The Korea Local Administration Review

Local governments are able to allocate resources efficiently and effectivelywhen they were given adequate local fiscal autonomy and own fiscal resources.Unfortunately, when local governments excessively depend their fiscal resourcesfrom the central government, while lacking their own fiscal resources andproper institutional and political monitoring systems, local leaders might haveincentives to engage in moral hazard behavior, resulting in fiscal inefficiencyand unsound fiscal practices.In this paper, we argue that the current emerging local fiscal crises in Koreaare in large part attributable to the lack of local governance system, resultingfrom the lack of fiscal autonomy, heavy dependence on central resources, andrent-seeking behavior by local political leaders and bureaucrats. By comparingand contrasting the causes of local fiscal crises experienced among the UnitedStates, Japan, and Korea, focusing on local governance perspective, we attemptto draw policy implications concerning the possibility of local fiscal crisis andits proper management in Korea.Above all, we argue that the central government should provide more fiscalresources back to local governments for a proper functioning of local fiscalautonomy. In return for that, we also argue that local governments must beresponsible for their own fiscal soundness based on transparent, responsible,and efficient fiscal behavior. To instill local fiscal discipline, we suggest that itis worthwhile to consider an introduction of municipal bankruptcy law, which isimplemented in state and local governments in the United States.Second, we argue that local governments must establish a proper localgovernance system to avoid unsound and irresponsible fiscal behaviors by localpolitical leaders and bureaucrats. Likewise, we argue that active citizenparticipation in local fiscal affairs are necessary to promote local fiscal
discipline and transparency. In sum, local governments should exercise properrole in introducing workable local governance system by actively interactingwith citizen and other stake-holders.