The impacts of institutional implementation on provincial economic performance, the case of vietnam (2007 2011)

INSTITUTE OF SOCIAL STUDIES UNIVERSITY OF ECONOMICS HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACTS OF INSTITUTIONAL FACTORS ON PROVINCIAL ECONOMIC PERFORMANCE: THE CASE OF VIETNAM (2007-2011) By PHAN THACH TRUC MASTER OF ARTS IN DEVELOPMENT ECONOMICS Ho Chi Minh City, December, 2013 UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACTS OF INSTITUTIONAL FACTORS ON PROVINCIAL ECONOMIC PERFORMANCE: THE CASE OF VIETNAM (2007-2011) A thesis submitted in partial fulfillment of the requirements for the degree of Master of Arts in Development Economics By PHAN THACH TRUC Academic supervisor Dr TRUONG DANG THUY Ho Chi Minh City, December, 2013 DECLARATION I declare that: "The impacts of institutional factors on provincial economic performance: The case of Vietnam (2007-2011)" is my own work; it has not been submitted to any degree at other universities I confirm that I have made all possible effort and applied all knowledge for finishing this thesis to the best of my ability Ho Chi Minh City, December 2013 PHAN THACH TRUC i ACKNOWLEDGEMENTS First and foremost I would like to extend my gratitude to my supervisor, Dr Truong Dang Thuy, for invaluable comments, guidance and engagement through the learning process of the thesis I am much obliged to Dr Pham Khanh Nam for introducing me to the topic as well as for the availability of the dataset In addition, I am thankful for Le Duc Anh for all your kind help during my time in class 17 Then I feel lucky to have time doing the thesis with Nguyen Thi Ngoc Linh and Nguyen Quang, from whom I have a lot of things to learn Lastly and obviously, I am deeply indebted to my family members for all the kind understanding and spiritual support Forever, I will be wholeheartedly grateful for your love ii ABSTRACT Given the intensive PCI score race among Vietnamese provinces in the past year so as to improve the enabling environment for local economic development, this study is to justify the imperativeness of such a race Employing the PCI and its nine sub-indices as proxies for institutional quality, we explore the institutional impacts on GDP for the dataset of 58 Vietnamese provinces from 2007 to 2011 In realizing this objective, we make an attempt to incorporate into the estimation models of both Cobb-Douglas and Translog functional form the de facto overstatement of provincial GDP While the positive impacts of PCI on provincial GDP are statistically confirmed, the regression results obtained for the nine sub-indices are divergent across functional forms and outlier treatment approaches To the extent that the economic significance of different institutional factors is assessed, our research objective is realized and respective policy implications are then suggested Key words: PCI, GDP overstatement, institution, Cobb-Douglas, Translog iii DECLARATION ACKNOWLEDGEMENT ABSTRACT TABLE OF CONTENTS Chapter INTRODUCTION 1.1Problem statement 1.2Research objective and research questions 1.3Contribution of the study 1.4Organization of the study Chapter LITERATURE REVIEW 2.1Theoretical literature: The New Institutional Economic 2.1 2.1 2.1 2.1 2.2Theoretical model: the aggregate production functions 2.2 2.2 2.3Empirical literature Chapter DATA AND RESEARCH METHODOLOGY 3.1Data and variable measurement 3.1.1 3.1.2 3.1.2.1 3.1.2.2 3.1.3 3.2Research methodology 3.2.1 3.2.2 3.2.2.1 Data cleaning – OLS regression for panel data 3.2.2.2 Modeling the overstatement of growth data – The Stochastic Frontier Analysis (SFA) 3.2.3 Model validation 3.2.3.1 Testing the model overall significance 3.2.3.2 Statistical test of individual coefficient significance 3.2.4 Analytical framework Chapter EMPIRICAL RESULTS AND DISCUSSION 4.1Overall explanation and hypothesis testing 4.1.1 4.1.2 4.1.2.1 Statistical test of model overall significance 4.1.2.2 Statistical test of individual significance of institution variables 4.2Model estimation – Institutional impacts on GDP 4.2.1 Transaction cost instituti 4.2.2 Property right and Contract enforcement institution: Access to Land and Legal Institution 4.2.3 Information problem institution: Access to information, Private sector development and Pro-activity of provincial leaders .56 4.2.4 Labor policy and training 62 4.2.5 The PCI 64 Chapter