THESISFISCAL DECENTRALIZATION: CASE STUDY OF VIETNAM

UNIVERSITE LIBRE DE BRUXELLES NATIONAL ECONOMICS UNIVERSITY Vietnam – French Community of Belgium Master Programmes MASTERS IN PUBLIC MANAGEMENT AND ECONOMICS THESIS FISCAL DECENTRALIZATION: CASE STUDY OF VIETNAM Prepared by: Dinh Duy Dong Instructed by: Dr. Le Thanh Tam Hanoi 2010 ii ACKNOWLEDGEMENTS I am thankful to everyone who has helped me along the way. I really appreciate the constant support and encouragement I received from many people throughout the process. I would like to first thank my advisor, Dr. Le Thanh Tam, for her tremendous help and support. I do not think that I would have been able to complete this thesis without her belief in me, and her enormous support. My gratitude is extended to my colleagues and coworkers, who helped me with the collection of data for the research. I am also very grateful for the time and information shared with me by all the employers involved in the survey. I very much appreciate the encouragement and support provided by all the professors and staff at the Vietnam - French Community of Belgium Master Programmes and the Faculty of International Education. I also truly value the friendship and assistance by the classmates of MPM5. Discussions and exchanges with them have really helped improve my scientific thinking and research methodology. Last but not the least, I would like to thank my family and friends who always believed in me, and have been there for me throughout this process. LIST OF TABLES Page Number Table 3.1: Assignment of Expenditure Responsibilities in Vietnam 24 Table 3.2: The number of sub-nations having low growth rate of education and training, science and technologies expenditures 28 Table 3.3: Growth rate of the State budget balanced revenues in 2004-2010 31 Table 3.4: Domestic revenue sorted by descending quantity 32 Table 3.5: The sharing percentage of shared revenues for provinces 33 Table 3.6: Outstanding stock of provincial debt as of October 2010 42 LIST OF FIGURES AND DIAGRAMS Page Number Figure 3.1: The ratio local expenditure to total expenditure 26 Figure 3.2: The ratio capital expenditure to local expenditure (balancing expenditure) 27 Figure 3.3: The structure of domestic revenue 35 Figure 3.4: Share of local revenue in total revenue 36 Figure 3.5: Share of intergovernmental fiscal transfers in total local revenues 40 Diagram 2.1: Four pillars of fiscal decentralization system 8 Diagram 3.1: Levels of territorial administration and budget 22 LIST OF ABBREVIATIONS NA: National Assembly VAT Value added tax MOF Ministry of Finance TABLE OF CONTENT EXECUTIVE SUMMARY iii CHAPTER ONE: INTRODUCTION 1 Rationale of the thesis 1 Objective of the thesis 2 Thesis questions 2 Scope of research 2 Methodology 2 Thesis Structure 3 CHAPTER II: LITERATURE REVIEW ON FISCAL DECANTRALIZATION 4 2.1. Definition of Fiscal Decentralization 4 2. 2. Rationale for fiscal decentralization 5 2.3. Content of fiscal decentralization 8 2.3.1. Expenditure assignments 8 2.3.2. Revenue Assignments to Local Governments 12 2.3.3. Intergovernmental transfers 14 2.3.4. Sub-national Borrowing/Debt 16 2.4. Measuring level of fiscal decentralization 18 CHAPTER III: THE FACT OF FISCAL DECENTRALIZATION IN VIETNAM 21 3.1. Current territorial administrative structure 21 3.2. Assignment of expenditure responsibilities 23 3.2.1. Current assignments 23 3.2.2. Significant issues 29 3.3. Revenue assignments 30 3.3.1. Current revenue assignments 30 3.3.2. Significant issues 37 3.4. The system of transfers 38 3.4.1. Current transfers system 38 3.4.2. Significant issues 41 3.5. Sub-national government borrowing 41 CHAPTER IV: RECOMMENDATIONS FOR IMPROVING FISCAL DECENTRALIZATION IN VIETNAM 46 4.1. Orientation on fiscal decentralization 46 4.2. Recommendations 47 4.2.1. To enhance the budget expenditure assignments 47 4.2.2. To enhance the revenue assignments for local authorities 49 4.3. Improving transfers system 51 CONCLUSION 53 REFERENCES 55 APPENDIX TABLES 57 ii EXECUTIVE SUMMARY The issue of fiscal decentralization has begun to feature significantly in many countries around the globe. Fiscal Decentralization may be defined in many ways, but typically involves increased autonomy and responsibilities for lower-level entities in one dimension or another. Fiscal decentralization covers two interrelated issues. The first is the division of spending responsibilities and revenue sources between levels of government (national, regional, local etc). The second is the amount of discretion given to regional and local governments to determine their expenditures and revenues (both in aggregate and detail). A design of fiscal decentralization systems is based on four pillars: expenditure assignment, revenue assignment, intergovernmental transfers/grants, and sub-national debt/borrowing. Most studies empirically examining fiscal decentralization describe the extent of fiscal decentralization as the local share of total government expenditure. This indicator measures the degree of local expenditure responsibility in the public sector. By the same taken, the local share of total government revenue is also applied to measure the degree of fiscal decentralization. A vertical fiscal gap is defined as the local revenue deficiency cause by the difference between local government revenue capacity and its expenditure responsibility. Following some fiscal decentralization indicators are focused to measuring level of fiscal decentralization: (i) Local share of total fiscal expenditure; (ii) Local share of total fiscal revenue; (iii) Local dependency on fiscal transfer; (iv) Local fiscal autonomy; (v) Local expenditure discretion. Base on these indicators, fiscal decentralization is classified into the following three types. First, the intergovernmental fiscal relationship can be considered as highly decentralized. Another type is that although local fiscal autonomy is limited, the discretion over expenditure is relatively high. The third type is both local fiscal autonomy and