3. A policy framework to respond to demographic changes in Korea

Korea now faces a major adjustment as it deals with the twin challenges of demographic decline and adapting to rapid technological change. While the adjustment will affect all parts of the country, the focus of this discussion is on the rural parts of Korea, where people mainly live in small settlements and minor cities. Two policy choices for rural areas are considered here.

The first is to allow a large part of the adjustment to take place in rural regions by adopting policies that reinforce current economic and demographic trends. These include: maintaining the flow of young people from rural to urban places, continuing to allow rural communities to lag behind in adopting technological change, allowing lower quality rural public services to continue in place and generally focusing public policy on fostering urban growth. The result of this policy will be a further reduction in the share of the Korean population living in rural areas and the abandonment of many small settlements when they decline in population and economic function to the point that residents abandon the community. For the nation this will lead to a process of desertification where previously settled areas revert to a natural state.

Alternatively, Korea could choose to try to maintain most of its territory in a settled state by improving economic opportunities and living conditions in rural places; thereby slowing the outflow of rural youth to urban centres and possibly encouraging a flow of people from cities to rural Korea. This second approach preserves the territorial integrity of the country, but will require major adjustments in public policy. Notably, it will require stimulating local economic development to provide attractive career opportunities. Because of the small size of local labour markets in rural areas these efforts will have focus on small and medium size enterprises, and many of these firms will not be competitive in international markets. Further, to ensure that the quality of life in rural areas is comparable to that in cities, there will have to be major improvements in rural public and private services. These investments will be challenged by the rural realities of limited potential for economies of scale and high transportation costs. This means that alternative service delivery mechanisms will have to be developed. Because worker productivity in Korea is currently lower in SMEs and in service-oriented firms it will be important to invest in ways to increase their productivity in order to make rural income competitive with urban income, and to help them offset the broader reduction in the size of the national work force.

Either policy choice also has implications for urban centres. For decades large cities in Korea have benefitted from rural to urban migration as a significant contributor to their labour markets. With demographic decline this inflow of workers will slow, but it will likely slow more if government policy increases opportunities in rural areas as part of a strategy to maintain a populated countryside and decrease congestion in large cities. Even with maintained flows of rural youth in percentage terms, the number of rural in-migrants will decline as the rural population declines. Other factors may also slow rural outmigration as the population ages. To the extent that rural communities retain a more traditional set of social relations, there may be increased pressure on young people to remain near their home in order to help care for elderly relatives. Elderly care is more likely to remain a family responsibility in rural areas because small settlements will be unable to provide public or private elderly housing.

Deciding on a broad approach to how spatial impacts of demographic decline will be addressed is important because it will affect the value of existing efforts to improve rural conditions. For example, the current program to rehabilitate rural housing makes more sense if it is part of a broader strategy to maintain a balanced distribution of the population. But even if this the case, it is unlikely that all rural communities with substandard housing will be viable in the long run. To some extent if communities self-select participation in the program there will be a tendency for the better-organised and more viable places to apply. However, self-selection may not achieve a spatial distribution of surviving communities that meets national needs, so more context may be needed for existing rural programs to make them more coherent with national objectives.

Korea has made rapid economic and social progress over the last fifty years. Much of the progress reflects a sound development strategy that has turned Korea into a global leader in manufacturing. Large Korean firms are dominant in important sectors, such as, batteries, telecommunications, automobiles, ship construction and electronics. Korea’s dominant export-oriented manufacturing firms were able to combine a high rate of technological progress with abundant relatively low cost but skilled workers to penetrate world markets. Policies followed by the Korean government supported the growth of these chaebols including financial support and favourable labour and environmental regulations.

A consequence of this growth was an increasing concentration of the population and economic activity in cities. This has led to most regions in Korea being urban in nature, and a decline in the both the number of rural regions and the rural share of the population. However, while rural regions in Korea are few in number, they now produce a higher per capita income than do urban regions (Chapter on Demographic trends in the OECD and Korea). This suggests that there are economic opportunities in rural Korea that can be leveraged for future growth. The rural population in Korea also tends to reside relatively close to a medium size or large city, and there are no remote rural regions. As a result, a large share of the rural population lives in what can be considered a peri-urban environment. This provides the potential to form stronger rural-urban linkages that can be a way to improve the quality of life in both urban and rural locations (OECD, 2021[1]).

However economic progress has not been uniformly distributed. Three aspects are relevant to the inequality. The first is a significant small firm versus large firm difference in productivity and profitability. The second is the concentration of growth in the manufacturing sector, with services playing a far more limited role. The third is a geographic concentration of prosperity in the largest cities that continue to attract workers from other parts of the country, particularly rural areas. The result is a classic case of unbalanced growth.

During the post-war period Korea experienced a demographic dividend of a rapidly growing labour force that also underwent a major increase in skills (Han and Lee, 2019[2]). The demographic dividend fuelled the economic transformation by providing a growing number of workers whose skill level improved with each new generation. Many of these workers came to cities from rural regions at a time when rural fertility rates were high, and employment prospects and living conditions in cities were better than in rural communities.

The Korean government is already embarking on a series of policy adjustments to bring about more balanced growth. However, Korea now faces a major new challenge that both makes strengthening and broadening growth more important, and that imposes new constraints on this effort. Korea has already moved from a favourable demographic structure, where new workers were more numerous and better skilled than older retiring workers, to one where the new worker replacement ratio is below one, resulting in a shrinking work force. While workforce skills continue to increase, the rate of improvement from generation to generation is slowing. And, while urban areas are still forecast to grow they will be less able to rely on an incoming flow of workers from rural areas, because persistent outmigration has led to a large decline in the number of women of child-bearing age, and fertility rates of women in rural areas are now comparable to those in cities.

With a less favourable demographic situation a number of common practices and behaviours will need examination to see if they should remain common. Examples are: relatively long working hours, pressure on older workers in large companies to retire at a relatively early age, a pattern of young workers remaining out of the labour force while they search for jobs in large firms or government, a high rate of entrepreneurship by older individuals that can be characterised as being driven by necessity and not opportunity, low service sector productivity and low rates of female employment. These practices and behaviours tend to reduce labour force participation rates or result in under-employment, which in turn limits productivity.

In its early decades of growth, Korea placed limited emphasis on rural development, with the notable exceptions of the land reform program of the 1950s under President Syngman Rhee, and in the 1970s the Saemul Undong program of President Park Chong-hee that provided support for village modernisation and economic diversification in addition to agricultural support (Looney, 2012[3]) (Whang, 1980[4]). More recently, Korea introduced a major multi-year effort to revitalise rural areas and improve living conditions with the Comprehensive Rural Village Development Program (Box 2.10) that operated from 2004 to 2017 (Hwang, Park and Lee, 2018[5]).

For most of the last fifty years Korea relied upon an unbalanced growth strategy that supported a relatively small number of globally competitive manufacturing firms concentrated in a few cities, particularly Seoul. Most recently Korea has embarked on a balanced growth approach that seeks to reduce the share of the population in Seoul by fostering the development of a number of new cities, and a broadening of the economy. The new strategy, Innovation Cities has the goal of fostering a shift in population and economic activity away for the Seoul metropolitan region to 10 existing regional cities and a new administrative city, Sejong (OECD, 2021[1]). Spreading population and economic activity to cities distributed across the country will relieve pressure on the Seoul region and lead to an improved geographic balance. And, while the policy is mainly an urban development approach, it should provide spill-over benefits to rural territory near these new growth poles.

