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t to UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES ng HO CHI MINH CITY THE HAGUE hi VIETNAM THE NETHERLANDS ep w VIETNAM - NETHERLANDS n lo PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS ad ju y th yi THE IMPACTS OF INSTITUTIONAL pl al n ua FACTORS ON PROVINCIAL ECONOMIC n va PERFORMANCE: THE CASE OF VIETNAM fu ll (2007-2011) oi m at nh By z z PHAN THACH TRUC ht vb jm k MASTER OF ARTS IN DEVELOPMENT ECONOMICS om l.c gm n a Lu Ho Chi Minh City, December, 2013 n va y te re UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES THE HAGUE VIETNAM THE NETHERLANDS t to HO CHI MINH CITY ng hi ep w VIETNAM - NETHERLANDS PROGRAMME n lo ad FOR M.A IN DEVELOPMENT ECONOMICS ju y th yi pl ua al THE IMPACTS OF INSTITUTIONAL n FACTORS ON PROVINCIAL ECONOMIC n va ll fu PERFORMANCE: THE CASE OF VIETNAM m oi (2007-2011) at nh z A thesis z ht vb submitted in partial fulfillment of the requirements for the degree of k jm Master of Arts in Development Economics om n a Lu PHAN THACH TRUC l.c gm By n y te re Dr TRUONG DANG THUY va Academic supervisor Ho Chi Minh City, December, 2013 DECLARATION t to I declare that: "The impacts of institutional factors on provincial economic ng performance: The case of Vietnam (2007-2011)" is my own work; it has not been hi submitted to any degree at other universities ep w I confirm that I have made all possible effort and applied all knowledge for finishing n lo this thesis to the best of my ability ad ju y th Ho Chi Minh City, December 2013 yi pl PHAN THACH TRUC n ua al n va ll fu oi m at nh z z ht vb k jm om l.c gm n a Lu n va y te re i ACKNOWLEDGEMENTS t to First and foremost I would like to extend my gratitude to my supervisor, Dr Truong ng Dang Thuy, for invaluable comments, guidance and engagement through the learning hi process of the thesis I am much obliged to Dr Pham Khanh Nam for introducing me to ep the topic as well as for the availability of the dataset In addition, I am thankful for Le w Duc Anh for all your kind help during my time in class 17 Then I feel lucky to have n lo time doing the thesis with Nguyen Thi Ngoc Linh and Nguyen Quang, from whom I ad have a lot of things to learn Lastly and obviously, I am deeply indebted to my family y th members for all the kind understanding and spiritual support Forever, I will be ju wholeheartedly grateful for your love yi pl n ua al n va ll fu oi m at nh z z ht vb k jm om l.c gm n a Lu n va y te re ii ABSTRACT Given the intensive PCI score race among Vietnamese provinces in the past year so as t to to improve the enabling environment for local economic development, this study is to ng justify the imperativeness of such a race Employing the PCI and its nine sub-indices as hi proxies for institutional quality, we explore the institutional impacts on GDP for the ep dataset of 58 Vietnamese provinces from 2007 to 2011 In realizing this objective, we w make an attempt to incorporate into the estimation models of both Cobb-Douglas and n lo Translog functional form the de facto overstatement of provincial GDP While the ad positive impacts of PCI on provincial GDP are statistically confirmed, the regression y th results obtained for the nine sub-indices are divergent across functional forms and ju outlier treatment approaches To the extent that the economic significance of different yi pl institutional factors is assessed, our research objective is realized and respective policy ua al implications are then suggested n Key words: PCI, GDP overstatement, institution, Cobb-Douglas, Translog n va ll fu oi m at nh z z ht vb k jm om l.c gm n a Lu n va y te re iii TABLE OF CONTENTS DECLARATION i t to ACKNOWLEDGEMENT ii ng hi ep ABSTRACT iii w TABLE OF CONTENTS iv n lo ad ju y th Chapter INTRODUCTION Problem statement 1.2 Research objective and research questions 1.3 Contribution of the study 1.4 Organization of the study yi 1.1 pl n ua al n va ll fu m oi Chapter LITERATURE REVIEW nh Theoretical literature: The New Institutional Economics at 2.1 z A renewed interest – some distinct features 2.1.2 Institutions matter for economic performance z 2.1.1 ht vb k jm Theoretical approaches 2.1.2.2 Mechanism and channels of influence l.c gm Theoretical model: the aggregate production functions 11 om 2.2 2.1.2.1 a Lu History of the production functions 11 2.2.2 Properties of the production function 14 n 2.2.1 n va Empirical literature 15 y te re 