The Current Status and Implications of the Local Extinction Reaction Fund in Korea

The Current Status and Implications of the Local Extinction Reaction Fund in Korea

Published: 2023.11.21
Accepted: 2023.11.17
37
NH Economic Research Institute, National Agricultural Cooperative Federation, Seoul, Korea

ABSTRACT

To address the crisis of population decline at the local level, the South Korean government is allocating KRW1 trillion (US$769.2 million) annually, starting from 2022. This funding will be provided to support basic and metropolitan local governments that have been designated as ‘depoulated areas’ (89) and ‘areas of concern’ (18) for a period of 10 years. The Local Extinction Reaction Fund is significant because it is the first financial resource directly allocated by the central government to support local governments in their efforts to address the crisis of depopulation at the local level. However, there are several issues related to the excessive number of support targets, limited support period, and operational procedures. Based on the current status of the Local Extinction Reaction Fund, we have identified the following implications: First, it is necessary to accurately identify local characteristics and develop a successful model that utilizes local resources. Second, it is necessary to strengthen cooperation with the central government, local governments, and the private sector. Third, it is necessary to ensure the sustainability of the Local Extinction Reaction Fund in order to maximize the impact of the policy. This will enable the fund to operate more efficiently and effectively as a catalyst for various policy initiatives aimed at addressing the decline in the local population and revitalizing local areas.

Keywords: regional extinction, Local Extinction Reaction Fund, depopulation region

INTRODUCTION

In 2020, South Korea experienced its first "death-cross" phenomenon, a natural population decline in which the number of births[1] is lower than the number of deaths. As the total fertility rate reached a record low of 0.78 last year, the issue of declining birth rates has become a key issue for the country's existence. In addition, as more than half of the country’s total population is living in the Seoul metropolitan area, which occupies less than 10% of the nation’s entire territory, non-metropolitan areas are experiencing a population decline, which leads to increasing regional disparities. The widening disparity between urban and rural areas in areas such as employment, housing, healthcare, education, transportation, and culture is exacerbating youth drain from rural to metropolitan areas[2].

The government has implemented various policies to address the imbalance in national development caused by demographic changes and social migration, as well as to tackle the issue of declining birth rates. The government has enacted the "Special Act on National Balanced Development" and implemented policies to enhance the self-reliant development capacity of regions. These policies aim to ensure equal opportunities for development among different regions. Nevertheless, current issues such as low economic growth, social polarization, declining birth rates, and rural depopulation are still ongoing. In addition, the government has invested approximately KRW280 trillion (US$215.4 million) over the past 15 years to tackle the issue of declining birth rates.

However, the total fertility rate has remained one of the lowest in the world. While the declining birthrate and aging population are natural demographic changes, the decrease in regional population caused by the migration of young people to urban areas is a social demographic change known as rural decline. The term "rural depopulation" was coined in 2014 by Hiroya Masuda, a former chairman of the Creation Council of Japan, in his article titled "Regional Decline: The Population Plunge Caused by Tokyo's Unipolar Concentration." The term "rural depopulation" refers to the phenomenon of rural areas experiencing a decline in population, leading to their disappearance. It is not just a quantitative decrease in population, but rather a loss of role and function as a village or community. In other words, "rural depopulation" means the failure of the village’s role and function as an economic, social, and environmental system, rather than just a decrease in the number of its residents.

In 2016, the Korea Employment Information Agency announced the number of depopulated areas, highlighting the crisis of rural depopulation in Korea. In response to the crisis of rural depopulation, the government implemented the "Integrated Support Project for Population Decline Areas (2017~2021). " In 2020, Article 2, No. 9 of the Special Act on National Balanced Development established the definition[3] of "depopulated areas." In 2021, the Ministry of the Interior and Safety designated 89 depopulated areas and 18 areas of concern out of a total of 243 local governments. In December of the same year, the Fund Management Basic Act for Local Governments was amended as part of fiscal decentralization, which involves the expansion of decentralization. The Local Extinction Reaction Fund was introduced as a result.