CONCLUSION AND PERTAINING ISSUES 70 5.1 Conclusion 67 5.2 Policy implications 68 5.3 Limitations and further studies 69 REFEERENCES 70 APPENDIX 74 vi LIST OF TABLES Table 3.1 Variable summary 28 Table 3.2 Summary statistics of key variables 29 Table 3.3 Between and within variations of key variables 30 Table 3.4 Overstatement of provincial growth data 35 Table 4.1 Attempted regressions of this study 44 Table 4.2 Hypothesis testing of overall significance of multiple regression 44 Table 4.3 Hypothesis testing of individual significance for institution variables 45 Table 4.4 Regression result– Transaction cost institution 48 Table 4.5 Regression result - Property right and Contract enforcement institution .54 Table 4.6 Regression result – Information problem institution 56 Table 4.7 Regression result – Labor policy and training 62 Table 4.8 Regression result –the PCI 64 vii LIST OF FIGURES Figure 3.1 Institution and economic outcomes: mechanism and channels of influence 27 Figure 3.2 Time-series plots of real GDP against year and PCI against year 31 Figure 3.3 Overall scatter plot of real GDP against PCI 32 Figure 3.4 Scatter plots for within and between variations of real GDP against PCI 32 Figure 3.5 Illustration of growth data overstatement 38 Figure 3.6 Different distributions of u 39 Figure 4.1 Effects of Time cost scores on GDP 51 Figures 4.2 Effects of Informal charge scores on GDP 52 Figure 4.3 Effects of Information access scores on GDP .59 Figure 4.4 Effects of Private sector development scores on GDP 60 Figure 4.5 Effects of Pro-activity of provincial leader scores on GDP 61 Figure 4.6 Effects of Labor policy and training scores on GDP 63 Figure 4.7 Effects of the PCI scores on GDP .65 viii 5.3 Limitations and further studies The most prominent limitation of the study lies in its failure to address the potential endogeneity of institution Because one of the two types of data used to construct the PCI is 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 environment are more or less affected by the state of the economy at a given time, which is called endogeneity problem Meanwhile, the data set used in the study does not support the employment of an instrument variable for endogeneity treatment Working on a sensitive data set is another important limitation of the study Since divergent results are obtained across functional forms as well as outlier treatment approaches, conclusions drawn are, in some cases, too conservative to deliver any actionable policy information This point was empirically evidenced by the case of Access to Information and Private sector development As a definite conclusion on the institution-growth relationship could not be drawn, no policy implications have been suggested concerning these two institutional factors Due to limited resources, we encounter the technical problems of computational capacity when the software (STATA) fails to deliver feasible outputs for Stochastic Frontier Analysis with Translog functional forms As a consequence, the respective models are excluded from our study To conclude, the above arguments present the extent to which our study has not worked nicely More research and more data are therefore needed to overcome the limitations of our study Besides, there are some other institution-growth related matters that could be investigated for the case of Vietnam, such as institutional threshold effects via parameter heterogeneity, or the indirect effects of institution on growth, to list some However, as our research objective is already defined, they are beyond the scope of this study 69 REFEERENCES Aidis, R., Estrin, S., & Mickiewicz, T (2009) Entrepreneurial entry: Which institutions matter? 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FACTORS ON PROVINCIAL ECONOMIC PERFORMANCE: THE CASE OF VIETNAM (2007- 2011) A thesis submitted in partial fulfillment of the requirements for the degree of Master of Arts in Development Economics... higher volume of transactions Institutions are, therefore, conducive to better economic performance in the long run The relevance of the underlying institution economic theory of information problems... supervisor Dr TRUONG DANG THUY Ho Chi Minh City, December, 2013 DECLARATION I declare that: "The impacts of institutional factors on provincial economic performance: The case of Vietnam (2007- 2011)" is