Impact of central government grants on local public finance in Korea: With focus on expenditure and equalization effects

The objectives of this study are to empirically investigate the impact of the central government's grants in terms of their distribution to local governments, and the responsiveness of local governments over the period 1979-1990 in Korea. Two primary questions are presented: (1) How much does the central government's political power affect the distribution of grants to local governments (equalization effect)? (2) How do local governments spend the grants (expenditure effect)?; The statistical technique employed is regression analysis. The models include a trend variable to capture the time effect, and city dummy variables to investigate possible differences among cross-sections. The unit of analysis is "city.". This study finds that subsidies (matching grants) appear to have an equal or greater impact on city expenditures than local share tax (general revenue sharing). In the analysis of local government responsiveness, local bureaucrats, despite their limited power, use some of the subsidies to increase the number of public employees. On the other hand, local share tax is not used to increase it. In the analysis of the equalization effect, three findings are evident. First, local share tax appears to decrease the financial disparity among regions. The impact of subsidies on regional financial disparity is not clear. Second, discrimination against the Honam area, which receives more local share tax per capita than other areas, is not detected. Further, there is no statistical difference among regions that received subsidies. Finally, political support, measured by the percentage of citizens voting for legislative candidates of the president's party, is not a factor in determining the size of grant awards.