Basic Report

  
  
    The purpose of this study is to improve the Special Account for Balanced National Development (SABND). SABND was established in 2005 to consolidate various fund sources related to balanced regional development, which are managed by the different departments in the central government and to execute them in an efficient manner. At the conception stage, SABND apparently aimed at a kind of block grants which not only provide a relatively high degree of fiscal autonomy to local authorities by distributing the grant money through the objective formulas but also reflect the priority of local authorities. However, in the process of introduction, SABND failed to actualize the original policy concept in many aspects, leading to identity problems (particularly, similarity with the National Subsidy in terms of programs, program operation, subsidy ratio, and etc.).
   SABND has revealed various problems and limitations related to the issues such as financing (stability of the related funds), operation and management of the grants system, consensus build-up among the stakeholders, methods of accomplishing policy objects, policy effects, and etc., mostly owing to a lack of time for sufficient preparation. In addition, possibilities of inefficiency related to the program execution and also some bureaucratic problems are raised. The conflicting policy goals of equality and efficiency between the two separate accounts within the SABND (between the Account for Regional Development and the Account for Regional Innovation) are also of a great concern at the moment. Lastly, SABND has virtually no policy linkages with other fiscal systems especially, in the macro system of the intergovernmental fiscal relations such as Local Shared Tax (general grants) and the National Subsidy (specific grants) and local tax and non-tax revenue systems, which are considered as a major problem in the context of the macro-management of local finance system.
   Considering all the problems and limitations of SABND, this study proposed the following policy alternatives for the improvement of SABND in the future.
  
   1. To transform SABND into a block grant system
   It is necessary to transform SABND into a block grant system to enhance both the efficient use of the grants money and autonomy of local authorities. Considering various obstacles of reality surrounding the system, it might be reasonable to establish many mini-block grant programs (say, within 20) by consolidating similar projects and distribute the related grants money through the distribution formulae in the short-run, while gradually establishing 4-5 relatively big block grants. In the process, the management system of SABND needs to be changed from the current line Ministry-oriented system to the program and projects-oriented one.
  
   2. A complete re-adjustment of the programs and projects of SABND
   It needs to re-adjust (restructure) the programs and projects of SABND from the basic aspects. This approach is particularly important from the aspects of improving the efficiency and effectiveness of SABND operation (programs). With the restructuring, the current Subsidy Ratio and the ways of determining the ratio need to be thoroughly reviewed. Nevertheless, the range and magnitudes of the restructuring need to be efficiently minimized in the sense that a rather wide- range restructuring might cause too much complexity and problems to a smooth operation of SABND which has a history of barely over one-year. In addition, a proper balance and a clear- cut identity must be maintained between SABND and the National Subsidy systems in the process of the restructuring.
   In addition, the government has to thoroughly review whether it is more beneficial (cost effective) to maintain the two seemingly different policy instruments, the Account for Regional Development and the Account for Regional Innovation within the SABND.
   3. Adjustment of the Subsidy Ratio and an application of the Differentiated Subsidy Ratio
   The current system of the Subsidy Ratio is too complicated and also lacks principle. In this regard, this study proposes that the basic Subsidy Ratio be changed into 5 types i.e., 100%, 80%, 60%, 40%, and the lump-sum subsidy. It might be controversial to introduce the so-called Differentiated Subsidy Ratio System in SABND, applying a rather favorable Subsidy Ratio to the more financially disadvantaged areas compared to the relatively financially rich areas, however, this kind of approach has a merit of meeting the spirit and the policy purpose of SABND.
  
   4. To change the grant distribution system
   It is necessary to develop and apply the distribution formulae to the programs of SABND as possible as it could, although there are some areas (programs, projects) difficult to apply the distribution formulae at present. This kind of approach basically meets the spirit and the purpose of SABND, quite differently from the current Subsidy Ratio-oriented approach. By doing so, it finally becomes possible to have a policy linkage between SABND and the Local Shared Tax which is the major intergovernmental fiscal transfer system in Korea aiming at mitigating the fiscal imbalances in terms of the vertical and horizontal senses. In doing this, a gradual approach is needed considering all the circumstances surrounding the local financing system in Korea. In designing the distribution formulae, most of all, variables related to fiscal ability and needs and population- characteristics need to be considered, and also other variables such as area size, sparsity, cost difference might be considered.
  
   5. Others
   Other policy proposals this study recommends for the success of SABND are a simplification of the fund application process for SABND, the adjustment and an expansion of SABND fund application period, real guarantee for the fiscal autonomy of local authorities related to the specifically prescribed areas, and the development of a performance evaluation system for SABND programs.