Impact of public investment on economic growth in Vietnam

IMPACT OF PUBLIC INVESTMENT ON ECONOMIC GROWTH

IN VIETNAM

A DISSERTATION PAPER

Presented to

the Faculty of the Graduate Program

of the College of Arts and Sciences

Central Philippine University, Philippines

In Collaboration with

Thai Nguyen University, Vietnam

In Partial Fulfillment

Of the Requirements for the Degree

DOCTOR IN PUBLIC ADMINISTRATION

NGUYEN PHUC AI

NOVEMBER, 2020

i

ACKNOWLEDGEMENT

The author wishes to convey the gratitude to the following persons who

wholeheartedly devoted and helped make this piece of work a reality:

To the leadership of Central Philippine University and leadership of Thai Nguyen

University for their enthusiasm to support executive for the participants who completed the

study program;

To Assoc. Prof. Nguyen Khanh Doanh for his advices, guidance, supervision,

suggestions, and precious time in enthusiastically reading and checking the manuscript,

providing the author useful materials;

To Doctor Reynaldo Nene Dusaran, his incomparable contribution and support to the

development of Doctor of Public Administration program in Thai Nguyen University as well

as his invaluable thoughts, insightful suggestions, useful guidance throughout the thesis work.

To the leadership of International Cooperation Center for Training and Study Abroad

and their staff for their enthusiasm to support executive for the participants who completed

the study program;

To the faculties and researchers of Thai Nguyen University of Economics and

Business Administration for their active involvement and cooperation which made the

conduct of the study possible.

Finally, I specialy would like to give inmost thanks to my family and friends for their

love and support in one way or another, and to all who have contributed to making this study

a success.

Thai Nguyen, November 2020

Nguyen Phuc Ai

ii

LỜI CẢM ƠN

Tác giả xin gửi lời tri ân đến những người đã tận tình giúp đỡ để tác giả có thể hoàn

thành luận án này:

Trân trọng cảm ơn Ban lãnh đạo trường Đại học Central Philippine và Ban lãnh đạo

Đại học Thái Nguyên đã nhiệt tình hỗ trợ điều hành cho các học viên đã hoàn thành chương

trình học.

Trân trọng cảm ơn PGS. GS Nguyễn Khánh Doanh đã tận tình chỉ bảo, hướng dẫn,

giám sát, góp ý và dành thời gian quý báu trong việc nhiệt tình đọc và kiểm tra bản thảo, cung

cấp cho tác giả những tư liệu hữu ích;

Xin cảm ơn tiến sĩ Reynaldo Nene Dusaran vì những đóng góp, hỗ trợ không nhỏ của

ông đối với việc xây dựng chương trình Tiến sĩ Quản lý hành chính công tại Đại học Thái

Nguyên cũng như những suy nghĩ, những góp ý sâu sắc, những chỉ dẫn hữu ích của ông trong

suốt quá trình tôi thực hiện luận án;

Cảm ơn Ban lãnh đạo Trung tâm Hợp tác Quốc tế Đào tạo và Du học cùng các cán bộ

đã nhiệt tình hỗ trợ giúp các học viên hoàn thành chương trình học.

Xin cảm ơn các khoa, các cán bộ nghiên cứu của Trường Đại học Kinh tế và Quản trị

Kinh doanh Thái Nguyên vì sự tham gia và hợp tác tích cực của họ đã giúp cho việc tiến hành

nghiên cứu trở nên khả thi.

Cuối cùng, xin cảm ơn gia đình và bạn bè của tôi đã dành tình cảm và sự ủng hộ cho

tôi bằng nhiều cách khác nhau, cảm ơn tất cả những người đã góp phần làm cho nghiên cứu

này thành công.

Thái Nguyên, tháng 11 năm 2020

Nguyễn Phúc Ái

iii

COMMITMENT

I assure you that the data and reseach findings in this disertation are honest and have

not been used for publication in any other reseach.

I would like to assure you that all helps for the implementation of the disertation has

been thanked and the information cited in the disertation is clearly indicated.

