Volker Ziemann
OECD Economic Surveys: Korea 2026
Abstract
Korea is undergoing one of the fastest demographic transitions in the OECD, with a rapidly ageing and shrinking population. While Seoul and some urban centres continue to attract younger populations, more remote areas face population decline, labour shortages and weakening local economies. Despite national efforts to support growth and improve the quality of life equally across the country, regional development should play a more prominent role in Korea’s policy response to demographic change. This chapter examines how spatially targeted policies can break the self-reinforcing cycle between economic concentration, regional decline and low fertility by improving framework conditions in lagging regions, adapting planning and housing policies to demographic realities, leveraging place-based policies and rethinking intergovernmental fiscal frameworks. By reshaping the geography of opportunity, these reforms can reduce regional disparities, ease bottlenecks to family formation and build stronger foundations for Korea’s long-term economic growth and social cohesion.
Korea’s well-being indicators reveal a persistent imbalance between the capital region, also called the Seoul Metropolitan Area (SMA) and the rest of the country. The SMA continues to attract people with its concentration of economic activity, abundant quality jobs and the country’s most valuable education, health and transport networks (Figure 4.1). Agglomeration effects facilitate knowledge spillovers and labour market matching, deliver economies of scale, foster innovation and expand economic opportunity. Dynamic urban areas like Korea’s SMA can therefore act as engines of national growth, driving productivity gains and structural transformation. At the same time, high housing costs, congestion and environmental strain increasingly temper the SMA's advantages and make family formation more challenging. Outside the SMA, many provinces offer a more comfortable living environment but struggle to rival the capital in economic opportunities and access to high-quality services, leading to outmigration of young adults and deepening concerns about rural depopulation. These contrasting dynamics highlight the need for more balanced regional development.
Note: Relative ranking among 468 OECD TL2 regions. For Korea, the 7 TL2-level regions are: Capital Region, Gyeongnam, Gyeongbuk, Jeolla, Chungcheong, Gangwon, and Jeju.
Source: OECD Regional Wellbeing Indicator Database.
The Bank of Korea finds that more than half of the growth gap between SMA and the rest of the country stems from productivity differentials alone (Chung et al., 2024[1]). Economic structure and labour productivity differ considerably across provinces (Figure 4.2). The most productive Korean region is roughly 2.5 times more productive than the least productive one, placing Korea close to the OECD median. Seoul is only outperformed by Ulsan and Chungcheongnam, where concentrations of heavy industry – including semiconductors, automotive manufacturing and petrochemicals – result in comparatively high output per capita. By contrast, Seoul’s economy is dominated by services, which account for more than 84% of the city’s gross production. This reflects its role as the country’s administrative, financial and cultural centre. Labour productivity in the rest of the country is considerably lower in the metropolitan areas of Daegu, Busan, Gwangju and Daejeon, with roughly half the per capita output of Seoul, Chungcheongnam and Ulsan.
Seoul’s primacy is further augmented by financial flows. Cross-regional transfers of property income, including dividends, interest, and reinvested earnings, generate a significant gap between where value is produced and where it is ultimately received. On a per capita basis, Seoul records the highest regional income, while industrial regions such as Ulsan and Chungcheongnam face net primary income deficits exceeding KRW 20 trillion. In contrast, Seoul and Gyeonggi each receive net inflows of more than KRW 60 trillion from other regions. These dynamics highlight the concentration of corporate headquarters and financial institutions in the SMA, which capture a substantial share of income generated elsewhere in the country.
Regional GDP per capita by sector, 2024, at current prices
Source: Ministry of Data and Statistics.
As a result, wages in the SMA significantly exceed those in other provinces, creating a powerful pull factor for younger cohorts seeking an ecosystem that offers superior employment and education opportunities (Figure 4.3). This has contributed to sustained net migration inflows among 15-29-year-olds in the SMA, while outflows of young adults from rural and industrial provinces have accelerated the ageing of other regions. The result is a self-reinforcing cycle in which human capital and investment cluster in the SMA, further deepening regional inequality and leaving non-metropolitan regions with weakened fiscal bases, service retrenchment, and declining social infrastructure.
Note: Net migration rate calculated as cumulative annual net internal migration from 2010 to 2024 divided as a share of the 2024 population.
Source: Ministry of Data and Statistics.
Korea is already undergoing one of the sharpest demographic declines in the OECD, with projections pointing to a loss of 10% of its population, about 5 million people, over the next generation alone by 2050 (Yang, Hwang and Pareliussen, 2024[2]; OECD, 2024[3]). The working-age population will even decline by more than 35% over the same period. Internal migration exacerbates the demographic decline in rural and small settlements, while it compensates for natural demographic decline in the SMA, notably outside Seoul (Figure 4.4). In Seoul, rising housing costs and congestion are pushing residents outward toward more peripheral areas of Gyeonggi Province, contributing to suburbanisation and urban sprawl, which tends to increase travel distances, car dependence and transport-related greenhouse gas emissions.
Source: Ministry of Data and Statistics.
Interregional migration is particularly skewed within younger cohorts. People aged 15 to 29 move from the provinces to Seoul, its commuting zone or other metropolitan cities (Figure 4.5). This migration is shaped by job prospects, educational attainment and perceived quality of life. Metropolitan cities other than Seoul experience massive outflows of young adults seeking better jobs and educational opportunities in the Seoul Metropolitan Area (SMA). Indeed, agglomeration dynamics in the SMA remain extraordinarily strong, reinforcing its role as Korea’s economic, educational and cultural hub. High concentrations of corporate headquarters, research institutions and professional services generate productivity advantages that are difficult for other regions to match.
Internal migration amplifies the demographic transition in rural areas and increases long-standing spatial inequalities. Residents in remote areas already face limited service availability and long travel times, which impede access to healthcare, childcare, education and financial services (OECD, 2025[4]). As younger households leave these areas in search of more diverse labour markets and better amenities, the remaining population becomes older and less mobile. The old-age dependency ratio, the number of people aged 65 years and over as a share of the working-age population, is projected to increase from 29.3% in 2025 to 77.3% in 2050, with remote areas exhibiting ratios above 100% (Figure 4.6). This dynamic reduces both the demand for and the viability of local services, weakening the local framework conditions for households and firms.
Note: Net migration flows are aggregated at the TL3 region level.
Source: Ministry of Data and Statistics.
People aged 65+ as a share of the working-age population (typically 15–64)
Note: The black line indicates the country average for 2050.
Source: Ministry of Data and Statistics, Population Projections for Korea.
Korea’s spatial disparities do not only manifest themselves in economic and demographic outcomes but also in how opportunity itself is transmitted across generations. Internal migration remains an important pathway to economic opportunity, but its benefits are unequally distributed. New evidence shows that where individuals are born and whether they can move between regions significantly affect their lifetime earnings and intergenerational mobility (Box 4.1). Migration toward the Seoul Metropolitan Area (SMA) often improves absolute income prospects, but it also reinforces disparities between those who can afford to relocate and those who cannot.
New evidence, produced by a joint OECD and Bank of Korea project, links spatial patterns of migration to intergenerational income mobility in Korea, and offers empirical estimates of how birthplace and internal migration interact to shape economic opportunity. Using the Korean Labour and Income Panel Study (KLIPS), the analysis tracks more than 1,000 individuals born between 1971 and 1990 and their parents over 1998–2023.
Two complementary measures are used: the intergenerational earnings elasticity (IGE) and the rank–rank correlation (RRC). Migration status is identified when the child’s current region differs from birthplace, and the analysis distinguishes between moves to and from the SMA.
Baseline IGE is 0.134, indicating moderate persistence in earnings across generations (Table 4.1). Movers show substantially higher intergenerational earnings mobility (IGE ≈ 0.06) than non-migrants (IGE ≈ 0.19). Mobility gains are asymmetric as migration to SMA raises absolute income but not earnings mobility. Conversely, migration for SMA-born reduces intergenerational persistence, notably when they move within the SMA. Migration’s role in improving mobility is strongest for earlier cohorts and appears to weaken among younger generations (born 1981-1990). Finally, for non-SMA children, mobility benefits of migration depend strongly on parental income, as poorer households are less likely to move.
***, ** and * represent significance at 1%, 5% and 10%.
Note: IGE refers to intergenerational earnings elasticity. Regressions include birthplace and cohort fixed effects and control for individual and parental gender.
Source: “Moving up? Internal migration and intergenerational mobility in Korea”, (Lee, Chung and Ziemann, 2026[5]).
Cohort analysis further suggests that intergenerational mobility has declined among younger generations born after 1980, reflecting that geographic mobility alone is no longer sufficient to offset the tightening link between parental and child income. This trend underscores the importance of regional labour-market quality, educational access, and social infrastructure in sustaining both demographic balance and equal opportunities. Policies that lower the cost of mobility (affordable housing, relocation assistance, access to higher education) should be complemented by investments that help keep communities viable through improvements in job quality, skills development and digital connectivity in regional hubs (Chung et al., 2024[1]), and by shrinking smartly in remote areas (OECD, 2025[6]). Strengthening both mobility and local opportunities is essential to prevent demographic decline from translating into persistent inequality (Lee, Chung and Ziemann, 2026[5]).
Indeed, the SMA has become a victim of its success as housing affordability has become an increasingly binding constraint. Between 2013 and 2026, transaction-based apartment prices in the SMA have almost doubled, far outpacing wage growth and placing disproportionate burdens on younger households (OECD, 2025[7]). While the national housing supply ratio has reached parity with demand (102.5 units per 100 households in 2024), Seoul’s ratio remains below 94, reflecting chronic undersupply relative to demand. This shortage is aggravated by the ageing of the housing stock, as over half of Seoul’s apartments are now more than 20 years old, intensifying demand for new construction and redevelopment.
In 2025, only about 7% of homes in Seoul were affordable for a median-income family relying on its own capital and standard mortgage financing, where affordability is defined as requiring loan repayments of no more than 25% of household income (Figure 4.7). The share of affordable homes has been shrinking over time: in 2012, 32% of homes were still affordable according to the same metric. Affordability pressures also extend to the outer areas of the Seoul Metropolitan Area (i.e., Incheon and Gyeonggi), where less than half of homes are within reach of the median-income household. While this analysis focuses on owner-occupier affordability, the Jeonse system remains central to rental market dynamics, particularly in Seoul and notably for younger households. Explicitly incorporating Jeonse, however, would not change the core implications, as Jeonse deposits closely track house prices, which are the primary driver of affordability constraints.
Korea Housing Opportunity Index: percentage of affordable homes, 2025
Note: Korea Housing Opportunity Index is a measure of housing affordability expressed as the percentage of homes considered affordable for a family earning the median income using its own capital and mortgage loans, where “affordable” means that the loan repayment required to acquire the home does not exceed 25% of the family’s income.
Source: Korea Housing Finance Corporation.
Partly as a result, Korea exhibits the longest commuting times in OECD countries, undermining job satisfaction and weighing on commuters’ wellbeing (OECD, 2021[8]; Yang and Bae, 2023[9]). Congestion in Seoul intensifies spatial and economic inequalities by limiting equitable access to jobs and disproportionately favouring those who are already well-off. Public transport performs comparatively well in areas with large employers, high-capacity regional transit (such as metro and commuter rail) and higher median incomes, while the dominance of the urban core concentrates opportunities and drives both congestion and investment toward these central districts. Yet, despite investments, job accessibility by public transport remains substantially lower than by car, particularly in peripheral areas where lower-income households are more likely to live. On average, car users can reach six times more jobs than public transport users and this gap is even more pronounced for lower-income earners, for whom car-based accessibility exceeds public transport-based accessibility by a factor of eight (ITF, 2023[10]).
Beyond affordability pressures in the Seoul region, spatial disparities in housing markets reflect a deeper mismatch between supply and demand. Even in shrinking metropolitan areas such as Busan and Daejeon, housing prices have generally increased, while vacancy rates in public rental housing tend to be higher in provincial regions than in the Seoul Metropolitan Area. The coexistence of rising prices and significant housing vacancy suggests that housing market pressures stem less from an overall supply shortage than from a misalignment between demand and the quality and location of available dwellings. Addressing these challenges will therefore require policies that prioritise renovation, adaptive reuse and improvements in housing quality rather than focusing solely on expanding new supply.
