Can public administration explain economic performance: the case of sixty three provinces in Vietnam

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM ERASMUS UNVERSITY ROTTERDAM INSTITUTE OF SOCIAL STUDIES THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS CAN PUBLIC ADMINISTRATION EXLPAIN ECONOMIC PERFORMANCE: THE CASE OF SIXTY THREE PROVINCES IN VIETNAM BY HOANG HONG QUAN MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, December 2017 i UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS CAN PUBLIC ADMINISTRATION EXLPAIN ECONOMIC PERFORMANCE: THE CASE OF SIXTY THREE PROVINCES IN VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By HOANG HONG QUAN Academic Supervisor: PROF DR NGUYEN TRONG HOAI HO CHI MINH CITY, December 2017 ii DECLARATION I, HOANG HONG QUAN declare that this thesis and all results concluded in it are my own effort and has been generated by myself as the result of my own original research: Can Public Administration Reform Explain Economic Performance: The Case Of Sixty Three Provinces In Viet Nam I confirm that: This work was done wholly or mainly while I have been in candidature for a research degree at the Viet Nam - Netherlands Programme for M.A in Development Economics; Where any part of this thesis has previously been submitted for a degree or any other qualification at this programme or any academic institution, this has been clearly stated; All references; materials quoted from the work of others used in this thesis, the source is always given With the exception of such quotations, this thesis is entirely my own work; Either none of this work has been published before submission, or parts of this work have been published I am hereby responsible for my declaration iii ACKNOWLEDGEMENT Here I would like to express my profound gratitude to thank my supervisor, Prof Dr NGUYEN TRONG HOAI for his valuable and unconditional supporting, understanding and supervising during the process of this thesis Besides, I would like to express my appreciation to the lecturers, staffs and members of the Vietnam - Netherlands Program at University of Economics Ho Chi Minh city for their willingness and priceless time helping me to enlarge knowledge and academic skills which are the background of this thesis to be generated Next, I would like to thank doctor Ricardo Perez Truglia from Harvard University who encourage the completion of this thesis with his data and materials as examples of data processing techniques, also I would like to thank all of my classmates for their hard work, which considered to be a typical example of surmounting challenges Lastly, I would like thank all of my friends, relatives and colleges for their unlimited assist during the time of staying presence in my programme iv ABBREVIATION GDP: Gross Domestic Product GRDP: Gross Regional Domestic Product PA: Public Administration PAR: Public Administration Reform PAR-MP: Public Administration Reform - Master Program PSR: Public Service Reform MI: Multiple Imputation BMA: Bayesian Modeling Average PIP: Posterior Inclusion Probability FE: Fixed Effects DGMM: Difference Generalized Methods of Moments SGMM: System Generalized Methods of Moments v ABSTRACT Economic growth can be explained using fundamental (De facto) cause and proximate (De jure) ones This study attempt to explore proximate nature which is of elements of economic activities of Vietnam including institutional quality based on cross-province dataset The methodology adopted is informal growth regression, which allow to account variables that represent the underlying as well as proxy for proximate causes of growth Multiple imputation (MI) technique is employed to deal with missing values of regressors since some observations are measured each couple of years and missing values Problem of model uncertainty is addressed using approach for model selection named BMA (Bayesian model averaging) to evaluate probability of including of predictors in growth model Variables flagged as being important by the above procedures then used in formulating the final models Using dataset collected from 63 provincial administrative level units of Vietnam with 15 proximate determinants, which are proxy for public administrative reform in Vietnamese context Panel data difference GMM (DGMM) is applied to examine in some detail and to deal with multicolinearity and endogenous nature of data The results indicate that elucidating economic growth variations of provinces in context of public administration would rather choose the fundamental group of variables than group of proximate variables For determinants of growth, an increase of public expenditure and a high level of lagged GDP will help to significantly raise provincial economic health In context of institutional change, control of corruption is proved to remarkably affect current economic well-beings Moreover, with additional models of estimations to quest for possible effects of all variables, the results show that the result of focused model of this study are consistent and robust vi CAN PUBLIC ADMINISTRATION REFORM EXPLAIN ECONOMIC GROWTH, THE CASE OF SIXTY THREE PROVINCES IN VIET NAM Contents DECLARATION ACKNOWLEDGEMENT ABBREVIATION Equation Chapter Section 1DECLARATION iii ACKNOWLEDGEMENT iv ABBREVIATION v GDP: Gross Domestic Product v GRDP: PA: Gross Regional Domestic Product v Public Administration v PAR: Public Administration Reform v PAR-MP: PSR: MI: Public Administration Reform - Master Program v Public Service Reform v Multiple Imputation v BMA: Bayesian Modeling Average v PIP: Posterior Inclusion Probability v FE: Fixed Effects v DGMM: Difference Generalized Methods of Moments v SGMM: System Generalized Methods of Moments v ABSTRACT vi ACKNOWLEDGEMENT vii ABBREVIATION vii FIGURES 10 vii CHAPTER INTRODUCTION 11 1.1 Problem statement 11 1.2 Research gaps 14 1.3 Specification of research problem 15 1.4 Research objective and research questions 17 1.5 Scope of study 18 1.6 Structure of the study 19 CHAPTER LITERATURE REVIEW 20 Literature review 20 2.1 Review of theory 20 2.1.1 Review research on institutional quality and economic growth 20 2.1.2 Review research on public administration reform and national income 23 2.1.3 Concept of public administration and the nature 24 2.1.4 Public