The Paradox of Subsidy-Dependent Local Autonomy

Korea’s local autonomy has developed in outward form through the expansion of institutional decentralization, including revisions to the Local Autonomy Act, the transfer of central government functions to local governments, and the expansion of local consumption tax. At the same time, as interregional disparities and local extinction emerged as national issues, the central government’s role in fiscal support and policy coordination has also continued to strengthen. In this process, although the scale of financial resources transferred to local governments has increased, authority over the scope of projects, allocation criteria, review of investment plans, execution management, and performance evaluation has often remained with the central government. This report defines the phenomenon in which local governments receive greater financial support while their policymaking authority and accountability to residents may actually weaken as “the paradox of subsidy-dependent local autonomy.”

The purpose of this report is to examine the theoretical and institutional dilemma between decentralization and balanced development policy, and to analyze the operational structure and problems of the Special Account for Balanced National Development and the Local Extinction Response Fund, two representative local government subsidy systems. To this end, it reviews discussions on fiscal decentralization theory, intergovernmental fiscal relations, fiscal illusion, soft budget constraints, and principal-agent relationships, and analyzes relevant laws and regulations, government plans, budget and settlement data, and official evaluation reports. It also uses as a key argument the empirical findings of Gwang yong Go (2026), which show that a structural crisis such as local extinction can strengthen the central government’s fiscal involvement and performance management functions while constraining the substantive autonomy of local governments.

The analysis finds that the Special Account for Balanced National Development serves to reduce fiscal disparities between regions and provide stable project funding, but that local governments’ effective discretion over the choice of financial resources is constrained by dependence on transfers from other accounts and funds, subdivided block grant programs, ministry-specific guidelines, local matching requirements, and overlapping performance evaluations. Even if the scope of block grant projects is expanded, if local governments can choose only within project categories set by the center, this is closer to limited implementation discretion than to autonomous financial resources.

The Local Extinction Response Fund likewise professes regional leadership in that local governments formulate investment plans, but central evaluation and differential allocation by grade determine whether funding is secured. As a result, local governments may prioritize projects that can receive high evaluation scores over residents’ long-term needs. Performance management centered on short-term output indicators—such as facility construction, project progress rates, and the number of participants—fails to adequately measure long-term effects on population, employment, and income, while problems also arise such as project delays and non-execution, repetition of similar projects, and the burden of operating costs after facilities are built. In particular, the weaker a region’s administrative manpower and planning capacity, the more disadvantaged it becomes in competing through written plans, creating the paradox that the regions most in need of fiscal support may actually be placed at a disadvantage in evaluation-based competition.

Although the Special Account for Balanced National Development and the Local Extinction Response Fund differ in policy targets and fiscal form, they share a common structure: the center defines the scope of projects, local governments submit plans, the center conducts evaluations, funds are distributed differentially, implementation is monitored, and performance is fed back into future decisions. If the two systems are operated in parallel without linkage, similar or overlapping projects, duplication of planning systems, confusion over roles between metropolitan and basic local governments, and gaps in accountability may arise. This distorts local governments’ policy priorities and their ability to build their own projects, while consuming administrative capacity in drafting plans and responding to evaluations. In addition, it accumulates local matching burdens and post-project operating costs, and shifts the object of local government accountability away from residents and local councils and toward central ministries and evaluation agencies.

To overcome subsidy-dependent local autonomy, it is necessary to pursue administrative, fiscal, and economic decentralization in an integrated manner, going beyond the simple transfer of administrative functions. The central government should focus on guaranteeing a nationwide minimum level of public services, adjusting fiscal disparities among regions, and responding to wide-area externalities, while allowing local governments to decide the specific mix of projects and methods of implementation. The Special Account for Balanced National Development should consolidate its subdivided project types into function-centered block grants, and the Local Extinction Response Fund should expand basic and formula-based allocations rather than relying on competitive evaluation. Performance evaluation should move away from overlapping ministry-by-ministry assessments and shift to a single ex post evaluation centered on outcome indicators such as employment, income, private investment, and tax base creation over 3- to 5-year periods. For facility projects, life-cycle cost evaluation including local matching funds and operating costs should be applied, and differentiated subsidy rates should be expanded for vulnerable regions.

Ultimately, the goal of balanced development should not stop at distributing more central government finances to the regions. Local governments should secure their own financial resources and generate income, jobs, private investment, and local tax bases by designing policies on regulation, industrial siting, workforce development, and business attraction in line with regional conditions. The substantive performance of local autonomy should be judged not by the scale of transferred resources, but by who decides on the use of those resources and to whom policy outcomes are accountable. The key task for resolving the paradox of subsidy-dependent local autonomy and advancing toward substantive decentralization is to shift from a state that supports local governments to one that guarantees local choice and responsibility.

I. Introduction: Problem Statement and Scope of the Study

II. The Dilemma of Decentralization and Balanced Development

III. Analysis of the Operation and Problems of Local Government Subsidies (the Special Account for Balanced National Development and the Local Extinction Response Fund)

IV. Specific Problems of Subsidy-Dependent Local Autonomy

V. Integration of Administrative, Fiscal, and Economic Decentralization

VI. Directions for Institutional Reform

VII. Conclusion

References

Original title: 보조금 의존형 지방자치의 역설

Author: Gwang yong Go

Date: 2026-07-27

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=report&pn=1&idx=29316