Fertility outcomes in Korea reflect a spatially segmented but mutually reinforcing dynamic. In core urban areas, notably the Seoul Metropolitan Area, congestion, high housing costs and intense work-related stress delay partnership formation and childbearing, resulting in persistently low fertility despite strong labour market opportunities (Figure 4.8). In contrast, regions outside the core tend to exhibit relatively higher fertility. However, imbalances continue to push young adults towards the capital region, shifting a growing share of the population into an environment where fertility is structurally lower. The increasing population concentration further intensifies congestion and housing cost pressures in the Seoul Metropolitan Area, further weakening fertility outcomes. At the same time, the erosion of the working-age population in peripheral regions further weakens their economic bases and reinforces outmigration pressures. Together, these feedbacks form a self-reinforcing dynamic that amplifies regional imbalances and contributes to Korea’s overall demographic decline.
Source: Ministry of Data and Statistics.
The authorities have mobilised a wide range of initiatives and institutions to rebalance growth across regions and mitigate rural depopulation. Korea’s decentralisation efforts evolved incrementally within a fundamentally centralised state. From the 1990s, the introduction of local elections and limited fiscal decentralisation expanded administrative autonomy. Successive development initiatives - such as the relocation of public institutions to innovation cities, regional industrial promotion policies and earlier National Territorial Plans - sought to mitigate overconcentration in the SMA. However, these initiatives were largely sector-driven, project-based and centrally designed, with constrained local fiscal capacity, weak coordination across policies and territories and limited incentives for sustained regional self-reliance, resulting in modest and uneven outcomes. The new regional policy agenda explicitly seeks to overcome these shortcomings by combining deeper devolution, integrated place-based planning, supra-provincial governance and performance-linked financing within a coherent, long-term national framework (Box 4.2). The remainder of this chapter will assess Korea’s policy framework against international best practices and provide tailored advice on how to cope with the demographic transition ahead.
5th Comprehensive National Territorial Plan (CNTP, 2020-40)
The Plan includes the designation of regional growth hubs, expansion of intercity rail and smart logistics corridors and targeted investments to strengthen innovation clusters outside the Seoul Capital Area. Multi-year national budget allocations for major infrastructure projects, co-financing mechanisms with provincial governments and integration with sectoral programs (housing, transport, digital, environment) ensure resource alignment. Implementation is coordinated through central-local agreements that require each province to prepare actionable territorial strategies consistent with CNTP objectives. Monitoring and evaluation are institutionalised through periodic national territorial assessments, spatial-indicator dashboards, and performance reviews tied to budgeting cycles. A revised CNTP (2026–2040) is currently under preparation, which is expected to introduce a new supra-regional spatial framework centred on five metropolitan poles and three special zones (see below), alongside policies to further decentralise functions from the Capital Region, promote AI-driven innovation, advance carbon-neutral territorial development, and expand ultra-high-speed national mobility networks.
1st Comprehensive Plan for Decentralisation and Balanced Development (2023-27)
This establishes a unified national strategy to strengthen decentralisation and rebalance regional development. It comprises five pillars: devolving authority and fiscal capacity to local governments; expanding regional education and talent systems; promoting innovation-led growth and special opportunity zones; supporting region-specific industrial and cultural development; and improving social safety nets, service delivery and infrastructure to counter depopulation. Implementation relies on coordinated local, sectoral and supra-provincial plans with annual reporting to the Presidential Committee for Decentralisation and Balanced Development. Funding is aligned through integrated, place-based budgeting and progress is monitored via regular central-local reviews and performance assessments.
1st Basic Plan for Response to Depopulated Areas (2022-26)
The Plan operationalises 16 policy tasks and 43 concrete actions, including incentives for corporate relocation, the development of youth-oriented employment and entrepreneurship programs, the modernisation of transport and digital infrastructure, the expansion of access to healthcare and elderly care, and enhancements to housing, education and everyday living amenities in designated depopulated areas. Implementation relies on bottom-up local master plans prepared annually by municipalities and evaluated by the central government, supported by the Local Extinction Response Fund, which allocates roughly KRW 1 trillion per year for 10 years, divided into basic and metropolitan support accounts and distributed using depopulation and fiscal-capacity indices. Annual investment-plan evaluations, performance reviews, and monitoring of demographic and service-provision indicators ensure accountability and allow iterative adjustment of measures.
5+3 National Balanced Growth Strategy
This strategy restructures the country into five supra-regional hubs (SMA, Busan-Ulsan-Gyeongnam, Daegu-Gyeongbuk, Daejeon-Chungcheong-Sejong, Gwangju–Jeolla) and three special self-governing provinces (Jeju, Jeonbuk, Gangwon), replacing the previous Seoul-centred model with a multi-polar system for growth and service provision. The blueprint outlines 11 tasks and 144 measures spanning industrial growth engines, university-anchored innovation, advanced cities and mega-zones and one-hour living-zone transport, alongside tailored autonomy for special regions. The strategy strengthens the fiscal foundations of balanced development by introducing a Balanced Growth Impact Assessment, establishing a dedicated Mega-Regional Special Account, expanding block grants and local fiscal capacity, and calibrating preferential support to regions according to their level of development.
Source: Ministry of Land, Infrastructure and Transport (MOLIT), Ministry of the Interior and Safety (MOIS), Ministry of Health and Welfare (MOHW), Korea Research Institute for Human Settlements (KRIHS), Smart City Korea.
Regional rebalancing depends fundamentally on the framework conditions that shape where people live, where firms invest and how regions adapt to demographic and economic change. As population ageing, low fertility, and spatial concentration intensify, existing institutional arrangements for service provision, regulation, and public finance might need an overhaul. Indeed, frameworks that merely favour scale, centralisation and uniformity reinforce metropolitan dominance, while uneven service access accelerates outmigration, rigid regulations constrain experimentation in low-density contexts and limited local fiscal autonomy weakens subnational governments’ capacity to adapt policies to local needs.
This section examines how Korea can recalibrate its institutional, regulatory and fiscal frameworks to support more balanced regional development. It focuses on three priorities: ensuring that service delivery systems support population retention and labour-market functioning across regions; modernising regulation and procurement to enable innovation and place-based solutions; and aligning intergovernmental fiscal arrangements with demographic change and local development needs. Strengthening these framework conditions would enhance regional resilience, improve policy coherence across levels of government and create the conditions for more sustainable and more balanced regional development.
4.2.1. Ensuring equitable access to services
Unequal access to education, childcare, healthcare and transport contributes directly to outmigration from rural and peripheral regions (OECD, 2025[4]). Ensuring better access to essential services such as hospitals, childcare, schools and transport is critical for both shrinking and growing areas and requires mixing physical, digital and mobile service delivery (Almeida et al., 2024[11]). Although Korea performs relatively well on many national indicators of access and quality, the distribution of health services between urban centres such as Seoul and rural regions is increasingly uneven.
Korea still has fewer practising physicians per 1 000 population than the OECD average (OECD, 2023[12]) and continues to experience pronounced regional heterogeneity, with university hospitals and physicians concentrated in Seoul and other metropolitan hubs (Figure 4.9). This configuration limits the exposure of medical students and residents to community-based practice and makes long-term medical careers in non-metropolitan areas less attractive. The selection of students with rural backgrounds, combined with rurally oriented education and scholarship-for-service schemes, increases the likelihood of long-term practice in underserved areas (Ono, Schoenstein and Buchan, 2014[13]). Korea’s emerging “community doctor” schemes, which combine targeted admissions, tuition support and regionally bound service obligations, provide an important structural lever but are not yet embedded in a clearly articulated career pathway.
Number of physicians per 1000 persons
Source: Ministry of Data and Statistics.
Korea should expand and standardise regional admission quotas and complement them with a dedicated community medicine education and career track that structures training, mentoring, and career progression. Japan’s regional quota programmes (chiiki-waku), which offer medical students from local areas scholarships tied to multi-year service in designated rural prefectures, now account for more than 15% of medical students (Matsumoto et al., 2021[14]). This programme illustrates how an integrated career model can strengthen rural pipelines, while also highlighting the importance of continuous evaluation and adjustment to maintain quality and retention.
Health care payment systems in Korea currently reward high-volume, procedure-intensive specialist care delivered in urban hospitals more than primary care or essential services in rural and remote areas. This reinforces the concentration of providers in metropolitan centres and in more lucrative specialities. Korea should differentiate tariffs and contractual arrangements so that providing health care services in underserved regions becomes more generously remunerated. This can be done by including blended payments that combine capitation, performance components and fee-for-service elements, while tying a share of National Health Insurance funding to regional performance on access and avoidable hospitalisations (OECD, 2023[12]).
Rapid population ageing in rural and peripheral regions is intensifying pressures on long-term care (LTC) systems precisely where service delivery capacity is weakest. LTC remains overly hospital-centred, reflecting financial incentives that favour long stays in LTC hospitals over care in LTC institutions or at home, alongside weak coordination between hospitals, LTC institutions and homecare providers (OECD, 2022[15]). This model is particularly problematic in regions with thin service networks, constraining ageing in place and prompting relocation to urban centres for adequate care. Shortages of visiting nursing services and underdeveloped home- and community-based care capacity further accentuate these regional imbalances and limit the ability of local services to meet the care needs of older adults outside metropolitan areas.
Harmonising reimbursement incentives between National Health Insurance and Long-Term Care Insurance could further reduce unnecessary hospitalisation and improve quality in LTC institutions through more reliable outcome-based indicators (OECD, 2022[15]). The integrated long-term care model, which began a nationwide rollout from March 2026 following the establishment of a legal framework in 2024, provides an institutional vehicle to operationalise these reforms by linking hospitals, LTC institutions, home-based care and primary care around individual and local needs. Early evaluations of integrated care pilot projects show that participation was associated with significantly lower hospitalisation rates, suggesting potential to reduce unnecessary hospital use and support ageing in place. However, implementation challenges remain for municipalities with limited fiscal and administrative capacity, underscoring the importance of targeted support for local coordination, workforce development and standardised service models to ensure equitable access across rural regions (Jang, 2025[16]).
Access to early childhood education and care (ECEC) and high-quality schools is vital for retaining and attracting families and ensuring healthy work-life balances. ECEC enrolment in Korea is near universal, reaching 95.8% for children aged 2 and 95.2% at age 4, compared to OECD averages of 45.4% and 89.1%, respectively (OECD, 2025[17]). These high national averages, however, mask growing spatial inequalities in service provision. Declining fertility and sustained outmigration from non-metropolitan areas are disproportionately reducing the number of childcare centres in rural regions (Figure 4.10). A large share of provision is privately operated, making supply highly responsive to demographic change and local market conditions. In rural and low-density areas, shrinking child cohorts undermine the financial viability of centres, leading to closures or consolidation. This creates a self-reinforcing cycle as reduced service availability makes these regions less attractive to young families, further accelerating outmigration and weakening local demand.
Funding allocation mechanisms, supported by detailed assessments of local population characteristics and service demand, can steer resources towards areas with insufficient provision and mitigate spatial inequalities (OECD, 2025[17]). In low-density and shrinking municipalities, standard per-child financing may be insufficient as enrolment falls below efficient operating thresholds. While workplace childcare and public childcare are strongly preferred by families, they remain in short supply, whereas there is excess provision of lower-quality private childcare (OECD, 2024[3]). In addition, childcare centres’ operating hours often do not align with full-time work schedules. Introducing targeted subsidies or additional grants for providers in underserved areas, combined with funding conditionality linked to access and quality objectives, can help sustain provision where market-based delivery would otherwise withdraw. Korea’s ongoing integration of ECEC governance under the Ministry of Education provides an opportunity to improve coherence, reduce fragmentation and align funding more closely with equity objectives across regions.
Source: Ministry of Data and Statistics.
