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Fiscal crisis of municipal and provincial gov`ts

Posted April. 05, 2012 06:55,   


The city of Incheon has paid its civil servants one day late, blaming “a temporary lack of liquidity.” The delay in pay due to a deficit of 2 billion won (1.8 million U.S. dollars) is something not to be ignored given the city`s annual budget of 8 trillion won (7.1 billion dollars). The debt ratio of the Incheon City Hall by year`s end is expected to reach 40 percent. If the figure exceeds 40 percent, this will plunge the city into a debt crisis and prompt an audit by the central government. This is tantamount to a debt workout program for corporations.

Incheon became debt-saddled due to a host of reckless populist projects carried out under former mayor Ahn Sang-soo. Eunha Rail, which cost 85.3 billion won (75.5 million dollars), will be torn down due to poor construction. A free economic zone into which the city injected more than 1 trillion won (885 million dollars) has attracted few investors. The construction of the main stadium for the 2014 Asian Games, a venture needing more than 500 billion won (443 million dollars), has also come under scrutiny. If Incheon`s Munhak Stadium, which hosted games of the 2002 World Cup soccer finals, had been renovated, the city would have needed just 54 billion won (48 million dollars). This is in stark contrast to Daegu, which successfully hosted the IAAF World Championships in 2011 by refurbishing Daegu Stadium.

Aiming for reelection, a number of provincial and municipal heads are racing to implement projects to show off achievements. They seem to ignore budget, feasibility and profitability of projects. If they lack budget, they simply ask for help from the central government, which provides “bailout” funds because it cannot turn a deaf ear to provincial opinions. This vicious circle should be stopped as soon as possible.

Incumbent Incheon Mayor Song Young-gil was elected in the 2010 local elections on the back of his pledge to solve debt problems. After taking office, he prioritized debt reduction, but debt continued to increase mainly due to the steep fall in housing prices and lower tax revenues due to the financial crisis. Song, however, cannot merely blame external factors. He should stop infeasible projects and conduct sweeping reform.

The situation is the same for Taebaek, Gangwon Province, which is suffering from the aftereffects of a reckless resort project. Siheung, Gyeonggi Province, is reeling from debt issued for the development of the new district Gunja. Populist welfare policies presented by politicians are taking a toll on provincial and municipal governments. In certain U.S. states, police officers cannot go on patrol due to lack of funds to fuel their cars, and penitentiaries release prisoners to cut expenses. In Korea, municipal and provincial governments are doomed to follow the footsteps of these states if they keep asking for help from the central government instead of striving to recover their fiscal health.