The World Bank June PREMnotes know what we deliver 2013 No. 3 Special Series on Public Participation in the Budget Process in the Republic of Korea Young Kyu Kang and Saw Young (Sandy) Min In January 2013, the International Budget Partnership (IBP) released the latest Open Budget Survey (OBS) with a new section on public participation. The survey results are not encouraging. For the 100 surveyed countries, the average score for public participation in the budget process is 19 out of 100. However, one country stands out. With a score of 92, Korea emerges as the only country “that provides extensive opportunities for public engagement” (IBP 2012, 33). What makes Korea an exception? This note investigates the different public participation mechanisms in Korea and illustrates how public inputs are reflected in the country’s budget process and fiscal policies. Why Did Korea Foster built on the political regime’s core philosophy of Public Participation in participatory government and decided to include Its Budget Process? stakeholders in different stages of the budget formulation for specific purposes. Participation Beginning with Korea’s democratic transition in in the budget formulation process provided a the 1980s, citizens’ awareness of and demand for mechanism through which government could transparency and reforms heightened. The role assert that a realistic expenditure ceiling had been of NGOs in monitoring government policy and established and that the government’s hands were budget allocations began to increase and the gov- tied in any attempt to renegotiate the ceiling. On ernment started to take them seriously. In 2003, the budget implementation and settlement side, former President Moo-Hyun Roh took office; his citizen’s involvement was encouraged to improve emphasis was on fiscal transparency and public the government’s effort to properly execute the participation. The Budget Office introduced budget. The public participation mechanisms significant public financial management (PFM) established by this regime continued to be main- reforms in 2003, including a medium term expen- tained by President Myoung-Bak Lee, an opposi- diture framework (MTEF), performance-based tion politician who came to office in 2008. In fact, budgeting, and integrated financial management his administration developed these mechanisms information systems. further and encouraged local government involve- The introduction of an MTEF, with budget ment in the budget mechanism to enhance fiscal allocations based on multiyear expenditure ceil- transparency and cooperation between central ings, improved the budget process, but this change and local government. posed a potential problem. Without credible and legitimate mechanisms for setting the multiyear ceilings and sticking to them, the rationale for the Korea’s Public Participation ceilings could be undermined, and enforcement Mechanisms by the Ministry of Finance on the line ministries Korea’s public participation mechanisms are could become difficult. To help bind the line closely aligned with the formulation and execu- ministries to the ceilings, the budget authorities tion cycle of the annual budget and the MTEF. FROM THE POVERTY REDUCTION AND ECONOMIC MANAGEMENT NETWORK There are six main mechanisms: (1) formalized “Open regard to policy direction on which stakeholders have Discussion for the Public” (ODP); (2) meetings with different positions. This is where ODP comes in. Pro- local government officials by central government agen- grams selected for discussion at the ODP are usually cies and field trips; (3) a fiscal policy advisory meet- those that could incur high costs and those that have ing; (4) an Assembly Experts Hearing; (5) a budget a direct impact on the quality of life of the citizens. waste reporting center; and (6) public participation In general, 12 sectors participate in the ODP. It is in audits by the Board of Audit and Inspection (BAI). held for five to six days addressing two or three sectors Each mechanism plays a specific role in the overall per day. Each sector, such as social welfare and health, budgeting process, ensuring a practical approach to infrastructure, and the environment, is allotted one monitoring its effectiveness in obtaining and using 90-minute session for deliberation and discussion public inputs. Multiple mechanisms are scheduled (usually on two or three broad issues), which concludes throughout the budget cycle for different purposes, with questions and comments from the floor. To ensure as shown in Figure 1. a balanced perspective, each sector convenes a panel consisting of public financial management experts, Open Discussion for the Public (ODP) high-level government officials from line ministries and The annual budget and MTEF cycle begins in January the Budget Office, budget