The effects of fiscal decentralization on local public finance in Korea : public spending, functional responsibility, and fiscal independence

by Kwon, Osung

In recent years, fiscal decentralization has been advocated worldwide. The common motive is that fiscal decentralization is considered to have the potential to improve the performance of the public sector. However, some recent studies hold that the conventional argument that fiscal decentralization will increase economic efficiency in the public sector may not be applicable in developing countries. Also, the conventional argument regarding functional assignment has been challenged on several grounds. The recent development of local autonomy and fiscal decentralization in Korea provides an excellent opportunity for empirical investigation of this subject. Because Korea represents the borderline between developed and developing countries, a decentralization study of such a country will contribute to testing the contention that there is no efficiency gain in developing countries, as well as investigating the issue of functional assignment outside developed countries. To date, there have been few efforts to systematically analyze the actual effects of decentralization on the overall public sector in Korea. This study asks three questions. First, has fiscal decentralization affected the size of the public budget in Korea? Second, what changes occur in functional responsibility after the onset of fiscal decentralization? Third, what are the effects of decentralization on the fiscal independence of local governments? The study employs regression analysis to test three hypotheses. We find decentralization improves economic efficiency and accountability in the Korean public sector. The levels of developmental and redistribution expenditures increase as decentralization proceeds in Korea. Finally, the degree of decentralization is positively associated with the degree of the fiscal independence of local governments.