by the satellite cities on the revenue side came from the increase in local tax revenues, especially from the property-related taxes. In light of the uniform rate structure, tax base assessment practice, and very similar revenue collection performance, the increased tax revenues were mainly Table 3.17: LDCAL DEET OUSfl3AkDIf OF CITIES IN THE SEOLL REGION a

Seoul Satellite Cities 'Total incheon S;eon Euijeongbu Any Bucheon Seongnan 1973 1932 1978 1982 1978 1982 1978 1982 1978 1.982 1978 1982 1978 1982 1978 1982

Debt outstanding (billion won) Principal 28.3 453.9 10.6 55.2 5.2 37.5 2.5 5.2 0.3 1.7 0.5 2.4 0.4 1.6 1.6 6.8 Interest 111 313.5 7.4 59.5 2.6 41.3 3.3 5.1 0.2 1.8 0.2 2.0 0.1 1.3 1.0 8.0 Total 39e4 767.0 18.0 114.6 7.8 78.8 5.8 10.3 0.5 3.5 0.1 4.4 0.5 2.9 2.6 14.7

Composition of outstanding debt Housing 9.9 13.6 33.3 66.3 37.3 77.0 8.4 8.0 84.0 65.8 87.7 13.8 37.9 3.4 51.6. 78.0 Water supply - 2.9 38.7 22.8 62.7 16.0 9.1 24,1 16.1 34.2 12.3 86.2 21.6 96.6 48.4 22.0 Public Facilities 90.1 73.4 26.8 0.8 - 1.2 82.5 ------Others - 10.0 1.1 10.1 - 5.8 - 67.9 - - - - 40.7 - - - Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

a! Figures represent local debt outstanding due to bond, issues only.

Source: Ministry of Home Affairs, Municipal Yearbook. of Korea, 1979, 1983. '

1 1 - 57 -

attributable to the growth in the tax base in these rapidly growing

localities. The role of user-related charges in improving the finances

in these cities was also noticeable. All in all, the pattern can be

interpreted as a progress toward enhanced self-sufficiency in the local

finances. It should be noted, however, that some disparities were present among the individual satellite cities.

IV. DISTRIBUTION OF INTERGOVERNMENTAL TRLANSFERS AMONG

LOCAL GOVERNMENTS IN THE SEOUL REGION

This section examines the trend of transfers from higher level governments to the local governments in the Seoul region, and documents changes in the distribution of funds between Seoul and the satellite cities.

1. Recent trends of Transfers from Higher Level Governments

Table 4.1 presents the per capita shared taxes and subsidies allocated to the local governments in the region during the 1973-1982 period. The data show that the amount of per capita shared taxes allocated to Seoul was negligibly small ..pared to those of the satellite cities during the period. For the satellite cities as a whole, the shared tax allocation continued to be a significant revenue source; since 1977, however, the per capita allocation declined in most satellite cities except for slow growing Suweon and Euijeongbu. In contrast, Bucheon and Anyang, two most rapidly growing cities, experienced a significant drop in per capita allocation; in 1982 they did not receive any. Table 4.1: PER CAPITA TRANSFERS FROM dIGdER LEVEL GOVERPTh1ENTS, 1973-1982 (in won)

Seoul Satellite Cities Total incheon Suweon Euijeongbu Anyang Bucheon Seongnam

1. Local Shared Tax 1973 270 1,230 1,288 2,342 2,162 207 1,152 0 1974 12 1,489 1,013 1,688 2,576 2,421 2,522 1,563 1975 38 1,460 892 1,784 2,993 2,128 2,160 1,640 1976 118 2,128 1,060 2,067 3,993 3,298 3,035 3,562 1977 131 2,620 1,525 3,154 5,400 4,812 3,028 2,912 1978 45 2,412 1,570 3,047 5,838 2,129 2,771 3,058 1979 36 1,636 582 2,756 6,160 1,221 986 2,876 1980 296 1,378 129 3,154 6,340 1,041 1,029 2,199 1981 1 2,029 38 5,586 10,109 932 1,626 3,091t 1982 1 3,220 3,401 4,369 1:3,164 0 0 2,565