Thai Nguyen, November 2020

Author of disertation

Nguyen Phuc Ai

iv

LỜI CAM ĐOAN

Tôi xin cam đoan: Số liệu và kết quả nghiên cứu trong luận án này là trung thực và

chưa được sử dụng để công bố cho bất kỳ nghiên cứu nào khác.

Tôi cam đoan rằng tất cả những trợ giúp cho việc thực hiện luận án đã được cảm ơn

và thông tin trích dẫn trong luận án đều được chỉ rõ nguồn gốc.

Thái Nguyên, tháng 11 năm 2020

Tác giả của luận án

Nguyễn Phúc Ái

v

TABLE OF CONTENTS

ACKNOWLEDGEMENT...........................................................................................................i

LỜI CẢM ƠN.............................................................................................................................ii

COMMITMENT .......................................................................................................................iii

LỜI CAM ĐOAN......................................................................................................................iv

TABLE OF CONTENTS ........................................................................................................... v

LIST OF TABLES ..................................................................................................................viii

LIST OF FIGURES...................................................................................................................ix

LIST OF ABBREVIATIONS .................................................................................................... x

ABSTRACT ..............................................................................................................................xi

CHAPTER 1: INTRODUCTION ........................................................................................... 1

1.1. Background and Rationale of the Study.............................................................................. 1

1.1.1. Background of the study................................................................................................... 1

1.1.2. Statement of the Problem ................................................................................................. 3

1.2. Objectives of the Study ....................................................................................................... 4

1.2.1. General Objective ............................................................................................................. 4

1.3. The Theoretical Framework ................................................................................................ 4

1.4. Conceptual Framework........................................................................................................ 5

1.5. Operational Definition of Variables and other term............................................................ 7

1.6. Significance of the Study..................................................................................................... 8

1.7. Scope and Limitations......................................................................................................... 8

1.7.1. Scope of the Study............................................................................................................ 8

1.7.2. Limitations of the Study ................................................................................................... 9

CHAPTER 2: REVIEW OF RELATED LITERATURE AND STUDIES ...................... 10

2.1. An Overview of economic growth theory and public investment..................................... 10

2.1.1. Overview of economic growth theory............................................................................ 10

2.1.2. Public investment theory ................................................................................................ 38

2.1.3. The role of public investment......................................................................................... 40

2.2. Approaches to estimate relationships in macro economic variables................................. 41

2.2.1. The Engle-Granger Two-Step Modeling Method (EGM).............................................. 41

2.2.2. The Engle-Yoo Three-Step Modeling Method (EYM).................................................. 42

2.2.3. The Saikkonen Method................................................................................................... 43

2.2.4. The Johansen Maximum Likelihood (ML) Vector Autoregressive (VAR) Method...... 43

2.2.5. The ARDL bound test method ....................................................................................... 45

vi

2.3. Review of related studies................................................................................................... 45

2.3.1. International studies on the relationship between economic growth and public

investment................................................................................................................................. 45

2.3.2. Study on the relationship between economic growth and public investment in

Vietnam .................................................................................................................................... 52

Chapter Summary..................................................................................................................... 56

CHAPTER 3: RESEARCH METHODOLOGY................................................................. 57

3.1. Research Design ................................................................................................................ 57

3.2. Population, Sample Size and Sampling Technique ........................................................... 58

3.3. Research Instruments......................................................................................................... 58

3.4. Ethical Considerations....................................................................................................... 58

3.5. Data Gathering Procedure ................................................................................................. 58

Chapter Summary..................................................................................................................... 65

CHAPTER 4: DATA PRESENTATION, ANALYSYS AND INTERPRETATION....... 66

4.1. Economic overview and public investment trend ............................................................. 66

4.1.1. Vietnam economic overview in the period of 1986-2015 .............................................. 66

4.1.2. Import and Export of Vietnam ....................................................................................... 67

4.1.3. Investment and public investment trend......................................................................... 69

4.1.4. Vietnamese public investment System and Issues ......................................................... 72

4.2. Empirical Results............................................................................................................... 76

