Foreign residents and local public expenditure: evidence from South Korea

Abstract

With rapid globalization and the growth of immigration, countries worldwide have become multicultural societies and are experiencing social changes. Several studies have focused on the impact of foreign residents on society, particularly from a public finance perspective. The current study examines how foreign residents affect local budget expenditure in South Korea, which is currently facing a historically low fertility rate and the aging phenomenon. The employment permit system, which is a government-ordained system that allocates quotas for foreign employees by region and year, was adopted in the instrumental variable estimation to identify a causal linkage between foreign workers and local budget expenditure. We found that government spending decreases as the proportion of foreign residents among the total population increases, and this impact is particularly noticeable in social welfare spending. The results of a battery of robustness tests support these findings. Furthermore, the findings varied depending on the heterogeneities within regions and political regimes. Additionally, we found suggestive evidence that foreign workers are one of the main factors that contribute to the results, causing local governments to spend more money on non-productive areas such as administrative expenses. Overall, the results show that a sharp inflow of foreign residents may be a risk factor in terms of the quantity and quality of local budget expenditure in South Korea, suggesting that immigration policies should be operated effectively to secure the fiscal soundness and sustainability of local finance.

Keywords:

• foreign resident
• immigrant
• local public finance
• instrumental variable
• South Korea

JEL Codes:

• F22
• H50

Disclosure statement

We appreciate financial support from the Public Finance Research Center at Seoul National University.

Notes

1 Extensive research has been conducted from various perspectives as follows: the economic perspective that links immigration to economic growth, labor market, and productivity (Alesina and Ferrara 2005; Kerr and Kerr 2011; Aleksynska & Tritah ,2015; Dustmann and Görlach 2016), the welfare perspective that relates immigration to social policy (Borjas and Hilton 1996; Borjas 1999; Hansen and Lofstrom 2003; Stichnoth & Van der Straeten, 2013; Dahlberg, Edmark, and Lundqvist 2012), the sociocultural perspective that focuses on the relationship between immigration and major social phenomena such as crime, education, and health (Gould, Lavy, and Paserman 2009; Coen-Pirani 2011; Speciale 2012; Facchini and Mayda 2009; Bianchi, Buonanno, and Pinotti 2012; Bell, Fasani, and Machin 2013; Flavin et al. 2018; Tabellini 2020), the political perspective that examines how immigration affects democracy, elections, and political support (Collier 2000; Barone et al. 2016; Halla, Wagner, and Zweimüller 2017; Dustmann, Vasiljeva, and Piil Damm 2019; Edo et al. 2019).

2 In 2020, the South Korea’s total fertility rate was 0.84, making South Korea the only country with a total fertility rate less than one among OECD countries. According to Statistics Korea’s estimate (released in 2019), working age population (aged 15 to 64) is expected to decrease from 37.57 million in 2017 to 17.84 million in 2067 and young population (aged 0 to 14) from 6.72 million in 2017 to 3.18 million in 2067. In contrast, elderly population (aged 65 or older) will increase from 7.07 million in 2017 to 18.27 million in 2067.

3 The Korea Employment Information Service defines an index of region extinction risk by dividing the number of fertile women aged 20 to 39 by the population over the age of 65. The local area is considered at risk of extinction if the index is below 0.5. The number of local regions with the index below 0.5 has increased in recent years from 75 in 2013 to 89 in 2018 and 97 in 2019 (out of about 200 local regions).

4 For example, immigration policies were one of the main subjects of the 2nd Population Policy TF of the Ministry of Economy and Finance in 2020, with the introduction of various policy alternatives such as expanding a multi-national system and strengthening visa benefits for talented foreign residents. Moreover, the total number of policy tasks directed toward foreign residents by local governments reached 1,045 in 2020 according to the 2nd (2018 ∼ 2022) Framework Plan for Foreigners.

5 As of 2020, 1.3% of foreigners stayed in South Korea for less than six months, 5.8% for less than six months to one year, 18.4% for less than three to five years, 28.6% for five to ten years, and 24% for more than ten years.

6 Since low-skilled foreign workers were introduced into South Korea in the 1980s, there was a need to manage them effectively. Consequently, an act regarding the employment, etc. of foreign workers was introduced in 2003 and took effect in 2004.

7 These 16 countries include Philippines, Mongolia, Sri Lanka, Vietnam, Thailand, Indonesia, Uzbekistan, Pakistan, Cambodia, China, Bangladesh, Nepal, Kyrgyzstan, Myanmar, East Timor, and Laos.

8 The figures were retrieved from the government’s official website [accessed on September 1, 2021]: https://www.index.go.kr/

9 National subsidies include subsidies provided for specific project expenses with discretionary judgment by public officials. Local share tax is for the purpose of securing costs for general administrative operations, and the size is specified by the law and regulations.

10 The administrative divisions in South Korea comprise 17 provincial-level divisions (Seoul, Busan, Daegu, Incheon, Gwangju, Daejeon, Ulsan, Sejong Special Self-Governing City, Gyeonggi-do, Gangwon-do, Chungcheongbuk-do, Chungcheongnam-do, Jeollabuk-do, Jeollanam-do, Gyeongsangbuk-do, Gyeongsangnam-do, and Jeju Special Self-Governing Province) and 226 municipal-level divisions. Considering the socio-demographic characteristics of local regions, we consider a total of 228 local governments at the same level: 226 municipal-level divisions, Sejong Special Self-Governing City, and Jeju Special Self-Governing Province. Omitting Sejong and Jeju does not qualitatively change the results.

11 In South Korea, there are 13 categories of local government expenditure by function: General Public Services; Public Order and Safety; Education, Culture and Tourism; Environment; Social Welfare; Health; Agriculture, Forestry, Maritime Affairs, and Fisheries; Industry, Small and Medium Enterprises, and Energy; Transportation and Logistics, National Land and Regional Development; Science and Technology; Reserves. To match this classification to the global standard, COFOG, we rearrange local government expenditure into nine new categories as follows: General Public Services; Public Order and Safety; Economic Affairs (Agriculture, Forestry, Maritime Affairs, and Fisheries; Industry, Small and Medium Enterprises, and Energy; Transportation and Logistics; Science and Technology), Environmental Protection (Environment); Housing and Community Amenities (National Land and Regional Development); Health; Recreation, Culture, and Religion (Culture and Tourism); Education; Social Protection (Social Welfare).

12 The policy project budget is related to the expenditure on specific policy programs. The centersubsidized project budget comprises funds provided by the central government via intergovernmental fiscal transfer, and the self-autonomous project budget includes fund obtained from the local governments’ own revenues.

13 This makes the IV orthogonal to the error term because it is determined by the institutional factors that are relatively free from foreigners’ endogenous residence decision problem.

14 It is noteworthy that social welfare expenditure decreases during the progressive regime. This is a somewhat different result from the prior expectation in that liberal governments generally emphasize social welfare and inclusive approaches toward multicultural policies. It should be supplemented by further research.