2.3 Chapter DATA AND RESEARCH METHODOLOGY 19 3.1 Data and variable measurement 19 iv 3.1.1 Data collection 19 3.1.2 Variable measurement 21 t to ng hi 3.1.2.1 Response variable 21 3.1.2.2 Explanatory variables 21 ep 3.1.3 w Research methodology 33 n 3.2 Descriptive statistics 29 lo ad 3.2.1 Model specifications 33 y th Estimation methods 35 ju 3.2.2 yi pl 3.2.2.1 Data cleaning – OLS regression for panel data 35 al n ua 3.2.2.2 Modeling the overstatement of growth data – The Stochastic Frontier n va Analysis (SFA) 37 ll fu 3.2.3 Model validation 41 oi m 3.2.3.1 Testing the model overall significance 41 at nh 3.2.3.2 Statistical test of individual coefficient significance 41 z 3.2.4 Analytical framework 42 z ht vb Chapter EMPIRICAL RESULTS AND DISCUSSION 43 jm 4.1 Overall explanation and hypothesis testing 43 k gm Overall explanation of model regression 43 4.1.2 Hypothesis testing 44 om l.c 4.1.1 a Lu 4.1.2.1 Statistical test of model overall significance 44 Legal Institution 53 v y 4.2.2 Property right and Contract enforcement institution: Access to Land and te re 4.2.1 Transaction cost institution: Entry cost, Time cost and Informal charges 46 n Model estimation – Institutional impacts on GDP 46 va 4.2 n 4.1.2.2 Statistical test of individual significance of institution variables 45 4.2.3 Information problem institution: Access to information, Private sector development and Pro-activity of provincial leaders 56 t to 4.2.4 Labor policy and training 62 ng hi 4.2.5 The PCI 64 ep Chapter CONCLUSION AND PERTAINING ISSUES 70 w n 5.1 Conclusion 67 lo ad 5.2 y th Limitations and further studies 69 ju 5.3 Policy implications 68 yi pl REFEERENCES 70 ua al n APPENDIX 74 n va ll fu oi m at nh z z ht vb k jm om l.c gm n a Lu n va y te re vi LIST OF TABLES Table 3.1 Variable summary 28 t to Table 3.2 Summary statistics of key variables 29 ng hi Table 3.3 Between and within variations of key variables 30 ep Table 3.4 Overstatement of provincial growth data 35 w n Table 4.1 Attempted regressions of this study 44 lo ad Table 4.2 Hypothesis testing of overall significance of multiple regression 44 y th ju Table 4.3 Hypothesis testing of individual significance for institution variables 45 yi pl Table 4.4 Regression result– Transaction cost institution 48 ua al n Table 4.5 Regression result - Property right and Contract enforcement institution 54 va n Table 4.6 Regression result – Information problem institution 56 fu ll Table 4.7 Regression result – Labor policy and training 62 oi m at nh Table 4.8 Regression result –the PCI 64 z z ht vb k jm om l.c gm n a Lu n va y te re vii LIST OF FIGURES Figure 3.1 Institution and economic outcomes: mechanism and channels of influence 27 t to Figure 3.2 Time-series plots of real GDP against year and PCI against year 31 ng hi Figure 3.3 Overall scatter plot of real GDP against PCI 32 ep Figure 3.4 Scatter plots for within and between variations of real GDP against PCI 32 w n lo Figure 3.5 Illustration of growth data overstatement 38 ad ju y th Figure 3.6 Different distributions of u 39 yi Figure 4.1 Effects of Time cost scores on GDP 51 pl ua al Figures 4.2 Effects of Informal charge scores on GDP 52 n Figure 4.3 Effects of Information access scores on GDP 59 va n Figure 4.4 Effects of Private sector development scores on GDP 60 ll fu oi m Figure 4.5 Effects of Pro-activity of provincial leader scores on GDP 61 nh Figure 4.6 Effects of Labor policy and training scores on GDP 63 at z Figure 4.7 Effects of the PCI scores on GDP 65 z ht vb k jm om l.c gm n a Lu n va y te re viii As can be inferred from the figure, an increase in the PCI scores is associated with an increase in provincial GDP for the whole data range of around 35 to 80 point scores If PCI scores go up by 1%, on average, provincial real GDP will go up by about 0.14%, with other t to factors remain unchanged (regression result from Table 4.8) Additionally, the monotonic ng hi upward concave curvature reveals that moving up along the score ladder, an improvement in ep the PCI score is associated with a smaller increment in provincial GDP, which is consistent with the Law of diminishing returns w n lo ad To sum up, out of the three models applied, CD(III) proves to be mostly preferred as being y th the only model delivering the reasonable sign of (+) for the labor input variable across ju regression equations of PCI and its nine sub-indices Concerning institutional effects on yi pl provincial