At the same time, OECD analysis highlights the importance of workforce-related funding levers, as wages and working conditions are central to attracting and retaining qualified staff and ensuring consistent quality (OECD, 2025[17]). Designing funding mechanisms that better reflect staff roles and incentivise workforce quality - particularly in underserved areas - can help address persistent shortages and high turnover. Embedding these measures within a broader, integrated policy framework that links ECEC with education, health and family policies would further support equitable access. Improved data systems and monitoring can ensure that funding responds dynamically to changing demographic and territorial needs.
Similarly, while Korean schools provide strong learning environments, teacher shortages have intensified, particularly in remote areas. In PISA 2022, 51% of school leaders reported that a lack of teaching staff hindered instruction, up from 33% in 2018 (OECD, 2025[18]). These shortages are most acute in specialised subjects such as information and communication technology, which are essential for implementing the High School Credit System and preparing students for evolving labour markets.
Korea can reinforce regional equity by linking teacher assignment, professional development and early childhood support to demographic and socioeconomic indicators. The Teacher Supply Plan for 2024-2027 sets the national quota for teaching staff while seeking to address evolving educational needs, such as improving regional educational conditions, guaranteeing basic academic skills, and strengthening AI and digital education, despite a declining student population. Korea’s 3rd Framework Plan for the Development of Early Childhood Education (2023-2027) establishes provincial expert pools to support curriculum implementation and digital learning across regions. With a similar equity objective, the High School Credit System, together with aligned reforms to the College Scholastic Ability Test (CSAT, see section 4.3.2), seeks to mitigate regional disparities in course availability. Monitoring of these initiatives should explicitly track regional variation in subject availability, teacher capacity and student participation (OECD, 2025[18]).
Fostering intermunicipal cooperation in areas with declining population density can be a viable tool for ensuring access to services. This is particularly relevant where shrinking scale raises per-capita delivery costs and makes stand-alone municipal provision inefficient or fiscally unsustainable. School network consolidation in Finland has been managed through legally mandated impact assessments and extensive community engagement when closures or mergers are considered. Evidence suggests that, when consolidation is necessary, this approach has led to improved learning environments and higher satisfaction among students and parents (OECD, 2025[6]). Box 4.3 Elsewhere in the OECD, several successful initiatives have helped remote areas respond more effectively to the pressures created by the demographic transition (Box 4.3). Examples such as rural primary health care networks in France and rural mobility hubs in the Netherlands demonstrate how targeted service innovations and improved connectivity can stabilise access to essential amenities and strengthen resilience in communities facing declining populations.
France: Rural primary health care networks.
2,501 multi-professional health houses operated by 2023 (target 4,000), reducing provider isolation and improving access in rural and priority urban areas. Their development is backed by multi-year contracts with Regional Health Agencies.
Finland: Digital health self-care to ease pressure on scarce staff.
In 2010, the city of Oulu, together with Finland’s Ministry of Social Affairs and Health, created a city-run platform for bookings, e-prescriptions, test results and self-care, which has achieved 110k users (roughly half the population) and EUR 4 million in operational savings in 2015-17. The model has since been adopted by and scaled to other municipalities.
Spain: Childcare micro-nurseries to retain young families.
Small villages have introduced home-based “casas nido” (micro-nurseries) to support young families. By 2024, more than 100 such sites were in operation, offering free childcare for up to eight hours per day. The initiative has created local employment opportunities, often for women, and has helped make parenting more compatible with living in rural areas.
Netherlands: Flexible rural mobility and hubs.
Flexible rural mobility solutions have been tested through data-driven pilots in Middelburg–Vlissingen. These included demand-responsive transport services, a digital booking platform and an improved “mobility hub” connecting the towns with surrounding rural areas. The pilots generated detailed insights into travel behaviour and helped upgrade infrastructure to integrate different transport modes.
Germany: Public-private regional partnership to revive small towns.
Since 2012, a public–private regional partnership has worked to revive small towns through a bottom-up association in which two-thirds of the members are from the private sector. The initiative has delivered more than 200 projects, including free Wi-Fi networks in six towns, skills-matching services, town-centre renewal efforts, and cultural programming.
Source: “Shrinking Smartly and Sustainably: Compendium of Good Practices” (OECD, 2025)
Current gaps in the transport system weaken efforts to strengthen compactness and improve connectivity, thereby limiting equitable access to services across all regions. Many regional hubs still require improved connectivity to the national rail network, which would help reduce dependence on private car travel in smaller cities where bus and rail services are limited or fragmented (OECD, 2025[4]). Depopulation reduces passenger volumes and weakens the financial sustainability of public transport. This creates a cycle of declining frequency and reduced quality, which further discourages use and increases the isolation of residents who already face limited mobility options. Decisions to maintain minimum service levels in low-density areas, therefore, imply accepting higher unit subsidies, which should be weighed transparently against alternative models such as demand-responsive transport, inter-municipal pooling of routes, or hybrid physical-digital access to services. Transit-oriented development and spatial planning, which concentrate population and essential services within an accessible distance of public transport nodes, can ensure that residents can reach core services without relying on private cars (see the spatial planning discussion below).
Stronger coordination across ministries, central and local governments, and among municipalities is vital. Functional urban areas frequently extend beyond municipal boundaries, yet responsibilities for transport, land use, housing and services remain fragmented. Stronger metropolitan governance can reduce this fragmentation, improve cost efficiency, and ease pressures on fiscal equalisation mechanisms arising from negative scale effects in service delivery. International practice shows that metropolitan or inter-municipal delivery bodies with clear mandates and multi-year funding, such as French métropoles or German regional transport associations, improve coherence, accountability and investment efficiency. Korea’s large urban regions beyond the Seoul Capital Area, such as Busan-Ulsan-Gyeongnam or Daegu-Gyeongbuk, operate as integrated labour markets but remain fragmented administratively.
Fiscal incentives for inter-municipal cooperation, or special-purpose metropolitan authorities, can improve infrastructure coordination, deliver economies of scale in deployment costs and enhance regional competitiveness by providing higher-quality and more efficient inputs for users such as firms and households (OECD, 2017[19]; OECD, 2019[20]). In Korea, the central government has recently expanded the use of fiscal incentives to promote supra-regional cooperation frameworks (“ultra-wide regional alliances”). The Special Act on Local Autonomy Decentralisation and Balanced Regional Development provides the legal basis for such arrangements, allowing subnational governments to undertake cross-jurisdictional co-operation projects that extend beyond a single provincial boundary and to provide administrative and financial support for their implementation.
Finally, demographic projections should be systematically embedded in territorial, fiscal and service delivery strategies. While Korea systematically incorporates demographic projections into national long-term fiscal outlooks and sectoral spending forecasts (notably pensions, health and long-term care), these projections are not systematically embedded in intergovernmental fiscal transfer formulas or territorially differentiated service delivery strategies. Forecasting service needs in shrinking municipalities can help identify vulnerable populations, support inter-municipal cooperation and facilitate cross-jurisdictional coordination (OECD, 2021[21]). The strategic use of data and artificial intelligence, including predictive modelling, real-time fiscal dashboards and scenario-based planning, can strengthen the capacity of subnational governments to anticipate service needs, adjust allocations dynamically and consolidate infrastructure where populations decline.
4.2.2. Harnessing digitalisation and regulatory flexibility
The expansion of digital public services offers new possibilities to sustain accessibility and quality of life in shrinking areas. Flagship initiatives such as Government24 and the Digital Platform Government (DPG) now integrate more than 1500 services into unified digital channels (OECD, 2025[22]), but there is scope to harness such hybrid models further to improve cost-efficiency while maintaining service coverage. For example, telemedicine (see Finnish example in Box 4.3), mobile libraries and e-learning can complement traditional provision, particularly in areas where fixed infrastructure is not viable (OECD, 2025[6]).
Yet, capacities and digital skills differ considerably across the country. Furthermore, the emergence of AI may further widen Korea’s already significant productivity and opportunity gaps. While national adoption rates are high, the aggregate figures conceal sharp disparities across regions, firms and population groups. This signals a new fault line in territorial cohesion. The share of businesses having adopted AI is high and rapidly advancing in Gwangju (60%), Gangwon-do (52%), Jeollabuk-do (49%) and Seoul (39%), whereas Jeju-do and Gyeongsangbuk-do remain below 10% (OECD, 2025[22]). The early movers tend to be regions with strong innovation ecosystems and high-tech industrial bases, where dense networks and specialised capabilities create fertile ground for AI hotspots and spillovers. Without targeted intervention, such imbalances risk reinforcing existing spatial inequalities.
Korea has built one of the most sophisticated digital-government ecosystems in the OECD. Strong legal frameworks, high-quality ICT infrastructure, and integrated national platforms (such as Government24 and the Public Information Sharing System) provide the foundations for advanced digital service delivery across the country. Korea’s leadership in data governance and open-data maturity also provides fertile ground for more ambitious applications of data and AI (OECD, 2025[23]). Public institutions already use administrative data extensively for planning and operations and emerging applications of AI - such as risk prediction, labour inspection and automated navigation - demonstrate the capacity to scale such tools into new domains. Recent disruptions to core data services in late 2025 – caused by a fire at a national government data centre that temporarily disabled Statistics Korea’s KOSIS platform and other public systems – further underscore the potential value of AI-enabled risk detection, infrastructure monitoring and early-warning systems to prevent, mitigate and recover from systemic shocks.
However, AI is hardly used for regional development functions. Text mining of 350 000 public procurement contracts shows that in 2023, only 0.8% of AI public procurement was dedicated to regional development, with most AI investments focused on general administration, public safety, transport and logistics and culture and tourism (OECD, 2025[23]). AI use in regional development thus remains limited, fragmented and largely ad hoc, despite the clear potential of AI to enhance territorial diagnostics, spatial targeting and multi-level coordination. In Zaragoza, Spain, for instance, the city has deployed AI tools to improve spatial targeting of regional policies by analysing complex socio-economic and mobility data to support transport planning and urban development decisions (Box 4.4). In Canada, AI-based predictive analytics have been used to forecast labour market trends at the provincial level, helping tailor workforce development interventions to local employment needs and demographic changes (OECD, 2025[23]).
Digital and AI capabilities are uneven across regions and levels of government. While some ministries and larger cities are piloting AI for urban planning (e.g. MOLIT’s AI-based spatial planning R&D projects in Busan, Cheonan and Damyang) and for smart-city applications, many municipalities, especially those facing depopulation and ageing, lack the data infrastructure, analytical capacity and financial resources to design, procure and operate AI-enabled regional development tools (OECD, 2025[22]). Many institutions still struggle to use data systematically for service design, anticipate user needs or evaluate impact. The uneven uptake of AI across levels of government means that municipalities rarely benefit from predictive or proactive tools that could help identify local business closures, anticipate labour-market challenges or target social and economic support. These gaps limit Korea’s ability to use digital tools as engines of regional revitalisation and territorial equity.
Korea already operates powerful data platforms such as the Korea Land Use Information Platform (KLIP) or the National Territory Monitoring System, but AI is not systematically used to transform them into operational planning tools at the municipal level. The international examples (Box 4.4) suggest that the value of building an AI-ready territorial data layer that integrates KLIP, National Territory Monitoring and administrative data into standardised, machine-readable formats accessible to municipalities can be substantial. Developing reusable AI services (e.g. document digitisation, geospatial analytics) that municipalities can plug into local systems without building models from scratch. For example, data-exchange architectures such as the EU’s “Apply AI” strategy and Estonia’s X-Road show how fragmented national and local datasets can be integrated across levels of government. Japan’s PLATEAU demonstrates how AI-enabled 3D territorial data can support municipal land-use planning, infrastructure investment and climate adaptation through scenario modelling and continuous data updates.
The OECD has identified 19 AI use cases across 15 countries, grouped around three main drivers: improving analytical capacity (“productivity”), enhancing spatial targeting (“responsiveness”), and strengthening monitoring, accountability and evaluation (“accountability”). These provide a menu of policy levers Korea can adapt to support balanced territorial development.
