.) 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