Public investments in transport and economic growth the case of viet nam in the period 1996 2006

NATIONAL ECONOMICS UNIVERSITY - INSTITUTE OF SOCIAL STUDIES VIETNAM-NETHERLANDS MASTER'S PROGRAM IN DEVELOPMENT ECONOMICS PUBLIC INVESTMENTS IN TRANSPORT AND ECONOMIC GROWTH: THE CASE OF VIET NAM IN THE PERIOD 1996-2006 A thesis presented by Nguyen Thi Que Huong Supervisor: Dr Le Quoc Hoi - Journal of Economics and Development - National Economics University, Vietnam October, 2011 ACKNOWLEDGEMENT First of all, I am grateful to my main supervisor, Dr Le Quoc Hoi who instilled on me the importance of conducting meaningful research and thinking critically and thoroughly about the topic, economic theory and methods He has been extremely helpful at all stages of my research, helping me to develop the research, enlightening me on many aspects of doing good research, and providing invaluable comments and feedback Without his guidance and support this thesis would not have been completed Also, I would like to thank the assistance and guide by Dr Do Ngoc Huynh who enthusiastically supports me and spends hours with me discussing model techniques, and providing excellent comments and suggestions I would like to thank Prof Vu Thieu for his professional guidance on the econometric techniques over the past four years of my studies to date I can applied in this thesis Along with my supervisors, I wish to sincerely thank my colleagues at Ministry of Finance for their help in collecting data set My final gratitude is devoted my friends who always give me invaluable encouragement, support and tolerance during the thesis writing ABSTRACT This thesis analyzes the impact of public investment in transport on Vietnamese economic growth over the period 1996 - 2006 Relevant econometric models based on panel data from 64 Vietnamese provinces are used to estimate the impact Empirical results obtained show that a change in public investment in transport has a positive and significant impact on the country’s economic growth Of the three main components of public investment, including transport, education and agriculture investments, empirical evidences indicate that only public investment in transport has contributed to growth Besides, a positive spillover effect of investment in transport on economic growth is also observed from the empirical results TABLES OF CONTENT ACKNOWLEDGEMENT ABSTRACT CHAPTER 1:INTRODUCTION CHAPTER 2:LITERATURE REVIEW 2.1 Theoretical review 12 12 2.1.1 Exogenous growth theories 12 2.1.1.1 Harrod - Domar Model 2.1.1.2 Solow - Swan Model 12 13 2.1.2 Endogenous growth theories 14 2.1.3 Theoretical models on public expenditures 15 2.1.3.1 Barro Model 15 2.1.3.2 Devarajan, Swaroop and Zou Model 18 2.2 Empirical review 19 2.2.1 International studies 19 2.2.2 Vietnam studies review 23 CHAPTER 3:OVERVIEW OF GOVERNMENT EXPENDITURE AND PUBLIC INVESTMENT IN TRANSPORT IN VIETNAM25 3.1 Overview of Vietnamese government expenditure 25 3.2 Transport system and public investment in transport in Vietnam 3.2.1 Overview of transport infrastructure system 28 28 3.2.2 Overview of public investment in transport in Vietnam 31 3.2.2.1 State and local government investment in transport 31 3.2.2.2 Transport infrastructure invested by the Ministry of Transport 34 3.2.2.3 Vietnam’s transport expenditure in comparison with neighboring countries 35 3.3 Transport investment and economic – social development in Vietnam 36 3.3.1 Contribution of transport investment to economic and social development 36 3.3.2 Impact of public investment in transport on GDP 38 3.3.3 Contribution of transport investment to GDP in Vietnam and some other countries 39 CHAPTER 4: EMPIRICAL ANALYSIS 40 4.1 Empirical model 40 4.1.1 Model specification 40 4.1.1.1 Baseline Regression 40 4.1.1.2 Extension regressions 42 4.1.2 Data and methodology 43 4.2 Empirical results and analysis 45 4.2.1 Public investments and economic growth - baseline regression results and analysis: 45 4.2.2 Public investments and economic growth - extension regression results and analysis 50 4.2.2.1 The role of education in the impact of public investment in transport on economic growth: 50 4.2.2.2 The spillover effect of public investments in transport of neighboring provinces 51 4.2.2.3 The relationship between the share of public investments in transport and economic growth rate 53 4.3 Robust Check: 55 CHAPTER 5:CONCLUSION AND POLICY IMPLICATIONS 5.1 Conclusions 59 5.2 Policy implications 60 BIBLIOGRAPHIES 63 APPENDIX 67 59 LIST OF TABLES AND FIGURES Table 1: Public expenditure as ratio of GDP (%) 25 Table 2: State government investment by sectors 26 Table 3: Actual state of national road system in Vietnam 28 Table 4: Actual state of national