GDP, there are substantive differences in empirical results obtained From the ua al statistical perspective, Land access, Legal institution and Entry costs not significantly n contribute to explaining cross-province GDP differentials In addition, whereas the PCI along n va with Time cost, Informal charges, Labor policy and Pro-activity positively impacts on ll fu provincial GDP with discernible patterns, no concluding remarks could be drawn on the m institution-growth relationship for Access to Information and Private sector development oi Rather, these two sub-indices offer empirical evidences for the sensitivity of the sample data nh at set to functional forms and outliers z z vb In passing, although divergent results are obtained among the PCI and the nine sub-indices, ht the overall picture is supportive for our argument that institution matters for provincial jm k economic performance Notably, except for the Time cost sub-index, the documented gm methodological change in constructing the PCI as well as its sub-indices in the year 2009 did om l.c not bring about a structural break in the respective institution-growth relationship n a Lu n va y te re 66 Chapter CONCLUSION AND PERTAINING ISSUES t to ng 5.1 Conclusion hi ep In the context that there has been an intensive race to improve PCI scores among Vietnamese w n provinces in the past year so as to enhance the enabling environment for better provincial lo economic performance, this study was conducted to justify the imperativeness of such a ad “race” Employing PCI and its nine sub-indices as proxies for institutional quality, our study y th ju has empirically investigated the impacts of institutional implementation on economic yi performance of Vietnam’s provinces for the 2007-2011 period pl al n ua Taking into account the crucial fact that there is overstatement of provincial GDP data, we va estimate the models in two ways As a conventional approach, we remove outliers following n the data cleaning process presented in the previous chapter before running the respective fu ll regressions Alternatively, we explicitly model the over-reported GDP data by incorporating m oi such a proven over-statement into the model estimation We then run three rounds of model at nh regressions corresponding to the full-data (or trial) model, the outlier-free model and the socalled over-statement treatment model In these three rounds of model estimation, we attempt z z to employ both Cobb-Douglas and Translog functional form for each round However, the vb ht last model fails to deliver feasible outputs for the TL case, making the total number of model k jm estimation amount to five for PCI as well as each sub-index gm Notably, out of the three models put into result analysis, including the Translog case for the l.c first two rounds, which is respectively coded TL(I) and TL(2), and the Cobb-Douglas for the om last round, namely the CD(III), the last model proves to deliver the most reliable estimation a Lu results While the economic significance of PCI’s impact on provincial GDP is statistically confirmed, Land access, Legal institution and Entry costs not significantly contribute to n y te re patterns, no concluding remarks could be drawn on the institution-growth relationship for n charges, Labor policy and Pro-activity positively impacts on provincial GDP with discernible va explaining cross-province GDP differentials In addition, whereas Time cost, Informal Access to Information and Private sector development Although empirical results obtained are divergent across PCI and its nine indices as well as across the three models employed, the broad picture supports our argument that institutions matter for economic performance 67 In light of the fact that findings from the study can help in justifying such a PCI score race and to the extent that the economic significance of institutional effects on provincial economic outcome is assessed, our research objective is realized and research questions are t to successfully solved ng hi ep 5.2 Policy implications w n lo Participating in the PCI score race, which has now been empirically justified, provinces ad should have their energies and limited resources channeled into specific institutional areas y th critically conducive to economic development With our empirical results utilized as ju actionable policy information, our following discussion on policy implication will be rested