2. Subsidies - 1973 143 736 210 1,236 619 324 200 2,692 1974 613 987 920 1,070 844 1,008 1,130 1,149 1975 1,531 1,902 1,785 1,949 2,753 2,877 1,153 1,688 1976 885 1,630 1,669 2,207 1,731 1,478 1,137 1,288 1977 635 3,507 1,733 4,353 2,046 11,877 3,129 4,144 1978 1,481 3,972 4,359 6,324 2,028 1,735 4,148 2,848 1979 2,515 4,848 3,422 10,528 6,778 5,440 3,915 3,489 1980 4,133 4,784 4,804 6,912 7,917 3,400 3,617 3,459 1981 4,128 5,013 2,258 3,130 13,014 6,291 5,331 6,680 1982 5,665 5,339 2,701 9,760 10,974 4,323 6,221 7,350 3. Total (1+2) 1973 413 1,966 1,498 3,578 2,781 531 1,352 2,692 1974 625 2,476 1,933 2,758 3,420 3,429 3,653 !,ILZ 1975 1,569 3,362 2,677 3,734 5,746 5,005 3,314 3,32')3 1976 1,003 3,758 2,729 4,274 5,724 4,776 4,172 4,850 1977 766 6,127 3,258 7,507 7,446 16,689 o,157 1,0560 1978 1,526 6,384 5,929 9,371 7,866 3,864 6,919 5,906 1979 2,551 6,484 4,004 13,284 12,938 6,661 4,901 6,725 1980 4,429 6,162 4,933 10,066 14,257 4,441 4,646 5,658 1981 4,129 7,042 2,296 13,716 23,123 7,223 6,957 9,771 1982 5,666 8,559 6,102 14,129 21,138 4,323 6,221 9,915 a/ Lncludes both the General Y!.ccnur and the Nor-education Special Account subsidies from the centraL and provincial governments. Source: tiinistry of dome Affairs, Financial Yearbook of Local Governments, 1974-83. - 59 -

Table 4.1 shows an increasing trend of per capita subsidies for all cities in the region. However, the growth of per capita subsidy for Seoul accelerated while that of other ciites as a whole declined;

the annual average growth rate of subsidies for the satellite cities as

a whole declined from 54 to 13 percent between the two subperiods, while

that of Seoul rose from 35 to 40 percent (Table 4.2). Euijeonbu, a

stagnant city to the. north of Seoul, was the only city whose revenue

from subsidies grew more rapidly in Seoul during the period. In terms

of the level, however, until 1982 Seoul's per capita subsidy was smaller

than that of the satellite cities as a whole.

The per capita total aid including both shared taxes and

subsidies was much higher for the satellite cities as a whole than Seoul

throughout the period, but the growth rate for Seoul was much higher

than that of the satellite cities as a whole (Talbe 4.2), hence,

reducing the gap significantly.

2. Distribution of Local Shared Taxes and Subsidies

Table 4.3 and 4.4 show that the satellite cities taken

togethter received an increasing proportion of shared taxes during the

1977-1982 period, while the opposite trend was observed for subsidies;

the former rose from 83 to 100 percent, while the latter sharply

declined from 58 to 22 percent. In contrast, Seoul's share of subsidies

rose from 43 tJ 78 percent during the period, partly owing the subway

construction. It should be noted that the figures for the satellite

cities include the subsidies from the government of Gyeonggi province as

well. In fact, the bias against these cities in the allocation of

subsidies becomes greater if we consider only the subsidies from the

central government. In 1977 the satellite cities taken together Table 4.2: GIEDDlI RATES OF LOCAL S[ARED 'TAXES AND SUBSLDIES BY CIIY, 1973-1982 a (in percent)

Per capita Per capita Per capita Local shared tax Subsidies Total aid Shared 'Tax Subsidies 'Total Aid 1973-77 1977-82 1973-77 1977-82 1973-77 1977-82 1973-77 1977-82 1973-77 1977-82 1973-77 1977-82