execution entities, and civil with line ministries and the Budget Office adjusting the society organizations. Any individual interested in the ceilings from those of the previous year as a starting topics can attend. The public is informed of the overall point and setting important policy priorities. After line schedule and agenda in advance through the press and ministries prepare their budget requests, the Budget the venue can usually accommodate about 300 people. Office sets ceilings in consultation with stakeholders The hearings are publicly televised to ensure transpar- consisting of budget experts, academic scholars, and ency and access to information. the private sector. In this part of the process, a number In its early years (2005–07), the ODP was held of projects may require feedback from the public with in March and April in time for public inputs to be Figure 1. Public Participation in the Budget and MTEF Formulation Processes Month MTEF and annual budgeting cycle Public particiaption mechanism 1 MTEF preparation (LMs) 2 MTEF Draft (BO) — Coordintaion (BO and LMs) 3 Open Discussion for the Public — Cabinet meeting 4 — Ceilings communicated to LMs (public hearing) Budget Formulation 5 Budget draft by LMs – MTEF taskforce Meeting with local governments 6 and field trips team work 7 – Budget – Finalize MTEF formulation – Submit to the 8 Fiscal Policy Advisory Meeting with – Submit to the Assembly LMS, experts, local governments 9 Assembly 10 Assembly review and Assembly Experts Hearing 11 finalization 12 Budget Implementation Budget Waste Report Center Budget Settlement & Audit Public participation in audits by BAI Source: Authors’ illustration. Note: BO = Budget Office; LMs = line ministries; MTEF = Medium Term Expenditure Framework. 2 PREMNOTE JUNE 2013 reflected in the draft MTEF before the President and Office, Directors General, and Directors takes a field the Cabinet endorsed the adjusted ceilings and policy trip to the16 major provinces and cities of Korea. The directions at the Fiscal Strategy cabinet meeting. This visiting team shares information about the central gov- increased the workload of the Budget Office. To reduce ernment’s fiscal status and fiscal decisions made at the this burden, the ODP was moved to May and June, cabinet meeting, and facilitates discussion on areas for after the ceilings had been distributed to the line which cooperation is needed. The teams make on-site ministries. Despite the schedule change, the ODP inspections to check the status of fiscal projects by in- continued to influence the ceilings because the ceilings terviewing local citizens and other project stakeholders. can be adjusted with ODP inputs before submission to In turn, the local governments voice their opinions on the National Assembly in September. projects, grants, and subsidy programs. At this point, Despite success at fostering public participation, local governments can request that the central govern- the ODP was criticized by some academics for being ment representatives support their regional agendas. an impractical and inefficient means for determining Between July and early September, after the field exact budget amounts for projects. A number of rea- trips have taken place, the Budget Office compiles the sons contributed to concerns about the limitations of inputs collected from the public, PFM experts, local the ODP. First, the ODP is open to the general public so governments, and line ministries, and then reviews citizens from all walks of life, with little or no expertise, them before the allocation of resources for each project. come to provide their opinions on how and where to Once the draft budget is prepared, the Budget Office allocate funds. Second, sometimes budget allocations solicits further feedback from the various stakeholders. might not be the most effective way to fund a specific At times the Budget Office brings attention to some of program. A systematic reform or tax benefits reviewed the responses that have not been considered, if neces- in conjunction with the budget may be a more suitable sary, at the Fiscal Advisory Meeting. approach. Third, budget allocations for projects should not be considered in isolation. Projects should be re- Fiscal Policy Advisory Meeting viewed under the overall fiscal envelope and according In September, before finalizing and submitting the to their prioritization within the national plan. Fourth, budget to the National Assembly, the Budget Office more than 8,000 government programs pass through consults with the Fiscal Policy Advisory Council the Budget Office annually, making it impossible to (comprising line ministries, outside experts, and local address each one comprehensively at the ODP. governments) regarding the budget and the adjusted See box 1 for influence of