administration reform and its nature 25 2.2 Theoretical framework 28 2.2.1 Growth model and institutions-augmented growth model 29 2.2.2 Institutions-augmented growth model 31 2.3 Empirical studies and methods applied 33 2.4 Institutional quality and economic Growth 36 CHAPTER RESEARCH METHODOLOGY 39 3.1 Measurements of institutional quality 39 3.2 Linking public administration reform and economic growth 41 3.3 Analytical framework 42 Econometric models 48 viii 3.4 Data collections 53 3.5 Variables description 54 3.5.1 The dependent variable – Gross domestic product at provincial level (GDP) 55 3.5.2 Group of independent variables as fundamental cause of growth 55 3.5.3 Group of variables as proximate cause of growth 58 CHAPTER RESEARCH RESULTS 62 4.1 OVERVIEW INSTITUTION AND ECONOMIC GROWTH IN VIETNAM 62 4.2 DESCRIPTIVE STATISTICS 62 4.2.1 SUMMARY OF MISSINGNESS 62 4.2.2 Filling in missing values 64 4.2.3 Unit root tests 66 4.2.4 Bayesian model averaging 69 4.3 Analysis of the empirical results 72 4.4 Further analysis and discussions 75 CHAPTER CONCLUSIONS AND POLICY IMPLICATIONS 81 5.1 Main findings and Policy implications 81 5.2 Limitations and Further research recommendations 84 Barro, Robert, J “Inflation and Economic Growth.” NBER Working Paper No 5326, 1995 88 ix FIGURES Figure 1: values of Br after taking multiple imputation Figure 2: values of Lnpar after taking multiple imputation Figure GDP estimated in conditions of control of corruption TABLES Table 1: missing patterns of variables Table Summary statistics Table Unit root tests for GDP estimations variables Table 4: correlation matrix of variables Table 5: result of Bayesian model averaging estimation Table 6: results of model selection Table results analysis under FE and DGMM estimations Table 8: estimated result using external variables Table 9: comparison of predictive power of the models 10 CHAPTER CONCLUSIONS AND POLICY IMPLICATIONS 5.1 Main findings and Policy implications Main findings Two sources of variables are applied in this study to explain growth level across provinces As can be seen from chapter 4, all variables which are of fundamental cause of growth directly contribute to total factor productivity (TFP) growth equation, which is consistent with theory of growth as well as study of Acemoglu and Robinson.(2008) Specifically, population; financial resources available in form of budget revenue; investments rate; public consumption; personal income are kinds of resource distribution These are determinants of growth equation A conclusion among several ones that can be drawn from this study is that personal income or income per capita are different across institution and this difference reflect the quality of institution In general, per capita income negatively affect to GDP regardless of biased estimation results GDP itself is also a determinant of economic growth in term of lagged value This mean that the persistence characteristic of GDP at time (t -1) is endowed from GDP at time t Another word, GDP at time t-1 becomes resource available funding GDP at time t Per capita income shows the strongest effect on GDP of a province with a negative amount for each mil paid by personal income The rest factors of this group put a certain negative or positive amount of impact on regional economies Group of de jure variables in the light of this study showed less or unimportant role in explaining GDP in period of 1996-2016 In this group, only control of corruption can explain economic This result is quite much undesirable since the quality of institution concerns the problem of how resources available are distributed among social classes The process of public administration, transparency index, public participation, administration burden, vertical accountability are statistical insignificant Review on literature showed that de jure affect remarkably on social arrangements and result in economic institution By the result of this study, this is of paradox The sense from 81 behind is that this study attempts to quantitatively measure the influence of these indicators on growth level In general, De factor and De jure are so basically different from each other that they need a definitely different methodology of analysis Although result analysis found a few De jure variables with statistical significant meanings, only two statistical coefficients of graft and participation at local levels as proxies for public administration, a component of institution, are evidence proving that good institutional quality will positively affect economic growth Specifically, the results of public administration will raise institutional quality The sense behind PAR program is that its results not directly contribute to economic process but prevent individual gains from illegal actions, stop expropriation, graft and mobilize social partition on public management Empirically, all variables of De factor group and two variables of De Jure political power have its statistical meanings with expected sign of affecting Clearly, De factor elements are considered to be direct contribute to economic activities such as saving rate of financial resources for investment instead of public wage-bill, unstable or non-production and non-business levying sources, a cumbersome structure of regime Also, with only control of corruption and participation at local levels indexes displayed its meanings, these indexes are not completely independent with variables of proximate cause of growth Practically, governor financial programs will be strictly supervised by high rate of participation at local levels, as an instance This mean means that if PAR results get improved, institutional quality will be strengthened and economic growth will be facilitated This is a clear channel through which PAR affect economic performance by affecting institutional quality and facilitate economic activities The research results, however, not meet the purpose verifying the relation between institutional quality and economic growth of this study With just two indicators of institutional quality, the solid rationale for concluding that public administration reform will support economic growth is not robust Specific indicators of public administration efficacy as agents for institutional