The Ministry of the Interior and Safety has implemented a new approach to receiving and evaluating local government investment plans. This new method replaces the previous practice of granting financial support to local governments based on the selection of individual projects. This is the first budget for the central government that directly addresses the issue of local disappearance. It is significant because the central government's budget will be allocated directly to local governments at the basic level, bypassing regional governments. In addition, recognizing the urgent need for national-level support to address the issue of rural depopulation, the government enacted the "Special Act on Support for Declining Population Areas" in 2022. This act established the foundation for providing assistance to depopulated areas.

Similar financial support systems to the Local Extinction Reaction Fund include the Regional Win-Win Development Fund and the National Balanced Development Special Account to adjust fiscal imbalances between regions, but the Local Extinction Reaction Fund is the only source of funding that directly responds to the local disappearance crisis. Other fiscal systems are operated for the purpose of mitigating fiscal disparities and balanced development, so it is difficult to directly respond to the crisis of local extinction.

This paper analyzes the current status of the Local Extinction Reaction Fund, a fund established to address local disappearances, and identifies key operational challenges. We propose implications for Korea's localization response.

STATUS OF THE LOCAL EXTINCTION REACTION FUND

The purpose of the Local Extinction Reaction Fund is to provide financial support for the implementation of local extinction reaction projects led by local governments. It is designed to support local governments for 10 years (2022~2031) with an annual amount of KRW1 trillion (US$769.2 million). A total of 122 local governments are eligible for support, including 15 metropolitan local governments[4] and 107 basic local governments[5]. The basic local governments are 89 depopulated areas and 18 areas of concern, which were selected based on the depopulation index according to Article 2 of the Special Act on National Balanced Development and Article 2.3 of the Enforcement Decree of the same Act (‵21.10.19. Designation and Notification).

The fund shall be managed and operated by the fund management association, but the Minister of the Interior and Safety shall determine the details of the fund allocation. For basic local governments, the Fund Management Association's investment plan evaluation team will evaluate investment plans and distribute them according to the results, and for metropolitan local governments, it will consider the population decline index, financial and population conditions, etc. 25% of the total budget of KRW1 trillion ($769.2 million) is allocated to the Metropolitan Support Account and the remaining 75% to the Basic Support Account.

In 2022, the first year of the Fund's operation, the investment plan for each foundation and local government was prepared and submitted to the Investment Review Committee by May. The evaluation team within the Local Extinction Reaction Fund Union evaluated the investment plan in June and July and submitted the evaluation results and opinions to the review committee, and consultations and advice on the investment plan were held. According to the distribution of the Basic Support Account of the Local Extinction Reaction Fund, 89 depopulated areas received 95% of the Basic Support Account, and 18 areas of concern received the remaining 5%. As of 2023, the Basic Support Account was KRW750 billion (US$577 million), or 75% of the total fund budget of KWR1 trillion (US$769.2 million), of which KRW712.5 billion (US$547.5 million) was allocated to depopulated areas and KRW37.5 billion (US$28.8 million) to areas of concern. The maximum allocation for depopulated areas is KRW12 billion (US$9.2 million), and the minimum is KRW6.4 billion (US$4.9 million).

KEY ISSUES IN THE MANAGEMENT OF THE LOCAL EXTINCTION REACTION FUND

In the process of managing and allocating the Local Extinction Reaction Fund, the central government and local governments did not have enough time to scrutinize the fund's operations and make investment plans tailored to local conditions. This raised a number of issues in fund management. The following are the opinions of those who manage regional and basic local government fund projects[6].

Too much support for the budget

122 local governments, nearly half of the number of the nation’s local governments, were included in the program with an annual budget of KRW1 trillion (US$769.2 million). While some have questioned whether the annual budget of up to KRW12 billion (US$9.2 million) per local government is adequate to realize the goal of "countering rural depopulation," and whether it would be more effective to invest more money in some local governments with a higher risk of depopulation through selection and focus, others have questioned whether it makes sense to support only certain regions based on the depopulation index when almost all local governments, except for the capital region, are potential depopulation areas.