However, the policy, as currently conceived does not explicitly identify rural development as a contributor to balanced growth. Certainly, increasing the number of dynamic urban regions and spreading them across more of the national territory provides greater opportunity for rural people to access urban services and employment opportunities, but this is not the same as strengthening rural development. Without more support for rural development it may be possible to create a more balanced urban system, but ongoing population and economic decline in rural areas is likely to continue.

Few regions in Korea are characterised as predominantly rural, 5 out of 17 regions. This may suggest that rural issues are not very important for Korea. However approximately 18% of the Korean population live in a rural environment because all types of region contain both urban and rural territory and populations (Chapter on Demographic trends in the OECD and Korea). Most of these people live in fairly close proximity to a city, with a median travel time of less than half an hour. This makes constructing opportunities for strengthening rural urban linkages a potentially important way to improve rural well-being. Close geographic proximity allows the possibility of rural people accessing services from nearby urban centres and perhaps finding work in these urban places if commuting is possible. Similarly, rural areas can benefit from urban people purchasing local goods, such as farm products, or from urban families travelling to rural areas for leisure activities. While these linkages can develop independently of national government support, they are more likely to lead to a stronger rural economy if they are explicitly encouraged (OECD, 2021[1]).

As noted in the chapter on Demographic trends in the OECD and Korea the quality of life of rural people in Korea is often inferior to that of urban Koreans. This includes: access to reasonable quality housing, availability of public services, quality of education, access to transportation, and, in some places, environmental quality. If rural regions are to continue to make a positive contribution to national development it will be important to ensure that rural areas are desirable places for workers to live. Assuring Inclusive growth across Korea can be framed in terms of: ensuring work and skills, and opportunities to start and grow businesses (OECD, 2021[6]). And these are certainly the key factors influencing productivity and production. However, in an environment where the labour force is shrinking and places must compete for workers, it is important to ensure that some places are not disadvantaged because they are currently unable to offer an adequate quality of life.

Korea now must decide how its rural policy will support general development objectives in this new period of demographic decline. It is clear that some rural places will not survive, because the national population is falling and there will be a significant geographic rebalancing of people. However, the number and geographic distribution of surviving rural communities will hinge on policy choices by the government on where investments in increasing productivity and providing public services will occur. Choices that assign a priority to favour factors that encourage the permanence of a significant share of the population across rural regions will reduce desertification and may meet national security objectives, but will require the implementation of a range of policies that focus on improving rural conditions. Conversely, a policy regime that is mainly urban focused will inevitably lead to higher rate of rural decline.

Korea has undertaken a highly successful national development strategy over the past fifty years that has made it a prosperous country. Historically much of Korea’s growth was driven by investments to support export-oriented manufacturing. This was clearly successful, but it has resulted in rapid urbanisation of the population as rural residents migrated to cities for better jobs, and significant rural decline. Korea has become a major manufacturing power and is a global leader in electronics, automobile and ship-building. In the process the economy and Korean society have become highly urbanised with Seoul becoming the dominant city. Currently the Korean government is engaged in efforts to spread economic activity and the population outside Seoul to create more spatially balanced growth and reduce increasing congestion costs in the capital city. Much of this effort involves creating a network of secondary cities. While Korea has a clear urban strategy it currently lacks a parallel rural strategy that could add to the current focus on achieving more balanced growth and increased prosperity for all citizens wherever they live.

OECD countries are affected by demographic change in different ways. Mainly due to ageing, immigration and falling fertility rates, many cities and regions in the OECD are likely to continue to “shrink” in the coming decades, even with some increases in population due to migration (from within or outside the country). There is a need for new thinking and policies to overcome some of the expected challenges ahead (e.g. ensure financing of services that are likely to see increased demand with the growth of the ageing population; balance employment opportunities for the youth and the elderly; innovate the management of urban infrastructure). The silver economy (referring to the elderly workforce) and the white economy (referring to the economic opportunities of healthcare) could be new sources of growth together with opportunities from green economy activities, but there is a need to create an enabling environment by providing appropriate support to local governments and business. At the same time, national and local governments are already working to address the ageing workforce, which is a priority issue, and a number of programmes and initiatives are in place (Martinez-Fernandez et al., 2012[7]).

Other OECD nations have recognised that it is important to move beyond just trying to reverse demographic decline in rural areas to finding ways to adapt to and manage the decline process. For example, in the Netherlands, population and households are projected to decrease rapidly in the near future. The decrease in the number of youths and the ageing population will also cause a rapid decrease in the size of the potential labour force. In 2010, the Dutch Government identified a strategy called “anticipating regions” for facing population shrinkage. Regions and municipalities had to anticipate the effects of demographic decline and adapt housing policies but also define new policies for the local economy, retail trade, business locations and the labour market. In fact, the experiences in shrinking regions show that there is little use trying to combat demographic decline and that a policy shift from combating shrinkage to managing, shrinkage is more effective, even if it is a difficult process. To do so municipalities need to work together at the regional level to ensure that they do not compete for the same residents and businesses. This also helps preventing unprofitable spatial investments, financial problems and unoccupied homes and offices. Regional and national government shall support municipalities in their search for new coalitions, in developing financial resources and in exploring the possibilities provided by existing regulations to implement common strategies that focus on anticipating and managing shrinkage. Main takeaways from evaluations of policies to manage shrinkage include: 1) Approach demographic challenges in an integrated way and adopting a long-term perspective. 2) Develop adapted financial instruments to facilitate long-term intergovernmental co-operation. 3) Make sure the right preconditions are in place to realise the opportunities in shrinkage areas and take away any obstacles in regulation that prevent regional-specific efforts and approaches. 4) Sharing experiences, expertise and knowledge between regions. 5) Make sure regions and municipalities have enough resources to maintain the basic social infrastructure to which everyone has a right. Make sure there is some flexibility in funding since this infrastructure might cost more in shrinkage areas then elsewhere (Verwest and Van Dam, 2010[8]).

Italy’s “inner areas”, rural areas that are found to be exceptionally remote from urban centres and to face specific infrastructure and service-delivery challenges, cover almost 60% of the national territory, hosting nearly 23% of the national population and encompassing approximately 53% of Italy’s municipalities. Inner areas are characterised by: distance from large and medium-sized urban centres; a wealth of natural assets and cultural resources; and a complex settlement pattern shaped by diverse natural phenomena and human settlement processes. In aggregate, these areas are experiencing population ageing and decline, loss of jobs and shrinking public and private service supply. Their decline in many cases has hydro-geological consequences and entails loss of cultural heritage and landscape degradation. A National Strategy for Inner Areas development has recently been developed with a view to promoting the recovery of such areas on the basis of a set of interconnected projects focused on few selected priority fields of intervention and co-ordinated with ordinary sectoral policies (service provision). The strategy seeks to enhance well-being and quality of life in Inner Areas by turning differences into competitive strengths, overcoming differences, interconnecting locations, and strengthening networks. The Strategy pursues two complementary objectives: i) improving Inner Areas populations’ capability to have access to essential services (education, health, transport); and ii) promoting Inner Areas’ development by capitalising on local assets and stimulating job opportunities. The ultimate goal of the Strategy lies in reinforcing Inner Areas’ demographic structure. Five major innovations differentiate the strategy from previous efforts in this field: 1 Though it is a national strategy, it is based on partnership across levels of government and a strongly participatory approach to local development. It neither forces local actors to conceive new development measures themselves nor plans them from the capital. 2) It has two clear aims of accessibility and promoting development, and the central government’s approach to these two goals is differentiated. For accessibility, it is a supply-focused policy rationalised by sustaining their quality of life. For promoting development, it is a support-giving function to promote local initiatives in selected domains. 3) The framework to promote development is well-conceived. It is a step-by-step process, enabling the government to minimise the risks of pouring resources into undesirable areas and to maximise the benefits expanding others. One prototype area per region is selected to evaluate the potential success of the Strategy and trigger a positive learning mechanism. All the selected areas come to be part of a project federation to encourage networking, exchange and learning. 4) The process for selecting prototype areas is very transparent. Meetings, datasets, results and reports are published on line. 5) The sustainability of Strategy actions is ensured by a bottom-up approach in which municipalities and regions are directly responsible for Strategy implementation. Municipal associations are utilised in Italy as a platform for collaborative work. (Source: Information provided directly by the Department for Development and Economic Cohesion of the Italian Republic). (OECD, 2016[9]).