expenditure discretion are limited. iii Over the past decade, Vietnam has been implementing decentralization program. A cornerstone of this program was the approval of the 1996 State Budget Law, the result has been a substantial and growing level of decentralization, with the share of sub-national government in total expenditure increasing from 26 percent in 1992 to 43 percent in 1998 ; and to 48 percent in 2002 (Socialist Republic of Vietnam and the World Bank, 2005). The 1996 State Budget law was the first legal document in Vietnam to provide explicit regulation for public financial management. The law defined the role and powers of each level of government in the budget process, reflecting the incipient decentralization of public finance. The law created framework financial relations between the national government and lower tier of government. A revised State Budget law was approved by NA in December 2002 and came into force in January 2004. This Law builds on the achievements of its predecessor, strengthening the legal platform of budget management in four important regards: (1) Clarifying powers and responsibilities; (2) Strengthening decentralization; (3) Promoting administrative reform; (4) Strengthening transparency and accountability. Although Vietnam has reached some achievements through current fiscal decentralization system as of January 2004, some weaknesses of Vietnam current system of decentralization are necessarily improved in coming time: (i) Assignment of expenditure responsibilities: One main problem with expenditure assignment in Vietnam is deal with the capital expenditure needs of sub-national government. Most sub-national governments lack of capital funds to rehabilitate, replace or construct new infrastructures. Another significant issue is the lack of regulation of concrete explicit expenditure assignments for the lower levels of governments of districts and communes. iv [...]... weaknesses of Vietnam s current system of fiscal decentralization? - What is needed to be done to further improve Vietnam s system of fiscal decentralization? Scope of research The issues examined in this research rest inside the following boundary: - Scale: Vietnam Government Sector - Focusing on analyzing and clarifying the mechanism of fiscal decentralization to local governments as of the effect of the... theories related to the research theme Chapter three: The fact of fiscal decentralization in Vietnam, provides a description of strengths and weaknesses of Vietnam s current system of fiscal decentralization Chapter four: Recommendations for improving fiscal decentralization in Vietnam, recommendations are offered to improve Vietnam s system of fiscal decentralization The final part, Conclusion, recaps... difficulties during the implementation of decentralization process I believe that it is indispensable to have solutions to improve the prevailing regime of fiscal decentralization in order to increase further both the efficiency and equity of the system This explains why “Fiscal Decentralization: Case study of Vietnam issue is chosen to my research topic 1 Objective of the thesis - This thesis, thus,... mobilization and allocation of resources, and in delivery of services which are more appropriate and responsive to the needs and wishes of local people and more efficient given local conditions and circumstances (Socialist Republic of Vietnam and the World Bank, 2005) Over the past decade, Vietnam has been implementing decentralization program A cornerstone of this program was the approval of the 1996 State... Methodology This thesis substantially builds on the theories of fiscal decentralization and various other available official publications and case studies to bring qualitative and quantitative analysis, logics and analytical review methods to the examination of practice of fiscal decentralization in Vietnam Most data used for this study is derived from the MOF 2 Thesis Structure The thesis is structured in four... theoretical concepts as a basis to analyze the practical of fiscal decentralization in Vietnam to provide a description of the strengths and weaknesses of the system - Base on significant issues of fiscal decentralization in Vietnam, to propose to improve the prevailing regime of fiscal decentralization in order to increase further both the efficiency and equity of the system Thesis questions Within this context,... and flexibility in budget management of government authorities at all level to effectively meet the requirements of socio-economic development of Vietnam The local budget self control should be strengthen and enhanced step by step to actively and efficiently assist the performance of the functions and tasks of the local authorities, basing on the on-going improvement of management capability, transparency... sub-national governments’ exploitation of fiscal power 6 Taxes levied on tax bases that are unevenly distributed should be centralized Uneven distribution of tax bases among sub-national governments forces the residents of one sub-national area bear the economic burden of taxes imposed by another jurisdiction Taxation of natural resource is the best example of this type of taxation practice 7 The revenue... code is the issue of revenue sharing Revenue sharing (same as shared responsibilities) has a number of advantages and disadvantages One of the major concerns, however, is how a system of revenue sharing would fit in with the style of the desired system of intergovernmental relations 2.3.3 Intergovernmental transfers Transfers are a compromise solution in the debate over the division of revenue-raising... of fiscal decentralization: (1) Local share of total fiscal expenditure RLE = ∑iLEi/(∑iLEi+CR) Where I denotes a local government, LE I is the expenditure of local government (i), and CE is the expenditure of the central government Accordingly, RLE measures the ratio of local expenditure to total fiscal expenditure including local and central expenditure This indicator hence quantifies the degree of