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With increasing fiscal decentralization and the growth in GDP per capital around the world, many countries, including those in the Organization for Economic Cooperation and Development (OECD), have been seeing a rise in local government expenditures(Zapata, 2017).1 According to OECD and KIPF (2016), the expenditure decentralization among OECD countries is higher than the tax decentralization on average, and that factors, such as the slowdown of the global economy, deepening polarization, and low fertility rate and aging population, will widen this gap further to threaten the sustainability of fiscal decentralization(OECD Publishing, 2016). Accordingly, various countries around the world have been implementing policies to enable local governments to become more financially sustainable and fiscally independent, a representative example being the introduction of municipal currencies (Hallsmith & Lietaer, 2011)
Municipal currency is a currency that can only be used within a limited area complementarily to the national currency prescribed by law (Hallsmith & Lietaer, 2006). The labor voucher issued by Robert Owen, the founder of the cooperative movement, pioneered the concept of municipal currency (Witjaksono, 2016), and the Local Exchange Trading System (LETs) established in Comox Valley, British Columbia, Canada in 1983 is a prime example how municipal currency could be implemented (Seyfang, 2002), About 3,000 municipal currencies are so far in use in 35 countries, including Ithaca Hours in the U.S., Chiemgauer in Germany and the Bristol Pound in the U.K (Johnson & Harvey-Wilson, 2018).
Previous studies have highlighted the positive effects of municipal currency in building trust and social capital in local communities (Cahn, 2000; Collom, 2008) and inducing environmentally friendly behavior (Holdsworth, D. Boyle, 2004). Among the various reasons behind introducing a municipal currency, the most prominent is to revitalize the local economy (Stodder & Lietaer, 2006). Municipal currency contributes to the local economy by increasing sales for small business owners and small self-employed people in the region as well as creating new jobs, which helps to strengthen the fiscal independence of local governments.
However, as municipal currencies are issued with veal in anticipation of such benefits, negative outcomes started to become more apparent. First of all, the closed nature of municipal currencies tends to constrict the larger market existing outside the local economy. Also, despite requiring financial support from the central or local government, the anticipated benefits of municipal currencies could only be reaped when they are actively utilized by local residents. Yet, municipal currencies are often perceived as a hassle by consumers, who find having to purchase municipal currency and the restrictions in use, such as limits on the amount of municipal currency that could be purchased, expiration date, and limited number of stores available for using this currency (Aldridge & Patterson, 2002).
This study analyzes the financial efficiency of local governments using municipal currency data from Korea. A number of municipal currencies issued by local governments are in use in Korea, including a gift certificate issued by the central government. In particular, Korea’s Gyeonggi Province has issued an independent municipal currency which could be used in the 31 municipalities under its jurisdiction, effective from March 2019. This municipal currency was issued simultaneously across all 31 municipalities under the umbrella of Gyeonggi Province, but the system allowed each municipality to determine the amount of currency to be issued, the method for issuing the currency, and per capita usage limit.