the ODP process on the MTEF. The vice minister from every ministry, vice social welfare sector. heads of the16 local governments, and about 25 ex- perts from academia and research institutes participate Meeting with Local Governments and Field Trips in the consultation process. In May and June, line ministries prepare their draft budgets with ceilings in collaboration with local gov- Assembly Experts Hearing ernments. This is a significant stage in the budget cycle When the National Assembly receives the draft bud- because it is the point at which local governments are get from the government, a Special Committee on called in to participate. Before 2009, opportunities Budget opens a public hearing with budget experts; were limited for local governments to engage in the this meeting is called the Assembly Experts hearing. budget process, but as essential partners in budget This public hearing was established in 2005 under formulation, budget authorities realized local govern- the National Assembly Act. The experts are selected, ments needed to be informed of the central govern- in coordination with political parties, to include a ment’s fiscal situation, policy direction, fiscal space, diverse range of specialists. The hearing evaluates and the inputs received at the ODP. For their part, local the overall economic and tax forecasts, fiscal stance, governments should be able to provide their respective and the need to amend any expenditure programs. positions on identified fiscal projects. Should questions arise from the hearing, the Special As a response, since 2009 the Budget Office has Committee on Budget requests a query session with been arranging meetings with local governments the government and makes adjustments to the draft throughout May and June to learn about their needs budget if necessary. and to get updates on projects being implemented at The IBP emphasizes that participation should oc- the local level. A team from the Budget Office consist- cur throughout the entire budget process, including ing of the Vice Minister or the Head of the Budget budget implementation and settlement (IBP 2012). JUNE 2013 PREMNOTE 3 Box 1. ODP Feedback on Budget Allocation for Social Welfare Sector Given the limitations of the ODP, it is important to evaluate whether and how ODP feedback is used in formulating policy direction and budget allocations in the medium term. To investigate its use and effect, this box reviews the ODP in the social welfare sector because this area has a high impact on citizens’ quality of life. The two major areas of interest at the ODP for the social welfare sector are child care and public health insurance. During 2005–12, five out of the nine ODPs focused directly on child care issues and three focused on public health insurance (see table B1). The following paragraphs illustrate what was discussed and how the resulting inputs were reflected in the budget. Table. ODP Agendas for the Social Welfare Sector, 2005–12 Date Agenda 06/13/2012 How to increase child care investment and improve effective child care programs How to design programs for the senior citizens 06/24/2011 What is the 2011–15 social welfare sector’s policy direction? How to meet the fiscal needs of health insurance 06/22/2010 How to expand the policy target in Basic Living Security Guarantee to a higher income level How to make the social welfare program sustainable 08/31/2010a The coverage of free child care and policy on private day care centers 06/22/2009 How to improve the governance and cost efficiency of the public health insurance system 06/26/2008 How to improve child care 03/14/2007 How to enhance the private role in social welfare service delivery How to improve efficiency in social welfare service delivery 03/23/2006 How to advance the Basic Living Security Guarantee system How to make government subsidy to public health insurance and the medical allowance system sustainable 03/14/2005 How to cope with low birth and an aging population Source: Ministry of Strategy and Finance Web site. a. In August 2010, the Special Committee on Budget of the National Assembly requested a second public hearing just before the Budget Office concluded its budget reviews as a direct response to the criticisms of ODP. This public hearing was performed only once and focused solely on the exact allocation of budgets rather than debating policy direction or resource allocation at the aggregate level. Child care. Since 2005, the main points consistently raised at the ODP have been the expansion of the target group receiving child care and the introduction of a monthly child care allowance. Both points have been reflected in the budget during the years since 2005. An increase in the child care budget relative to other areas was requested. The child care budget increased at