Similarly, Japan has introduced two new strategies that provide a context for developing a range of policies to address demographic decline. The Long-term Vision and the Comprehensive Strategy for Overcoming the Population Decline and Vitalizing Local Economy were both approved by the Cabinet in December 2014. The “Long Term Vision” is Japan’s vision to alleviate the rapid population decline and vitalise the regional economy for 2060. The primary perspectives are: 1) Ease the overconcentration in Greater Tokyo Area; 2) Support young generation’s hope for work, marriage, and parenthood; 3) Solve the regional challenges based on the specific characteristics of each region. The “Comprehensive Strategy” is Japan’s basic policy principles and its implementation for the coming five years. The objectives are: 1) “Generate stable employment in regional areas,” 2) “Create a new inflow of people to regional areas,” 3) “Fulfil the hopes of the young generation for marriage, childbirth, and parenthood,” 4) “Create regional areas suited to the times, preserve safe and secure living, and promote co-operation between regions.” The Government and local governments co-operate in pursuing solving issues by: 1) creating “Regional Economy Data Analysis System” to provide local governments with big data to analyse various indicators, including demographics, business activities, and tourism trends in each region; 2) financial support (grant for local governments, local allocation tax, and tax incentives for businesses) for creating the “Regional Comprehensive Strategy” in each region and its implementation; 3) Human support by assigning government officials and the other experts to assist the chiefs of smaller cities, as well as providing local governments with consultant service by government officials. The “Long Term Vision” is revised every five years, and the “Comprehensive Strategy” is revised every year. In December 2020, “Comprehensive Strategy” was amended, which included the measures for avoiding spreading the pandemic, such as promoting Digital Transformation and decarbonisation society, promoting teleworking, creating attractive universities and industries in regions, and increasing the number of people who move or visit regional areas frequently. The “Basic Policy for Overcoming the Population Decline and Vitalizing Local Economy in Japan” contains detailed policies to achieve the principles in the “Comprehensive Strategy (OECD, 2016[9]).

In recent years, Korean governments have recognised the need to invest in rural areas. Several factors are important.

  • The first is a recognition that unbalanced growth policies have left rural people worse off than their urban pers. When it was important to induce rural to urban migration flows this may have been considered acceptable. But now there is less need for more people in the large urban centres, and many rural people now lack the skills demanded by urban employers as they transition to more advanced production methods.

  • Second, Korea has reached a point where the returns from further investments in strengthening large export focused manufacturing firms in urban areas are starting to decline. Consequently, future economic growth will require contributions from other parts of the economy and from other parts of the country, including rural areas.

  • Third, demographic decline has started to impact the labour force with retirements exceeding new entrants. In this environment it is crucial to increase labour force participation rates and to ensure that workers are not “underemployed”. In rural areas there are lower labour force participation rates, especially by females and the productivity rates of rural firms are considerably lower than those in urban places.

The OECD has shown that rural areas can make effective contributions to national economic objectives but they need particular types of support that are tailored to their situation and capabilities, which differ considerably from large urban regions (OECD, 2016[10]). In particular, economic growth and sustainability in rural areas hinges on the development of tradable sectors that sell their production, whether goods or services, outside the local economy. In the past rural areas tended to specialise in the production of natural resources, including agriculture, fishing, forestry and mining. First stage processing of these resources developed and this introduced manufacturing. Over time, some rural regions have been able to expand beyond first stage processing of resources by expanding the variety of manufactured goods they produce. More recently, many rural areas have become specialised in providing tourist activities that are based on nature of local cultural attributes. In addition, some rural regions have been able to act as retirement destinations for urban residents who relocate to enjoy a quieter lifestyle in a pleasant surrounding. Finally, modern ICT has allowed some services to be able to locate to rural areas, including call centres and various “back-office “functions that do not involve close interaction with customers.

While the service sector, broadly defined, employs more people in rural regions, just as it does in urban regions, most service-sector jobs support the local economy but do not generate any revenue from external sales. Because they lack a large home market, due to a small population, rural areas have to purchase many of the goods and service that are required locally from outside their region. This in turn requires that they sell sufficient locally produced outside the region to pay for their imports. Ultimately, a sustainable rural economy requires a strong core of export-oriented firms that form the base of the economy. On this basis, it will be possible to develop a fabric of firms and local government services that create an improved quality of life. But absent the base, the fabric will dissolve as the externally generated funds needed to support it disappear.

Policies may affect the consequences of decline in regions and rural areas in one of three ways.

  • The first are supply side policies that try to increase the number of potential workers, either through increasing birth rates or through encouraging in-migration. Inward migration is also a challenge for most nations, and while internal migration within a country can improve population numbers in some regions, it will reduce them in others.

  • Second, policies to enhance the utilisation of the current labour forced largely by increasing participation rates or slowing the rate of retirement can be introduced. These can be effective, but there are limits to their use since they tend to be less effective each time they are used. It may be possible to increase the workforce participation rate by a few percentage points, but it becomes much more difficult to subsequently entice those with stronger reasons for not participating. Similarly, the youngest cohort of older workers may be easily encouraged to work longer, but it is more difficult to entice people in their late 60s to continue to work.

  • The third, and most effective way to adapt to a shrinking workforce is to enhance worker skills and substitute capital and technology for workers as they become scarce. This has the additional benefit of increasing worker wages because this approach enhances labour productivity, which should increase wages. Improved workforce training is a key part of this but it is clear that skill development has to be tightly coupled to employer needs, which will vary by industry and often by size of firm if they are to be effective. It also suggests that the effects of demographic decline by industry must be examined and effective ways to adjust to this decline must be identified. Only then can appropriate workforce development programs be identified.

Of these policies, very few – increasing fertility rates and increasing immigration, attempt to directly reverse demographic decline. All the rest can be characterised as efforts to mitigate the effects of decline, by altering how labour markets function, how and how governments deliver workforce development programs.

Labour force development is best understood in the context of Active Labour Market Policy (ALMP), which focuses on the supply of labour, the demand for labour and ways to make labour markets function more effectively. On the supply side three policy areas are discussed: retaining a larger share of rural youth, increasing the labour force participation rate of those with low current rates and improving rates on migration to rural areas. Labour demand is mainly discussed in the three subsequent sections covering agriculture, tourism and manufacturing. In addition, the importance of raising the effective supply of labour by improving workforce skills is considered in a rural context.

