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.