UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACTS OF INSTITUTIONAL FACTORS ON PROVINCIAL ECONOMIC PERFORMANCE: THE CASE OF VIETNAM (2007-2011) By PHAN THACH TRUC MASTER OF ARTS IN DEVELOPMENT ECONOMICS Ho Chi Minh City, December, 2013 TIEU LUAN MOI download : skknchat@gmail.com UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M. IN DEVELOPMENT ECONOMICS THE IMPACTS OF INSTITUTIONAL FACTORS ON PROVINCIAL ECONOMIC PERFORMANCE: THE CASE OF VIETNAM (2007-2011) A thesis submitted in partial fulfillment of the requirements for the degree of Master of Arts in Development Economics By PHAN THACH TRUC Academic supervisor Dr. TRUONG DANG THUY Ho Chi Minh City, December, 2013 TIEU LUAN MOI download : skknchat@gmail.com DECLARATION I declare that: "The impacts of institutional factors on provincial economic performance: The case of Vietnam (2007-2011)" is my own work; it has not been submitted to any degree at other universities. I confirm that I have made all possible effort and applied all knowledge for finishing this thesis to the best of my ability.
Ho Chi Minh City, December 2013 PHAN THACH TRUC i TIEU LUAN MOI download : skknchat@gmail.com ACKNOWLEDGEMENTS First and foremost I would like to extend my gratitude to my supervisor, Dr. Truong Dang Thuy, for invaluable comments, guidance and engagement through the learning process of the thesis. I am much obliged to Dr. Pham Khanh Nam for introducing me to the topic as well as for the availability of the dataset.
In addition, I am thankful for Le Duc Anh for all your kind help during my time in class 17. Then I feel lucky to have time doing the thesis with Nguyen Thi Ngoc Linh and Nguyen Quang, from whom I have a lot of things to learn. Lastly and obviously, I am deeply indebted to my family members for all the kind understanding and spiritual support. Forever, I will be wholeheartedly grateful for your love.
ii TIEU LUAN MOI download : skknchat@gmail.com ABSTRACT Given the intensive PCI score race among Vietnamese provinces in the past year so as to improve the enabling environment for local economic development, this study is to justify the imperativeness of such a race. Employing the PCI and its nine sub-indices as proxies for institutional quality, we explore the institutional impacts on GDP for the dataset of 58 Vietnamese provinces from 2007 to 2011. In realizing this objective, we make an attempt to incorporate into the estimation models of both Cobb-Douglas and Translog functional form the de facto overstatement of provincial GDP. While the positive impacts of PCI on provincial GDP are statistically confirmed, the regression results obtained for the nine sub-indices are divergent across functional forms and outlier treatment approaches.
To the extent that the economic significance of different institutional factors is assessed, our research objective is realized and respective policy implications are then suggested. Key words: PCI, GDP overstatement, institution, Cobb-Douglas, Translog iii TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENTS DECLARATION .iii TABLE OF CONTENTS. iv Chapter 1 INTRODUCTION .2 Research objective and research questions .3 Contribution of the study .4 Organization of the study. 4 Chapter 2 LITERATURE REVIEW .1 Theoretical literature: The New Institutional Economics .1 A renewed interest – some distinct features .2 Institutions matter for economic performance .2 Mechanism and channels of influence .2 Theoretical model: the aggregate production functions .1 History of the production functions .2 Properties of the production function.
15 Chapter 3 DATA AND RESEARCH METHODOLOGY .1 Data and variable measurement. 19 iv TIEU LUAN MOI download : skknchat@gmail.1 Data cleaning – OLS regression for panel data .2 Modeling the overstatement of growth data – The Stochastic Frontier Analysis (SFA) .1 Testing the model overall significance .2 Statistical test of individual coefficient significance. 42 Chapter 4 EMPIRICAL RESULTS AND DISCUSSION .1 Overall explanation and hypothesis testing .1 Overall explanation of model regression .1 Statistical test of model overall significance .2 Statistical test of individual significance of institution variables .2 Model estimation – Institutional impacts on GDP .1 Transaction cost institution: Entry cost, Time cost and Informal charges .2 Property right and Contract enforcement institution: Access to Land and Legal Institution. 53 v TIEU LUAN MOI download : skknchat@gmail.3 Information problem institution: Access to information, Private sector development and Pro-activity of provincial leaders .4 Labor policy and training.
64 Chapter 5 CONCLUSION AND PERTAINING ISSUES .3 Limitations and further studies. 74 vi TIEU LUAN MOI download : skknchat@gmail.com LIST OF TABLES Table 3.2 Summary statistics of key variables .3 Between and within variations of key variables .4 Overstatement of provincial growth data .1 Attempted regressions of this study .2 Hypothesis testing of overall significance of multiple regression .3 Hypothesis testing of individual significance for institution variables .4 Regression result– Transaction cost institution.5 Regression result - Property right and Contract enforcement institution .6 Regression result – Information problem institution .7 Regression result – Labor policy and training .8 Regression result –the PCI. 64 vii TIEU LUAN MOI download : skknchat@gmail.com LIST OF FIGURES Figure 3.1 Institution and economic outcomes: mechanism and channels of influence 27 Figure 3.2 Time-series plots of real GDP against year and PCI against year .3 Overall scatter plot of real GDP against PCI .4 Scatter plots for within and between variations of real GDP against PCI .5 Illustration of growth data overstatement .6 Different distributions of u .1 Effects of Time cost scores on GDP .2 Effects of Informal charge scores on GDP .3 Effects of Information access scores on GDP.4 Effects of Private sector development scores on GDP .5 Effects of Pro-activity of provincial leader scores on GDP .6 Effects of Labor policy and training scores on GDP .7 Effects of the PCI scores on GDP. 65 viii TIEU LUAN MOI download : skknchat@gmail.com Chapter 1 INTRODUCTION 1.1 Problem statement There has recently been a resurgence of interests and discussions on the relationship between institutional framework and economic performance among economists and policy-makers across countries.