Policies that significantly expand the number of workers have been difficult to implement in OECD countries. The main driver of national population decline has been a large drop in female fertility rates that took place over several generations. This largely reflects differences in lifestyle choices by families that would be difficult to reverse. For family size to increase major changes in support for women is required. While families can play a role in this process national governments will have to provide far better support for working women than is now available in all but a few OECD countries. This includes: extended paid time off for new mothers and fathers, high quality subsidised day care, access to after school care that is close to places of work and flexibility in working hours to deal with family emergencies. Countries that provide these family friendly policies tend to have significantly higher fertility rates than do countries where these accommodations are not widely available.

While these policies offer only a long-term opportunity to influence fertility rates they can have a significant short-term effect in countries and regions where female labour force participation rates are low. For women to be willing, or able, to take on paid work they must have a way to transfer a significant portion of their household responsibilities for family care to their partner or another provider. In the past this may have been a member of the extended family. However, in modern society it is less common to have relatives living in close proximity, which means that a formal institution, such as a licensed day care facility or a similar entity that provides after school care is required. Cost, quality of care provided and ease of access are all important factors that will influence a woman’s willingness to take on formal employment. If countries see higher female participation rates as a way to deal with imminent workforce shortages this may be an additional reason to support programs that also provide long term increases in fertility rates even these may not affect the work force for decades.

Korea has recognised that fertility rates in Seoul and in other high cost, congested, large cities are lower than in the rest of the country. In part this may reflect a self-selection process where individuals less interested in having children concentrate in urban centres or live in cities for the part of their lives when they do not have children. However, it may also be a response to the high cost of housing, the resulting small living spaces for most households and difficulty in affording care for children without both parents working. Current efforts by the Korean government to provide family friendly environments in secondary cities are an appropriate response to this problem and appear to be successful (Economist, 2020[13]). To the extent that rural locations offer a contrasting situation to large cities – affordable housing less stress, lower cost of living, perhaps more nearby relatives, efforts to stimulate young households to move to rural communities might have a positive impact on fertility rates. However, it will be important to provide similar forms of support for young mothers. Otherwise, the number of relocations may be small, or relocating families may decide to reduce their degree of participation in the formal labour force to manage the time obligations of childcare.

In rural areas of the OECD there is typically a high rate of youth outmigration from rural communities. When fertility rates were high this reflected the pull of better jobs in urban places and a push that came from an insufficient number of jobs for young people in rural regions. Surplus labour in rural regions can lead to wage stagnation and inferior working conditions, since employers believe they can always find replacement workers. This situation, in turn increases both outmigration and lower rates of labour force participation. Youth outmigration, especially by young females, increases the rate of population decline. Such migration may be rational for the individual, and it is clearly positive for the cities receiving these people; but it is a problem for the rural community and it can be unclear whether it is beneficial for the nation. Korea’s effort to encourage a reverse flow of people from cities to rural regions suggests that the social costs of rural depopulation when combined with the costs of urban congestion are too high.

With the number of new entrants into the workforce falling below the number of people leaving, it is important to increase youth participation rates and to ensure that young workers achieve their full potential in terms of productivity. In the past youth outmigration from rural regions achieved these two objectives. Young people left a region where their employment prospects were limited due to a scarcity of jobs, and in urban areas young migrants from rural Korea found work that made better use of their skills, which increased their productivity. This remains true today and will only change if the nature of employment in rural regions changes to make it less advantageous for youth to leave. Whether this happens will depend on the responds of rural employers to the increasing shortage of workers.

Productivity in rural areas of Korea lags behind levels in urban areas (OECD, 2018[14]). In part this reflects differences in the industrial mix, but it also reflects differences in production technology. Rural firms continue to rely on production techniques that are based on low cost labour and high-cost capital. In urban areas large Korean firms are substituting relatively low-cost technology for increasingly costly workers. One consequence of this is a strong incentive for rural youth who already possess a high job skill, or who have the aptitude to acquire high job skills to leave. The resulting “brain drain” from rural regions may be more important than the number of people who leave for rural development. Rural employers face a smaller and less skilled work force as a result. The small number of workers precludes continuing to rely on labour intensive production technology, but the low skill potential of much of the remaining rural youth limits the opportunity to shift to more capital-intensive production techniques that would increase productivity and wages. With no change, a large share of rural firms will eventually fail, either due to an insufficient number of workers, or by falling so far behind in terms of cost and quality that they lose market share.

If Korea is to achieve its objective of more balanced growth while adapting to demographic decline, it will be important to ensure that employment opportunities in rural areas offer comparable standards of living to those in urban areas. This does not mean that wages will have to be equal, or that all careers are available in the two types of geography. It does require that quality of life measured over multiple dimensions be fairly similar, including employment satisfaction. For some rural youth leaving for urban opportunities will still be preferred. Others may choose to stay if a better mix of local skill development and better career prospects is available. Further, if a broader range of employment opportunities in rural areas can be developed the government objective of having residents of urban places relocate to rural communities may be more achievable.

In all cases the main task is to identify policies that will encourage individuals who are currently out of the labour force to engage in employment. In some cases this may be a simple function of wages, which should increase as the number of workers declines. However, in many instances an important impediment is not directly related to wage levels. Women may have low participation rates because they have major household care responsibilities for children or elderly relatives. Providing high quality care at low cost and in close proximity to the home or place of work could increase female participation rates. Elderly may not participate because they no longer wish to, or are unable to work full time. By creating part-time jobs or facilitating the sharing of a single job among several individuals it may be possible to increase their participation rates. The disabled may not participate because they need specific work adaptations that employers have previously been unwilling to provide. With accommodation’s they could are more likely to engage in work.

In remote and sparse rural areas, transport to work is more difficult than in urban places. Even where public transit exists, it is generally infrequent and does not cover many routes. This means that people tend to rely on local jobs that are in close proximity to their residence or require an automobile. In the first case the likelihood of a good match between employer and worker can be low, which can decrease participation rates. In the second case the cost of owning and operating a car may be too high given the person’s skills and prevailing wages, leading to withdrawal from the labour force. No standardised solution exists to resolve the transport issue, but many rural places are exploring innovative ways to provide relatively low-cost transport options in a rural context (see for example Italy’s Inner Areas Strategy and Box 3.6)

Demographic decline at the national level is typically accompanied by high rates of decline in some regions and increases in population in other regions. Regions that tended to lose population, or which had slow rates of growth prior to the onset of demographic decline, typically continue to experience significant population drops. Korea’s projections show that decline in rural areas will continue and accelerate in some cases due to significant outflows of young people, especially young females. In general, it can be assumed that regions with low rates of employment and low earned incomes will be unattractive to migrants, Further, rural regions across the OECD have been relatively unattractive places for international migrants unless they are required to go there as a condition of entry to the country. Even then many individuals leave for an urban setting as soon as they can, especially if the urban place has a significant number of their fellow citizens (Box 3.7).

If a rural region cannot retain a large share of its youth, it is unlikely to be an attractive place for others. The single large exception to this rule is in agriculture, where in many countries foreign migrants, either permanent or temporary, now constitute a large part of the farm labour force. This largely reflects the prevailing low wages and harsh working conditions on farms that discourage local people from farm work. The use of restricted entry visas that limit foreign workers to farm labour provide farms with necessary labour. While farm employment is unattractive to most rural citizens it can be desirable for people from poor countries. Programs to admit farm workers tend to exist in countries where the majority of production takes place on large farms and a large number of seasonal workers are required for harvest and field operations. However, most farms in Korea are small enough to be able to rely on family labour and often cannot fully utilise all their available labour on a regular basis, which makes bringing in large numbers of seasonal farm workers improbable.