"While preparing an investment plan for a region with a declining population, I wonder if this project will increase the population of our OO county. Although KWR1 trillion (US$769.2 million) is not a small amount of money, distributing it to half of the country's depopulated areas in a piecemeal fashion may slow down the population decline, but it does not seem to be the answer to rural depopulation." (Representative of the Local Extinction Reaction Fund, OO County)

Policy effectiveness of temporary fund management

Since each year's evaluation determines the size of the next year's fund allocation, local governments are likely to focus on short-term performance-oriented projects rather than long-term investment plans. Therefore, it is a question of how much policy effect can be expected with a limited fund of 10 years. Most of the projects are hardware-oriented, and like existing regional development projects, they are likely to repeat the vicious cycle of constructing a building with a budget and becoming an unused resource when the project ends, and the operating cost support is cut off. A careful approach is needed to ensure that the project is sustainable in the long run. It is impossible to improve the demographic structure in a short period of time, and it is necessary to take a long-term perspective to improve it through social migration. In addition, there is an ongoing controversy that the fund projects are concentrated on one-time and consumable projects, which fails to serve the original purpose. It is also necessary to reflect on whether investment plans are focused on evaluation rather than local creativity.

"As a local government representative, I would like to include projects that contribute to local revitalization by gathering the will of local residents in the investment plan, but I can't help but consider the performance evaluation at the end of the year. We are not free from the structure that determines the next year's allocation based on the evaluation results. We have no choice but to focus on projects that can produce good quantitative results in a short period of time." (Representative of the Local Extinction Reaction Fund, OO County)

"It is recommended that cash support be excluded from the investment of the Local Extinction Reaction Fund because the effect of the support is often only temporary and limited, but considering the local conditions and the specificity of the project, we would like to allow projects that require labor costs in the investment plan as a percentage of the total fund budget through an exception rule. Because no matter how much money there is, if there is no one who can utilize it to create more value, none of the possibilities can be shared in a concrete form." (Representative of the Local Extinction Reaction Fund, OO County)

Procedural and scheduling issues with the local extinction reaction fund

Even considering that 2022 is the first year of fund allocation, frontline local governments have expressed many difficulties in implementing the fund project. Although local governments aim for autonomous projects, there are scheduling and procedural constraints such as annual evaluation and fund allocation. There is a need for more systematic cooperation and communication between the central government and local governments.

"For infrastructure construction projects with design costs exceeding KRW100 million ($76,923), it typically takes six months to a year to issue a design order. This process involves architectural planning, preliminary review of the business plan, planning supplement, and planning review." It is difficult to meet the project schedule due to the long preliminary period. The submission of the investment plan for 2024 is scheduled for the end of June this year, with finalization expected around November to December after evaluation and deliberation. However, there are challenges in advancing public construction deliberations for projects that have not been finalized. Some projects are prepared and promoted in advance, but... In the case of subordinate projects, the project may be eliminated when the project cost is adjusted according to the evaluation results... It is necessary to simplify the schedule coordination and procedures by reflecting the voices of the frontline sites for stable business operations. Without a finalized budget, it is not possible to proceed with the preliminary procedures in advance or apply for the public building review. (Representative of the Local Extinction Response Fund, OOO Provincial Government)

"The funding allocation for 2022 and 2023 was based on five tiers, but it has been changed to four tiers for 2024 (proposed). We have not yet received an official letter, but we anticipate that the upper and lower budget amounts will be revised. From the perspective of frontline local governments, it is challenging to implement a rubber-stamp allocation system where the budget changes every year. "I would like the budget amount to be confirmed for a period of 3-5 years. This would allow local governments to plan projects with the assurance of securing financial resources." (Representative of the Local Extinction Response Fund, OOO Provincial Government)

STATUS OF THE LOCAL EXTINCTION REACTION FUND PROJECT AND USE CASES

In 2022, the first year of the fund, the project implementation schedule was delayed, so local governments in depopulated areas submitted two-year investment plans (‵22~‵23) together. In 2022 and 2023, 811 and 880 investment plans were submitted, respectively, including basic depopulated areas, areas of interest, and wide areas.

By sector, culture and tourism, industry and jobs, and housing accounted for about 70% of the submissions. As mentioned earlier, this is a result of local governments focusing on short-term results as they make investment plans with evaluation in mind. Looking at the examples of sectoral funding projects, there is not much difference from existing regional development projects.

Currently, most of the projects from last year and this year are underway, and there are very few showing tangible results. That's why we'd like to take a look at how the funds are being utilized, focusing on the cases of local governments that received excellent evaluations in their 2022~2023 investment plans.

