UNIVERSISTY OF ECONOMICS HO CHI MINH CITY VIET NAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIET NAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE NEXUS AMONG CORRUPTION, PUBLIC EXPENDITURE AND ECONOMIC GROWTH: EVIDENCE FROM PROVINCES OF VIETNAM By NGUYEN THI MY PHUC MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH, November 2015 UNIVERSISTY OF ECONOMICS HO CHI MINH CITY VIET NAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIET NAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE NEXUS AMONG CORRUPTION, PUBLIC EXPENDITURE AND ECONOMIC GROWTH: EVIDENCE FROM PROVINCES OF VIETNAM A thesis submitted in partial fulfillment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN THI MY PHUC Academic Supervisor: DR NGUYEN HOANG BAO HO CHI MINH, November 2015 ABSTRACT This research investigated the impact of public expenditure in investment on the economic growth under the presence of corruption Three stage least squares method is employed in order to indicate this effect in the panel data of 63 provinces/cities in Vietnam from the period 2008-2013 The findings are: (1) The lower corruption is associated with the lower in public expenditure in development investment; (2) The lower corruption has a positive effect on economic growth; (3) Public spending in development investment has a positive effect on economic growth and the presence of corruption not reduce this effect; (4) The lower corruption has a positive effect on private investment; (5) In term of the openness, foreign investment can reduce corruption Thereby, some implications have been proposed to foster the growth of economy Keywords: corruption, public investment, public expenditure, Three stage least squares method i ACKNOWLEDGEMENT First of all, I would like to express my deep and sincere gratitude to Dr Nguyen Hoang Bao, my supervisor His inspiration together with intellectual supports has encouraged me to complete this thesis Special words of thanks also go to Dr Truong Dang Thuy for his critical comment, patient guidance and enthusiasm throughout the course of writing my thesis Finally, I would like to express my deepest gratefulness and thankfulness to my family, my friends, my colleagues, for all the continuing support for me to complete this research work ii TABLE OF CONTENTS ABSTRACT I ACKNOWLEDGEMENT II TABLE OF CONTENTS III ABBREVIATIONS V LIST OF FIGURES VI LIST OF TABLES VII CHAPTER INTRODUCTION 1.1 PROBLEM STATEMENT 1.2 RESEARCH OBJECTIVE 1.3 RESEARCH HYPOTHESES 1.4 THESIS STRUCTURE CHAPTER LITERATURE REVIEW 2.1 THE KEYNESIAN THEORY ABOUT GOVERNMENT EXPENDITURE 2.2 GOVERNMENT EXPENDITURE IN NEO-CLASSICAL THEORY 2.3 ABOUT CORRUPTION IN PUBLIC EXPENDITURE IN INVESTMENT 2.4 EMPIRICAL REVIEW 2.4.1 Public spending in investment and economic growth 2.4.2 Corruption and public spending in investment 2.4.3 Corruption and growth 2.4.4 Private investment in the relationship with growth, corruption and public investment 2.4.5 Foreign investment in the relationship with growth and corruption 11 2.5 CONCEPTUAL FRAMEWORK 12 CHAPTER METHODOLOGY AND DATA 13 3.1 METHODOLOGY 13 3.2 DATA SOURCES AND CHARACTERISTICS 14 3.2.1 DATA SOURCES 14 3.2.2 MEASURE GDP FOR EACH PROVINCE 15 3.2.3 CHOICE OF CORRUPTION VARIABLE 16 3.2.4 ENDOGENOUS AND EXOGENOUS VARIABLES 17 3.3 MODEL SPECIFICATION 18 3.4 ESTIMATION METHOD 20 iii CHAPTER ANALYSIS RESULTS 21 4.1 PRELIMINARY STATISTICS 21 4.1.1 DESCRIPTIVE STATISTIC 21 4.1.2 CORRELATION OF COEFFICIENTS 25 4.2 THE IDENTIFICATION PROBLEM OF THE SIMULTANEOUS EQUATION 28 4.3 RESULTS 29 CHAPTER CONCLUSION AND SUGGESTION 38 5.1 CONCLUSION 38 5.2 POLICY IMPLICATIONS 38 5.3 SUGGESTIONS FOR FURTHER RESEARCHS 39 5.4 THE LIMITTED OF THESIS 39 REFERENCE 41 APPENDICES 46 iv ABBREVIATIONS BRVT Ba Ria Vung Tau FDI Foreign Direct Investment FGLS Feasible generalized least squares GDP Gross Domestic Product GMM Generalized Method of Moments GSO General Statistics Office IMF International Monetary Fund OLS Ordinary least squares PCI Provincial Competitiveness Index TSLS Three Stage Least Squares USAID United States Agency International Development UTC The Unmatched Count Technique VCCI Vietnam Chamber of Commerce and Industry VND Vietnam Dong WB World Bank v LIST OF FIGURES Figure 2.1: Rahn Line (source: Tejvan Pettinger (2008)) Figure 2.2: The relationship among corruption, public investment, private investment, foreign investment and growth 12 Figure 4.1: A combination of four scatter plots shows the correlation with GDP per capita variable of: informal cost, non-State investment capital, public spending and foreign investment capital (these variables excluding