Korea has introduced policies to encourage people in urban areas to consider relocation to a rural community. The success of this program will hinge on both the community being attractive as a place to live and there being an opportunity to earn an adequate income. Rural places often have desirable amenities and it relatively easy to provide acceptable housing. However, it can be harder to provide the full set of public and private services that urban people are used to. Even more difficult is providing adequate employment, especially for a young family. If both parents work, which must become common given the shrinking labour force, then high quality affordable childcare will be required. Further, in many rural areas there are few or no opportunities for many urban careers and it can be difficult for an individual to identify a community where their skills are marketable. Box 3.8 provides examples of investments that have been made in a number of rural regions in OECD countries that can increase attractiveness. Box 3.9 describes an island community in Japan that successfully underwent a revitalisation process and is now attracting new residents.

Revitalising local rural economies is required, both to slow current high rates of youth migration and to attract urban people to rural areas. Investments in public infrastructure and improvements in government services can make rural areas more attractive places to live, but without a strong local labour market, mainly based on private firms, communities can only survive if they receive ongoing transfer payments. Sustainable rural places must have an economic capacity that allows then to be competitive exporters of goods and services (OECD, 2016[16]).

While rural policy can be described as any policy that affects the people or places in rural territory, it is useful to focus on a small number of core policy domains where rural specific policies can be identified that have the potential to offer substantial support to rural people, forms and communities in Korea. They are:

  • agricultural policy broadly defined to include farming and fishing and related activities;

  • tourism, once again defined to included cultural activities that can attract visitors to rural areas;

  • manufacturing, mainly focused on SMEs.

Because rural areas are characterised by low density, long distances and an inability to take advantage of economies of scale they are often challenging places to provide goods and services by typical means in both private and public sectors. This opens an opportunity for non-profit providers to play a larger role. In addition, it is important to ensure that rural areas are able to keep up with technological change by engaging in innovative activities.

Currently Korea’s rural policy focuses on expanding agriculture and tourism, with much of the focus in rural tourism either on landscape amenity or cultural tourism that is linked to traditional farming and fishing locations. These are important strengths for rural areas in Korea, but only having two pillars for rural economies can be problematic. In particular, farming both tends to offer seasonal employment with low wages and preserving traditional farming and fishing practices is now being challenged by an inability to attract new entrants. In principle while tourism and farming could offer the equivalent of a full time job by combining part-time work in both sectors this is in practice difficult, because the peak employment seasons for both sectors overlap to a great extent.

Given the strength of Korea in manufacturing a potential third pillar could be rural manufacturing, but at present rural manufacturing firms struggle to remain competitive (OECD, 2018[14]). Despite the clear challenges facing rural manufacturing firms they are present in most of the country and there is a considerable rate of new business starts, suggesting that people are interested in manufacturing. While rural manufacturing may not directly employ as many people as farming or tourism, it has the advantage of providing mostly full-time jobs with better wages. Even if wages in rural areas are not as high as in Korean cities, the addition of a third pillar in rural areas would offer an additional source of household income that, in conjunction with farm or tourism sector employment, could raise community and family incomes to a higher level.

In addition, it is important to find ways to stimulate alternative ways of organising firms in rural areas beyond traditional investor owned ‘for-profit” enterprises. Encouraging a larger role for co-operatives and various forms of social enterprise in rural areas can both increase number and variety of businesses and improve the attractiveness of rural communities to current and potential residents. Returns on investment in rural locations are often low because demand is low, input costs are high and there are few opportunities to achieve scale economies. Various forms of social enterprise can thrive in these conditions because firm owners have a broader objective. In many rural places, some form of community ownership has allowed a vital business to remain in operation and help to stabilise the population.

Farming has become a smaller part of the rural economy in Korea, just as it has in all OECD countries. But farming remains the largest single use of rural land. In Korea, as in other OECD countries, the farming population is becoming older and fewer children of farmers wish to take over their parents’ farms. In some countries the result has been a significant increase in average farm size, with a relatively small share of very large farms producing large quantities of output for domestic and export markets. These countries are typically much larger in size than Korea and have far more favourable agronomic potential. However, even in these countries there is an increase in the number of small farms that produce high value specialty crops and livestock products for either local or on-farm sales to, tourists, local residents or to specialty shops outside the region.

In Korea, where rice farms are the main specialisation and largest land use. there are considerable opportunities’ for modernising production techniques that can improve farm household income. This however leads to farm consolidation and a reduction in the number of farm households, which can accelerate rural depopulation. The inherent trade-off between increased farm productivity and stabilising rural populations requires the use of integrated policies that address both issues. Japan has undertaken a project on modernising rice farms described in Box 3.11 that may suggest a model for Korea.

Korea would seem well suited to expanding this type of agriculture as a part of its rural development strategy. Small-scale farms provide agricultural output and are also more likely to provide a high-quality natural environment, as well as being a key part of supporting local and national heritage amenities. These multi-functional farms are consistent with a current trend in agricultural policy to move away from direct price support for the production of commodities to an agricultural policy that is more environmentally friendly and that supports broader rural development objectives.

Small-scale farms are also more likely to support broader rural development efforts. Part-time work is common, both in terms of hiring supplemental labour on the farm during busy seasons, and in farm household members seeking temporary or full-time work off the farm to supplement farm income. Small farms also result in a larger local population than do a few large farms on the same area of land. This larger population provides more local demand for retail establishments and for public services, which makes the broader local economy more viable. (See for examples the Box 3.13and Box 3.14).

Korea has already taken important steps to increase the role that tourism can play in rural communities. Because most of rural Korea is in close proximity to an urban agglomeration a key focus for tourism could be short-term visits that bring visitors for a weekend or a multi-day midweek stay. In addition, rural communities in Korea could become places where urban families have a summer home they visit regularly, especially if these families have some historic attachment to the community. Most rural regions in Korea cannot offer the kind of compelling, globally recognised tourism experience that makes them a destination for international tourists. However, it may be possible to put together a package of tourism experiences that are collectively more interesting for international tourism. Examples of the approach are: the Bourbon Trail in central Kentucky that offers visits to about 20 different distilleries, barging in Burgundy that allows visitors to take a barge along historic canals and stop in a number of small villages, or the Queensland Heritage Trail in Australia that links multiple communities each of which have an interesting cultural or natural feature. In addition, special events, such as seasonal festivals or concerts can bring people to a region for the first time and provide the motivation for repeated visits or even longer-term investments in a second or retirement home.

Tourism has become an important way to diversify the economic base of rural communities and regions. While it provides mainly lower wage seasonal employment opportunities, these can be an important addition to household income in a rural labour market where many other jobs are seasonal in nature. Moreover, tourism can be an effective part of a recruitment strategy that tries to attract new residents and businesses. Individuals who vista place and form a favourable impression are likely to be more interested in a permanent relocation because they have had a direct positive experience and are likely to have developed personal connections in the community.

Manufacturing is a recognised strength of the Korean economy and there is a significant amount of manufacturing already taking place in rural Korea. There are opportunities to broaden the range of manufacturing, particularly by SMEs that could complement existing subsidiaries of large firms (Box 3.17). While subsidiary establishments can provide employment to a large share of a local labour market in a rural area, the nature of the work is typically highly specialised, which leaves workers with a skill set that is not very useful to other employers or for becoming an entrepreneur. Moreover, because branch plants are integrated into national or global supply chains opportunities for forward or backward linkages within the community or region are limited. As a result, multiplier effects for the local economy are small.