Improving analytical capacity for place-based policy
The EU Strategy “Apply AI” and Estonia’s X-Road address fragmented datasets through data exchanges, allowing local, regional and national bodies to share data securely while retaining autonomy.
Japan’s PLATEAU integrates AI into 3D digital twins to model urban dynamics, simulate scenarios and update spatial data automatically, enabling municipalities to plan land use, infrastructure and climate responses more precisely.
The UK’s AI-enabled planning data initiative uses large language and vision models to digitise legacy planning documents, cut processing time and make local planning data comparable across councils.
Enhancing spatial targeting and local responsiveness
Chile’s Impacta GovTech uses challenge-based procurement to crowd in startups that address common municipal permitting and monitoring problems, aggregating local demand to achieve scale.
Sweden’s Kraftsamlingen and Denmark’s co-funding initiative provide technical assistance, communities of practice and direct co-funding for municipalities to use AI in priority sectors such as health and local services.
Colombia’s “Territorios IA” equips municipalities with AI-enabled tools for agriculture, environment, mobility and procurement, built on open data and tailored to local priorities.
Strengthening monitoring, accountability and participation
Spain’s competition authority uses AI to detect bid-rigging in procurement, supporting cleaner multi-level investment frameworks. Zaragoza (Spain) deploys AI to monitor environmental risks, informing territorial responses, urban planning and resilience strategies.
Switzerland’s Data Science Competence Centre and the UK’s Artificial Intelligence Hub supports local authorities with guidance, case studies and peer learning, explicitly aiming to reduce disparities in digital capability across regions.
Helsinki uses tools such as UrbanistAI to support participatory urban planning, while generative tools and chatbots in multiple cities help translate technical documents into accessible language and improve access to local services.
Source: “How can Artificial Intelligence help make better regional development policy in Korea“ (OECD, 2025[23])
Procurement plays a significant role in this challenge. Korea’s procurement system is highly centralised and procedurally strong, anchored in the Public Procurement Service (PPS) and the end-to-end Korea Online E-Procurement System (KONEPS) platform. This model ensures transparency, consistency and risk management. The new Next-Generation KONEPS upgrade adds AI, big data, and blockchain to improve forecasting, supplier recommendations and real-time analytics. However, the system’s reliance on prescriptive specifications, sequential project-management rules and annual funding cycles can limit experimentation, particularly when municipalities need flexible, small-scale digital solutions tailored to local economic and demographic conditions (OECD, 2025[22]). Limited procurement expertise at the local level, coupled with frequent staff rotation, further restricts the municipalities’ ability to engage in innovative procurement or co-design solutions with local businesses and citizens.
Recent reforms signal gradual movement toward greater flexibility. In early 2026, a pilot programme allowed discretionary procurement of PPS unit-price contract items, enabling local governments to purchase independently while risks such as regulatory non-compliance or unfair bidding conditions are monitored centrally. Building on such initiatives, expanding the use of innovation-oriented procurement approaches - such as pre-commercial procurement, design contests, innovation partnerships, competitive dialogue and outcome-based contracts -could further enable municipalities to test prototypes, work directly with innovators and focus procurement on measurable service outcomes rather than prescribed inputs (OECD, 2024[24]). Given the limited commercial capacity in many municipalities, however, such approaches would require safeguards and capacity-building to mitigate risks of supplier hold-up or cost escalation.
The collaboration between the public and private sectors to design user-centric digital government solutions (GovTec) is still relatively under-resourced in Korea compared to leading OECD peers (OECD, 2025[22]). International practice offers concrete models for how Korea could use procurement and digital tools more dynamically to support shrinking regions. Lithuania’s GovTech Lab runs structured, challenge-based procurement where agencies define a problem, call for solutions from startups, test proofs of concept, and then scale what works. Norway’s StartOff programme uses a repeatable six-month process, from defining the challenge to delivering a minimum viable product. They work with SMEs on finding innovative solutions, lowering risk for both sides. The Netherlands’ Algorithm Register shows how publishing information about algorithms used in government can support accountability and enable learning across institutions. Finally, the United Kingdom’s Magenta and Green books provide guidance to local governments and other agencies on evaluating projects’ qualitative and quantitative impact assessments.
Supporting municipalities will require not only new procurement mechanisms but also organisational and financial flexibility. Korea could also implement central purchasing bodies at the regional or local level, as recommended by the OECD recommendation on public procurement and as operated by 40% of member countries (OECD, 2025[25]). Dedicated procurement guidance, model contracts and regional support teams could help local governments design and manage innovation-oriented tenders. Multi-year investment envelopes could complement annual budgets to support phased experimentation. Coupled with strong legal guidance on data use, investment in regional data teams, and improved coordination across levels of government, Korea can create a system in which even small municipalities harness digital tools to support business dynamism, reduce out-migration, and improve residents’ quality of life.
In sectors that determine regional connectivity, such as transport, logistics, energy and telecommunications, Korea still exhibits above-average product-market restrictions by international standards. According to the OECD Product Market Regulation (PMR) indicators, barriers to entry, administrative bottlenecks and the level of public-sector involvement remain relatively high. These restrictions potentially raise infrastructure deployment costs and limit competition. Geography amplifies these effects because sparse populations make commercial rollout more sensitive to regulatory costs.
Korea has introduced regulatory sandbox mechanisms to enable firms to test innovative products and services under temporary regulatory exemptions. Sandbox projects have been implemented across a range of sectors, including rural mobility, decentralised energy systems and agricultural technologies. Several initiatives have taken place outside major metropolitan areas, such as rural mobility projects in Sejong and Chungnam, decentralised energy pilots in Jeju and Ulsan, and agricultural innovation initiatives, including the Smart Farm Innovation Valley in Jeonbuk. Ensuring that entrepreneurs and innovators throughout the country are aware of and able to access sandbox programmes will be important to support solutions that help mitigate the challenges associated with depopulation.
Similarly, excessive regulatory barriers to professional services can exacerbate the shortage of services such as lawyers, notaries, accountants or architects in underserved regions. Korea has been identified as the country that would benefit the most from aligning its regulation with the top three least regulated countries in the OECD (Figure 4.11). Korea’s high restrictiveness scores in professional services are primarily driven by strict entry pathways (Chapter 3), compulsory membership, tight ownership and control rules, and prohibitions on multidisciplinary practice. Such restrictions tend to suppress business model innovation, competitive pressure and lower labour productivity in downstream sectors (OECD, 2025[7]).
Labour productivity gains from moving to the top three least regulated countries, in %
Note: Based on country-sector-level regressions linking sectoral productivity to the level of regulation in professional services and sectors’ exposure to it through input-output linkages. Sectoral productivity gains are then aggregated to the country level using value-added weights across sectors.
Source: OECD Economic Outlook 118.
An update of regulatory settings can address these issues. International regulatory co-operation (IRC) could play a stronger role in Korea and help align domestic standards with global norms in network sectors, reducing duplication, facilitating competition from new operators and lowering deployment costs, particularly in regions where investment viability is marginal (Sarliève et al., 2025[26]). Simplifying licensing and permit procedures through digital integration and rule consolidation would reduce administrative time and cost, especially for small firms located far from administrative centres.
Korea maintains one of the most comprehensive regulatory-governance systems among OECD members. The country operates a fully developed regulatory registry, mandatory regulatory impact assessments (RIA) for executive-branch regulations, systematic ex-post reviews, sunset clauses and a central oversight body, the Regulatory Reform Committee (RRC). These mechanisms provide a strong institutional base for ensuring transparency and evidence-based rulemaking. Korea also runs advanced digital participation channels such as Sinmungo, which allows businesses and citizens to report burdensome or outdated rules and has built internationally recognised regulatory sandboxes in fields such as fintech, mobility and energy (OECD, 2025[27]).
One central challenge stems from the limited scope of Korea’s RIA system. While Korea’s RIA framework for executive-initiated regulations is widely recognised internationally for its quality and effectiveness (OECD, 2025[27]), legislative proposals initiated by the National Assembly are not systematically subject to the same RIA requirements. Given the constitutional separation of powers, the executive cannot mandate such procedures for parliamentary bills. As a result, significant regulatory burdens can be created without the benefit of impact assessment, cost-benefit analysis or structured consultation with affected groups, including regional SMEs. Strengthening RIA coverage for all primary legislation would help ensure that regional SMEs are not disproportionately affected by new regulatory requirements (Sarliève et al., 2025[26]). Ongoing discussions within the National Assembly on strengthening cost estimation and analytical review for legislative proposals could further enhance the overall consistency of regulatory quality.
Administrative implementation of regulations also involves sub-national governments, particularly in areas such as permitting, licensing and local service delivery. While national guidelines and evaluation mechanisms help promote consistent enforcement, differences in administrative capacity across municipalities may affect the efficiency with which regulatory procedures are implemented. OECD assessments document that sub-national governments often lack specialised staff, analytical tools and systematic procedures for evaluating the necessity and proportionality of regulations (OECD, 2017[28]). This leads to regulatory fragmentation, inconsistent enforcement, and cumulative administrative burdens for firms operating across municipalities. For SMEs in remote areas, these inconsistencies translate into higher costs and greater uncertainty.
Strengthening local regulatory capacity through training, effective guidance and harmonised regulatory frameworks would limit fragmentation and raise regulatory quality across provinces. In parallel, regulatory reforms in network industries - typically led at the national or provincial level - can significantly shape regional development outcomes by lowering entry barriers, attracting new operators and accelerating infrastructure deployment in underserved regions. Extending regulatory sandboxes beyond large cities would allow local innovators to develop context-specific solutions and reveal regulations that could be permanently streamlined (OECD, 2024[3]).
4.2.3. Aligning fiscal frameworks with local development needs
As demographic decline and ageing progress, unit delivery costs for core local services with strong scale economies (e.g. local transport, primary health care, social services and education) are set to rise in shrinking municipalities. This creates structural expenditure pressures that are not fully captured by population-based transfers and raises the question of how far equalisation mechanisms should compensate higher per-capita costs arising from low density and fragmentation. For instance, the automatic link between the Local Education Subsidy and 20.79% of internal taxes makes it difficult for budget distributions to adapt to rapid population shifts, such as the decline in the school-age population and societal aging.
Korea’s system of intergovernmental transfers remains highly centralised and complex, with limited local discretion and weak links between tax effort and spending autonomy. According to OECD’s Fiscal decentralisation database, in Korea, less than 20% of total tax revenues – including social security contributions – are collected by subnational governments while they bear more than 40% of the general government’s expenditures. Additionally, for more than one-fourth of these sub-national taxes, the central government determines rates and reliefs, leaving little room for local discretion (Figure 4.12). Moreover, the already limited taxing power of sub-national governments in Korea may be overstated. Although local governments are formally assigned certain taxes under the Local Tax Law, this law itself is enacted and fully specified by the central government. In practice, no local government exercises effective discretionary taxing power.
Granting greater local taxing powers could benefit Korea. The OECD’s cross-country evidence (OECD, 2021[29]) shows that meaningful sub-national tax autonomy is associated with stronger accountability, improved responsiveness to local preferences and enhanced fiscal discipline when combined with well-designed rules and equalisation mechanisms. The evidence also suggests that countries with higher local tax autonomy tend to achieve more stable sub-national finances and stronger incentives for regional growth.
Although fiscal decentralisation remains an explicit policy objective, implementation has generally proceeded incrementally, with periodic adjustments to the local consumption tax share and other local tax bases rather than wholesale structural changes. Recent fiscal decentralisation initiatives have sought to strengthen subnational fiscal autonomy, most notably through the “second phase” fiscal devolution agenda. This agenda aimed to shift the national-local tax revenue balance from an 8:2 to a 7:3 ratio by reallocating a portion of the value-added tax (VAT), previously levied as a national tax, to the local consumption tax. Over time, this share has been gradually increased from 10% in 2010 to 25.3% currently, without increasing the statutory VAT rate (see Chapter 2).
2023
Note: Taxing power is defined as the tax revenue collected by sub-national governments (SNG), over which they exercise discretion on rates and/or reliefs, expressed as a share of general government tax revenue.