4.2.1. Descriptive Statistics...................................................................................................... 76

4.2.2. Unit root test................................................................................................................... 77

4.2.3. Empirical results of the impact of Public Investment on Economic growth .................. 78

4.3. Discussions........................................................................................................................ 84

Chapter Summary..................................................................................................................... 87

CHAPTER 5: SUMMARY, CONCLUSIONS AND POLICY RECOMMENDATIONS....... 88

5.1. Summary............................................................................................................................ 88

5.2. Conclusions ....................................................................................................................... 88

5.3. Policy recommendations ................................................................................................... 89

5.3.1. Economic restructuring................................................................................................... 89

5.3.2. Public investment restructuring...................................................................................... 89

5.3.3. Reduce the proportion of public investment in society's total investment, improve

the efficiency of public investment .......................................................................................... 90

5.3.4. Changing the role of public investment in the economy................................................ 91

5.3.5. Strict control of public investment ................................................................................. 92

vii

5.3.6. Improve the quality capital and effectively use capital for public investment

activities.................................................................................................................................... 94

5.3.7. Improve the efficiency of the implementation of the National Target Program

(NTP) and others ...................................................................................................................... 96

5.3.8. Prioritize public investment for infrastructure projects.................................................. 97

5.3.9. Strengthen public investment in agriculture and rural development.............................. 98

5.3.10. Promote reformation of SOE sector ............................................................................. 99

Chapter summary.................................................................................................................... 100

REFERENCES ..................................................................................................................... 101

APPENDICES....................................................................................................................... 107

viii

LIST OF TABLES

Table 4.1. Statistics of Variables..............................................................................................77

Table 4.2. Unit root test............................................................................................................78

Table 4.3. Bound test results ....................................................................................................79

Table 4.4. Estimation of ARDL model.....................................................................................79

Table 4.5. Estimation of long -run variables............................................................................80

Table 4.6. Estimation of ECM variables ..................................................................................81

Table 4.7. Serial correlation test...............................................................................................82

ix

LIST OF FIGURES

Figure 1.1. Conceptual Framework ............................................................................................6

Figure 2.1. The classical theory of growth ...............................................................................10

Figure 2.2. Fix proportion Production function........................................................................17

Figure 2.3. Equilibrium output change with investment ..........................................................17

Figure 2.4. Production function with some factor substitution ................................................19

Figure 2.5. Production function................................................................................................22

Figure 2.6. Output, consumption and investment.....................................................................24

Figure 2.7. Depreciation ...........................................................................................................24

Figure 2.8. Investment, depreciation and steady state..............................................................25

Figure 2.9. Steady state consumption.......................................................................................27

Figure 2.10. The saving rate and the golden rule .....................................................................28

Figure 2.11. The saving rate is reduced....................................................................................29

Figure 2.12. The saving rate is increased .................................................................................29

Figure 2.13. Effects of depreciation and population growth ....................................................31

Figure 2.14. Effect of population growth .................................................................................32

Figure 2.15. Steady - state with technical progress..................................................................33

Figure 4.1. GDP growth rate ....................................................................................................67

Figure 4.2. Total import and export..........................................................................................68

Figure 4.3. Trade deficit ...........................................................................................................69

Figure 4.4. Capital/GDP ratio...................................................................................................69

Figure 4.5. Investment at constant 2010 prices by types of ownership....................................70

Figure 4.6. Structure of Investment by types of ownership (%)...............................................71

Figure 4.7. Change of GDP and Investment.............................................................................75

Figure 4.8. Description of variables .........................................................................................77

Figure 4.8. Cusum test..............................................................................................................83

Figure 4.9. Cusum of square test ..............................................................................................83

Figure 4.10. TFP growth rate for 2006-2015 period ................................................................85

x

LIST OF ABBREVIATIONS

GSO General Statistic Office

WB World Bank

ARDL Auto Regressive Distributed Lag

ADF Augmented Dickey Fuller

GDP Gross Domestic Product

EYM Engle-Yoo Three-Step Modeling Method

xi

ABSTRACT

Public investment is considered as the consumption of goods that reduces the saving

and capital investment of an economy. For low-income countries, public investment is a

problem because they spend their scarce resources on the purchase of raw material rather than

on infrastructure, and other economic factors. Public investment also causes inequality

behavior in an economy. The de-unionization cause inequality when public investment

increase and employment reduce which create the phenomenon of wage inequality. Therefore,

the mechanism by which economic growth and inequality related is simply straightforward.