Other OECD countries with strong manufacturing sectors have found ways to combine large scale manufacturing plants in more urban regions having large labour forces, with smaller export-oriented firms in more rural regions with smaller labour forces. Notable examples are Germany and Italy. Many of these small firms are family owned and focus on producing highly specialised products that have small but profitable markets. The manufacturing processes typically combine sophisticated technology with skilled labour, and strong customer service, making it difficult for potential competitors to enter the market. The mittelstand in Germany (Box 3.18) provides a useful example. Key to the success of these firms is access to new knowledge, and while German firms have developed this capacity over time it will be important for Korea to support firms of this type initially with government programs. The manufacturing extension service in the United States provides an example of a way to do this (Box 3.19).

In the future a smaller local labour force may make it more difficult to support larger branch plants in rural communities. However, smaller, niche product manufacturing enterprises could provide a path to a stronger rural manufacturing economy. For this to happen a multi-part support program is required. The first element is to provide encouragement to young (but also senior people) to consider entrepreneurial behaviour, rather than seeking a job in a large corporation or in government. Once nascent entrepreneurs exist a second step is to provide them with the support to take their business idea to a stage where it can actually be implemented. The third step is to provide the support for them to implement their business plan. At this stage incubators and funding can be crucial factors for a successful business launch. The final step is to assist young, promising companies and help them to grow either in size or to broaden the number of products or services they provide.

The social economy or social enterprise serves as a complementary alternative to either for-profit firms or government as a provider of goods and services. In rural areas social enterprise can be particularly important when neither for-profit firms nor government are prepared to serve the community in a manner that meets local needs. Because social enterprises are embedded in their local community and are owned and operated by people who also use the good or service produced they can thrive when other typed of provider withdraw. The main advantages of a social enterprise are: that it can rely on volunteers for at least part of its labour needs, it can obtain financing from members or through grants that need not receive a market rate of return, and it can tailor its activity to the specific needs of the member-owners. Social enterprises that provide services are often more closely related to government, such as co-operative schools or community owned health care facilities. Other social enterprises, such as community shops or farmers marketing co-operatives are more like for-profit businesses in their orientation, In all cases a social enterprise should cover its costs and generate sufficient funds to make investments to allow it to grow but does not distribute a profit.

Some brief examples of successful social enterprise in rural regions of OECD countries can provide a context for developing a broader use of the concept as tool for rural development in Korea.

  • Appalshop, Whitesburg, Kentucky USA. Appalshop was founded in Whitesburg in 1969 to teach young people in the region to make films that documented local history and culture. In the process it would teach people marketable skills. By 1975 it had 20 full-time employees and had expanded to provide support for artists, theatre and other creative work. Today it operates a radio station, sponsors a music festival and in 2019 installed a net-metred renewable energy system. The guiding principle of Appalshop is that supporting cultural development is also a means to supporting economic development.1

  • Gotland’s Broadband Initiative, Gotland ,Sweden. By the mid-2000s small communities on the island of Gotland realised that major telecommunications operators in Sweden were not interested in providing last-mile fibre-based broadband to rural households. In response villages organised to develop a framework where they would be responsible for installing the fibre in their community through volunteer labour with each household providing 3 days of work. Starting in 2010 and ending in 2017 broadband has been installed in all 92 parishes with a high rate of homes connected for a modest fee. In 2017 the project was one of five winners in eh European Union annual European Broadband Award.2

  • Candover Valley Community Shop, Hampshire, England. In 2013 the only village shop in the area decided to close, which would have left about 2 000 people in 5 villages and 4 hamlets with no local sources of food or other services. The shop owners agreed to continue in business until the community could develop a plan to take it over. Residents formed a committee to investigate taking over the shop as a community owned business. Subsequently local people raised GBP 120 000 and GBP 105 000 was obtained from grants to build a new shop that would also host the post office. The new shop opened in 2019 and is staffed by 40 volunteers and has 250 member-owners.3

  • iCoop, Korea. iCoop Korea is the second largest consumer co-operative in Korea with more than 170 000 members, it focuses on ensuring that Korean households have access to high quality foods produced in a sustainable way. The co-op contracts with farmers to produce food that meets its desired standards and means of production. One of its main activities has been to find ways to produce rice in more environmentally friendly way. Research was sponsored to develop new production methods that improved biodiversity in rice paddies and subsequently farmers received contracts to produce rice using the new methods. ICoop believes that its effort is helping consumers and helping to maintain a viable agriculture in rural Korea.4

  • Greencraig Community Wind Turbine, Falkirk, Scotland. The turbine project is a partnership between a local social enterprise, the Bespoke Community Development Corporation that focuses on enhancing green travel in the area and on employment training, and Locogen a for-profit renewable energy specialist. A new community investment corporation will operate the project with 65% of profits flowing to community development purposes. Bespoke received grants from the Scottish government to cover most of its share of the investment and will receive a minimum payment of GBP 37 500 over the life of the project to support its activities. Power from the project will be fed into the grid at prevailing prices.5

  • Social Traders, Melbourne Australia. Social Traders is social enterprise that acts as a certifier of individual social enterprises that provide goods or services and as a platform that connects these certified businesses with public and private supply chains across all of Australia. This intermediation function is vital for many social enterprises that have not fully developed a market niche. It also allows companies and governments that want to buy from social enterprises to certain that the firms they deal with are legitimate. Their objective is to facilitate more than $5 billion in demand for social enterprise in Australia by 2030. This will lead to major increases in employment and in related job training as well as providing other community benefits.6

Across the OECD there is untapped potential within social economy organisations and social enterprises that requires policy action to unlock. These entities can help build more inclusive and sustainable society in each region. Much of the policy needs concern the development of enabling ecosystems. Building a conducive ecosystem for social economy development includes: 1) Raising awareness and visibility of social economy organisations, including social enterprises. This can be done through dedicated and enhanced framework laws or national strategies that define the nature, mission and activities of social economy organisations and therefore help policy makers to more effectively target their support. This can also be done through lighter policy options such as setting up communication campaigns or providing specific support to networks that connect social entrepreneurs to investors and public-sector representatives.2) Providing business support to social enterprises throughout their developmental phase. Specific public support for structures such as hubs, accelerators or incubators can facilitate the development of social enterprises across territories and activity sectors. 3) Supporting a diversification of financial sources. While public support (predominantly through grants and subsidies) is a major financial source for a number of social enterprises, an increasing number now seek to access financing provided by mainstream or new funders (e.g. commercial banks or impact investors). Still, mainstream funders or impact investors perceive social enterprises – especially in the early stages – as high-risk clients and are therefore reluctant to invest in them. Policy makers need to raise awareness through capacity-building, along with efforts to share the risks with mainstream funders, impact investors and commercial banks, for example through guarantee schemes. 4) Fostering social-entrepreneurship skills in the education system. In the long run, education and skills that breed entrepreneurial behaviours need to be developed. For example, educational programmes on social entrepreneurship can provide students with opportunities to develop new solutions to unresolved social challenges and learn about business-creation processes and planning at the secondary and higher education levels. 5) Ensuring institutional continuity and political support for social enterprise development (OECD, 2020[22]).