21.9 33.7 Seoul -6.9 -59.8 35.1 39.5 27.5 37.3 -11.1 -59.2 29.3 35.9 6.7 4.5 All Satellite Cities 25.1 6.9 54.0 13.0 39.0 10.7 16.6 0.9 44.3 29.6 -1.3 Incheon 13.4 7.7 59.9 0.6 34.7 3.2 7.7 2.1 52.4 -4.0 27.9

Su,qeon 18.7 15.9 56.4 16.0 36.2 16.5 11.4 9.9 46.7 10.9 27.8 10.5 23.7 Euijeongbu 26.8 19.7 31.7 47.3 28.0 29.6 24.1 15.7 29.2 42.6 25.4 -10.9 Anyang 39.1 -27.2 94.5 4.4 64.2 -2.4 27.5 -33.1 78.8 -4.9 50.9 0.2 Bucheon 35.6 -14.4 84.4 21.9 53.8 11.3 12.1 -22.5 52.9 9.7 27.1 8.7 Seongrom 51.8 3.5 29.8 20.5 37.9 13.9 39.8 -1.1 16.1 l41v 24.4

a/ The grost,h rates were caLculated by using the two year average figure for both end of a period.

Source: Ministry of Htome Affairs, Financial Yearbook of Local Governint, 1974-1983. - 61 -

Table 4.3: ALLOCATION OF LOCAL SHARED TAXES AMONG CILTIES IN THE SEOUL REGION, 1977-1982 (in percent)

1977 1978 1979 1980 1981 1982

Seoul 16.9 6.8 7.5 43.1 0.2 0.0

All Satellite Cities 83.1 93.2 92.5 56.9 99.8 100.0

Inchieon 22.9 28.4 15.5 2.4 0.8 47.6

Suweon 13.5 15.7 20.4 17.0 35.7 18.0 Euijeongbu 10.7 13.3 19.6 14.7 26.9 22.0

Anyang 13.5 7.7 6.7 4.6 4.8 0.0

Bucheon 7.2 8.8 4.9 4.0 7.9 0.0

Seongnam 15.4 19.2 25.3 14.1 23.7 12.3

All cities in the Seoul Region 100.0 100.0 100.0 100.0 100.0 100.0 (in million won) (5,824) (5,168) (3,919) (5,749) (5,069) (8,435)

Source: Ministry of dome Affairs, Financial Yearbook of Local Government, 1978-1983. - 62 -

Table 4.4: ALLOCA.lEON OF SUBSLDIES a~/AM.ONG CITIES IN TthE SEOUL REGION, 197 7-1982 (in percent)

19/7 1978 1979 1980 1981 198Q2

78.3 Seoul 42.5 59e4 65.5 75.3 74.1 21.7 All satellite cities 57e5 40.6 34.5 24.7 25.9 5.3 4.9 Inchieon 13.5 20.9 11.5 22.1

Suweon 9.6 8.6 9.8 4.7 1.5 5.3 3.6 2.4 Euijeongbu 2.1 1.2 2.7 1.3

Anyang 17.2 1.7 3.8 1.9 3.4 l.6

Bucheon 3.8 3.5 2.5 1.7 2.7 2.6 4.6 Seongnam 11.3 4.7 4.3 2.8 5.4

100.0 All Cities in 100.0 100.0 100.0 100.0 100.0 (64,489 the Seoul Region (11,252) (19,517) (31,146) (45,936) (48,313) (in million won)

the a/ Sum of the General Account and Non-education Special Account subsidies from Central government and from Gyeonggi province.

Source: Hinistry of Home Affairs, Financial Yearbook of Local Government, 1978-1983. - 63 -

received 41 percent of the total central government subsidies given to the region, but this share dropped drastically to 13 percent by 1982.

This could have resulted from the large sum allocated to Seoul for subway construction.

3. Education Finances and the Distrib:ltion of Education Grants

As described earlier, local education in Korea is administered by the local borad of education which is independent of the local government. Moreover, a large part of the education expenditure is fin,anced by education grants transferred from the central government.

For this reason we did not include education finances (E/A) in our discussion of fiscal performance presented in the previous chapter.