Source: OECD Fiscal Decentralisation Database.
Moving towards a national-local tax revenue ratio of 7 to 3 has been a longstanding policy objective and is now enshrined in the national policy agenda. However, progress has remained elusive, as no new taxes or a binding implementation timetable have been announced so far. Reform discussions have generally emphasised both gradual improvement and fiscal sustainability rather than a decisive reallocation of tax authority to the subnational level. The local consumption tax rate remains centrally determined and therefore limited in its capacity to strengthen local accountability (NABO, 2025[52]).
Intergovernmental transfers substantially augment local government resources and reshape the distribution of fiscal capacity. However, greater resource availability does not imply greater fiscal autonomy, as local governments remain dependent on centrally determined revenue instruments and transfer mechanisms. Subnational governments’ decision-making power over resource use is constrained in Korea (Figure 4.13). A heavy reliance on earmarked transfers and centrally mandated spending items limits local governments' discretion in allocating resources across programmes and expenditure categories, including housing, transport, and long-term care. Even where own-source revenues have increased, spending choices are often constrained by detailed central guidelines and compliance requirements. This weakens the link between local political accountability and fiscal decision-making, as local authorities have limited capacity to reprioritise spending in response to local needs or emerging challenges.
Accordingly, reforms should focus on shifting toward a framework that emphasises outcomes and accountability (Dougherty, Montes Nebreda and Mota, 2024[30]). First, increasing policy autonomy would allow services to better reflect local demographic, economic and social conditions. Second, enhancing budget autonomy by consolidating earmarked grants into broader, block-grant arrangements would strengthen local prioritisation and fiscal responsibility, while still allowing the central government to safeguard national objectives. Third, expanding input autonomy, particularly in personnel management, would improve managerial flexibility and service efficiency. Finally, strengthening output autonomy by allowing local governments to define complementary performance indicators, within a nationally agreed framework, would improve innovation while preserving transparency and comparability. Together, these reforms would move Korea toward a more balanced system in which responsibilities, resources and decision-making authority are better aligned across levels of government.
Note: Panel A shows the composite indicator of spending autonomy of sub-central governments across five policy areas (education, old-age care, housing, transport and health care) and measured across 4 dimensions: i) policy autonomy, ii) budget autonomy, iii) input autonomy, iv) output autonomy. The aggregate indicator ranges from 0 (no autonomy) to 1 (full autonomy). Panel B: Old-age care data not available for Korea. Low-level indicators range from 0 to 10.
Source: “Spending Autonomy of Sub-central Governments: Conceptualisation and Measurement”, (Kantorowicz and van Grieken, 2019)
Aligning transfers more explicitly with ageing trends, depopulation and density factors would help stabilise service provision in shrinking municipalities while avoiding underfunding in growing regions (Moisio and Vidal Bover, 2023[31]). OECD analysis suggests that well-designed fiscal equalisation arrangements allow all subnational governments (SNGs) to provide comparable public services at similar tax rates, even when fiscal capacities and expenditure needs diverge substantially (Dougherty and Forman, 2021[32]). Korea’s large-scale and institutionally embedded fiscal equalisation (FE) system reflects its unitary governance structure and the structurally limited revenue autonomy of SNGs. Vertical equalisation instruments dominate the system, accounting for nearly 60% of consolidated local budgets, while horizontal equalisation remains marginal at around 6% (Table 4.4). While this configuration helps prevent large fiscal disparities, it may also weaken incentives for local revenue mobilisation. When increases in own-source revenues lead to offsetting reductions in equalisation transfers, subnational governments face reduced incentives to expand local tax bases or strengthen tax collection. Ensuring that equalisation formulas preserve redistribution while maintaining incentives for local tax effort, therefore, remains an important design challenge.
Source: “Local finance of Korea 2025”, (NABO, 2025[33]). “Adapting intergovernmental fiscal transfers for the future: Emerging trends and innovative approaches”, (Dougherty, Montes Nebreda and Mota, 2024[30])
Outside education, the redistributive impact of Korea’s FE system is increasingly diluted by the rapid expansion of conditional grants, which reached KRW 89.2 trillion in 2025 and now account for more than 20% of local government revenues. A large share of conditional general transfers can undermine the benefits of decentralisation by constraining local problem-solving capacity and amplifying administrative burdens, particularly where matching requirements are high. In contrast, block grants and outcome-based transfers, combined with the use of standardised cost measures, enhance responsiveness and fiscal resilience (Dougherty and Phillips, 2019[34]; Dougherty and Forman, 2021[32]). Performance-oriented ex post conditionality would be more consistent with international best practice than detailed ex ante spending controls, especially in a context of fiscal consolidation and rising service complexity (Dougherty, Montes Nebreda and Mota, 2024[30]).
As greater policy autonomy is devolved to local governments, governance complexity increases, particularly in regions where demographic decline raises service delivery costs. To manage negative scale effects under devolution, fiscal frameworks need to be complemented by institutional mechanisms such as mandatory or incentivised inter-municipal cooperation, shared service provision platforms and multi-year co-financing arrangements for jointly delivered services. Korea could introduce explicit “scale-adjustment components” in equalisation transfers for sparsely populated areas, conditional on participation in inter-municipal service delivery or consolidation plans, to balance territorial equity with cost-efficiency.
With fiscal consolidation needs looming, given the projected impact of ageing in Korea, authorities should protect the core equalisation mechanisms by favouring formula-based equalisation grants anchored in law. The allocation of these grants should be based on structural needs and tax capacity rather than on local spending behaviour, thereby insulating them from discretionary cuts during fiscal consolidation. Korea should also rebalance capacity and needs equalisation outside education. For example, Sweden’s municipal equalisation system integrates fiscal capacity equalisation with expenditure needs equalisation, helping to reduce disparities in both revenue-raising ability and service-cost pressures across its autonomous communities. Estonia’s equalisation grants embed expenditure-need criteria within the local transfer allocations (Dougherty, Montes Nebreda and Urrutia, 2025[35]).
Overcoming partisanship in fiscal transfers and spending decisions is equally critical. Research highlights that political competition often shapes the allocation of intergovernmental grants more than objective measures (Ha and Lee, 2022[36]). Against this backdrop, Korea would benefit from institutionalising regular evaluation and consensus-building mechanisms, such as periodic independent reviews of equalisation outcomes and interactions between transfer instruments. OECD experience suggests that independent bodies and structured review cycles help insulate equalisation systems from ad hoc adjustments, improve evidence-based recalibration and enhance public trust in allocation outcomes over time (Dougherty, Montes Nebreda and Mota, 2024[30]; Dougherty and Forman, 2021[32]).
Industrial policy has received renewed interest in recent years, with one justification being to foster equitable economic development when large regional disparities exist (Millot and Rawdanowicz, 2024[37]). Korea has a long tradition of proactive policy intervention to support business. For example, the Ministry of SME and Start-ups advertises almost 1500 distinct support programmes for small and medium-sized enterprises. Tax expenditures for corporations via Corporate Income Tax reduction, tax credits, tax exemptions or special depreciation provisions account for more than 1% of GDP (NABO, 2025[38]) (Chapter 2). Yet, only a few of the programmes explicitly include instruments that could be described as place-based polices targeting specific regions or clusters (OECD, 2025[39]).
Place-based interventions can be seen as a form of pricing in negative externalities arising from regional disparities, inducing social, economic, fiscal and environmental costs that undermine cohesion, competitiveness and development. Such policies promise to: help correct spatial mismatches between firms, workers and local assets; strengthen local public goods and infrastructure, which underpin long-term development; and support regions in managing asymmetric shocks, such as uneven demographic transitions - an increasingly salient challenge in Korea (see Figure 4.4). They can also promote innovation, industrial diversification and policy integration by leveraging local strengths and networks (OECD, 2025[40]). Investments in skills, research, infrastructure, and digital connectivity are also essential complements, as they strengthen the foundations for new industrial ecosystems and support diversification in regions dominated by legacy heavy industry, which is relevant for the industrial clusters of Ulsan, Pohang, and Changwon in Korea.
OECD work on place-based policies stresses the need to ground regional interventions in local comparative advantages, clear policy objectives and strong multi-level governance, while ensuring coherence with national industrial, innovation and environmental strategies. Moreover, place-based interventions should target specific coordination failures rather than attempting to revive activities with weak long-term prospects, ensuring that public support mobilises under-used assets, skills and knowledge. In practice, this requires establishing transparent eligibility criteria, an evaluation framework that monitors progress in structural transformation, innovation outcomes and the modernisation, as well as credible exit strategies to avoid prolonged dependence on public assistance (OECD, 2025[40]).
4.3.1. Consolidating place-based development support
Korea’s balanced regional development policy has evolved through successive waves of institutional reform and targeted place-based interventions. Early approaches focused on redistributive investment toward lagging and rural areas. This approach was supported by dedicated legislation, special accounts and five-year regional development plans. From the mid-2000s, policy emphasis shifted toward spatial decentralisation through the Innovation Cities programme and the creation of Sejong as a multifunctional administrative city. The objective of this switch in policy was to curb overconcentration in the Seoul Metropolitan Area (SMA) and stimulate growth in non-SMA regions (OECD, 2025[4]).
The Innovation Cities approach relied primarily on relocating public-sector institutions to newly designated sites outside the SMA. While the programme successfully redistributed public employment and generated short-term population and fiscal gains in host locations, it did not consistently create self-sustaining urban centres. Implementation prioritised speed of relocation and administrative targets over integration with existing cities. This resulted in urban sprawl, weak transport connectivity, and limited service provision. In many cases, new Innovation City districts have developed separately from historic urban cores, drawing activity away from existing centres rather than reinforcing them, and increasing car dependence and spatial fragmentation (OECD, 2025[4]; OECD, 2025[6]). Relocation and infrastructure provision alone proved insufficient to achieve population and development goals, particularly in the absence of dense services, high-quality housing, cultural amenities and strong connectivity to surrounding labour markets. As national demographic decline and ageing intensify, these weaknesses become more pronounced, reducing the effectiveness of peripheral expansion strategies and increasing the fiscal cost of maintaining dispersed infrastructure and services.
The current policy framework, anchored in the Comprehensive Plan for Decentralisation and Balanced Development (cf. Box 4.2), seeks to address these limitations by shifting toward region-led, place-based development. The DBDMP integrates decentralisation and balanced development objectives and introduces four special zones as core delivery instruments (OECD, 2025[4]):
Opportunity Development Zones to attract private investment (ODZ)
Education Development Zones to strengthen local talent pipelines (EDZ)
Downtown Cohesion Zones to promote high-density, mixed-use city-centre development (DCZ)
Cultural Driven Cities to leverage cultural assets and improve quality of life (CDC)
The current implementation model risks reproducing earlier fragmentation. Cities apply separately for each zone designation, and instruments operate largely in parallel rather than as an integrated spatial strategy. Without a clear geographic anchor, zone-based policies may disperse resources across multiple sites, dilute scale effects and weaken complementarities between investment attraction, service provision, housing renewal and mobility. A hub-centred approach provides a mechanism for aligning the DBDMP’s instruments with functional urban dynamics. Using service availability and settlement-network centrality, recent OECD analysis identifies 37 regional hubs in Korea that combine high service diversity with a central role for surrounding areas. The methodology defines hubs as settlements that simultaneously function as education, healthcare, commercial and leisure service centres and as the largest accessible settlement within a 30-minute travel time. This approach shifts spatial policy from administrative boundaries toward service reach, accessibility and functional scale (OECD, 2025[4]). These hubs could potentially provide an evidence-based geography for implementing the DBDMP.
Concentrating investment in such hubs can strengthen second-tier agglomerations, expand effective labour markets and improve access to services for surrounding towns and rural areas. By contrast, continuing to prioritise dispersed investment or peripheral expansion undermines compactness, increases infrastructure costs and limits spillovers (Chung et al., 2024[1]). Policy instruments under the DBDMP should complement rather than compete with each other within designated hubs to i) concentrate density and services (DCZ), ii) anchor private investment (ODZ), iii) align skills supply (EDZ) and iv) foster cultural amenities and quality of life (CDC). Connectivity investments should prioritise hub-to-hinterland and hub-to-hub links, with rail or high-quality express public transport tied to station-area densification and walkability. Korea’s 5+3 blueprint follows this logic by coupling regional growth-engine development with integrated transport networks to ensure that key services, jobs and urban centres are accessible within one hour across each region, and with integrated administrative-fiscal arrangements designed to support functional mega-regional economies rather than isolated sectoral interventions (Box 4.2). Korea can also learn from approaches used in France, Finland and Japan that route regional development through intermediate cities as designated service-and-employment anchors, then back those anchors with fast, reliable regional connectivity and compact, high-amenity urban cores (Box 4.5).
The OECD Programme “Unlocking the Potential of Intermediary Cities” highlights the role of intermediate cities as service, employment and connectivity anchors that link metropolitan areas and rural regions. Intermediary cities typically host a critical mass of higher-order services, concentrate regional labour markets and provide access to opportunities for surrounding territories. Strengthening these cities improves spatial efficiency, service accessibility and regional resilience, particularly in countries facing ageing populations and uneven growth.
Evidence from OECD countries shows that intermediary cities deliver stronger outcomes when policy explicitly concentrates growth and services in dense urban cores and connects them effectively to surrounding areas:
Japan has pursued compact, transit-oriented development strategies in intermediary cities such as Toyama. By concentrating housing, services and public investment along high-quality public transport corridors, Toyama increased public transport ridership, revitalised its city centre and reduced infrastructure maintenance costs associated with sprawl. This approach helped stabilise municipal finances and improved access to services in a shrinking and ageing context.
France anchors regional development in second-tier cities through strong inter-municipal governance (intercommunalités) and integrated land-use, transport and economic planning. Metropolitan and functional urban-area institutions enable cities such as Nantes and Rennes to coordinate investment at scale, supporting economic performance, dense urban cores and high-quality-of-life outcomes while serving wider regional catchments.
Finland relies on intermediary cities as regional service centres, supported by mandatory inter-municipal co-operation through regional councils. This structure enables smaller municipalities to access education, healthcare and transport services concentrated in regional hubs, preserving service accessibility and fiscal sustainability in sparsely populated and ageing regions.
Source: ”Shrinking Smartly and Sustainably: Strategies for Action”, (OECD, 2025[6]); “Shrinking Smartly and Sustainably: Compendium of Good Practices“, (OECD, 2025); “The Governance of Land Use in France: Case studies of Clermont-Ferrand and Nantes Saint-Nazaire”, (OECD, 2017).
4.3.2. Integrating universities into regional ecosystems
Demographic decline and urban concentration challenge the capacity of rural and provincial areas to sustain high-quality educational provision. Structural imbalances in Korea’s education system exacerbate this pressure. Strong competition for admission to a small group of prestigious universities in the Seoul Metropolitan Area drives heavy reliance on private tutoring and narrow preparation for the College Scholastic Ability Test (CSAT). Students concentrate on maximising test scores rather than exploring diverse pathways or responding to regional labour needs (Chapter 3). This dynamic reinforces the concentration of talent in the capital region and reduces the pool of qualified applicants for regional universities (OECD, 2025[18]; OECD, 2024[3]). Empirical evidence indeed suggests that returns to moving to non-SMA regions or to entering non-SMA-based universities have been diminishing in recent decades (Figure 4.14).
Average income rank of children who were born outside SMA
Note: Based on the Korean Labour and Income Panel Study (KLIPS). The analysis tracks 8,694 individuals born between 1965 and 1994.
Source: “Moving up? Internal migration and intergenerational mobility in Korea”, (Lee, Chung and Ziemann, 2026[5]).
Korea can strengthen regional talent pipelines by ensuring that school reforms reflect territorial needs. Regional general high schools typically offer fewer specialised subjects and have greater difficulty recruiting qualified teachers compared with large metropolitan schools, which restricts students’ ability to build strong academic profiles (OECD, 2025[18]). Korea’s High School Credit System, to be implemented nationwide in 2025, aims to expand student choice and personalise learning. However, schools with fewer teachers and lower student density may struggle to offer the required breadth, which risks widening regional disparities. CSAT reform for the 2028 academic year provides an opportunity to encourage broader learning, yet regional schools will require targeted support to deliver the revised curriculum effectively. Shared course delivery through the Shared Curriculum and the Online School system helps ensure that students in sparsely populated or underserved regions can pursue diverse academic pathways comparable to those available in metropolitan schools, reinforcing both equity and regional talent development (Box 4.6). The Teacher Supply Plan can contribute to the High School Credit System by considering the need for balanced allocation of teachers in underserved regions.
Edunet is the portal for Korea’s national education information services, operated by the Korea Education and Research Information Service (KERIS). It provides access to digital learning resources, curriculum materials, and online services that support course delivery and student learning.
The Educational Broadcasting System (EBS) provides high-quality, centrally produced instructional content across television and digital platforms. EBS offers curriculum-aligned lectures, exam-preparation materials, and supplementary learning resources for middle and high school students. Its digital services, such as on-demand video libraries and interactive learning tools, are especially valuable for asynchronous learning in remote areas. EBS content allows schools with limited subject specialists to rely on nationally standardised lessons, which local teachers can integrate into classroom instruction or blended learning formats.
The Shared Curriculum is a programme that offers small-group or advanced subjects - often difficult for an individual school to provide - through collaboration between schools, regions, or universities. This programme provides a diverse range of subjects tailored to the specific requirements and demands of students and schools. It is delivered via face-to-face (offline) classes, real-time interactive online sessions, or a combination of both elements.
The Online School is an institution providing part-time, remote lessons for students wishing to study subjects not offered at their affiliated school. In particular, it contributes to expanding students’ subject choices by offering advanced courses—such as those in emerging industries and new technologies—that are challenging for an individual school to provide. Furthermore, an online school supports the diversification of school curricula by accepting requests for specific subjects from schools that struggle to offer a wide range of courses due to limitations in human and material resources. Alongside standard lessons, an online school utilises teaching methods tailored to the characteristics of each subject, including lessons in virtual spaces, flipped learning, and discussion- or project-based learning.
Source: Korea Education and Research Information Service (KERIS).
SMA-based universities have been subject to caps on student numbers since the 1960s to counteract regional imbalances. This is likely not an effective policy, as it increases scarcity and thereby the prevalent perception that the so-called “in-Seoul” universities are of higher quality than “out-Seoul” universities. It also reduces these universities’ incentives to adjust their intake per department as labour market demands change, thereby contributing to field-of-study and job mismatch (OECD, 2022[15]). Addressing these issues would require a combination of reforms. These include strengthening the competitiveness of flagship universities in non-SMA hub cities in connection with core regional industries, while significantly strengthening employment incentives for graduates and expanding high-quality jobs in non-SMA areas. Together, these measures could reduce competitive pressures, improve the matching of graduates to jobs in their field of study and level the playing field for low-income students outside of SMA (Lee, Chung and Ziemann, 2026[5])). These efforts should be coupled with the strict application of quality criteria and, as student numbers drop, steer relative funding and growth towards high-quality institutions nationwide (Chapter 3).
Regional universities will experience significant pressure as demographic decline accelerates. Falling student numbers and sustained concentration of talent in the capital region have already weakened the financial sustainability and innovation capacity of regional institutions (OECD, 2025[18]). Although multiple government programmes over the past decade supported industry co-operation, lifelong learning and institutional revitalisation, these initiatives operated separately and did not generate sustained regional specialisation or strong labour market alignment (Table 4.6). While per-student public expenditure was higher in non-capital regions, fragmentation limited the cumulative impact of these programmes (NABO, 2025[41]).
The Regional Innovation System and Education (RISE) reform represents a major shift towards decentralised higher education governance. Under RISE, regions prepare multi-year plans, prioritise local industries and allocate a significant share of higher education funding. The 2025 RISE budget totals KRW 1.8 trillion, and the GLOCAL University Initiative supports 27 university models aimed at developing globally competitive regional specialisations (NABO, 2025[41]). Following this reform, local governments now manage over half of the university grant budget (OECD, 2025[18]).
1: Regional Innovation-Centred University Support System (RISE).
Source: “Evaluation of the Policy for the Promotion of Regional Universities” (NABO, 2025[41])
Decentralisation of funding and decision-making power does not guarantee stronger regional performance. Many local governments lack the analytical capacity, planning expertise and coordination mechanisms required to design effective long-term strategies (OECD, 2025[18]). Without reinforced governance - mirroring the coordination and scale effects with AI adoption (see above) - regions risk dispersing funds across small, disconnected projects rather than building coherent skills ecosystems. Weak alignment between universities, vocational institutions and employers further limits the effectiveness of regional innovation agendas. To maximise the impact of RISE and GLOCAL, Korea should invest in regional planning capabilities, establish shared labour market intelligence systems and require coordinated cluster strategies linking higher education and regional economic development. Performance indicators should focus on measurable outcomes such as skill development, innovation activity, graduate retention and employer engagement.
Korea can strengthen the role of regional universities by aligning institutional missions with regional economic strategies. The Special Account for Higher Education and Lifelong Learning provides mechanisms to support university specialisation in areas that reflect regional industrial structures, such as advanced manufacturing, maritime technologies, green industries or digital services. Stronger collaboration with employers and local governments can help regional universities function as anchor institutions for local skills ecosystems. Examples from Finland, the Netherlands or Denmark show that universities which aligned their institutional strategies with clearly defined regional economic priorities were more successful in building durable industry partnerships, attracting investment, embedding cooperation outcomes into core teaching and research activities and positioning themselves as stable anchor institutions in regional innovation and skills ecosystems (European Commission, 2024[42]).
The 2025 amendments to the Higher Education Act reinforce this regional agenda by strengthening the government’s capacity to restructure the higher education landscape in line with demographic and territorial realities (OECD, 2025[18]). The revised Act grants the Ministry of Education clearer authority to assess the financial viability of universities and to suspend enrolment or mandate the closure of persistently underperforming institutions. This authority is intended to address excess capacity as youth cohorts shrink and to reallocate resources towards viable regional universities with strong links to local labour markets. The Act also expands institutional responsibilities toward international students, including obligations to provide information on employment prospects and work-visa pathways, which can support regional talent supply and help alleviate local skill shortages.
Vocational pathways are currently underused and could be a viable means to reinforce the linkages between higher education and labour market needs. Only 16% of 15 to 19-year-olds in Korea’s upper secondary system were enrolled in VET programmes in 2022, compared with an OECD average of 40% (OECD, 2025[18]). Limited work-based learning opportunities further constrain transitions into skilled regional jobs. Many graduates, therefore, seek employment in the capital region, which offers more stable and higher-paid positions (Lee, Chung and Ziemann, 2026[5]). Korea can strengthen regional retention by expanding high-quality vocational programmes, promoting region-specific apprenticeships and supporting co-designed curricula between GLOCAL universities, vocational colleges and employers (OECD, 2025[18]). Austria and Germany demonstrate that when vocational pathways align with regional economic clusters, they generate strong school-to-work transitions and support the retention of young people in non-metropolitan regions.
Integrating skilled immigrants to offset population decline will become increasingly pressing. Korea is an attractive place to study, but the transition from a student visa to a work visa remains complex and restrictive, with eligibility criteria that often exclude otherwise qualified graduates. This is particularly the case among those seeking employment in small and medium-sized firms or outside the Seoul metropolitan area (OECD, 2024[3]). Easing visa eligibility requirements for skilled migrants and simplifying post-study work transitions would strengthen incentives for international graduates to remain in Korea. This could enhance the attractiveness of regional universities and better align higher education policy with demographic and territorial challenges. Recent reforms point in this direction (Table 4.7), including the introduction of new pathways for vocational graduates (e.g. E-7-M) and the expansion of high-skilled visa eligibility, although transition barriers and labour market constraints for graduates outside major firms and regions remain.