informal cost are in value log) 27 Figure 4.2: A combination of four scatter plots shows the correlation with public spending in investment variable of: State investment capital, informal cost, foreign investment capital and GDP per capita (these variables excluding informal cost are in value log) 28 vi LIST OF TABLES Table 4.1: Descriptive Statistic 22 Table 4.2: Correlation of coefficients 25 Table 4.3: Three stage least squares regression with impact of corruption on government expenditure in investment and economic growth (when i.id variable is not considered) 30 Table 4.4: Three stage least squares regression with impact of corruption on government expenditure in investment and economic growth (when i.id variable has been used) 31 Table 4.5: Three stage least squares regression with impact of corruption on government expenditure in investment and economic growth 33 Table 4.6: Three stage least squares regression with corruption affecting government expenditure in investment, taking an interaction variable into consideration 34 Table A.1: The list of provinces 46 Table A.2: Data sources 47 Table A.3: The development investment expenditure of Vietnam (2007-2013) 47 Table A.4: The data on the development investment capital of Vietnam (2007-2013) 48 Table A.5: The ranking of 63 provinces/cities in the PCI index in the period from 2008 to 2014 50 vii CHAPTER INTRODUCTION 1.1 PROBLEM STATEMENT Public investment and its role in economic development have been affirmed by many economists and policy makers In developed or developing countries, public expenditure in investment is considered as a foundation in long run economic growth (Tanzi and Zee, 1997) According to Cashion (1995), Kocherlakota and Yi (1997), Fuente (1997) and Kneller et al., (1999) public investment has positive effects on economic growth, especially in the case of developing countries (cite in Kneller R and Haque M E., 2008) However, a positive impact of public investment depended on institution It was found that a better institutional setting may foster the positive effects of public investment (de la Croix and Delavallade, 2009; Dort et al., 2014) While a poor institution, especially corruption, waste is popular (Tanzi and Davoodi, 2002b) Firstly, corruption impacts the public investment in both quantity and quality There is a wide spread of corruption on over the world, especially in developing countries in the recent years From its detrimental impact on economic growth, corruption distorts decision of higher political, retards economic growth (Tanzi, 1998) Heath W (2000) stated that: “corruption is a cancer in society and is slowly eating away at the public sector” It reduces the return in public investment, lead to the economic development down following by Kneller R and Haque M E (2008) In conclusion, through the impact on the public investment, corruption retards the economic development Vietnam is a developing country in Southeast Asia with over 90 million inhabitants By political and economic reforms (Doi Moi) launched in 1986, Vietnam’s GDP per capita increase from around 100$ to over 2000$ by the end of 2014 within a quarter of a century In reducing poverty, Vietnam has a dramatic change in which the number of people dropped from over 50% in the early 1990s to 3% today (World Bank, 2015) With the development of two big cities is Ha Noi and Ho Chi Minh, Vietnam inherited the contribution of 63 provinces in the process of its own economic development The GDP of Ha Noi and Ho Chi Minh account for 10.3% and 20% of the GDP of whole country H5: The foreign corruption has a negative effect on corruption In Table 4.5, the foreign capital investment has a positive and significant effect on the informal cost (significant at level 1%) That means when get more foreign investment, corruption has a dramatic drop This result is consistent with Ades and Di Tella (1999) One of prerequisite thing contributed in this is international law When attending in the economy of Vietnam, they tend to find an open market which is not only professional but also must accept the law This thing acquires a big change of anti-corruption define in bureaucrat system 37 CHAPTER CONCLUSION AND SUGGESTION This section briefly summarizes the methodological approach, major findings, and policy implications, as well as suggestions in some directions for further research 5.1 CONCLUSION The main purpose of this paper is to explore the impact of corruption in the relationship between public investment and growth Firstly, the methodological approaches in this study are: i) The model of the simultaneous equation system was built on the