 

Geumsan-gun, located in Chungcheongnam-do, is actively promoting its culture and tourism sector. The goal is to attract more visitors who seek healing and relaxation in the forest. To achieve this, the region is establishing a healing and therapeutic work vacation and rural study abroad center. The main activities include renovating unused facilities in the village to create lodging options, offering forest bathing experiences, and implementing a 'one-month living program' for the incoming population.

 

The "Creating a Youth Workshop to Support Youth Start-ups" project in Uiseong-gun, Gyeongsangbuk-do, will promote a "Youth Workshop" that creates youth start-ups and local jobs by incorporating the metaverse, which has recently attracted attention, into local food. The plan is to maximize marketing effects by combining the creation of a metaverse-based experience space with restaurant start-up activities using local agricultural products.

The "Hamyang Nui Center Construction" project in Hamyang-gun, Gyeongsangnam-do, a multidisciplinary area, provides services in various fields such as care, education, culture, and job support to local residents, and aims to create a work-life balance complex cultural center that anyone can use. It will provide integrated services in various fields in demand by local residents, improve settlement conditions to prevent the net outflow of local residents, and serve as a community space for communication between existing residents and new residents.

In the field of education, Muju-gun, Jeollabuk-do's "High Altitude Smart Farm Management Training Center" project aims to foster and attract young and old farmers by utilizing natural environments such as climate. Leafy vegetables thrive in cooler climates, making Muju-gun an ideal semi-alpine region for year-round cultivation. It is also geographically located in the center of Korea, making it easy to access from anywhere in the country. The business in this region was possible because Mujuwon and Sarang Strawberry, two leading companies that have previously realized high-altitude smart farms, existed. For smart farms that require high initial investment costs, sufficient experience and education are important, so management training centers that can be practiced for 2-3 years can reduce farming failures and contribute to the stable settlement and population influx of returning farmers.

IMPLICATIONS

In rural areas, it's sometimes hard to find a lighted store or people walking around in the early evening. This is the moment when you realize the visualization of 'local extinction'. The word "activation" is used to describe the active functioning of a society or organization. In order to revitalize regions, especially rural areas, it is important to prevent the existing population from declining, but it is also necessary to attract new people so that the community can function organically. Japan's regional revitalization drive is based on the declining population of young women (20-39 years old). However, in Korea, the cause of local population decline is not simply explained by the fertility rate as in the Masuda report. On the contrary, some population-declining regions in Korea show higher fertility rates than those of other regions. A more convincing argument is that the underlying cause of rural decline is social depopulation, in which younger local populations migrate to metropolitan areas to study or work. At the local level, it is necessary to actively respond to the depopulation caused by aging and the outflow of young people. There needs to be a force to pull the population of overcrowded metropolitan areas back into the region.

Japan has also been promoting localization policies for nearly a decade, but they have not been able to prevent the concentration of population in the Tokyo area. However, it is a positive achievement that there are cases where local creative localization strategies have created jobs and revitalized villages by gathering people. The power changing “local extinction” to “local revitalization” was mainly due to the focus on the role of people along with financial support from the government and local governments. No matter how much money is given, it is up to people to make it a business and create results.

In Korea, various projects to promote population vitality, such as creating local jobs, attracting young people, and expanding the living population, are being promoted through the Local Decline Response Fund. We would like to make the following three suggestions in the hope that the fund can be operated more efficiently and effectively as a stepping stone for various policies to respond to rural depopulation in declining areas.

UNDERSTAND THE LOCAL CONTEXT AND BUILD A SUCCESS MODEL THAT LEVERAGES LOCAL RESOURCES

In Korea, various attempts have been made to identify the causes of rural decline and to solve them by utilizing local resources. In response to population decline and regional communication, various actors such as local governments, local residents, and young people are working together to attract people to local areas and create new jobs through systematic cooperation.