Political impetus can act as a catalyst for both nascent and/or well-established ecosystems, fostering and accelerating favourable conditions for the growth of social enterprises. However, challenges may emerge when political support for developing the sector of social enterprises fluctuates owing to government changes. Sustained policy support is essential to establish an enabling ecosystem allowing social enterprises to thrive over time. Concerning policy actions that are specifically designed to support the employment creation role of social economy organisations, policy makers could promote: 1) Funding stability. Ensure that public financial support goes beyond short-term contract funding so that longer term employment plans can be developed; 2) Public procurement. An important tool to sustain social enterprises is public procurement, for example including “social clauses”, using “reserved contracts”, or applying “best quality/price ratios” so that social enterprises can compete in getting public contracts; 3) Employment subsidies. An ecosystem favourable for social economy can be also facilitated through the use of employment subsidies for social enterprises working with disadvantaged individuals to offset the costs stemming from the loss of productivity associated with hiring individuals whose job performance is less than normal (OECD, 2020[22]).

With a shrinking population it essential that rural regions find ways to increase productivity and remain competitive if they are to remain viable communities. Innovation is a major way to achieve this objective. But innovation can be difficult in rural regions because they lack most of the underlying characteristics, such as, formal research and development organisations, pools of investment capital and a core group of scientific and engineering professionals. Innovation in rural areas comes from a number of sources. In some instances, it diffuses from urban areas where it originates. In other instances, research in urban areas is focused on applications in rural areas – for example research in agriculture, forestry or mining is typically undertaken in an urban location. Finally, there is innovation that originates in rural areas by the efforts of rural people. It is this latter form of innovation that is most subject to influence by rural society since both the actors and the locale are rural. In particular, there is a strong link between rural innovation and entrepreneurship (Box 3.21).

One way to enhance innovation is to try to attract innovative people to a rural region by offering them an environment that is conducive to their efforts. Box 3.20 illustrates an approach taken in one community in Japan. Another approach is to try to induce people who might not think of themselves as being entrepreneurial or innovative to consider a new activity. Box 3.22 provides some recommendations for increasing entrepreneurial activity by the elderly. Innovation is typically understood as the creation of a new product or new form of production, but it can also include a new service or a new way of delivering services. In rural areas all forms of innovation are important especially as a shrinking supply of labour and pressures to adjust to the effects of climate change are making current ways of providing goods and services less effective. Box 3.21 provides a number of examples from eh OECD Review of the Northern Sparsely Populated Areas of Finland, Norway and Sweden (OECD, 2017[30]) that illustrate innovative practices in remote rural areas.

With increased global economic integration, more developed economies lose their comparative in less-skilled activities over time making an upskilling of their work force imperative. Demographic decline is increasing the pressure to improve workforce skills to allow higher productivity to drive future economic growth. With fewer available workers appropriate policy responses are to increase the labour force participation rate, so that a larger share of potential workers are actually employed, and to improve skill levels to increase the productivity of those workers. Geographic differences in local labour markets between rural and urban places make it important that policies to accomplish these objectives reflect the differing conditions.

Figure 3.1, below, based on Fernandez, Hijzen, Pacifico and Theswissen, 2020, looks at two dimensions that affect participation rates – work readiness and incentives to seek work. The left side of the figure shows that in Korea there are 3 groups (5, 8 and 9) that will require additional support to improve their skills if they are to be employed. The right-side figure considers the incentives that people have to work. These can be considered as factors that affect the reservation wage, which is the lowest wage people require for their participation in the labour force. Many factors can affect work incentives: including high family income that reduces the need for another person to work, significant family responsibilities that have to be offset by hiring external help, or a lack of suitable work opportunities. In Korea. Group 2 (prime age housewives with some experience) is the single largest group with low incentives for work.

Typically, the idea of local labour markets is not extended to rural regions, even though the combination of long distance, low density and small local economies makes it difficult for many workers in rural regions to find work within a usual commuting range of under 1 hour. The coat of commuting in rural regions is also an impediment to work especially for lower wage, lower skilled workers because public transport is not available. Even if people wish to relocate to another labour market, they may face difficulties in identifying employment opportunities or finding affordable housing The result is a set of small weakly connected local labour markets distributed across rural territory with limited potential for people to Skill development within rural regions is particularly important because local labour markets are small and weakly connected. This can make it difficult to attract workers from other regions, and hard for people with skills that are not in demand to find work.

Given the anticipated worker shortages and evolving employer needs, efforts to match the development of youth skills with changing skill needs in the local economy is particularly important. In many rural regions boys often believe that formal skill development is not needed because they can obtain artisanal skills through on the job-training just as their fathers did. However even if jobs in the industries their fathers worked in ae still available, it is likely that the skills workers today and tomorrow require are very different and are based on a strong formal education. For girls, the common experience is that they finish school with a strong education but find it difficult to obtain local work that offers an opportunity to use their skills. Consequently, young rural women have high propensity to move to cities, which reduces the size of the local labour force and has implications for future population growth. To retain these young women the economy has to evolve in ways that offer them better opportunities. Doing so should help both labour productivity and increase the potential for them to raise a family in the region.

Improving the matching process may be the single most important element of labour force development in rural regions. With a small semi-autonomous labour force and an evolving set of job skill requirement a good matching process is needed to avoid unemployment and underemployment. At present, less effort Is placed in formal matching processes in rural areas then in urban locations. This may reflect the slower pace of change in rural areas and the greater reliance on informal “word of mouth” recommendations. A smaller number of people also tends to increase the unit cost of a formal matching service because fixed costs must be spread over a small number of individuals. On the other hand, the costs of a poor matching process in rural areas are likely to be high, because workers can end up in sub-optimal careers harming both themselves and their employer, and ultimately weakening the community.

The combined effects of demographic decline and technological change are likely to increase the average skill requirements of most workers and to make ongoing training an integral part of a person’s career. This suggests that aptitudes should be identified fairly early in the educational process and potential career paths that match these aptitudes suggested to the individual. Certainly, individual interests and potential opportunities can change over time so flexibility is important. Further mid-career assessments and supplemental skill development are likely to be increasingly important as technologies and production methods evolve. While these investments may be expensive the imminent scarcity of younger workers makes them essential.

Rural communities are small places but must still carry out most of the functions of larger places, although in different ways and with less complex procedures. These include providing public services, abut also developing a strong civil society and supporting economic development. In larger communities most of these functions are carried out by paid professionals who work for the community. In smaller places some functions are carried out by paid workers, others by volunteers and others are not provided. Co-ordinating these tasks in a way that improves the quality of well-being for residents is a particular challenge for most rural places. (See for example the Comprehensive Rural Village Development Program in Korea, Box 2.9)

In general, rural communities face a shortage of leaders, who are often volunteers and who lack a background in public management or in other professions that would facilitate their role. In addition, in comparison to larger places, rural communities have a more limited capacity to influence their evolution. In most OECD countries rural places have a small tax base that is required to be spent on mandated services and very little other own source revenue. They are often too small to be eligible for some national government grants or programs and can lack the capacity to generate a strong application for those that they are eligible for. Local firms are typically too small and limited in number to be able provide much voluntary support to the community and there are few individuals with professional skills. Moreover, local financial institutions typically do not provide many functions beyond deposit taking and a limited range of consumer and business loans.

While some communities are able to manage to make significant progress over time despite these capacity constraints, others do not. This makes national government support for capacity building an important function. Various programs have been introduced across the OECD countries, such as LEADER in the European Union (Box 3.24) and Community Futures in Canada (Box 3.25), with the goal of strengthening local economic development. The hallmark of these programs is they provide a modest amount of money for a specific period of time to allow the recipient places to undertake a development activity that is both community defined and endorsed by a large share of the local population. As a result, not only does the community gain from the specific program, but it also befits from a strengthened sense of cohesion and a recognition that positive change is possible.