4.3.3. Leveraging zone-based policies
Zone-based policies are one instrument among place-based policies and comprise geographically targeted interventions that offer regulatory or fiscal advantages, such as tax incentives, customs exemptions, or simplified procedures, to stimulate specific economic activities. Zone-based instruments in Korea partly reflect traditional industrial policy approaches targeting specific sectors and regions. The recent resurgence of industrial policy across advanced economies is driven by strategic, security, and decarbonisation objectives, but also entails well-documented risks, including policy capture, misallocation of capital, low additionality, and subsidy races that erode the tax base without delivering broad-based productivity gains (Millot and Rawdanowicz, 2024[37]).
Experience from across the OECD suggests that the effectiveness of such instruments hinges on whether support is conditional on addressing identifiable market failures (e.g. regulatory uncertainty, coordination failures), the existence of positive externalities (environment, learning) and whether incentives are time-bound, performance-based and embedded in a coherent place-based development strategy. In the absence of these safeguards, zone-based industrial policy instruments risk locking in declining activities, crowding out more productive firms and regions, and entrenching spatial and sectoral distortions.
Korea has used Free Economic Zones as a flagship instrument to attract high-value foreign direct investment (FDI), improve the business environment for foreign-invested firms and support regional development. Under the Special Act on Designation and Management of Free Economic Zones, FEZs are defined as areas developed “to improve the business environment for foreign-invested enterprises and enterprises repatriating to the country,” with extensive regulatory and fiscal flexibilities relative to the national regime. Since the first designation in Incheon in 2003, nine Korean Free Economic Zones (KFEZs) have been created, including Busan–Jinhae, Gwangyang Bay, Gyeonggi, Daegu-Gyeongbuk, Chungbuk, Gangwon, Gwangju and Ulsan, mostly in coastal or metropolitan locations with strong logistics or industrial bases.
The policy mix inside FEZs combines generous tax incentives, deregulatory measures and targeted support services. Foreign firms and developers located in FEZs can benefit from exemptions or reductions of customs duties on imported capital goods and inputs, acquisition tax and property tax for specified periods, alongside accelerated administrative procedures and one-stop investor services. These fiscal incentives are complemented by relaxations of selected labour and land-use regulations, more flexible spatial planning, and eased entry for foreign professionals. Cash grants can also be provided, subject, in principle, to an assessment of their expected contribution to national and regional development objectives (e.g., technology transfer, R&D, clustering, and high-quality job creation).
This model has supported the development of hubs such as the Gwangyang Bay Area Free Economic Zone (GFEZ) or the Incheon Free Economic Zone (IFEZ) and its bio-cluster in Songdo. However, evidence also points to several structural issues that limit the effectiveness of FEZs and raise concerns around distortions and fiscal sustainability. The early years saw a gap between pledged and realised FDI. For example, the IFEZ had attracted only a fraction of the headline investment commitments (albeit during the global financial crisis), with much of the investment concentrated in a few large developers and highly sensitive to the global business cycle. This calls for an in-depth ex post evaluation to support the cost-benefit analysis of future FEZ financial support. Such analysis would provide performance-based support and clearer alignment with the national industrial agenda and regional development priorities (OECD, 2025[40]).
In addition to Free Economic Zones, Korea has developed Regulation-Free Special Zones (RFSZs) as a distinct form of place-based policy aimed at fostering innovation-driven regional growth. Introduced in 2019, RFSZs designate non-metropolitan areas where existing regulations can be temporarily relaxed or waived to enable the testing, demonstration and early commercialisation of new technologies and business models. Unlike FEZs, which focus primarily on attracting foreign investment through fiscal incentives and improved business conditions, RFSZs are explicitly designed as regulatory testing beds linked to regional industrial specialisation and local development strategies. They seek to address co-ordination failures and regulatory uncertainty that can be particularly constraining in smaller regions.
RFSZs operate as a geographically anchored complement to Korea’s national regulatory sandbox framework (see above). By concentrating regulatory flexibility within specific territories and sectors, such as digital healthcare, mobility services, energy technologies or data-driven applications, RFSZs create localised innovation ecosystems in which firms, local governments and regulators can jointly experiment with new activities under controlled conditions. This place-based approach helps mitigate disparities in administrative capacity and in direct contact with relevant regulators (e.g., consultations on compliance expectations, rule interpretation and adjustments to regulatory conditions) that often disadvantage firms in peripheral regions. It also allows regulatory relief to be aligned with complementary policy instruments, including infrastructure provision, R&D support and skills development, thereby strengthening the potential for durable local spillovers rather than isolated pilot projects (OECD, 2021[43]).
As with other zone-based instruments, the effectiveness of RFSZs ultimately depends on governance quality and the ability to translate successful experimentation into broader regulatory reform. If exemptions remain narrowly confined to specific locations or projects for prolonged periods, the risk is that zones generate uneven playing fields or lock in temporary advantages rather than facilitating diffusion. When well designed, however, RFZS can enhance the attractiveness of non-metropolitan regions for innovative firms. This approach complements Korea’s broader place-based development toolkit by embedding regulatory flexibility directly into lagging regions’ growth strategies. To maximise their contribution to regional rebalancing, RFSZs require systematic evaluation, clear exit strategies and timely incorporation of proven regulatory adjustments into the national framework (OECD, 2024[3]).
The introduction of a third category of zone-based policies, Crisis Response Zones, reflects the desire to protect strategic activities, manage exposure to global shocks and encourage new sources of sustainable growth (Box 4.7). It comes together with a broader set of industrial support measures. Gwangyang, a city with a very high concentration of steel-sector activity, received crisis response status following a sharp deterioration in global market conditions and mounting trade-related pressures. Seosan and Pohang have received similar designations in response to significant downturns in petrochemicals and steel, with the authorities seeking to avoid sudden job losses and the collapse of regionally important supplier networks. In each of these cases, the government has also framed the intervention as a foundation for longer-term restructuring and a transition toward higher-value, lower-carbon activity.
Korea operates a two-tier system of “Crisis Response Zones” to support regions facing industrial decline. The pre-emptive industrial crisis response zone is designated when a region’s main industry is expected to weaken due to structural changes, major shocks or the exit of key firms. This forward-looking designation enables early support such as financial assistance, R&D programmes, export promotion and employment-stabilisation measures. The special industrial crisis response zone applies when a region has already suffered substantial industrial and economic deterioration. To qualify, local governments must demonstrate high dependence on a vulnerable industry, clear declines in industrial indicators, broad economic distress and the need for emergency intervention. Designations last up to two years and can be extended for up to five, accompanied by extraordinary measures, including tax relief, eased regulations for industrial facilities, and higher national subsidy rates.
These mechanisms are governed by the Special Act on Response to Local Industrial Crisis and Recovery of Local Economy, formally enacted in June 2023. Although the Act is recent, the underlying scheme is not new: Korea has designated industrial-crisis areas since 2018 under earlier provisions of the Special Act on Balanced National Development. The 2023 Act consolidates and strengthens these tools by creating a dedicated legal framework, clarifying designation criteria and expanding available support.
Source: Ministry of Trade, Industry and Energy (MOTIE).
Firms located in Crisis Response Zones become eligible for temporary support measures, including emergency liquidity assistance, concessional policy loans and extended repayment schedules for small and medium-sized enterprises, as well as being granted greater regulatory flexibility. The economic rationale for short-term stabilisation is clear. In regions with highly concentrated industrial activity, external shocks can have severe, immediate effects on firms, workers and local public finances. Temporary financial support can prevent viable firms from failing solely because of short-lived disruptions, thereby preserving productive assets, specialised skills and supply chain relationships that would be costly and slow to rebuild.
At the same time, the policy raises important concerns about efficiency and resource allocation. There is a risk that support may sustain activities that face persistent structural weaknesses, including chronic global excess capacity or declining competitiveness. In such cases, intervention may delay necessary adjustment or encourage expectations of continued public assistance. The concentration of employment in declining sectors can also create strong political incentives to prolong support beyond what is economically justified. Furthermore, public resources devoted to sustaining activity in crisis response zones reduce fiscal space for targeted interventions justified by externalities or co-ordination challenges or the provision of public inputs such as education and training, research and development and core infrastructure (Juhász, Lane and Rodrik, 2023[44]). Table 4.8 summarises the pros and cons of the various types of special zones.
Against this backdrop, the current support for the steel industry in Gwangyang under the Crisis Response Zone framework could be justified by the high costs of greening steel production and the positive spillovers in terms of decarbonisation and innovation. The current policy environment, however, does not provide clear and predictable incentives required for firms to scale up low-emission production. The public procurement system does not include steel within its minimum green product standards (An, 2025[45]) and net effective carbon rates in the industry sector are just EUR 11 per tonne of C02 compared with the OECD average of EUR 48 (OECD, 2025[46]). Until environmental costs are adequately priced (Chapter 2), support measures should be conditional on concrete steps toward the modernisation and decarbonisation of steel production.
Other than special economic zones, place-based incentives for residents can also help anchor the population in remote areas. In Norway, for instance, the government has introduced a targeted “action-zone” package of incentives for the far North (Tiltakssonen for Nord-Troms og Finnmark). Measures include a reduced corporate tax rate (18.5% compared with 22%), free kindergarten, enhanced student-loan write-offs and lower costs for ferries and regional flights. These are all designed to attract and retain residents in the region. A similar approach will be tested in Korea: Beginning in 2026, the government will provide monthly cash transfers of KRW 150,000 to residents of designated farming and fishing communities facing population decline. The two-year program (2026-27) is expected to cost about KRW 1.27 trillion and will be complemented by a community-based integrated medical, nursing and care support initiative in rural areas. Authorities should assess the fiscal costs of such measures and carefully balance them against the potential benefits of mitigating rural depopulation through an explicit cost-benefit analysis.
Korea’s planning and development model was optimised for rapid growth and metropolitan expansion. It relied on hierarchical plans, prescriptive zoning and development-led land conversion supported by land value capture and large-scale public land development. In today’s context of ageing, depopulation and widening spatial divergence, these same features can produce structural misallocation by perpetuating outward expansion where demand is weakening, locking in dispersed infrastructure liabilities and amplifying the gap between high-opportunity regions with tight housing markets and regions facing vacancies and underused assets.
This section examines how Korea can adapt its spatial planning and housing frameworks to support more efficient settlement patterns and improve regional mobility. It focuses on decentralising planning authority while maintaining strategic coherence and reducing regulatory overlap; reorienting land value capture from reinforcing capital-region concentration toward financing regeneration and compact-city investment in regional hubs; and improving housing-market efficiency through instruments that expand well-located affordable supply, reduce transaction frictions that impede labour mobility and better align public and social housing with actual regional demand.
4.4.1. Decentralising planning authority
Korea’s land-use governance is built on a centralised, hierarchical planning system that cascades from the national to the municipal level. The Comprehensive National Land Plan (CNLP) sets the spatial vision for the entire country, while provincial and metropolitan governments prepare medium-term regional plans aligned with it. At the local level, urban master plans and district-unit plans regulate zoning, building density and land use with detailed parameters such as maximum floor area ratios and building height limits. This system has historically ensured rapid urbanisation and environmental control during Korea’s industrial expansion, but today it faces structural stress from demographic and spatial imbalances (OECD, 2019[47]). The National Land Use Plan, agricultural protection zones, forest designations, and urban planning instruments operate simultaneously with limited horizontal coordination, leading to overlapping regulations and slow implementation at the local level. Municipalities, particularly those facing rapid depopulation, must navigate these parallel systems even as fiscal and administrative pressures intensify.
The 5th Comprehensive National Territorial Plan (2020-2040, Box 4.2) marks a significant shift by explicitly encouraging local governments to incorporate mixed-use principles into Urban Master Plans and District Unit Plans. Additionally, as part of the Urban Regeneration New Deal, Spatial Innovation Districts imply flexible zoning and mixed-use development. But decentralisation does not always serve the overarching objective of efficient, inclusive and sustainable development. Korea’s rural planning still treats non-metropolitan regions as largely homogeneous, despite substantial variation in demographic trajectories, service viability and land-use potential. This contributes to the continued expansion of built-up areas, even where long-term population decline makes such development fiscally unsustainable (OECD, 2025[48]).