link between the GDP per capita growth, public spending in investment and informal cost; ii) Three stage least squares (TSLS) method was employed to find this connection; ii) The descriptive data analysis is prefer using for getting the overview in data Overall, the finding in this study is consistent with research hypotheses The various relationships among corruption, public expenditure in investment, economic growth, as well as the others were found The findings are: i) When corruption reduces, public expenditure in investment reduce; ii) When corruption reduces, there is a positive impact on the economic growth; iii) The presence of corruption does not have impact to public expenditure in investment, and this spending has a positive effect to economic growth; iv) When corruption drops, private investment increases; v) A rise in foreign investment has a positive effect on reducing corruption 5.2 POLICY IMPLICATIONS After having an overview of this research, it is indicated that the role of public investment is important It is not only for each province but also for the whole country Actually, the efficiency in this investment activity has been creating for Vietnam and each province in particular a new foundation on the integration road with the world Thus, it is necessary in strengthen this investment Nevertheless, the most concern is corruption in this activity, although its impact in this study is insignificant In fact, the government of Vietnam has been complied two laws: the anti-corruption law (effective in 2006, January 1) and the public investment law (effective in 2015, January 1) This thing also indicates that a big 38 concern of government about corruption Because of this, an enhancing in anti-corruption in bureaucrat system becomes more important than ever Getting a drop in corruption, Vietnam will get more achievement in the development process In order to that, firstly, administrators of Vietnam and province in particular need to become an exemplary model in fighting corruption In term of integration process with the world of Vietnam, the openness policy gets more important Attracting more foreign investments, Vietnam as well as 63 provinces/cities will have a chance for decreasing corruption 5.3 SUGGESTIONS FOR FURTHER RESEARCHS With the time is short from 2008 to 2013, together with the limited in data, this study only find the trend in this impact In further study, we suggested to regress with more valuable methods and run with a lag variable of public investment to find out the margin coefficient in the result Furthermore, to investigate in the economic growth, some valid control variables should be considered in this study such as the labor skills, as well as the leadership capacity of the government or the quality infrastructure index Especially, having a study to build a set of indicators on corruption of 63 provinces/cities in Vietnam bring a great significant not only for policy makers but also for the development of a whole economy, Vietnam 5.4.THE LIMITTED OF THESIS This section lists some limitations of this study In fact, this study approaches the informal cost “chi phi khong chinh thuc” in the PCI index to indicate the corruption variable for 63 provinces/cities It is a limitation When “chi phi khong chinh thuc” is only showed a part of corruption activities; that is a type of bribery during business registration and licensing from a survey on firms of VCCI survey on each province 39 Moreover, the source of province data was only accessed from Provincial Statistic Yearbook and statistic office of each province There is still not having an 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Retrieved from: http://fee.org/anythingpeaceful/does-government-spending-helpthe-economy/ Tejvan Pettinger (2008, April 23) The rahn curve – economic growth and level of spending Retrieved from: (Oct 22, 2015) http://www.economicshelp.org/blog/447/economics/the-rahn-curve-economic-growth-andlevel-of-spending/ 44 World Bank (2015, Oct 5) Overview Retrieved from: (Oct 22, 2015) http://www.worldbank.org/en/country/vietnam/overview 45 APPENDICES APPENDIX 1: Table A.1: The list of provinces An Giang Bà Rịa Vũng Tàu Gia Lai Khánh Hịa Ninh Bình Sơn La Kiên Ninh Giang Thuận Hà Nam Kon Tum Phú Thọ Thái Bình Cao Bằng Hà Nội Lai Châu Phú Yên Thái Nguyên Bắc Ninh Đà Nẵng Hà Tĩnh Lâm Quảng Đồng Bình Bến Tre Đăk Lăk Bình Định Đăk Nông Bắc Cạn Cà Mau Hà Giang Bắc Giang Cần Thơ Bạc Liêu Bình Dương Bình Phước Bình Thuận Điện Biên Đồng Nai Đồng Tháp Hải Dương Hải Phòng Hậu Giang Hịa Bình Hưng n Lạng Sơn Lào Cai Long An Nam Định Nghệ An 46 Quảng Nam Quảng Ngãi Quảng