The absence of an internal capacity to introduce new activities and create an effective program delivery mechanism is a crucial weakness of many rural local governments. While this weakness was less evident in periods of relative stability when the demand for new programs and new ways of delivering services was absent, the new environment of an aging population and rapid technological and social change is difficult for rural leaders to comprehend, let alone manage. Appropriate responses in rural regions are likely to be different from those adopted by metropolitan regions, which means that rural local governments will have to develop their own solutions for their specific situation. Associations of local governments can play a useful role in creating a forum for smaller regions to develop and share approaches. Funding from national and state/provincial governments to support these forums and build local capacity, as well as to help implement effective responses will also be important.

With demographic decline the capacity of smaller local governments to carry out existing responsibilities becomes questionable. Revenues will decline as responsibilities increase, because transfer payments are typically based on local populations and the local tax base will shrink as the economy contracts. The appropriate response is to explore some form of consolidation of local governments to achieve some minimum efficient scale. But consolidation in rural areas can often result in few cost savings because people are widely dispersed. Various studies across OECD countries show that forced municipal consolidation can lead to weaker local governments in terms of popular support and weaker social cohesion (Charron and Rothstein, 2018[33]) (Dollery and Crase, 2004[34]) (Douglas, 2007[35]) (Zimmerbauer and Paasi, 2013[36]). This in turn can make efforts to improve local economic conditions more challenging and exacerbate incentives for outmigration.

Building local support for collaborative development efforts can improve local governance and increase willingness for inter-municipal co-operation (Lackey, Freshwater and Rupasingha, 2002[37]). Over a period of time the OECD Rural Programme has identified a number of useful policies and actions that both national and local governments can adopt to improve the performance of rural local governments. Most of these policies and actions are generally desirable, but in an environment of where demographic decline is a major issue they can be particularly effective in helping facilitate a smoother transition to a new environment.

As noted previously rural locations often face difficulty in providing services to people and firms. Often, they are required by national or state governments to adopt specific delivery mechanisms that are designed to be effective in urban contexts, but which do not work well in a large area, sparsely settled, small population contest. If national and state governments adopted regulatory systems that focused on the desired outcomes from services, rather than on the specific service delivery mechanisms, then local providers could choose the most appropriate way to provide services in their specific context. Areas where this approach could be useful include; tele-health, tele-education and other internet-based approaches; but also, core infrastructure, such as water and waste-water treatment facilities, and solid waste disposal; and public transit. Delivering public and health services through a single site as is being done in France is a way to find new delivery methods (see Box 3.8).

Small communities in close proximity often fail to work together to produce and deliver services despite opportunities to reduce unit costs and improve quality. Barriers to collaboration take several forms. The first is a fear that a neighbouring place may benefit by hosting a specific serve for the larger group of settlements. Conversely, in the case of an undesirable facility, such as a solid waste disposal site, each community may fear it will be forced to accept others’ waste. In addition, higher-level governments that either set regulations governing service provision or provide funding may not create incentives for collaboration. Finally, despite close physical proximity there is often little experience in local government collaboration. Each of these impediments is a significant barrier, but none is insurmountable, especially if national or state/provincial governments provide incentives to collaborate. The example of local authorities collaborating in Vaster-Norrland, Sweden described on Box 3.21 shows the benefits of collaboration.

Few governments consider the possibility of finding alternative providers of public services, despite the potential for significant cost savings and an opportunity to reallocate scarce public funds to higher priority actions. In rural areas local governments may be unable to provide services that are easily provided in a larger community because they lack funding or the ability to attract individuals with the skills to actually provide the services. However they may be able to provide equivalent services by relying on a different mechanism such as local volunteers, a private contractor or a sharing agreement with a number of nearby places in a similar situation. . Rural transport services are difficult to provide using conventional bus systems, but some form of public transit is essential in most rural areas. Box 3.26 provides an innovative example from Korea.

National or state/provincial governments often mandate specific technologies or ways of delivering public services that they devolve to local governments. Typically, these rules specify best available technologies or specific levels of service to ensure uniform treatment across the entire jurisdiction. However, in many cases small communities are unable to meet the standards either because it is not technically possible or because the cost of compliance is too high. However it may be possible to provide similar levels of outcome by alternative delivery mechanisms if regulations are relaxed.

In most OECD countries local government have very limited revenue capacity and rely on “ear-marked” grants and transfers from higher levels of government to carry out their activity. This is a particular problem for small local governments in rural areas where transfer funds based on population do not go as far, because per capita service costs are higher than in more densely settled, higher population communities. A source of local funding is essential if these communities are to be able to make the locally specific investments that can enhance their productivity and attractiveness. In the European Union the LEADER programme has provided a new source of funding to rural areas that has allowed many regions to undertake new activities that could not be financed from national sources.

Too often small places accept that they will not provide very high-quality services because they lack revenue or face high costs. But without a strong foundation of good services their economic future is perilous. Not only do they face difficulty in attracting outside investment, but they are likely to experience high rates of outmigration by young people who seek a better quality of life. Box 3.8 expands on this point.

Demographic decline is occurring at a time when the nature of work is changing to allow some individuals greater choice in where they work as a result of electronic communication. At the same time other individuals face more stringent conditions on where and how they work as technology better fuses human labour with complementary forms of mechanisation. COVID-19 has demonstrated the uneven nature of these changes with some individuals largely avoiding many of the impacts of the pandemic while working from home, while others were significantly exposed to the virus by virtue of their working conditions. In both cases, technology has changed the nature of work, but in some instances, it provides more flexibility, and in other it imposes more rigidities. Typically, higher skill workers befit from increased flexibility, while lower skill workers increasingly work at a pace set by machines.

National demographic decline will not result in equal rates of decline across regions. Some regions may even grow in the short term if current migration patterns remain in place. This may lead to continued rates of outmigration from rural areas to large cities. However, within a few years, the population of rural areas will have shrunk considerably, and the age composition shifted enough that there will be few young people left. At this point cities, particularly those that have a very low local fertility rate, will experience a large decline in the number of new young workers.

Demographic decline may increase the number of workers having non-routine jobs, but only if the share of the labour force with advanced skill levels increases. For those with lower skills working conditions will remain difficult, even though wages may rise due to a reduced supply of labour. However, wages may not increase by a lot because higher wages create an incentive to adopt technology to reduce the number of workers required.

Efforts to increase the number of women in the workforce by increasing female participation rates are likely. But so too are efforts to increase fertility rates. Whether women working longer hours will be compatible with higher fertility rates will largely depend on the availability of cheap high quality childcare and society changing so that men provide a greater share of household responsibilities. Similarly increasing the share of women in paid work will reduce their ability to provide care for the elderly and ill, shifting these burdens onto paid providers.

Finally, a higher productivity labour force is generally seen as the best way to address an imminent worker shortage. But at least in the short run bringing more marginal workers in terms of skills into the labour force will tend to lower average productivity. And increasing the share of workers in child car and elderly care will also lower productivity unless the way we provide this care changes significantly to increase labour productivity.

In framing the next generation of sectoral policies, it will be important to link sector specific policies to the necessity to incorporate adaptations to demographic decline. This will require a stronger linkage to labour market development policy than has typically been the case, especially for skill development to allow fewer workers to be more productive. Because rural labour markets are, small, more specialised and only weakly connected to each other, different approaches will be required both for skill development and for matching firms and workers.


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