This study uses both qualitative and quantitative methods to assess the impact of

public investment on economic growth in Vietnam based on data from GSO and the World

Bank over 30 years (1986-2015) by applying the autoregressive distributed lag (ARDL)

method. The method was applied to study the effects of public investment on Vietnam‟s

economic growth in both short and long terms. The findings indicate that public investment in

Vietnam in the past period does affect economic growth in the long - run, with positive

effects, while there is no empirical evidence of the impact of public investment on economic

growth in the short - run. This result implies that when the economy needs an investment

environment to attract private investment, public investment does not play an important role.

Meanwhile, in the long term, the role of public investment is significant due to the coefficient

of positive impact. This can be explained by the low efficiency and inadequate management

in public investment together with improperly spread investment portfolio lead to the

situations of capital shortage, prolonged projects, and increases in costs. Therefore, the critical

issue in improving the efficiency of public investment is to assure appropriateness in project

evaluation and selection. To make the right choice, preventing imperfections throughout the

process of the project proposal, project approval in central government and local authority by

checking and developing a well-tailored procedure of project proposal, project selection, and

public investment capital distribution, avoiding overlapping situations, is highly required. It

also may be to continue to privatize public investment projects where appropriate. In addition,

it is necessary to reduce government intervention in the production business sector, to

promote equalization for increasing investment in infrastructure to reduce public debt, to

create an investment environment that attracts domestic private investment and FDI capital,

ultimately boosting economic growth.

Keyword: Public Investment, Private Investment, Economic Growth, ARDL

bound test

1

CHAPTER 1

INTRODUCTION

1.1. Background and Rationale of the Study

1.1.1. Background of the study

Public investment can be defined as an investment that is procured based on the

sovereignty of the state or taxpayer‟s money and a huge amount of public investment has been

made on improving economic infrastructures such as roads, railways, etc. and social

infrastructure such as welfare, education, etc. across the world. Economic infrastructure plays

a crucial role in the improvement of national industrial competitiveness and economic

development since investment in infrastructure provides long-term economic benefits through

increases in output, income, employment, and productivity, or reductions in costs of

production. So many countries around the world have consistently made a huge amount of

investment to improve the level of public economic infrastructure. In recent years, there has

been also a growing need for investment in social infrastructure according to population

growth, aging, and growing gaps in income. However, government financial resources are

limited and many countries across the world have paid a lot of attention to improving the

efficiency of public investment. Public investment has a great impact on the national economy

and requires substantial costs. And, it is very difficult to suspend in the middle of the project

once its implementation is confirmed. Therefore, it is crucial to prepare detailed plans and

appraise the feasibility of the public investment projects accurately. It is also important to

manage and evaluate the investment projects in an intermediate phase whether they are being

implemented as originally planned and whether they are still feasible in new contexts if the

plan has been modified. It is also important to evaluate the investment projects or programs in

an ex-post phase to check if they are effective. In this way, it is very important to establish an

integrated evaluation system (ex-ante, intermediate, and ex-post) over the project life cycles

to improve the efficiency of the overall public investment management.

Public investment is considered as the consumption of goods that reduce the saving

and capital investment of an economy. For low-income countries, public investment is a

problem because they spend their scarce resources on the purchase of raw material rather

than on infrastructure, and other economic factors. Public investment also causes

inequality behavior in an economy. The de-unionization causes inequality when public

investment increase and employment reduce which create the phenomenon of wage

inequality. Therefore, the mechanism by which economic growth and inequality related is

simply straightforward.