The interest in investigating this issue has been motivated by the increasing consensus in considering institutions as a crucial determinant shaping economic performance. From a methodological perspective, the study of this relationship has been initiated by the debut of the New Institutional Economics, the origin of which could be traced back to Coase (1937) with the well- known message emphasizing the importance of institutions in the presence of high transaction costs “When it costly to transacts, institution matters”. According to Bates (1995), this strand of analysis contributes to explaining sources of economic growth by integrating institutions, which are defined as the formal and informal “rules of the games and their enforcement characteristics” (North, 1994, p.361) into economic theory. The basic argument for the roles of institution in the growth literature is that in the absence of efficient institutions, it is challenging for standard factors of production to deliver rapid growth (Eicher, Garcia-Penalosa & Teksoz, 2006), especially in transition economies.
Theoretical and empirical literature on the issue suggests that channels of institutional influence on economic outcomes may be direct via affecting relevant costs incurred or indirect via affecting the incentives for investment in factors of production. Despite a great number of studies in the empirical literature focusing on the institutions – growth nexus, institutional analysis is still in its development stage (Brousseau & Glachant, 2008; Chang, 2006) and further research needs to be conducted “before the institutional perspective can be fully operationalised” (Pelikan, 2003; Rodrik, Subramanian & Trebbi, 2004). Being a transition economy experiencing recent institutional reforms, Vietnam offers an appropriate empirical context for addressing the above-mentioned issue. A provincial level study for the country is of imperative concern for plenty of reasons.
Since the 1986 economic reform called “Doi moi”, Vietnam has witnessed a significant 1 TIEU LUAN MOI download : skknchat@gmail.com growth of the non-state sector with its legal recognition in the early 1990s and remarkably, the promulgation and enactment of Enterprise Law in the year 2000. Despite this legal milestone, the sector still faces numerous constraints to its establishment and business operation, the majority of which is closely related to the implementation of central policies by local governments, which varies substantially across provinces. Such institutional variations arise, for the most part, due to the complexity of law, which entails the issuance of quite a great number of sub-law gazettes for enforcement purposes. This, in turns, makes the implementation of laws depend a great deal on the interpretation of local officials, who can always apply their own interpretation to central policies even when regulations are not vague (Nguyen, Pham, Bui & Dapice, 2004; Tenev, Carlier, Chaudry & Nguyen, 2003).
Put differently, there exists a high level of discretion by Vietnam’s local authorities compared with other developing countries, which is a prominent feature of Vietnam’s institutional reforms (Fforde & Vylder, 1996; Tran, Grafton & Kompass, 2009). On the other hand, Vietnam’s provinces differ substantially in their achievement of economic outcomes. A preliminary analysis reveals, to some extent, high dispersion of income both in terms of growth and level across provinces for the 2007 – 2011 periods. Notably, the provincial GDP 5 - year average growth rate ranges from a striking low 2.92% to an approximate ten-time greater figure of 29.
Similar divergence is evident in provincial output levels as well. In particular, Ba Ria- Vung Tau exhibited highest GDP of around VND122,000 billion and VND170,000 billion for the year 2007 and 2008, respectively. Likewise, Ho Chi Minh City maintained its reign as top performer with impressive figures of VND131,000 billion, VND 151,000 billion and VND158,000 billion respectively in the 2009, 2010 and 2011 scores. Standing at the other end were Bac Can for the year 2007-2009 and Lai Chau for the 2010-2011 period with GDP scores even below the VND3,000 billion level.
Against this background, a crucial question was posed on the contribution of institutions in explaining tremendous variations in economic performance among Vietnam’s provinces. As the concept of institution means different things to different scholars and varies from studies to studies (Nelson & Sampat, 2001), inquiries firstly fall on how to 2 TIEU LUAN MOI download : skknchat@gmail.com measure such a multi-dimension notion. Compiled from survey-based responses of randomly selected private enterprises and hard data from published sources, which is subsequently aggregated into a provincial level score, the Provincial Competitiveness Index (PCI) is an annual composite index representing the voice of the local business community in ranking Vietnam’s provinces according to their governance quality. Specifically, nine aspects of governance are measured by nine corresponding sub- indices, namely Entry costs, Land access and security of tenure, Transparency and access to information, Time costs of regulatory compliance, Informal charges, Pro- activity of provincial leadership, Business Support Services, Labor and Training and Legal institutions.
Since its launch in 2005 by the collaboration of the Vietnamese Chamber of Commerce and Industry (VCCI) and the United States Agency for International Development-funded Vietnam Competitiveness Initiative (USAID/VNCI), PCI has been considered as a critical tool for analyzing and monitoring progress in the local regulatory environment from the perspective of the private sector. Importantly, using PCI ranking to measure progress in provincial institutional reform, Schmitz, Dau, Pham and McCulloch provide evidence for the essential role of Vietnam’s private sector in driving the economic reform at provincial level, stating that “there was no formal public-private coalition but the dynamic was one of proactive government seeking the input from the private sector, and the latter lobbying for and contributing to responsive and effective government” (Schmitz et al. On the other hand, facts and figures obtained from VCCI at the relevant website www.org reveal that there has been an intensive race to improve PCI scores among provinces in the past years in an effort to create a better enabling environment for economic development.