road system in Vietnam 29 Table 5: Public investment in transport in 2000-2006 .32 Table 6: State and local government’s investment in transport 2000-2006 .34 Table 7: Kinds of transport infrastructure invested by MOT (1996-2007) 35 Table 8: Transport Expenditure Levels as Percentage of GDP of East Asian Countries in period 1999-2004 .36 Table 9: Contribution of the transport sector to GDP in selected countries (%) .39 Table 10: Descriptive statistics 44 Table 11: Statistics for government investment shares, 64 provinces, 1996-2006 45 Table 12: Baseline regression estimates 46 Table 13: The effect of education level on growth elasticity of public investment in transport 50 Table 14: Spillover effect of public investment in transport 52 Table 15: Effect of a change in component’s shares on economic growth 54 Table 16: Public investments and economic growth – baseline regression results with lagged variables 55 Table 17: The role of education in the impact of public investment in transport on economic growth - extension regression results with lagged variables .56 Table 18: The spillover effect of public investments in transport of neighboring provinces extension regression results with lagged variables 57 Figure 1: Trend of public investment in transport infrastructure in constant price 32 Figure 2: Public investment in transport infrastructure per GDP 33 Figure 3: Public investment in transport versus GDP 1996-2006 38 LIST OF ABBREVIATIONS FDI – Foreign Direct Investment GDP – Gross Domestic Product GSO – General Statistics Office IMF – International Monetary Fund OECD - Organization for Economic Co-operation and Development MOF – Ministry of Finance MOT – Ministry of Transport UN – United Nations US – United States USD – United States Dollar WB – World Bank WTO – World Trade Organization CHAPER INTRODUCTION 1.1 Problem statement How to raise the rate of economic growth and improve human living standards is always a great question by governments and policy makers In an economic perspective, the past decades have seen efforts of economists to clarify the source of economic growth and the root of increasing disparities between rich and poor countries Exogenous growth models initially promoted by Solow (1956) recognized capital accumulation and technical progress as the determinants of economic growth According to their studies, policy variables have no effect on long term economic growth Policy variables such as investments in public infrastructure have only transitional growth effects Contrast to the idea of the exogenous growth theory, a new stream of endogenous growth theory which is prompted by Lucas (1988) and Romer (1990) argued that the rate of productivity growth is directly depended upon the level of some policy variables such as the level of education of workforce, the amount of transport investment or level of public investment This framework of endogenous growth theory has later stimulated the body for empirical analyses which attempt to examine the link between public investment and aggregate economic activities Examining time series data from the United State in the post World War II, Aschauer (1989a) found a large and significantly positive elasticity of output with respect to public capital stock Firming for his finding, Aschauer (1989b) argued that in area such as public utilities, road and education, public expenditure may complement higher private marginal rate of return This finding is later supported by early study of Munnell (1990a) By exploring the case of the US she indicated that at national level percent increase in stock of public capital would increase output by 0.34 percent Also focusing on the relationship between public investment and economic growth but based on panel data at state level, some other authors provided the result that public capital stock had a significant positive impact on output (Munnell, 1990b; Kelejian and Robinson, 1994) However, they show that the estimated magnitude of public capital stock elasticity generally gets smaller when moving from national to state data because of infrastructure spillover effects The explanation articulated the finding of Munnell (1992) when she argued the benefit of infrastructure spillover across state borders, so that state7 level studies not measure the full effect of public investment This low correlation is also recognized by Nourzad and Vrieze (1995) Based on econometric method of Aschauer and Munnell and taking into account random effect, their study on a panel data of OECD countries over the period of 1963-1988 has shown a relatively low but significant output elasticity of 0.05 with respect to public investment Recognizing the impact of public capital stock on economic