Reining in local governments

To fix the credit crisis in local governments, it is essential that we establish a mechanism to restrain the moral hazards imposed by local government heads.

With the construction of its lavish city hall, Seongnam’s debt woes veered beyond profligacy into the realm of the truly unreal.

But the city of Seongnam has not been alone in pursuing extravagant construction projects they cannot afford.

Local governments have ballooned their debt by enlarging staff, launching infrastructure projects and hosting gratuitous events.

The central government initially gave them license for such actions under a structure that offers easy subsidies to local governments that have few resources of their own. Under the current structure, there is no way to mitigate the risks governors and mayors are taking with taxpayer money.

Who wouldn’t spend the cash if they had the central government to pick up the tab and clean up the mess every time?

And the situation is bound to get worse. All of the candidates who won in last month’s elections promised ambitious infrastructure and development projects during their campaigns.

We cannot even estimate how much would have to be funneled into local government coffers to fund the promises that were made.

The government must find a way to penalize the local governments that incur serious fiscal problems. It should demand austerity measures from these governments, such as staff reductions, and it should also put a cap on debt issuance or subsidies.

Most other countries have punitive mechanisms such as these.

In a positive step forward, the Ministry of Public Administration and Security recently announced a set of measures to strengthen the fiscal health of local governments. But what matters are real actions. The government should conduct a thorough evaluation of the financial situation of local governments based solely on financial and economic logic - not on politics.

In doling out penalties and incentives, the ministry must not let itself be swayed by the party to which the local government head is affiliated, while also exercising moderation.

It must not infringe upon the local governments’ independent authority. In addition, it must allow these leaders to operate freely while ensuring that they also account for their faults.

The central government must also reconsider the tax distribution system. Local governments cannot stand on their own under the current structure, in which 80 percent of their operating budget comes from federal tax revenues and just 20 percent comes from the local community.