yi pl on those sub-indices exhibiting a discernible pattern of significant impacts on provincial n ua al economic outcomes va As revealed by our empirical results, Time cost and Informal charge sub-index significantly n ll fu contributes to explaining provincial economic variations This finding implies that intensive oi m actions should be taken at provincial level to eliminate these transaction costs in conducting business In particular, the costliness of bureaucratic regulation and paperwork as well as the nh at unofficial payments to “grease the wheel” of business operation should be ultimately z eradicated z ht vb jm Another institutional factor significantly matters for provincial economic performance is Pro- k activity of provincial leaders As a result, provincial investments should be geared towards gm enhancing the dynamism of officials in working with regulatory framework as well as om l.c realizing their initiatives to support private sector development a Lu With Labor policy and training sub-index showing significant explanatory power to cross- n province GDP differentials, the implication is that provincial leaders’ efforts in enhancing n va vocational training and labor placement for local enterprises should be, in which way or y te re another, strongly encouraged and imperatively promoted 68 5.3 Limitations and further studies t to The most prominent limitation of the study lies in its failure to address the potential ng hi endogeneity of institution Because one of the two types of data used to construct the PCI is ep perception data, it is much likely that the index is prone to perception bias In which sense, the data is collected via surveys whose respondents’ perceptions of the existing institutional w n environment are more or less affected by the state of the economy at a given time, which is lo ad called endogeneity problem Meanwhile, the data set used in the study does not support the ju y th employment of an instrument variable for endogeneity treatment yi pl Working on a sensitive data set is another important limitation of the study Since divergent ua al results are obtained across functional forms as well as outlier treatment approaches, n conclusions drawn are, in some cases, too conservative to deliver any actionable policy va information This point was empirically evidenced by the case of Access to Information and n ll fu Private sector development As a definite conclusion on the institution-growth relationship oi m could not be drawn, no policy implications have been suggested concerning these two institutional factors at nh z Due to limited resources, we encounter the technical problems of computational capacity z ht vb when the software (STATA) fails to deliver feasible outputs for Stochastic Frontier Analysis jm with Translog functional forms As a consequence, the respective models are excluded from k our study gm l.c To conclude, the above arguments present the extent to which our study has not worked om nicely More research and more data are therefore needed to overcome the limitations of our a Lu study Besides, there are some other institution-growth related matters that could be n investigated for the case of Vietnam, such as institutional threshold effects via parameter n y te re research objective is already defined, they are beyond the scope of this study va heterogeneity, or the indirect effects of institution on growth, to list some However, as our 69 REFEERENCES t to ng hi ep Aidis, R., Estrin, S., & Mickiewicz, T (2009) Entrepreneurial entry: Which institutions matter? 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Hai Duong ju (a) Outlier I - Dien Bien yi pl n ua al n va ll fu oi m at nh z z (d) Outlier I - Hoa Binh (c) Outlier I - Phu Tho ht vb k jm om l.c gm n a Lu n va y te re 75 Table A.4 Outlier II detection t to ng hi ep w n lo ad ju y th yi pl 2008 2007 n ua al n va ll fu oi m at nh z z ht vb k jm om l.c gm n a Lu n va y te re 2011 76 2010 2009 ad ju y th yi pl Table A.5 Summary of empirical studies ua al Author (s) and study Data set n No va Siddiqui & Ahmed (2013) The Effect of Institutions on Economic Growth: A Global Analysis Based on GMM Dynamic Panel Estimation -Panel data 61 countries (1965-2005) n Dias & Tebaldi (2012)Institutions, human capital, and growth: The institutional mechanism Methodology Proxy variable -Political institution: Polity-IV measure of democracy and autocracy -Structural institution: share of educated labor in the economy (steady state condition) oi m ll fu - Formal growth model -GMM dynamic nh - Formal extended growth model -GMM - based Arellano-Bond linear dynamic Index of Institutionalized Social Technologies (sub-indices: institutional and political rents, policy rents and riskreducing technologies) at z z Panel of 84 countries 2002-2006 Key findings The importance of interactions between institution and human capital accumulation is highlighted Policy implication: the growth path is tied to structural institutions, not political ones k jm ht vb Good institutions favor economic growth For a developing country, institutional and political rent index is more important than the other two factors Higher quality of regulation leads to higher growth om economic growth Governance indicators from World Bank l.c -Solow’s growth model -Fixed and Random effect On the relation between regulation and Panel 23 OCD Countries (2002-2008) gm Atul and Sal (2012) an Lu va n -Historical perspective approach -Institutional comparative approach -Imperfect information theory Institutional framework substantially influences economic outcomes si critical survey of the new institution approaches andl evidence Meta analysis ac th economic change: A Theoretical approaches and empirical evidences on the subject y te re Gagliardi (2008) Institutions and g e cd 79 jg hg ad ju y th yi pl ua al Hasan et al (2007) Institutional development, financial deepening and economic growth: evidence from China Panel China’s 31 provinces, 1986-2002 Jalilian, Kirkpatrick & Parker, (2007) The impact of regulation on economic growth in developing countries: A cross-country analysis - 117 countries 1989 – 1999 - 96 countries 1980- 2000 - Cross-section regression - Panel regression (fixed effects) Tran et al.(2009) Institutions matter: The case of Vietnam PCI 2006 Firm-level data 2005 OLS PCI: proxy for institutional quality Glaeser et al (2004) Do institutions cause growth? Cross-country 1960-2000 OLS regression with country fixed effects Executive constraints, Democracy, Autocracy-polity IV, Expropriation risk, Autocracy-Alvarez, Government effectiveness n Sobel (2008) Testing Baumol: Institutional quality and the productivity of entrepreneuship OLS Institutional quality scores: economic freedom index Good institutions channel resources to productive entrepreneurship, thus leading to higher economic growth -Barro’s (1991) growth equation - OLS -System GMM (annual and three year average) -Size of private sector: private sector total fixed investment/ overall fixed investment -Rule of law: number of lawyers/10,000 people - Awareness of property rights: number of domestic trademark applications/ number of firms Institutional development plays an important role in economic development Two regulatory indicators: RQ (regulatory quality) and GE (government effectiveness) A strong causal link exists for the institution – growth nexus in developing countries n va Cross-section 48 USA’s states oi m ll fu at nh z z k jm ht vb om l.c gm an Lu Local governance quality is an essential factor explaining differences in firm’s economic performance va n y te re ac th It is challenging to establish a causal link between institutions and economic growth due to problems in institutional measurements and limitations in econometric techniques si g e cd jg 80 hg ad ju y th yi pl Executive constraint variable (Jaggers Investigate the indirect effects of 70 countries Endogenous and Marshall , 2000) institution on growth allowing for (1960-2000) sample splitting parameter heterogeneity Evidence shows technique that institutions influence the marginal n va heterogeneity Panel data n 10 -OLS fu ua al Jenny Minier (2007) Institutions and parameter m ll effect of policy variables on growth oi at nh z z k jm ht vb om l.c gm an Lu va n y te re ac th si g e cd jg 81 hg Table A6 Marginal effects of institutional factors on GDP – HCMC case 2011 - CD(III) t to RGDP (million VND) ng Institution variables hi dy Y (3 5 )* dx X ep (1 unit score change ) w PCI 369,450** n -677,050 lo Entry costs ad 3,770,401*** ju y th Time costs 155,054 yi Informal charges pl 1,360,516 -896,819 3,513,714** ll fu Access to information n va Legal institution n ua al Land access m 895,911*** oi Private sector development at nh Pro-activity of leaders 3,089,269** z z vb Labor policy and training 2,550,986** ht k jm om l.c gm n a Lu n va y te re 82