an average annual rate of 27.2 percent from 2005 to 2013, surpassing the 8.5 percent annual growth rate of the social welfare sector as a whole. The target group expanded from low-income households to all households with children under age five. The govern- ment introduced a monthly child care allowance in 2009. Public health insurance. The ODP brought two suggestions forward for sustaining fiscal stability in public health spending: (1) governance reform in public health insurance and (2) changes in economic incentives for health providers to refrain from increasing medical costs. Given the complexity of the public health insurance system and the various stakeholders involved, it is difficult to assess whether the ODP inputs are reflected in the policy process. Despite intense public pressure to increase the budget, the government successfully maintained a moderate 6.2 percent annual growth rate from 2005 to 2013, which is less than the 8.5 percent annual growth rate of the social welfare sector. However, specific ODP suggestions for achieving fiscal sustainability, such as governance reforms and changes in the incentive structure, were less successful because of conflicts among stakeholders. 4 PREMNOTE JUNE 2013 In Korea, two public engagement mechanisms gather for citizen feedback. Citizens are encouraged to suggest citizen feedback following budget formulation: the what public entity operations or expenditures should Budget Waste Report Center (BWRC) and the BAI. be audited. Second, citizens can request the BAI to examine any reports of impropriety or inspect certain Budget Waste Report Center budgets throughout the budget implementation phase. Citizens can report any suspected cases of budget waste Third, citizens can gather to collectively request audits online through the Ministry of Strategy and Finance of matters of public interest, including not only budget Budget Waste Report Center website or by phone waste, but also extensive delays in program implemen- via the budget waste hotline. Any citizen can claim tation and completion, and unreasonable public policy. any misuse of the budget or suggest creative ways to These requests have more gravity and significance for save budget resources. Retired Budget Office officials BAI. The following qualify to petition for this type of with budgeting or budget implementation experience audit: (1) a group of more than 300 citizens age 19 and manage the hotline. They have sufficient knowledge older, (2) civil society organizations consisting of 300 to respond to the calls efficiently, send waste cases to or more members, (3) the head of a public entity, or (4) relevant units, and most important, guide callers in the the local assembly. The acceptance rate for this third right direction. The system was adopted by the local type of participation is illustrated in Table 2. governments as well. To increase awareness and encourage citizen Other Participation Efforts: Competition for Ideas participation in reducing budget misuse, the govern- In addition to the government’s efforts to engage the ment allocated funds to advertise how and where public throughout the budget cycle, it initiated an to report budget waste. As shown in Table 1, the innovative pilot activity to bring about public partici- number of reports received on budget waste increased pation in the project design phase. In July 2012, the from 2006 to 2007, suggesting a relationship to the Budget Office launched its first nationwide contest increase in the public relations budget. In 2008, the to gather creative ideas from the public on new fiscal advertising campaign was reduced because of budget projects. The objective of the contest was to engage cuts, resulting in a significant decrease in the number the public in providing opinions on what and how of reported cases of waste. When the Budget Office projects should be designed. A total of 866 ideas were resumed advertising in 2011, the number of reports submitted and transferred to the related ministries or also increased. agencies, which then selected the best ideas that could reasonably be implemented as actual projects. Public Participation on Audit by Board of Audit Out of the 866 submissions, 12 suggestions (both and Inspection new project ideas and ideas that expanded on ongoing The BAI facilitates participation in three ways. First, it projects) were reflected in the budget. Some of the ideas posts the names of agencies to be audited along with highlighted as creative and reasonable include (1) the the respective audit dates on its website and opens it establishment of a network for small and medium Table 1. Relationship between Awareness Campaign and Reports of Budget Waste 2006 2007 2008 2009 2010 2011 2012 Number of reports 570 838 570 448 208 164 212 Budget for Public Relations 11 