Opinion Leaders` Digest 03-25
Date : July 31, 2003
Author :WON Yunhi, Professor of Science in Taxation, University of Seoul, yhwon@uos.ac.kr

In search of policy directions for local decentralization

Decentralization - its significance and needs of the times

Now it is emerging as one of global trends that central governments surrender or delegate their powers - political, financial and administrative - to local governments. The basic idea of local decentralization is that the local residents provide local public services by themselves as they may need and at the same time they shall bear their own financial responsibility thereon, thus enabling them to evaluate whether their services are worthy and justifiable for their financial burden. In other words, decentralization is to attain an economic efficiency in resource allocation through the mechanism of autonomy and responsibility.

In addition to above-mentioned theoretical aspects, practical reasons abound in the process of local decentralization in various countries throughout the world. According to a World Bank report, decentralization has occurred to cope with technological innovations and globalization trends, and to meet political needs of mitigating the conflicts and diversified demands arising from the diversity in races, languages, creeds and cultures, etc.

In our case, President Roh's participatory government presents "local decentralization and balanced national development" as one of the key national agenda. "Participation and decentralization," from a viewpoint of needs of the times, is to change the paradigm of national policy from "distrust and control" to "trust and autonomy." This is to set up a partnership between the central and the local governments and to overcome the demerits of centralization, thereby to attain sustainable development of the whole nation.

Experience and evaluation of local decentralization

Different evaluations are observed about whether the local decentralization has contributed to raise the economic efficiency of the resource allocation as its original aim. The World Bank's report summarizes that "much of the discussion of decentralization reflects a curious combination of strong perceived beliefs and limited empirical evidence."
We have flatly conflicting evaluations on the experiences of local decentralization of last 10 years. On the one side, it is argued that there has been good performance in enhancing quality of administrative services by developing creative policies well fit to diverse local demands. Poor financial situations and controls from the central government have been attributed as disturbing a sufficient realization of the merits of local decentralization. This argument is supported by "a declaration of local decentralization" by the 2000 local intellectuals of the whole nation in September, 2001.
On the other side, it is also argued that heads of local government, who, sensitive to the future election, have wasted local budgets for pork-barrel and for-display purposes, producing inefficiency in the financial administration of local government. Abuse of the authority on personnel administration and disorderly regional development have been frequently cited as some other examples of negative aspects of local decentralization. Some argue that effective devices should be arranged to control such negative effects. This is why the 34 members of the national assembly submitted a joint proposal for an amendment of local autonomy law in November 2000.
Each of these two conflicted arguments is actually looking at only one side of the two main pillars of local autonomy, that is, autonomy and responsibility. Accordingly, a systematic scheme should be set up to secure concurrent development of these two norms.

Logical frames in search of alternatives

Recently, a number of alternative proposals are debated and published thus far for changes and reshuffles in connection with the drive of the local decentralization. It will be necessary for the realization of local autonomy to expand local financial sources by expanding the local tax sources or transfer of financial sources. Local government's power should be more firmly and widely assured for the administration of the transferred financial sources as well.
Alternatives to promote detailed projects are hotly debated among the related ministries to set up a special account for the balanced national development. And the Ministry of Government Administration and Home Affairs announced its plan to make a clean sweep 94 out of 313 local-related works. The ministry is going to either abolish or delegate its own powers to the local governments such as the power of case-by-case approval of local bond issues, the authority to reduce and to exempt local tax, guidance for the budget preparation. This is to enhance and to improve the discretionary power of the local governments and at the same time, the ministry will concentrate more on financial diagnosis and evaluation of the financial soundness of local governments to secure their financial accountability.
As such, a series of concrete alternatives are sought for to promote the "local decentralization and balanced national development," specially in financial aspects. In consideration of the mutual close interdependent links of the local financial structures, they ought to be proposed in package instead of one by one, individual and independent policy. Overall and synthetic effects should be taken into consideration because of the inter-active, inter-related and inter-dependent nature of related systems of the central and the local finance, of the national and the local taxes, of local taxes and local financial adjustment.

However, in pursuit of the alternatives, we may work out a logical order as follows.
Firstly, it is necessary to develop its feasibility and basic purpose of the system itself regarding the detailed items of local tax and local financial systems. The author illustrates some case studies in this regards.
Secondly, local governments should meet the financial requirement to provide its administrative services necessary to the local residents. It is basic obligation of a nation to enable all of its nationals to enjoy a minimum level of administrative services wherever they may reside in the country. Such function should be performed through the local share tax. Source of the local share tax may need to be increased to a certain level, on top of its simplicity and transparency being raised.
Thirdly, local governments should be assured for more freedom to choose for themselves and efforts should be devoted to raise the efficiency of their financial administration. Furthermore, systematic control devices should be developed to make sure of their financial accountability.
Lastly, An alternative should be worked out for the balanced national development to the extent that it may not conflict with the national competitiveness. Contrary to the first three steps where local imbalances are premised, we here try to find out more aggressive measures to achieve a balanced development of the nation. But it should not obstruct the competitive edge of the whole nation.¡á

(August 11, 2003 summarized and re-edited in English by JUNG Churle, a Research Fellow, jungchrl@unitel.co.kr. Some changes and corrections were made in wordings and in expressions by good advices from the author.)