A representative example is "Replace", a company in Mungyeong, Gyeongsangbuk-do, which utilizes rural vacant houses and unused spaces to provide young people with new life opportunities in rural areas. In 2018, the company opened Hwasuheon, a hanok[7] cafe, by renting out an unused hanok, as a business model to attract tourists by recreating local unused spaces. "Replace" continues to innovate by incorporating the ideas of young people to reimagine local resources and create local content that meets the needs of consumers. The company has discovered various travel programs using local resources and renovated unused spaces into various business spaces such as travel information centers and editorial shops. In addition, the café has sourced raw materials from local farmers and small businesses, and held various local events for local residents to enjoy together. By fostering local creators and strengthening networks, the company has discovered various business models to enhance the vitality of the region and are growing into a platform that provides new jobs and startup opportunities for young people. This has led to an increase in local employment and attracted about 100,000 tourists annually. It is significant that the combination of local unused resources, creative ideas of young people, and budget support from local governments has created a foundation for other young people to settle in the region.

Similarly, projects utilizing the Local Disappearance Response Fund require creative and unique projects that take advantage of the unique characteristics of each region. Based on the success stories of rural revitalization, local governments and local residents should solve their own problems through numerous discussions, and if they cannot do it on their own, they should connect with external support. A more specific roadmap at the national level and creative strategies at the regional and basic local governments should be organically linked to create synergy.

STRENGTHEN COLLABORATION WITH THE PRIVATE SECTOR AS WELL AS THE CENTRAL AND LOCAL GOVERNMENTS

In order to address rural depopulation, it is essential to foster collaboration between ministries and promote integrated projects in partnership with local communities, rather than implementing isolated policies from the central government. It is crucial to establish a rural depopulation response system that facilitates the sharing and utilization of information. Additionally, there is a need to enhance laws and regulations that are insufficient in addressing population decline. In order to establish a locally-led planning and autonomous implementation system, it is important to provide comprehensive financial support in collaboration with local governments, rather than solely from the central government. The Ministry of the Interior and Safety is implementing the "Creating Youth Villages" project to revitalize local areas. This initiative involves constructing youth villages in areas that are at risk of disappearing, separate from the Local Extinction Reaction Fund. The Ministry of Small and Medium Enterprises (SMEs) and Startups' "Local Creator Training Project", the Ministry of Culture, Sports and Tourism's "Cultural City Project", and the Ministry of Land, Infrastructure, and Transport's "Local Demand Customization Support Project" are some of the initiatives implemented by each ministry to prevent the migration of young people from local areas. In order to effectively meet the needs of young people, support policies should be promoted comprehensively rather than individually. Strengthening inter-ministerial collaboration is necessary to provide young people with start-up and housing spaces, as well as improved basic living infrastructure.

The government is promoting the multi-ministry Local Extinction Reaction Fund. The "Regional Vitality Town Creation Project", which is coordinated by seven ministries including the Ministry of Land, Infrastructure, and Transport, is a project to create a living base that combines housing, culture, and welfare to support the migration of retirees and young adults to rural areas, with a total investment of over KRW150 billion (US$115.4 million). In addition, the Ministry of SMEs and Startups, together with the Ministry of the Interior and Safety, is promoting the "Local Enterprise Innovation Competition Project", which links the Local Extinction Reaction Fund and the Ministry of SMEs and Startups' support projects to create jobs to foster local enterprises with a total investment of over KRW80 billion (US$61.5 million). Through this inter-ministerial project, examples of linkages and cooperation are being created using the Local Extinction Reaction Fund, such as improving settlement conditions and expanding jobs.

According to the Special Act on Support for Population Reduction Areas, the government creates a "regional-led response plan for population reduction areas (five years)" and develops a national plan based on the plans of cities, counties, and districts. The aim is to create a comprehensive plan that accurately reflects the unique characteristics of each region. When establishing the plan, the aim is to systematically connect the Local Extinction Reaction Fund project to enhance the fund's efficiency. In addition, the special law emphasizes policies to promote the linkage and cooperation of local governments in declining areas and to expand the living population. The central government provides support to them. In addition to expanding the living population, it also stipulates customized support for population-decreasing areas such as strengthening residents and local capabilities, support for the settlement of young people and middle-aged people, improvement of living environments and landscapes, and use of information and communication technology. In order for such legal support to work properly in the region, incentives are also needed to be provided incentives for the inflow of excellent human resources and to stimulate private participation. Since the efforts of the government and local governments alone cannot effectively address local extinction, the involvement of various private actors in the region is crucial. It is essential to establish a cooperative structure between regional innovators and develop future strategies in order to become a sustainable business.