Ninh Quảng Trị Sóc Trăng Tây Ninh Thanh Hóa Tiền Giang Hồ Chí Minh Trà Vinh Thừa Thiên Huế Tuyên Quang Vĩnh Long Vĩnh Phúc Yên Bái APPENDIX 2: Table A.2: Data sources Variable Definition of variable lggdpper Log of GDP per capita Informal cost The informalcost ("chi phi khong chinh thuc") devex Log of Government expenditure in development investment LgIp Log of non-State capital investment LgIf Log of foreign capital investment Lgpop Log of population LgIg GDP per capita Log of State capital investment Ligdp Log of initial GDP per capita GDP per capita Data sources Provincial statistic yearbook Viet Nam Chamber of Commerce and Industry (VCCI) Provincial statistic yearbook Provincial statistic yearbook Provincial statistic yearbook General Statistics Office (GSO) Provincial statistic yearbook Provincial statistic yearbook Provincial statistic yearbook APPENDIX 3: Table A.3: The development investment expenditure of Vietnam (2007-2013) Year 2007 2008 2009 2010 2011 2012 2013 Government expenditures in investment (billion VND) 112,160 119,462 181,363 183,166 208,306 195,054 271,680 Structure (%) 28% 26% 32% 28% 26% 22% 39% Source: GSO, Ministry of finance 47 APPENDIX 4: Table A.4: The data on the development investment capital of Vietnam (2007-2013) Source: GSO (2007-2013) Investment capital of Vietnam (2007-2013) 500,000 450,000 400,000 350,000 140% 123% 105% 97% 114% 99% 300,000 250,000 120% 107% 100% 91% 80% 60% 200,000 150,000 Development investment capital (billion vnd) Development index (%) 40% 100,000 50,000 20% 0% 2007 2008 2009 2010 2011 2012 2013 APPENDIX 5: About Provincial Competiveness Index (PCI) The PCI index is based on the experiences of nearly 8.093 domestic enterprises (2013) about a quality execution and business environment through at 63 provinces/cities of Viet Nam and the estimation of nearly 1.609 foreign firms This survey was done by Chamber of Commerce and Industry of Vietnam (VCCI), with support from United States Agency International Development (USAID) PCI index indicates for the quality of provincial public governance In fact, PCI is a set of indicators of the perceptions of domestic private investors about governance and public administration at the provincial level This index is constructed by asking a randomly selected set of firms in every province questions about nine different aspects of the investment climate: Entry costs; Land access and tenure security; Transparency; Time costs of regulatory compliance; Informal charges; Proactivity of the provincial government; Business support 48 services; Labor training; and Legal institutions Sub-indices are constructed for each of these components and then combined to provide an overall indication of the quality of economic governance The sub-indices include both perception-based and concrete indicators The questionnaire was designed to have name and position of respondent usually by the ownbusiness experience That made to increase confident for this survey (For full details of the construction of the PCI, see www.pcivietnam.org) The informal charge is one of nine indicators of this data It was surveyed regard on bribery during business registration and licensing 49 APPENDIX 6: Table A.5: The ranking of 63 provinces/cities in the PCI index in the period from 2008 to 2014 PCI RANKING (TOP) Da Nang Vinh Phuc Vinh Long Dong Thap Long An PCI 2010 PCI 2011 PCI 2013 PCI 2012 PCI 2014 72.18 Da Nang 75.96 Da Nang 69.77 Lao Cai 73.53 Dong Thap 63.79 Da Nang 66.45 Da Nang 66.87 71.76 Binh Duong 74.01 Lao Cai 67.95 Bac Ninh 67.27 An Giang 63.42 Thua Thien Hue 65.56 Dong Thap 65.28 70.47 Dong Thap 67.22 Long An 67.12 Lao Cao 63.08 Kien Giang 63.55 Lao Cai 64.67 68.54 Tra Vinh 65.80 Dong Thap 67.06 Binh Dinh 63.06 Quang Ninh 63.51 Tp.HCM 62.73 67.24 Binh Duong 65.72 Da Nang 66.98 Vinh Long 62.97 Dong Thap 63.35 Quang Ninh 62.16 66.65 Bac Ninh 64.48 BRVT 66.13 Kien Giang 62.96 Ben Tre 62.78 Vinh Phuc 61.81 Binh Duong PCI 2009 PCI 2008 69.37 66.97 66.64 63.99 Lao Cai Dong Thap Vinh Long Vinh Phuc Sources: PCI Report (2008-2014) 50 51 ... PUBLIC EXPENDITURE AND ECONOMIC GROWTH: EVIDENCE FROM PROVINCES OF VIETNAM A thesis submitted in partial fulfillment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS...UNIVERSISTY OF ECONOMICS HO CHI MINH CITY VIET NAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIET NAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE NEXUS AMONG CORRUPTION, PUBLIC. .. enhances the steady-state growth rate Furthermore, the identifying of Ghosh and Roy (2004) to analyze the impact of element of public spending in both public capital and public services on economic growth