[Op-Ed] Local Currencies Should Be Abolished Unless Reformed to Reduce Fiscal Waste

Local currency is often used for private education expenses such as hagwon fees, rather than to revitalize local economies

Korea Institute of Public Finance: “If all local governments issue local currency, its effect in revitalizing local economies may disappear”

Depending on local governments’ fiscal conditions, it can worsen inequality between the rich and the poor; advanced countries have moved to abolish local currency programs

The side effects of local currency, which began to be introduced in earnest in 2019, are growing. Its original purpose was to help small mom-and-pop businesses and boost local economic activity. But reality is different. Unfortunately, contrary to its original intent, the side effects are increasing.

Over time, negative uses of local currency have been rising. In particular, local currency wasted on hagwon tuition deals a serious blow to small business owners. Vouchers were issued in the hope of revitalizing local economies, but they have been used more for private education expenses such as hagwon fees than at restaurants or small businesses.

According to Seoul Metropolitan Government statistics, 19.6% (728.5 billion won) of Seoul Love Gift Certificates issued from 2020 to 2024 was spent on private education expenses such as college entrance exam prep academies. This was higher than the 18.9% (704.7 billion won) spent at restaurants and other food service establishments during the same period, showing a concentration of spending on private education. In this way, local currency is being used in a direction completely different from its original goal, resulting in a situation in which support does not reach the small business owners who actually need help.

Local currency is failing to achieve its intended effects. The criticism that “taxpayers’ money is going into private education costs” is, perhaps, only natural. Trillions of won have been poured into local currency, yet it is also undeniable that the effects have been minimal. In addition, according to a report released by the Korea Institute of Public Finance, it warned that “if all local governments issue local currency, its effect in revitalizing local economies may disappear.”

Local currency places a heavy burden on public finances. Last year alone, local currency worth 20 trillion won was issued. Considering discount rates of up to 10%, it is estimated that nearly 2 trillion won in budgetary resources was投入. This is causing serious fiscal waste.

Local currency worsens inequality between the rich and the poor depending on local governments’ fiscal conditions. The more fiscally well-off a local government is, the more local currency it can issue, allowing affluent residents to enjoy greater benefits. For example, wealthy local governments such as Seongnam City have been increasing local currency issuance every year. By contrast, issuance has been declining every year in budget-strapped local governments such as Pohang and Gyeongju in North Gyeongsang Province.

Local currency is failing to produce positive effects in almost all regions. If a particular local government issues a large amount of local currency, sales may rise for small merchants in that area, but sales for nearby merchants decline, turning it into a “zero-sum game.” In other words, while many parties affect one another, the end result is that the total gain is zero in every case.

Suppose small business owners in neighboring Local Government A and Local Government B operate restaurants in similar lines of business. If wealthy Local Government A issues more local currency than Local Government B, consumers from B may come to A to spend. As a result, the area receiving local currency support appears to benefit, while the area that does not receive such support suffers losses.

There have been cases in advanced countries overseas where local currency was introduced to revitalize local economies, but in many instances its use was suspended or the system was abolished as various drawbacks, such as transaction fees, came to the fore contrary to the original intent. For example, the Bristol Pound system in the United Kingdom was introduced to promote transactions with local shops, but it was ultimately abolished due to problems such as transaction fees and operational complexity.

If the local currency system cannot be improved in a way that reduces fiscal waste, it should be abolished. To this end, the government should come up with measures to prevent fiscal waste and reduce inefficient side effects going forward.

Gubeom Jeong, Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [칼럼] 지역화폐, 재정낭비 줄이는 방향으로 개선 못하면 폐지해야

Author: Gu-beom Jeong

Date: 2025-03-25

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&idx=27430