NEED TO SPREAD POLICY EFFECTS BY SECURING THE SUSTAINABILITY OF THE LOCAL EXTINCTION REACT FUND

Even at this early stage of the program, the limitations of a 10-year program are clear. Since most of the investment plans are focused on fixed investments centered on hardware, it is unclear how many years it will take to create the desired results. As mentioned earlier, the financial resources to operate the facility are more important than the investment in building the facility, so for the sustainability of the business, we can only worry about the sunset date of 2031 and beyond. In particular, in order for the effect of the fund's investments to lead to a virtuous cycle in the local economy, it is necessary to create a structure that creates high-quality jobs and attracts young people to return to the region, which requires long-term policy promotion. The fund, currently at KRW1 trillion (US$769.2 million) per year, needs to be increased in size. The annual allocation of KRW6.4 billion (US$4.92 million) to KRW12 billion (US$9.2 million) for each depopulated area is inadequate to fund the development of essential infrastructure for residents.

Additionally, in order to reduce the risk that the Local Extinction Reaction Fund is a temporary financial resource, it is necessary to increase its scale in conjunction with other policy projects and focus on effective results. It is necessary to eliminate redundancies with existing programs utilizing the Regional Win-Win Development Fund, the Hometown Love Donation system, the National Balanced Development Special Account, government subsidies, local taxes, and policy funds, and to consolidate similar programs to improve project linkages, efficiency, and effectiveness.

REFERENCES

Ha, Hye-Young and Kim, Ye-Sung. 2021. "Current Status and Future Challenges of Endangered Areas", NARS Legislation and Policy No. 85, National Assembly Legislative Research Service.

Ha, Hye-young. 2023. "Implementation of the 'Special Act to Support Population Decline Areas' and Future Challenges", Issues and Controversies No. 2054, National Assembly Legislative Research Service.

Heo, Moon-Koo. 2022. "K-Fatness Index and Policy Issues", Korea Institute for Industrial Economics & Trade.

Ryu, Young-Ah. 2022. "Introduction of the Local Extinction Reaction Fund and Future Issues: Mid- and Long-Term Policy and Base Strategies", NARS Legislation and Policy No. 108, National Assembly Legislative Research Service.

Song, Mi-ryung, Kim, Kwang-Sun, Shim, Jae-Heon, Jeong, Do-Chae, and Seo, Hyung-Ju. 2019. "Envisioning a Rural Utopia for Happy Balanced Development", Korea Rural Economic Institute.

Ministry of the Interior and Safety press release. Aug. 16, 2022. "First Distribution of Local Extinction Reaction Fund to Overcome Population Decline Crisis"

Ministry of the Interior and Safety (http://www.mois.go.kr)

増田寛也. 2014. "地方消滅: 東京一極集中が招く人口急減", 中央公論.


[1] The average number of expected births a woman is projected to have during her reproductive years (ages 15 to 49)

[2] In the past, young populations used to migrate to regional hub cites before making their way to the metropolitan area. However, nowadays, with direct movement from local regions to the capital area, the vitality of regional hub cities is diminishing (Heo, 2022)

[3] Article 2 (Definitions) of the Special Act on National Balanced Development (Act No. 17597) provides the meanings of terms used in this Act "A declining population area" refers to an area designated by the Presidential Decree for cities (excluding special cities), counties, and districts that are at risk of disappearing due to population decline. This designation takes into account factors such as birth rate, the number of elderly people aged 65 or older, the number of children aged 14 or younger, or the number of productive people.

[4] Excluding Seoul and Sejong among metropolitan local government

[5] In South Korea, local governments are categorized into two main groups: metropolitan local governments, which are composed of "special cities, metropolitan areas, and provinces," and basic local governments, which comprise "cities, counties, and autonomous districts." Metropolitan local governments comprise multiple basic local governments based on area and population, and handle responsibilities that basic local governments cannot or do not handle.

[6] In May, 2023, the researcher personally conducted an interview with the central government and metropolitan/basic local government fund project managers and excerpts of the content.

[7] A type of traditional Korean house

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