The prevailing urban development model in Korea has reinforced these dynamics. For instance, the Korea Land and Housing Corporation often acquired greenfield or agricultural land at relatively low cost, rezoned and serviced it through public infrastructure investments and subsequently resold the newly urbanised land at higher market values. This mechanism has been effective at generating revenue to recover infrastructure costs and finance public amenities such as roads, parks and affordable housing. However, it has also entrenched a pattern of increasing artificial surface cover and contributing to spatial inefficiencies, fragmented settlement patterns and environmental degradation.
More proactive management of the existing building stock offers a viable alternative pathway. Systematic strategies to repurpose or adaptively reuse vacant properties, consolidate or downsize underutilised settlements and restore ecologically sensitive areas would be more economically efficient and environmentally sustainable than continued outward expansion. Recent national efforts to encourage compact, connected development and urban regeneration represent important steps, but stronger integration of demographic realities, land-use constraints, and environmental considerations into rural and regional planning frameworks remains essential. Reforms in several OECD countries provide examples of how to adapt planning authorities to ease spatial bottlenecks and allow development to better align with local and regional requirements (Box 4.8).
Japan
Japan, facing a similar rural decline, introduced the “Compact City” model, designating urban cores for concentrated services while repurposing peripheral land for agriculture or renewable energy. As a result, the share of residents living in transit corridors rose from 28% (2005) to 40% (2022), helping curb sprawl and stabilise city-centre vitality and tax revenues.
Germany
Germany’s Länder planning system gives regional governments strong discretion over land-use zoning and fiscal instruments, allowing cities like Leipzig to regenerate through local land banks and flexible brownfield redevelopment.
The Netherlands
The Netherlands decentralised planning authority to municipalities but set clear national guidelines for density and environmental quality, fostering balanced regional growth without sacrificing coherence.
Italy
A national programme co-designs inter-municipal plans with local communities: 72 pilot areas (1000+ municipalities) were selected by 2020 with more than EUR 1 billion in combined funding, providing a mix of service innovations (e.g., remote classrooms, smart pharmacies) and local development.
Source: “Shrinking Smartly and Sustainably: Strategies for Action” (OECD, 2025[6]).
Japan’s recent National Land Management Concept illustrates how strategic coherence can be maintained while giving subnational governments greater capacity to adjust land use to demographic, environmental and fiscal realities. Japan requires prefectures and municipalities to prepare integrated land management concepts that translate national objectives into explicit spatial choices, including where to concentrate development, where to limit or withdraw it and where land should transition to ecological or agricultural uses (OECD, 2025[49]). Adopting a similar requirement in Korea would reduce regulatory overlap, improve coordination across planning regimes and strengthen municipalities’ ability to repurpose declining settlements, underused land and hazard-prone areas in line with local conditions, rather than continuing outward expansion by default.
4.4.2. Using land value capture to rebalance development incentives across regions
Korea’s long-standing use of urban development and land value capture (LVC) instruments through land readjustment, development charges, developer dedication and public contributions has historically enabled rapid urban expansion and the financing of large-scale infrastructure, particularly in the Seoul metropolitan area (Kim, 2023[50]). These instruments (cf. Table 4.9) helped deliver serviced land, new towns, and major transit investments with comparatively low public debt issuance. However, the existing deployment of LVC mechanisms has been spatially asymmetric: value uplift generated in and around Seoul has been repeatedly recycled into further development in the capital region, reinforcing spatial concentration rather than counterbalancing it. By contrast, some regional cities may lack market depth or institutional capacity to mobilise LVC effectively, even when infrastructure investments create substantial potential land-value gains. As Korea enters an era of population ageing and slower growth, repurposing LVC toward regional regeneration and compact-city transformation could become a cornerstone of more balanced territorial development.
Source: “Global Compendium of Land Value Capture Policies” (OECD/Lincoln Institute of Land Policy, PKU-Lincoln Institute Center, 2022[51]); KRIHS.
Future LVC efforts should focus on strengthening regional hubs rather than expanding Seoul's commuter belt. International experience suggests that well-designed LVC instruments can anchor high-quality, mixed-use districts around major rail stations and knowledge hubs. These developments can support job creation and reduce pressure on capital cities. In Korea, extending development-based LVC to Korea train express (KTX) nodes and regional metropolitan areas (e.g. Daejeon, Gwangju, Daegu, Busan-Ulsan) would create credible alternatives to Seoul’s urban amenities. Ensuring that local governments retain a meaningful share of these revenues would maintain incentives to implement land value capture, while national redistribution could help finance development in smaller and medium-sized cities and make them more attractive locations for firms, young professionals and families. Such a shift would align spatial planning with national goals of territorial cohesion and reduce excessive commuting pressure on the capital region.
Land readjustment has been one of Korea’s most effective tools for developing land at scale, particularly towards the end of the 20th century (Kim, 2024[52]). In the context of shrinking regional cities and ageing neighbourhoods, the focus shifts from expansion to consolidation and adaptive reuse. Applying land readjustment to underused central districts rather than to peri-urban greenfield tracts would enable municipalities to reconfigure fragmented plots, upgrade local infrastructure and reduce vacancies while preserving community continuity and maintaining public services. To ensure equitable outcomes, owners could receive re-plotted parcels or development rights matching pre-project values, while surplus land or floorspace created through upzoning could be sold or leased to finance regeneration. This approach mirrors urban land readjustment initiatives in Germany and Japan, where land pooling has been repurposed as a mechanism for compact-city development and the revitalisation of ageing districts (OECD/Lincoln Institute of Land Policy, PKU-Lincoln Institute Center, 2022[51]).
Deploying LVC more effectively requires improving local capacity and realigning fiscal incentives. Municipalities often lack the technical expertise to implement complex LVC schemes. Addressing this gap requires targeted capacity-building measures, including technical assistance, standardised implementation guidelines and training programmes for municipal staff in land valuation, project appraisal and legal design of LVC instruments. National authorities could adopt performance-based grants that reward municipalities for transparent and well-designed LVC implementation, such as a consistent application of development charges, public auctioning of development rights or the use of land readjustment for regeneration. These grants could be tied to measurable goals, including affordable housing, the revitalisation of declining centres or the creation of mixed-use transit-oriented districts. Such a system would encourage municipalities to leverage land-value gains more strategically while ensuring coherence with the Comprehensive National Land Plan and regional growth objectives.
4.4.3. Making housing markets more efficient
Ensuring adequate, affordable housing is central to regional rebalancing and sustainable economic growth. Well-located and appropriately designed affordable housing can act as a catalyst for labour mobility, support emerging regional growth centres and reduce pressures in the SMA and alleviate housing affordability issues in metropolitan areas, notably the SMA (Figure 4.7). In metropolitan areas, housing developers typically target owner-occupied apartments or higher-rent segments, as the combination of land prices, construction costs and financing conditions makes it difficult to deliver affordable rental units without public support or regulatory incentives. In non-metropolitan regions, declining populations and weak rental markets reduce the profitability of new construction and adaptive reuse, risking persistent vacancy or underuse of the existing stock (OECD, 2025[48]). As a result, low-income households either accept high housing cost burdens in dynamic labour markets or remain in areas with lower housing costs but limited employment and service opportunities.
Many OECD cities now use inclusionary zoning (IZ) linking development approvals to obligations to deliver affordable housing units. In this way, they use planning decisions and land value increases to support low-income households. In Germany, most major cities apply IZ-type requirements in new developments to secure mixed-income neighbourhoods and to prevent further spatial segregation of low-income households (OECD, 2023[53]). The Brussels Blueprint for Affordable Cities and Housing for All similarly encourages inclusionary measures to increase affordable housing in more affluent neighbourhoods (OECD, 2023[54]). Korea has begun to explore similar concepts in the context of compact and transit-oriented development, but inclusionary mechanisms are not yet deployed systematically across metropolitan and provincial cities (OECD, 2025[4]). Introducing a clear national framework for inclusionary zoning, with flexibility for local tailoring, would help ensure that new density and public investments translate into additional low-rent units in high-opportunity areas.
The framework could also include density bonuses that grant developers additional buildable floor space, height or relaxed standards (e.g. parking minima) in exchange for providing affordable housing or other public benefits. Across OECD countries, several countries, including France, Germany, Portugal, Spain and the United States, embed density bonuses in local planning regulations to leverage private investment for affordable housing while promoting more compact, transit-oriented urban forms (OECD, 2021[8]). City-level programmes in large metropolitan areas often combine density bonuses with streamlined permitting when projects meet affordability, design and environmental standards, which can significantly increase the volume of mixed-income developments delivered in central and inner-suburban locations (OECD, 2023[55]). Against this backdrop, the government has announced and is implementing a large-scale housing supply programme to deliver 1.4 million housing units in the SMA by 2030, which is expected to help stabilise its housing market.
In Korea, repeated episodes of project-finance stress have created macro-financial disturbances and exposed structural vulnerabilities in the project development financing system (Hwang, 2025[56]). These disruptions can weigh on construction activity and project initiation, particularly for capital-intensive developments. Easing project-finance bottlenecks, through targeted liquidity backstops, risk-sharing mechanisms, and improved market transparency, while maintaining a reasonable level of borrower-based safeguards (see Chapter 1), could help accelerate supply where constraints are most binding. Furthermore, strengthening project-finance conditions outside the capital region could catalyse residential and mixed-use development in regional cities, supporting labour mobility toward emerging employment centres and reducing spatial segmentation between Seoul and the rest of the country. Any public policy support, however, should be guided by thorough cost-benefit analyses.
Housing taxation constrains mobility in Korea due to high and complex acquisition taxes. Shifting gradually from transaction-based taxes toward recurrent property taxation would reduce distortions and regressivity and support labour market efficiency (see Chapter 2). Recurrent property taxes also enhance local government accountability by directly linking revenue to public services and capturing increased property values from urban development.
The provision of social housing has been identified as one of the most effective housing policies to make housing markets more efficient, inclusive and sustainable, in particular to promote residential mobility (OECD, 2021[8]). However, substandard quality and poor accessibility weaken the attractiveness of public rental housing and diminish the incentives for residents to relocate to or remain in regional areas. Persistent high vacancy rates pose a chronic challenge for Korea’s public housing programs, largely due to a mismatch between local supply and actual demand. As of 2024, the vacancy rate for public rental housing in non-metropolitan areas stood at 5.7%, significantly higher than the 2.8% recorded in the Seoul capital area. Similarly, vacancy rates for “Happy Housing” - a public rental initiative targeting youth and newlyweds - remain notably higher in non-metropolitan regions (9.3%) compared to the capital area (6.6%).
These high regional vacancies reflect the placement of units in new towns and industrial complexes with delayed in-migration, limited accessibility or weak living infrastructure, such as the Chungcheongnam-do provincial relocation site and Pohang Blue Valley industrial complex. In these locations, young households have little incentive to occupy public rental units, regardless of low rents. Evidence on commuting and healthcare disparities confirms that the construction of public housing insufficiently considers job access, service availability and walkability (Jang and Park, 2025[57]; Jeon and Woo, 2024[58]). A revised national location framework should mandate minimum accessibility thresholds and incentivise municipalities outside the Seoul Capital Area to develop well-connected, mixed-use public rental housing as part of broader regional revitalisation strategies. This would reduce spatial inequities while creating demand anchors for labour mobility toward non-metropolitan regions.
Furthermore, uniform unit-size standards, heavily skewed toward small units (<40 m²), fail to match the preferences of households in provincial areas, where demand is often for larger, family-suitable units and where land availability makes them feasible (Jang et al., 2023[59]; Chung and Kim, 2023[60]). To address these disparities, the Korean government has established the “guarantee of basic housing rights through universal housing welfare” as a key national priority. Plans are underway to improve the overall quality of public housing by expanding mid-sized or above units and enhancing site locations. Targeted federal grants or matching funds could reward municipalities that adopt high-quality, flexible design standards aligned with local industrial and labour-force development plans.
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