Table 4.5 provides the per capita education expenditure in all cities in the region during 1973-1981. Throughout the period Seoul continued to outspend the satellite cities on a per capita basis.

M4oreover, the gap widened considerabLy in recent years. In 1977, the per capita education expenditure of the satellite cities as a whole was

68 percent of that of Seoul, but this ratio was 54 percent in 1981.

Table 4.6 indicates that the annual growth rate of per capita education expenditure for Seoul was lower than that of all other cities during

1973-1977; this trend was reversed in the latter subperiod.

Table 4.7 reports the share of education grants in the total education expenditure for each city in the region for three selected years between 1973 and 1980. About 95 percent of education expenditure for the satellite cities was financed by the grants. The share for

Seoul was much smaller throughout the period, but the grants became increasingly more important, the share rising from 48 to 66 percent during the period. Lndeed, a larger proportion of total funds available - 64 -

Table 4.5: PER CAPITA EDUCATION EXPENDITURE BY CITY 1973, 1977, and 1981 (in won)

1973 1977 1981

Seoul 2,604 (.22) a!/ 8,118 (.22) 30.143 (.26)

Ail Satellite Cities 1,512 (.21) 5,523 (.29) 16,148 (.21)

Incheon 1,526 (.20) 5,164 (.28) 15,121 (0.17)

Suweon 1,721 (.20) 5,705 (.32) 16,094 (.25)

Euijeongbu 1,924 (.35) 6,640 (.42) 15,897 (.26)

Anyang 891 (.35) 5,186 (.15) 16,837 (.33)

Bucheon 1,291 (.28) 6,157 (.40) 15,886 (.18)

Seongnam 1,480 (.15) 5,971 (.36) 19,006 (.32)

a/: Figures in parentheses ar-e ratios of per capita education expenditure to per capita non-education, expenditure.

Source: Ministry of Home Affairs, Financial Yearbook of Local Employment, 1974, 1978, 1982. - 65 -

Table 4.6: GROWTd OF EDUCATION EXPENDLTURE BY CITY, 1973-1981 (Annual Growth rate in percent)

Per capita Education expenditure Population growth Education expenditure 1973-77 1977-81 1973-17 1977-81 1973-77 1977-81

Seoul 39.0 43.8 4.6 3.6 32.9 38.8

All Satellite Cities 48.8 41.0 7.6 7.8 38.2 30.8

Incheon 42.6 39.9 5.2 6.9 35.6 30.8

Suweon 44.0 38.5 6.7 6.9 34.9 29.6

Euijeongbu 39.5 29.4 2.4 4.0 36.3 24.4

Anyang 70.9 50.6 10.1 12.2 55.3 34.2

Bucheon 78.4 46.4 20.7 15.5 47.8 26.7

Seongnam 59.8 41.6 12.7 6.0 41.7 33.6

All Cities in the Seoul Region 40.2 43.4 5.1 4.5 33.3 37.3

Source: Ministry of Home Affairs, Financial Yearbook of Local Governments, 1974, 1978, 1982, and Hunicipal Yearbook of Korea, 1979, 1983. - 66 -

Table 4.7: PERCENTAGE OF EDUCATION EXPENDILTURE FINANCED BY EDUCATLON GRANTS BY CITEY, 1973-1980 (in percent)

1973 1977 1980

Seoul 48.4 55.5 b5.6

All Satellite Cities 95.5 99.1 94.8

Incheon 92.3 98.4 97.7

Suweon 96.7 100.4 73.4

Euijeongbu 99.5 100.3 100.1

Anyang 92.9 100.4 92.5

Bucheon 95e2 95.5 104.3

Seongnam 102.8 98.5 99.9

Source: Ministry of Hiome Affairs, Financial Yearbook of Local Government, 1974-82. 67 -

for education grants went to Seoul by rising from 77 to 80 percent during 1977-1980.

4. Disparities in Distribution of Transfers: A Summary

The allocation of transfers from the central government favored Seoul. This tendency was strong in the distribution of subsidies. In fact, the per capita subsidies for Seoul was growing five times faster than that of the satellite cities during 1977-1982.