19 0 0 0 0.3 0.3 (hundred million Korean won) Source: Ministry of Strategy and Finance. Table 2. Reports Received from the Public and BAI’s Acceptance Rate for Requests to Audit Matters of Public Interest 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total Number of 40 79 104 126 110 118 138 148 108 169 180 1,320 reports Acceptance 53.3 63.0 71.2 61.6 64.0 32.6 26.1 21.4 40.0 29.4 41.3 41.7 rate (percent) Source: Board of Audit and Inspection. JUNE 2013 PREMNOTE 5 companies by function or by region for better coordi- describes that the council is advisory but a necessary nation and information sharing, and to improve the process for the following agenda: (1) MTEF; (2) Public companies’ bargaining power and reduce costs; and (2) Fund Plan; (3) budget formulation guidelines; (4) a mentoring program through which college students evaluation results on public funds; (5) new special ac- guide and teach children from low-income households. counts or public funds; (6) amendments on fiscal laws; (7) budget reform; and (8) any other agenda requested Conclusion by the Minister of Strategy and Finance. Furthermore, the committee can gather related experts or govern- This note highlights ways in which the public can be ment officials in the meeting for opinions. engaged in the budget process. The level of public 3. The enforcement decree of the National Fiscal Man- participation in Korea was influenced by both social agement Law (article 51) articulates that every min- consensus and political will. Incorporating public istry and all entities responsible for public resources participation mechanisms in the budget process was should establish a hotline for citizens to report fraud possible because it received support from budget and should follow up with citizens on how the issue authorities and political leaders as well as nongovern- was resolved. In addition, there are rewards for sugges- mental organizations. Without social and political tions that lead to actual budget savings. support, it would have been difficult to initiate or sustain public participation. In addition, Korea’s participation mechanisms References were created in parallel to ongoing PFM reforms, Board of Audit and Inspection of Korea. http://www.bai. MTEFs in particular, and were inserted in a variety of go.kr/. Budget Office of Korea. 2010. The 2010 Public Finance of ways throughout the different parts of the budget pro- Korea. cess. Including diverse stakeholders to get their inputs International Budget Partnership (IBP). 2012. “The Open at various stages of the budget process was essential, Budget Survey 2012.” Washington, DC. http://inter- especially during the setting of budget ceilings, the sub- nationalbudget.org/what-we-do/open-budget-survey. mission of the budget to the National Assembly, and Ministry of Strategy and Finance of Korea. http://www.mosf. the finalization of the budget at the National Assembly. go.kr/main/main.jsp. Ministry of Strategy and Finance of Korea. 2011. “The Re- Equally important was the involvement of the public sults on the Open Discussion for the Public on Social after budget implementation through the reporting Welfare Sector.” Seoul. http://www.mosf.go.kr/policy/ of budget waste using the Ministry of Strategy and policy02.jsp?boardType=general&hdnBulletRunno=7 Finance website and hotline, and making sure that the 6&cvbnPath=&sub_category=127&hdnFlag=1&cat=& BAI investigates fraudulent activities. hdnDiv=&select=subject&keyword=%EA%B3%B5%E A%B0%9C&hdnSubject=%EA%B3%B5%EA%B0%9C& date_start=2005-03-08&date_end=2013-03-15&&acti Notes onType=view&runno=4009777&hdnTopicDate=2011- 1. The MTEF in Korea is well integrated into the 06-24&hdnPage=1. National Fiscal Management Law and its Enforcement De- budget cycle and consistent with the annual budget, cree. http://www.law.go.kr/lsSc.do?menuId=0&subMen as illustrated in Figure 1. u=1&p=&query=%EA%B5%AD%EA%B0%80%EC%9E 2. The National Fiscal Management Law (article 10) %AC%EC%A0%95%EB%B2%95#liBgcolor0. and its Enforcement Decree (article 6) provide a The National Assembly Act. http://korea.assembly.go.kr/res/ legal basis for the Advisory Council. The law clearly low_02_read.jsp?boardid=1000000036. This note series is intended to summarize good practices and key policy findings on PREM-related topics. The views expressed in the notes are those of the authors and do not necessarily reflect those of the World Bank. PREMnotes are widely distributed to Bank staff and are also available on the PREM Web site (http://www.worldbank.org/ prem). If you are interested in writing a PREMnote, email your idea to Madjiguene Seck at mseck@worldbank.org. For additional copies of this PREMnote please contact the PREM Advisory Service at x87736. This series is for both external and internal dissemination 6 PREMNOTE JUNE 2013