quality such as administrative burden, public service delivery, vertical accountability have no statistical meaning so finding clear evidence that 82 public administration directly support economic growth is not met and answering rate of supporting quantitatively is not clear as well As an answer for the first research question of this writing and as in literature review, institutional quality can be well defined using indicators as classified by De jure elements, this paper, however, come to the same line of using proxy for institutional quality but less evidence of clear influence from public administration to economic growth Policy implications Basically, factors which directly contribute to growth such as financial resources available, population as potential workforce, budgetary, public consumption should be distributed appropriately to have a suitable strategy in support economic growth Although size of public sector in term of public wage bill are not contribute to economic growth under consideration of this study, this is not kind of insignificantly statistically Theoretically, a cumbersome state structure can only attract a huge resource for ensuring its legal function without any positive influence Also, public investment and public consumption are not significant in context of this study Public investments, however, have latent influence on economic well-beings of a region Public investment cannot be ignorably accessed since this account will create infrastructure, capital account and even competitive advantages for economic activities Personal income or per capita income is another concept Since income per capita is kind of saving and national saving, personal income can be changed to public investment using channel of capital mobilise such as Bond, open market operation of state bank This asset can be directly affect growth in long term Besides, proxy for institutional quality such as transparency, control of corruption, vertical accountability, public participation, administration burden are not meaningless in measure economic indicators such as growth Transparency, for example can prevent someone from privately gain illegally or expropriation behavior Even the amount of this gain may or may not a big ratio to GDP or total social product, the psychology of society will be seriously impacted Transparency index can be accessed using other indicators of 83 institutional quality For instance, if transparency is not high, participation of public in social event will not high enough, supervising from the mass will loosen Also, administrative burden is remarkable will cost much time, opportunity cost then change into sunk cost in economic viewpoint and then waste a huge amount of resource Although result findings on economic health from provincial levels using two sources of determinants are not as expected, specifically, in case of data nature collected facing model uncertainty, which only allow fundamental causes of growth to show its effects Empirically, proximate cause of growth and its mechanism of influencing on economic growth or growth effect of De jure elements are the most focused target from viewpoint of state managers Practically, regardless of model uncertainty and technique of choosing variables, control of corruption is to seize power abuse is the most focused purpose of any social and political institution For this reason, in context of this writing, unclear growth effect of proximate cause is not mean that this have no economic meanings Using academic technique in context of this study deserves only to find direct influence of De jure elements on economic growth or growth effect Participation at local level, transparency, vertical accountability, control of corruption and so forth will keep power controlled while public administration reform keep saving resources from ineffectiveness using, clearing backlogs state apparatus and detecting defect and keep improving institutional quality of an ruling institution 5.2 Limitations and Further research recommendations Limitations Firstly, there are missing observations in dataset since most of de jure indicators just applied six to ten years ago This time gaps lead in using MI method to fill in missing values Mathematically, this filling can be allowed, the latent problem is that if one observation of group which ranked at low institutional quality move to higher group, MI technique is still consistent and the result of estimation will be biased instead Filling in missingness should be as less as possible to avoid fake values In addition to this, 84 institutional quality indexes should have a unique measurement system in comparison with arithmetic measurement system of economic index to avoid error model specification Secondly, applying BMA technique has narrowed down variables of baseline equation The results of regressions in case of adding external variables not deviate from those of conditioned by BMA and this is kind of contradiction from model to model Thirdly, it is supposed to have much difficult in explaining the influence of De jure elements on economic growth in term of measurements, this means that each unit rise or decline of TSPR will lead in x% rise or decline of GDP Taking nature logarithm of de jure elements also result in functional form and model specification As a result of functional form and model specification, the fourth drawback of this study is that the statistic insignificant characteristic of almost all external variables This is kind of fake result from viewpoint of researching and policy makers Further research recommendations For more investigating the real effects of causes on comparative economic growth, it is supposed to determine functional forms separately in which De jure elements as proxies for economic activities should be enlarged to surmount the first limitation in this trend of study Data processing is so an important role that all possible values must be recorded before applying gap-filling technique to avoid bias Reasonably, Bayesian analysis should be discussing in depth in choosing model deviations with each variable added chronologically to terminate possible probability of inclusion to come to the final model 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