A similar pattern was observed in the distribution of education grants in the Seoul region. The growing disparity in per capita education expenditure between Seoul and the satellite cities was attributable to the central government allocation of the education grants in favor of Seoul. It is clear that the pattern of distribution of transfers from the central government is inconsistent with the policy objective of decentralizing the population and economic activity in the region.

V. CONCLUDING REMARKS

This paper analyzed the fiscal performance of the local governments in the Seoul region during 1973-1982. During this period, the rapid growth occurred in the satellite cities. Our analysis focused on the revenue and expenditure trends of these cities in relation to

Seoul. The analysis in terms of per capita revenue and expenditure indicates that on the whole the satellite cities outperformed Seoul in meeting the increasing fiscal demand resulting from the rapid growth of population and economic ativity. This favorable fiscal performance of the satellite cities relative to Seoul was possible by their ability to - 68 -

increase self-raised revenues. The growth in tax reve-iiles for these cities, especially revenues from the property-related taxes, was impressive considering the fact that the localities are under the uniform rate system and there is virtually no variation in collection efficiency among them. The revenue growth was attributable mainly to the increasing tax bases in these cities. The performance in raising tax revenues in recent years and a significant rise in the revenue share from user-related charges can be interpreted as a sign of improvement in local finances in the satellite cities in the region.

Our analysis indicates that the disparities in per capita revenue and expenditure betweenl Seoul and tthe satellite cities have been significantly reduced in recent years. Table 5.1 summarizes these findings. The table shows per capita revenue and expenditure of the satellite cities as percent of those of Seoul. In all cases except for

Anyang, the satellite cities were improving their relative positions with respect to Seoul in the latter period.

The role played by the central government in reducing the disparities is not clear; if it played any role at all, the central government favored Seoul relative to other cities in allocating financial transfers in the form of the shared taxes, subsidies, and the education grants. This pattern of distribution of transfers is inconsistent with its policy objective to deconcentrate the population and economic activity in the region.

Indeed, conclusions drawn from other work 1n this research project indicate that the rapid growth of satellite cities resulted largely from the movement of population and employment in response to - 69 -

Table 5.1: INDEX OF PER CAPITA FISCAL DLSPARITfES: 1973-1982 (Seoul=100 for each year)

Expenditure Revenue 1973 1977 1982 1973 1977 1982

All Satellite Cities 63.4 52.5 65.1 67.9 60.1 70.1

Incheon 65.1 50.9 77.6 67.3 55.4 79.1

Suweon 74.6 49.2 54.8 79.5 50.8 62.7

Euijeongbu 47.2 43.1 52.8 49.7 56.2 53.7

Anyang 21.8 92.6 44.1 25.8 105.6 54,4

Bucheon 40.1 42.9 73.7 63.6 67.8 77.7

Seongnam 86.5 46.2 50.4 94.5 54.8 61.3

Rest of Gyeonggi 44.5 53.7 54.5 44.5 53.5 54.0

Source: Calculations are based upon Table 3.1 and Table 3.7. - 70

operations of the land and otlher markecs rather than to the central aovernment's spatial policies. The analysis in this paper indicates tnat the local governmenits' ability to cope with such growth was made possible through the expanding tax bases as these cities grew, with little support from the central government. This process of accomodating the rapid growth by the local governments could be expedited by removing some of the existing constraints, including the lack of local governments' control over major revenue sources, and the absence of the central goverment's coordination with local governments with respect to their investment and financing plans and programs. - 71 -

References

Chun, D.d. and K.S. Lee (1985), "Changing Location Patterns of Population and Employment in the Seoul Region," Discussion Paper No. UDD-65, Water Supply and Urban Development Department, The World bank.

Kim, K.d. (1985), "Municipal Finances in Korea," Discussion Paper No. UDD-64, Water Supply and Urban Development Department, The World Bank.

Smith, R. and C.I. Kim (1979), "Local Finances in Non-metropolitan Cities of Korea," Urban and Reaional Report No. 79-1, The World Bank.

Lee, K.S. (1985)9 "Decentralization Trends of Employment Location and Spatial Policies in LDC Cities," Urban Studies, Vol. 22.