productivity, other economists tend to focus on the relationship between economic growth and public investment in one of core infrastructures - the provision of transport infrastructure such as highway, road, port or airport - at national, regional and state levels Based on cross country data, a study of Antle in 1983 implies that transport and communication weakness is the most constrain in less developing countries (LDCs) to raise their production Later in 1993, study of Easterly and Rebelo indicates that growth and public investment in transport has a strong and robust association At the same time with study of Easterly and Rebelo, when exploring the case of US, Canning and Fay (1993) also found a large estimated rate of return for transport and telephone systems at about 40 percent Based on this finding they come to conclude that developed countries with higher income will have normal rate of return for transport infrastructure while newly industrializing countries like South Korea and Chile have a very high rate of this return This finding has been supported for arising concerns on identifying effects on economic growth of transport investment factor in the case of industrializing and developing countries Known as a developing country with impressive economic success of the gross domestic product (GDP) growth rate at 7.5% over 2000-2006, identifying the determining factors of rising economic growth rate while maintaining macroeconomic stability is thus crucial to the government and policy makers in Vietnam In process of finding a reasonable way to improve the economy, public investment is always considered as an engine of economic improvement by the Vietnamese government Budget for transport infrastructure investment accounts about 45-50% of the country’s total non-military spending each year Understanding the effects of public investments in transport on economic growth thus is essential to policy makers in the face of increasing globalization Upon the demand, economic studies on the subject have been widely discussed in recent years Empirical study of Kokko and Tingvall (2005) has provided some policies that the Vietnamese government would use to promote provincial growth and development, of which more investments in transport infrastructure take an important part Exploring other side of the subject, Lien (2004) examines reality of investments in transport system in Vietnam and concluded that although Vietnam’s transport infrastructure system has been improved, it has not met demands of the country’s social and economic development Other researches describe the impact of transport investment on economic development process in Vietnam and come to conclusion of the need for more investment in the field (Son, 2008 and Tin, 2008) Although identifying impacts of investment in transport infrastructure is an important issue for Vietnamese policy makers, existing researches on the subject are only descriptive It is easily observed that there have not been empirical studies using econometric method to examine the correlation in Vietnam These reasons require a study based on a quantitative analysis to examine the contribution of investments in transport on economic growth and thus give a comparison between level of transport investment’s contribution with that of other public investment In this study, based on frameworks of Aschauer (1989), Munnell (1990), Barro (1991) I focus on investigating the impact of public investment in transport on economic growth in Vietnam and making statistical comparison between the contribution of public investment in transport and the contribution of other components of public spending The study also gives policy implications which would be crucial for long-run development in Vietnam 1.2 Objective of the thesis  Review public investments in transport in Vietnam in recent years  Investigate whether public investments in transport have a significant impact on economic growth of Vietnam in the period 1996-2006  Compare the contribution of public investments in transport with that of other public investments to Vietnamese economic growth in the period 1996-2006  Find out some factors which would affect level of the contribution of public investments in transport to economic growth  Recommend appropriate policies to raise the effectiveness of public investments productivities in transport and government investments in general as well 1.3 Research questions The thesis attempts to answer the following question: “Do public investments in transport have a significant impact on economic growth of Vietnam in the period 1996-2006?” In order to answer this main research question, it is necessary to answer the following sub-questions: