INTRODUCTION
Problem statement
The establishment of governance institutions significantly influences the formation of central and regional governments, impacting economic activities The role of institutions in controlling, guiding, and facilitating civil and economic activities is a critical focus for political and economic scientists, who recognize it as a key determinant of growth Variations in the quality of governance, citizen participation, and the effectiveness of public services contribute to disparities in economic progress among countries While traditional neoclassical growth models, such as those proposed by Solow, Cass, and Koopmans, explain differences in national income through factor accumulation, they fail to account for the impact of institutional variations.
Growth theories suggest that sustained steady-state growth can be driven by externalities resulting from the accumulation of physical and human capital, as highlighted by Romer (1986) and Lucas (1988) Additionally, these theories propose that steady-state growth and technological advancement can be endogenized, further emphasizing the importance of human and physical capital in economic development.
In the early 1990s, researchers like Grossman and Helpman, as well as Aghion and Howitt, adhered to the neoclassical framework, attributing variations in economic growth rates to factors such as preferences and endowments However, their approaches fell short of offering a comprehensive explanation for the underlying mechanisms driving economic growth, as highlighted by North and Thomas in their seminal work.
According to North and Thomas, the key to understanding comparative growth lies in the differences in institutions rather than in factors like innovation, economies of scale, education, or capital accumulation, which they argue are not merely causes of growth but are, in fact, growth itself.
Max Weber, a foundational figure in modern sociology, explored the connection between growth theory and political institutions in his influential essay, "Economy and Society." He emphasized the crucial role of bureaucracy as a cornerstone of capitalist growth, particularly in the early 1900s when he examined the interplay between bureaucracy, public administration, and governance Weber's model of bureaucracy laid the groundwork for contemporary public administration, leading to the enduring term "Weberian civil service" for a classic, hierarchically-organized civil service Utilizing the concept of Weberianness as a metric for assessing the effectiveness and efficiency of state apparatus, Evans and Rauch (1999) analyzed the relationship between administrative structures and economic output, concluding that bureaucratic authority is vital for fostering economic growth.
Effective governance requires a structured system of procedures and administrative processes to ensure control and operation within political and social institutions The debate surrounding the efficiency of these bureaucratic systems often highlights issues of transparency and simplification, leading to extensive research on institutional quality and its impact on economic performance Numerous studies demonstrate a strong correlation between regulatory efficiency and economic outcomes, with findings from Olson et al (1998) and Kauffman et al (2005) indicating that good governance fosters economic growth The quality of government is typically assessed through empirical measures that transcend traditional growth models, emphasizing the importance of a well-structured state bureaucracy Historical evidence from the 1990s shows that effective bureaucracies in certain Asian countries significantly contributed to their economic growth The World Bank's 1997 report, "The State in a Changing World," analyzes why some bureaucracies outperform others, emphasizing the need for research into bureaucratic characteristics and inter-organizational dynamics Evans and Rauch (1999) further highlighted the importance of structural features in bureaucracies and called for efforts to enhance bureaucratic effectiveness through informed policymaking and scholarly inquiry.
The relationship between institutions and political regimes has become a focal point of interest for scholars and practitioners, particularly in understanding the disparities in prosperity across countries (World Bank, 2004) Researchers aim to uncover the connections between collective actions and economic activities that contribute to a unified global model Acemoglu and Robinson (2008) explore whether institutions are fundamental drivers of economic outcomes or merely responses to geographic or cultural factors Ultimately, the goal of studying institutions is to identify specific characteristics that influence economic well-being, such as the impact of legal frameworks on business contracts.
Analyzing the determinants of growth from social, political, and organizational perspectives hinges on understanding the concept of institutions and their influences According to Douglass North (1990), institutions are defined as the "rules of the game" in society, representing human-created constraints that shape interactions This definition highlights the importance of bureaucracy, state apparatus, public administration, governance, regulations, and the rule of law as crucial elements and determinants of effective institutions, which play a significant role in explaining national growth rates.
The study of the relationship between economic growth and its determinants is complex and diverse, encompassing both social and natural factors This analysis can be divided into two main branches: de facto components, which refer to actual conditions and practices, and de jure components, which pertain to legal and institutional frameworks.
Research gaps
While extensive literature examines both proximate and fundamental causes of economic growth, as detailed in section 1.3, there is limited theoretical and empirical research that focuses on public administration reform within the context of growth mechanisms It is evident that growth accounting alone cannot adequately clarify the existence of GDP at varying levels, whether high or low.
De jure political power is not accounted for
The institutions-augmented Solow model highlights that institutional variables are crucial indicators of governance quality, which directly influences economic growth While analyses typically emphasize governance indicators and recommend reforms to improve institutional quality, there is a lack of research focusing on the deep determinants of institutional quality, particularly from the perspectives of Public Administration (PA) and Public Administration Reform (PAR) In Vietnam, the PAR-MP serves as a comprehensive framework for simplifying and modernizing public administration, yet it lacks a robust indicator system to evaluate the impact of PAR on the PA system and its subsequent effect on national and provincial economic growth Establishing such a system is essential to identify administrative burdens and organizational challenges, enabling a thorough evaluation of bureaucracy's influence on macroeconomic indicators, such as fiscal policies and public expenditure relative to GDP, and to refine the state apparatus towards a more service-oriented public administration.
To date, the potential for productivity has been assessed both qualitatively and quantitatively through composite indexes and insights related to growth rates However, the criteria and determinants of institutional indicators, such as hierarchical structures, bureaucratic processes, and public formalities, have not been systematically analyzed for their causal relationships.
Despite the growing importance of New Public Administration (NPA), the significance of legitimacy procedures in the economy has not received adequate attention Commonly emphasized factors include education, physical capital, and health, as highlighted by Afonso and St Aubyn (2006a, 2006b), along with governance indicators from Kaufmann, Kray, and Mastruzzi (2006) and the International Country Risk Guide (ICRG) by Olson, Sarna, and Swamy (2000).
Specification of research problem
De facto and De jure components of growth process
This paper examines the impact of economic institutions on growth, focusing on whether these institutions are influenced by internal (endogenous) or external (exogenous) factors, particularly in the context of Vietnam According to Douglass North (1990), institutions are shaped by societal influences, raising the question of why some societies experience greater poverty due to poorer economic institutions Prominent scholars such as John Locke, Adam Smith, and Douglass North have highlighted the significance of economic institutions in fostering growth However, a comprehensive theoretical framework is still needed to understand how these institutions are formed and why they vary across nations Despite the recognized importance of economic institutions, the literature often overlooks fundamental institutional causes in favor of more immediate factors affecting economic growth.
This article explores the crucial factors that govern effective institutions, particularly focusing on the endogeneity of economic institutions It emphasizes the political economy of institutions, highlighting the significant role political factors play in driving growth Central to this discussion are two key components of political power: de jure (institutional) power and de facto political power, which form the foundation of the argument presented.
De jure political power is derived from the formal political institutions within a society, which establish the rules and frameworks that guide the behavior of key political actors These institutions play a crucial role in shaping the constraints and incentives that influence decision-making and governance in the political arena.
Political institutionst De jure political powert
De facto political power refers to the ability of a social group or class to impose their will on society, even without being allocated formal political power This concept gives rise to two primary sources of political power: the group's ability to solve collective action problems, and the distribution of economic resources The latter is particularly significant, as it determines a group's capacity to utilize or manipulate existing political institutions, as well as their ability to exert influence or force against other groups.
With these pieces, a schematic picture of institutional research on economic performance is as follow:
De facto political powert Political institutions t+1
This economic analysis emphasizes the "De jure" aspect, highlighting how political institutions influence economic performance by regulating economic institutions Key elements of the "De jure" framework include governance, institutional quality, and bureaucracy While recent studies have focused on "de facto" factors like human capital and investment, this analysis prioritizes "De jure" determinants such as public administration and state apparatus, which are critical subjects for reform Ultimately, the study will examine the impact of public administration reforms and other control variables on economic growth.
Research objective and research questions
The Solow model, as categorized by Acemoglu and Robinson (2008), can be enhanced to incorporate De facto and De jure elements, addressing the research gaps identified in the context of Vietnam This study primarily focuses on key questions related to public administration science, aiming to provide valuable insights into the subject.
- Whether public administration is an appropriation proxy of institutional quality to be used for elucidating economic growth?
- How has Viet Nam’s public administration system contributed to economic growth?
- What are measures for enhancing Vietnam’ public sector contribution towards improving Viet Nam’ economic growth rate?
The purposes of this research are:
- Using public administration indicators as a proxy of institutional quality to find rate of affecting provincial comparative economic growth
- Categorize determinants of economic growth from aspects of De jure and De facto and from which to find specific influence as follow
- Access administrative burden, a signal of effective public administration program which affect economic outcome of a province.
Scope of study
In context of Viet Nam, public administration program has been applied since the year of
Since 1996, the state apparatus and the restructuring of socio-economic activities have been guided by reform strategies across 63 provinces and regions The variables can be categorized into De facto and De jure, with most being perfectly collected, except for some De jure variables Despite these exceptions, the reform process aimed at enhancing public administration and institutional quality continues, as noted by Acemoglu and Robinson (2008), who argue that De jure elements serve as indicators for assessing sectors that contribute to institutional quality This perspective aligns with the Solow model, which has been adapted to incorporate institutional factors.
For this reason, the scope of this study spread on 63 province and regions in the period of 1996 to 2016.
Structure of the study
The study comprises five chapters, beginning with an exploration of the problem and its connection to Vietnam, focusing on institutional quality to facilitate public administration reform through mathematical modeling The second chapter reviews relevant theories and empirical research methodologies Chapter three introduces the analytical framework and econometric models for regression analysis specific to Vietnam, detailing data collection methods and variable descriptions In chapter four, regression results are presented using appropriate econometric models, alongside a comparison of statistical interpretations within the theoretical and empirical context of Vietnam Finally, chapter five discusses the practical applications of the analysis results, offering policy recommendations and concluding the study.
LITERATURE REVIEW
Literature review
2.1.1 Review research on institutional quality and economic growth
In 1848, Karl Marx categorized concepts such as institutions, public administration, governance, and bureaucracy under historical materialism, a key aspect of social sciences This analysis highlights that these terminologies lack inherent economic characteristics.
The dialectic studying method classifies concepts as De jure elements, as analyzed by Acemoglu and Robinson (2008), and models them as determinants of economic outcomes This approach establishes a quantitative relationship between social scientific nomenclatures and economic terms While most previous analyses have focused on De facto elements as determinants of economic growth, few studies have explored De jure elements and their indices in econometric models De facto factors typically relate to tangible resources such as physical capital and geography, whereas De jure elements pertain to the organization and management of social relations and the rule of law Despite the significance of De jure components, empirical research often overlooks them, with limited studies examining institutional factors like political accountability and bureaucracy and their impact on overall economic production.
This chapter aims to examine the relationship between the fundamental factors influencing institutional quality, public administration (PA) systems, and de jure political power, as they relate to economic growth It seeks to provide an analytical framework for understanding how de jure political power affects economic performance, focusing on quantitative growth outcomes Although economic institutions are not the primary focus of this study, the analysis will utilize institutional quality as a key indicator, with public administration reform (PAR) and its attributes serving as measures of institutional quality.
The concept of De jure, as highlighted by K Marx and empirically examined by Acemoglu and Robinson, is inherently context-specific, reflecting the historical materialism of society Elements such as public governance, institutional quality, and public administration vary significantly across nations and within different periods of the same nation This paper adopts a clear definition of public governance to analyze how various ruling powers can effectively issue, enhance, maintain, and strengthen public systems (Governance International, 2003) The following sections will further explore these abstract concepts.
Public governance serves as a framework for social management, facilitating interaction among various social classes to shape public policy outcomes Effective governance ensures that the social expectations and economic interests of these classes are met through negotiation and agreed-upon principles, as highlighted by Bovaird and Elke Lűffler (2003) Contextual specificity is crucial in this analysis, as public governance is a broad concept while public administration focuses on the rule of law governing the relationships between the state, public employment, and citizens in a particular area.
The efficiency of government functions can be evaluated through De jure elements like public wage-bills, employment rates, and public expenditure, which serve as indicators of institutional quality These elements influence economic activities by enhancing public governance and fostering social agreements Economic growth is driven by social participation in commercial activities, supported by secure investment and property rights Numerous empirical studies, including those by Helliwell (1992) and Alesina and Perotti (1997), have explored the relationship between investment rates and factors such as corruption and expropriation risk However, these studies often overlook deeper determinants of institutional quality, such as bureaucratic efficiency and the need for structural reforms to streamline administrative processes.
Ding and Knight (2010) emphasized the significance of structural change in understanding China's remarkable economic growth by applying the Solow model to identify key growth factors from an institutional perspective Their analysis highlighted determinants such as trade openness, education, human resources, secondary education enrollment, and factor endowments, including colonial characteristics and railway density Additionally, they incorporated geographical advantages and available resources into their model, categorizing these variables as de facto factors in line with the theory proposed by Acemoglu and Robinson (2008).
2.1.2 Review research on public administration reform and national income
Evans and Rauch (1999) analyzed the impact of public size elements on institutional efficiency and its influence on national growth They concluded that these elements are significant in explaining a nation's circumstances However, their approach, which utilized cross-national indicators and unique systems like the Weberianness scale, ICRG, and BRI, lacks context specificity due to the varying institutional attributes across different nations.
A significant area of research on the De jure elements influencing economic growth is the quantitative analysis of bureaucracy's impact, as explored by Dahlström et al (2010) Their study utilized Webrian indicators to evaluate the attributes of a state's bureaucratic structure, emphasizing that administration is closely tied to the current government and management activities This results in similarities in administrative operations across both public and private sectors Notable contributions to this field include studies by the CPB Netherlands Bureau for Economic Policy Analysis (2004), Gelauff and Lejour (2006), the Swedish Agency for Growth Policy Analysis (2010), the Australian Government Productivity Commission (2006), as well as research by Klapper, Laeven, Rajan (2006), and Djankov, La Porta, Lopez-De Silanes, and Shleifer.
Research by Ciccone and Papaioannou (2007), Costa and Aubyn (2012), and others indicates that regulatory burdens significantly hinder the entry of new firms into the market Their studies highlight the negative impact of administrative formalities on business operations and overall income from commercial activities They propose that reducing administrative burdens can stimulate economic activities, emphasizing the importance of context-specific characteristics in this process Consequently, minimizing costs and delays associated with starting new businesses is crucial for fostering a more dynamic economic environment.
“red tape” on entrepreneurship, possible effects of legal-simplification programs will be remarkably affected, more transparent business environment is created
The public size is a crucial factor to assess in the context of Vietnam, particularly regarding its financial implications, such as reducing budget deficits and enhancing national savings This examination aims to boost productive investments in infrastructure and social services, ultimately contributing to overall growth, as highlighted by Albertini and Bertucci (2006) However, their study operates on an international level, utilizing cross-national data linked to the De facto causes of growth discussed by Acemoglu and Robinson (2008).
2.1.3 Concept of public administration and the nature
The history of public administration can be categorized into six distinct phases, beginning with Woodrow Wilson (1856 - 1924), who marked the initial stage of its development The second phase, spanning from 1900 to 1926, focused on the theoretical model that emphasized the separation of politics and administration In the third phase, key administrative principles were systematically compiled, further shaping the field.
From 1927 to 1937 and again from 1950 to 1970, public administration evolved from being viewed as political science to management science, ultimately being recognized as administrative science today Public administration serves as a mechanism for exercising state power, closely linked to national institutions Effective organization within these institutions requires a systematic approach to procedures and formalities This dissertation focuses not on the relationship between public administration and political institutions, but rather on how effective public administration contributes to economic performance and growth It emphasizes the need for a thorough analysis of the causal links between efficient regulation, well-structured administrative principles, and the quality of institutions For developing and transitioning countries, the appropriate framework lies not at the technological frontier but within a more accessible range.
Public administration (PA) science examines the mechanisms and attributes of government operations, focusing on policies, systems, structures, and personnel It particularly emphasizes the executive branch, which includes political leadership and government departments or agencies staffed by state employees (Earle and Scott, 2010).
2.1.4 Public administration reform and its nature
Public administration reform (PAR) aims to enhance the management of the public sector by refining policies, procedures, and organizational structures funded by the state budget According to the United Nations Development Programme (UNDP), PAR involves optimizing the collective machinery responsible for the executive government's operations and its interactions with various stakeholders This reform is crucial as it serves as a foundational element, establishing a causal link between institutions and economic performance However, the implementation of PAR can be time-consuming, requiring sustained efforts to yield meaningful results.
RESEARCH METHODOLOGY
Measurements of institutional quality
Institutional quality encompasses various aspects of public administration and reform, including changes in organizational structures, decentralization, personnel management, public finance, and results-based management, as highlighted by Kaufmann, Kraay, and Mastruzzi (2007) Their research presents a comprehensive cross-country governance database featuring six key indicators that reflect institutional quality and governance dimensions This framework is applicable to Vietnam, given its universal approach that transcends specific political contexts.
- Voice and Accountability: measurements of political rights, civil liberties, public participation in political events such as electing policy makers, independence of media, accountability and transparency of government decision
- The Political Stability: the risk of political destabilization by social tension and violence
The first two indexes together can be proxies of democratic rate as discussed by Williamson (1995), Acemoglu et al (2001) and Aron, (2000)
- The Government Effectiveness: quality of public service provision such as education and health care facilities, bureaucratic effectiveness and efficacy, competence of civil servants, independence of civil service from politicians
- The Regulatory Quality or regulatory burden: related to the procedural intervention of government on banking system, international trade, and business development
- The Rule of Law: protection of property rights, perceptions on the incidence of crime, effectiveness of the judiciary and enforceability of contracts
- Graft or control of Corruption: exercise of public power for private gain
Enhancing productivity primarily hinges on effective organization and management, alongside a public administration system focused on eliminating barriers to economic activities To meet growth targets, it's essential to reform production organization, resource allocation, infrastructure, and governance Additionally, significant behavioral changes are necessary, some of which extend beyond government policy yet profoundly impact economic performance Contributions to growth can be categorized into four main areas.
• Institutional quality and effective governance
As the name of this dissertation, institutional quality and effective governance, the fourth category is focused as the most priority as whole.
Linking public administration reform and economic growth
The public administration system encompasses various angles, including its bureaucratic dimensions and regulatory quality The size of the bureaucracy, often measured by public employment levels, significantly impacts the national wage bill and payroll While individual civil servant salaries may seem minor, the cumulative annual expenditure on public wages is substantial, influencing national investment and savings A higher level of public employment correlates with a larger budget percentage allocated to salaries, affecting national financial dynamics (S=I) Research by Evans and Rauch (1999) introduced a Weberianness scale to assess the bureaucratic dimension of public administration, focusing on meritocratic recruitment and predictable career progression, which are crucial for bureaucratic effectiveness Furthermore, Dahlström et al (2010) established a strong link between bureaucratic dimensions and economic growth, supporting the findings of Evans and Rauch through Weberian indicators.
The impact of bureaucracy on economic growth is direct, while the influence of regulatory quality is more complex Regulatory quality affects economic growth directly through the time-consuming costs associated with launching startup projects and the expenses of managing the regulatory system (Guasch and Hahn, 1999) Additionally, it indirectly influences growth by positively impacting key indexes, such as corruption control Simplified administrative procedures enhance citizen participation and oversight (Dawson, 2007; Djankov et al., 2006).
The graft will enhance procedural administration by simplifying processes through a one-stop-shop and inter-level access, promoting transparency in application procedures, timelines, and fees This approach will tightly manage financial resources related to informal transaction fees, leading to a reduction in private gains Ultimately, the effectiveness of this procedural simplification via the OSS mechanism will improve regulatory quality, contributing positively to governance indicators.
Public administration reform significantly impacts economic growth by enhancing fiscal and macroeconomic indicators, which in turn improve governance quality The interplay between these six governance indicators and institutional quality ensures a sustainable and robust economic growth rate Wescott (2004) identified key channels through which public administration reform fosters institutional quality, emphasizing the importance of targeted reforms in the state sector.
Analytical framework
Total factor productivity significantly reflects the influence of institutional determinants on economic growth, as established by researchers like Lucas (1988) and Romer (1986, 1990, 1994) They highlighted the crucial role of institutional factors in shaping growth rates, operating through the framework of de jure political power, which impacts resources for investment and human resources management Barro (1991) further illustrated the detrimental effects of public spending and government consumption on growth rates, emphasizing the importance of institutional quality This suggests that GDP figures may be misleading, as political entities often utilize resource-intensive power to maintain their influence, leading to trade-offs between saving and consumption (Mankiw, 2006) In the case of Vietnam, government consumption has consistently exceeded budget revenue in many provinces from 1996 to 2016, funding payrolls, bonuses, and policy incentives, with notable exceptions in cities like Ho Chi Minh and Hanoi.
In Hai Phong, the GDP for 2015 was 824,830 billion VND, with a legal budget revenue of 3,681,000 million VND and public expenditure amounting to 236,363 million VND, representing 4.08% of the GRDP This study focuses on the two key indices of GDP and annual budgetary revenue, which are essential for understanding the economic landscape of the region.
In this study, payroll (coded as BW) serves as a critical indicator linking bureaucratic structure to economic growth As highlighted by Evan and Rauch (1999), a predictable career ladder offers both tangible and intangible benefits to civil servants However, a larger payroll correlates with a bigger workforce and greater rewards for experienced employees (Gerth and Mills 1958; Parsons 1964) The percentage of payroll within the budget reflects the resources available for public investment Analyzing the political entity's structure through annual wage rate policies reveals that positive features contribute to a more competent and cohesive bureaucracy, ultimately leading to higher economic growth, as explained by De jure political power (Acemogu, 2001) In Vietnam, approximately 5.5 million officials serve from the grassroots to central government, alongside 8.83 million retired officials, highlighting the significant financial implications of these payrolls.
Evan and Rauch (1999) analyze the proximate causes of growth by utilizing the Weberianness scale to assess the quality of governance in states Key indicators such as structural dimensions, resource distribution, social class negotiations, regulatory frameworks, and legal systems serve as essential metrics for evaluating production quality Various growth determinants, including the International Country Risk Guide (ICRG), Business Environmental Risk Intelligence (BERI), and the Kaufmann, Kraay, and Zoido-Lobaton (KKZ) indices developed by the World Bank, provide insights into the relationship between public institutional quality and economic performance High scores in these assessments, particularly in the ICRG, indicate lower risk levels and better governance, reflecting a favorable environment for economic growth.
1 statistics collected from official website http://www.mof.gov.vn/webcenter/portal/btc and cross province comparison made across period of 1996-2016
2 Official statistics of GDP collected from https://www.gso.gov.vn/Default.aspx?tabidp6&ItemID412 as component of national account
The reliability of statistical data in annual reports from governors indicates that insecurity in the business environment and limited settlement opportunities are significant issues State bureaucracies tend to attract higher investment rates, but risk-averse entrepreneurs often encounter increased implicit costs (Amsden 1989; Evans 1995; Johnson 1982; Wade 1991; World Bank 1993) In Vietnam, institutional quality is assessed annually and published internationally; however, these ratings are derived from third-party surveys and may not accurately represent the legal system's true characteristics Instead, they often reflect personal perceptions rather than comprehensive provincial data or community insights, leading to inconsistencies in incentive policies for business activities, despite Vietnam's high Transparency International scores This aligns with findings from Williamson (1995), Acemoglu et al (2001), and Aron.
The quality of an institution is assessed by its transparency, accountability, and the public's perception of its voice This connection highlights that high-quality institutions contribute to economic growth and lead to increased GDP.
Kaufmann, Kraay, and Mastruzzi (2007) utilized six bureaucratic indexes that align closely with Vietnam's general indicators such as PAPI, PAR, and PCI to analyze long-term structural changes and growth One key component, voice and accountability, indicates that a higher score reflects a more positive impact of institutions on management practices This relationship holds true in the context of Vietnam, where provinces with higher voice and accountability scores demonstrate improved governance and management effectiveness.
The component index of the Provincial Administrative Performance Index (PAPI) indicates the familiarity of a region's population with the business environment and their readiness to engage in negotiations and social issues For example, Da Nang, with a high PAPI score of 6.61, is classified as a region of very good quality, resulting in a significant GDP of 380,694 billion VND in 2011 In contrast, Bac Lieu, which has a low PAPI score of 3.14, reported a GDP of only 222 billion VND, highlighting the correlation between PAPI scores and economic performance.
Transparency (TSPR) is another sign of good quality as studied by Acemoglu et al
Transparency is essential for achieving accountability, ensuring that authorities are responsible for their actions In countries with strong legal systems, laws and social norms foster social and economic activities While transparency is not a direct proxy for total factor productivity, it plays a crucial role in the augmented Solow model, indicating that social costs are evident and there are no sunk costs associated with starting a business Moreover, an independent media facilitates the flow of information In Vietnam, provinces with high-quality institutions contribute significantly to economic growth, exemplified by Ho Chi Minh City, which boasts an impressive annual GDP of approximately 10.377 trillion VNĐ.
Control of corruption (CC), synonymous with graft, refers to the misuse of public power for private gain, as discussed in studies by Williamson (1995), Acemoglu et al (2001), and Aron (2000) In Vietnam, CC is assessed through vertical accountability and public administration procedures (PP), which indicate the risks of implicit costs that are not accounted for in the production matrix A high level of PP combined with low CC and voice and accountability can hinder access to resources like land and property transfers, leading to time-consuming costs that adversely affect production processes As noted by Amsden (1989) and Evans and Rauch, the complexity of formalities increases opportunities for corruption and expropriation In Vietnam, with a CC score of 3.66, Kon Tum reported a low annual GDP of 284.600 million VNĐ in 2010, in stark contrast to Long An's CC score of 6.1 and GDP of 572.270 million VNĐ.
Public service delivery (PSD) is a crucial indicator of a country's readiness for economic startups and social activities, reflecting government effectiveness High-quality public services, including education and healthcare, along with bureaucratic efficiency and the independence of civil servants, contribute to a favorable business environment However, while strong PSD can provide entrepreneurs with opportunities, it can also present risks such as high costs, corruption, and sunk costs In Vietnam, the reform strategy has led to the implementation of a one-stop-shop (OSS) model to alleviate political and institutional burdens Regulatory quality, which encompasses government intervention in banking, international trade, and business development, is essential for assessing the impact of formal regulations on economic well-being The PAPI index, developed by the Vietnam Fatherland Front, independently ranks these factors using components like PSD, regulatory pressure (PP), transparency, and local participation.
This study explores the relationship between institutional quality and economic performance, highlighting that while high marks in PSD, PLL, and PP typically correlate with high GDP, this relationship has not been quantitatively measured using econometric methods It is widely accepted that strong institutional quality can enhance economic outcomes, and the findings are anticipated to show consistency Consequently, the research focuses on modeling fundamental causes—de facto elements—and institutional quality indicators—de jure elements, which will be elaborated upon in section 3.3.
This article examines the mixed evidence surrounding the factors influencing an economy, highlighting that most studies utilize cross-country analyses to conclude that macroeconomic distributions significantly impact total annual revenue It discusses the modeling of growth determinants through various production functions, including Cobb-Douglas, Solow, and Augmented-Solow, in discrete time The paper aims to enhance empirical analysis by employing a robust dynamic panel data approach across a diverse panel.
This study employs an institution-augmented Solow model in continuous time to analyze the impact of macroeconomic factors on regional economic well-being Key elements such as GDP, budget revenue, public expenditure, employment in the state sector, payroll for this workforce, public investments, and annual income per person are examined at the regional level Additionally, the influence of De jure factors is investigated, highlighting their significant role in explaining GDP variations at the provincial level.
The relationship between De jure and De facto elements significantly influences economic health, as illustrated in the diagram below It is evident that the variables of national control and provincial control are interchangeable, indicating that while De jure and De facto indicators are implemented on a national scale, their effects are assessed at the regional level.
Vietnamese political, cultural and social context
Enhancing quality of public services
Barro, Sala-i-Martin (1995), World Bank (2005)
Afonso, Ebert, Schuknecht, Thone (2005) National control variables
Administrative formalities reform on sectoral state management functions:
- high efficiency, quality of institution
Create creditable investment environment, increased productivity of private sector, mobilize social capital.
- institutional stability and policy environment for investment activities
Data collections
Official statistical sources were utilized to compile variable values in the model, using a panel dataset that includes information from sixty-three provinces The data spans from 1996 to 2016, providing a comprehensive analysis for each province involved.
The analysis is based on 1,311 observations across 63 provinces, utilizing an unbalanced dataset primarily sourced from the General Statistics Office (GSO) of Vietnam Key economic indicators such as GDP, population, and annual personal income at the provincial level are derived from the Vietnam Household Living Standards Survey (VHLSS) and provincial statistical yearbooks GDP figures, being inherently numerical and continuous, are calculated by province, while annual personal income is obtained by multiplying monthly data by twelve Public expenditure (PE), budget revenue (BR), payroll of the public workforce (BW), and public investment (PI) are collected from annual reports of the 63 provinces and the Ministry of Finance's yearly statistical publications In cases where provinces lack reported statistics, alternative sources such as annual provincial statistical yearbooks and government websites are utilized All variable values are numerical and measured in millions of VND.
The public employment rate can be accurately determined by utilizing compulsory social insurance data from official sources, ensuring that all state sector employees comply with social insurance policies This approach is more reliable than annual reports, which often lack accuracy Since 2010, the obligation to report the number of personnel in each state authority has further refined these statistics Consequently, public employment is represented as discrete numerical values, facilitating quantitative analysis.
In accessing nexus growth of public administration reform and economic growth, group of eight variables are compiled using data from Papi index which is contributed by Viet
Nam Fatherland Front, UNDP Viet Nam, Viet Nam National Assembly and CECODES
4 www.mof.gov.vn/webcenter/portal/btc/r/cddh/sltk/thhdttbh43
The official webpage provides access to component indexes, including data collected from annual publications by VCCI The Papi index comprises several key components: vertical accountability, local participation, public procedures, corruption control, transparency, and public service delivery, all of which are quantified This framework aligns with the discussions of Kaufmann, Kraay, and Mastruzzi on governance metrics.
In various studies, such as those by Williamson (1995), Acemoglu et al (2001), and Aron (2000), indicators are measured independently on a scale from one to one hundred, recorded as unique numbers without subcomponents However, in Vietnam, these indicators serve as sub-indices of the Public Administration Performance Index (PAPI), with values ranging from one to ten This approach aims to analyze the effects of institutional quality and public administration by treating each index as an independent variable, thereby replicating findings from previous research All variables are numerical in nature, and their values are also represented in natural logarithmic form.
To address measurement errors, the study interacts seven fundamental growth variables with GDP using a common aliquot of 10 and an exponential coefficient of 9 The subsequent eight variables are transformed using natural logarithms to create the final dataset The analysis covers a time period from 1996 to 2016 across 63 provinces Notably, rather than limiting the timeframe to ten years, this research aims to extend the analysis duration, reflecting the initiation of Vietnam's Public Administration Reform Master Program (PAR-MP) in 1996.
Variables description
Vietnam's regulatory quality is addressed through the guidelines of Decision No 225/QĐ-TTg, dated February 2, 2016, which aims to enhance government effectiveness, reduce public expenditure, and improve institutional quality The relevant proxy variables are detailed in Table 1.
7 http://papi.org.vn/gioi-thieu-ve-papi
3.5.1 The dependent variable – Gross domestic product at provincial level
Chong and Calderon (2000) highlighted the challenges of quantitatively measuring GDP levels in relation to institutional quality, primarily due to the ambiguous definition of economic growth Currently, economic growth is linked to GDP per capita, yet the selection of indicators across different populations and samples remains a contentious issue.
In Vietnam, the calculation of annual GDP at the regional level is managed by decentralized state bodies, leading to the adoption of the term Gross Regional Domestic Product (GRDP) as outlined in the national account measurement decision GRDP, while similar to GDP, focuses on local economic performance This study utilizes GRDP to assess how effectively a province operates its economy within its institutional framework Although this approach is unprecedented, it is particularly well-suited to the Vietnamese context.
3.5.2 Group of independent variables as fundamental cause of growth
EL, representing provincial public employment demand, quantifies employment levels across provinces According to Kaufmann, Kraay, and Mastruzzi (2007), a unique system evaluates institutional quality, suggesting that higher public employment correlates with lower government effectiveness due to cumbersome administrative structures, especially when considering GDP and financial resources allocated for wage bills A significant portion of the budget dedicated to payroll can hinder opportunities for other investments This perspective is particularly relevant to Vietnam, where public employment figures serve as a valuable index Data for this analysis are sourced from official websites and annual provincial statistical yearbooks, with population levels incorporated into the regression model to account for labor growth effects.
9 Decision N o 715/QĐ-TTg, dated May 22 nd , 2015
Budgetary wage (BW) refers to the portion of the budget allocated for public employment, with the premise that reducing wage bill expenditures can free up funds for economic activities, thereby positively impacting reform programs Clements et al (2010) highlighted that assessing government employment as a percentage of the total population serves as a valuable tool to determine whether employment levels are appropriate or excessively generous compared to the optimal number of state employees needed to deliver essential services Baddock et al further examined the size of the public sector by using government wage bill and employment wage bill as key explanatory variables.
In 2015, it was determined that cumbersome equipment could lead to significant compensation costs for employees, with the total amount varying based on the size of the economy and its production activities.
This study compiles data from annual provincial statistic yearbooks, focusing on organizations such as the Communist Party, state management agencies, and the Vietnam Fatherland Front, which receive direct funding from the state budget Public service delivery agents are excluded from this analysis These two variables are significant as they align with the objectives of public administration and resemble the World Governance Indicators (WGI) established by the World Bank.
Public spending, denoted as PE, plays a significant role in economic growth, as highlighted by Been-Lon Chen (2006) and Abel et al (2010), who emphasize the importance of analyzing its quantitative rate from budgetary perspectives In Vietnam, administrative payroll is a key component of public spending; however, the wage rate (BW) represents only a narrow aspect of public expenditure and fails to capture the total financial compensation for civil servants, which includes bonuses, holiday entitlements, maternity leave, overtime, and other benefits Furthermore, individual payments are influenced by the working experience of each employee, making it challenging to accurately measure the total compensation Consequently, the overall rate paid for administrative positions is regarded as an opportunity cost, as classified by Gemmell and Kneller.
In their 2013 study, Kneller, Bleaney, and Gemmell (1999) argue that public expenditure can be viewed as an unproductive investment, leading to high opportunity costs for alternative investments This finding aligns with the research of Sturm et al (1995), which provides clear evidence regarding the productivity of public expenditure in the United States and the Netherlands.
The dilemma between public expenditure and public payroll, as well as public revenue and economic growth, is illustrated in the neoclassical growth model by Barro and Sala-i-Martin (1995) In this model, government consumption is represented as y = f(k, g) = Ak^αg^(1−α), where g signifies productive public spending per capita Given budget constraints and the assumption that government spending does not contribute to production or capital accumulation, the resource constraint is expressed as ct + gt + it = yt = f(kt) This indicates that a higher ratio of public spending to GDP correlates with a lower growth rate, highlighting the opportunity cost of not investing in other sectors Additionally, the dynamics of capital are defined by the equation kt+1 − kt = f(kt) − (δ + n)kt − ct − gt, illustrating the impact of government spending on capital accumulation.
Government spending is financed with proportional income taxation, at rate τ ≥ 0, a fraction τ of aggregate output: gt = τyt
Disposable income for a household is defined as yt - gt or (1 - τ)yt, where consumption and investment are fixed amounts derived from this disposable income: ct = (1 - s)(yt - gt) and it = (1 - s)(yt - gt) The dynamics of capital are expressed by the equation γt = (kt+1 - kt)(kt)^-1 = s(1 - τ)Φ(kt) - (δ + n), where Φ(k) is defined as f(k)/k Notably, the growth rate γt decreases as τ increases, given the values of s and kt.
Annual personal income is also considered to be additional variable of quantitative model of this study
Budgetary revenue (BR) plays a crucial role in influencing total economic production, as highlighted by Barro and Sala-i-Martin (1995) They emphasized the relationship between budgetary revenues, expenditures, and fiscal deficits, illustrating the impact of fiscal policy on economic growth Furthermore, Afonso, Ebert, Schuknecht, and Thone (2005) identified a strong correlation between the institutional environment, economic growth, and sound public finances, reinforcing the importance of effective fiscal management The preferred measurement unit for the PE variable aligns with these findings, underscoring the interconnectedness of these economic factors.
Public investment (PI) plays a crucial role in economic development, as highlighted by Rostov (1960), who emphasized the importance of expanding livable and tradable territories as a prerequisite for growth David Aschauer (1989) later revisited the significance of infrastructure in this context The primary goals of productive public investment include reducing budget deficits, enhancing the efficiency of budget utilization, and ensuring transparency in capital allocation In Vietnam, the impact of public investment is a result of various qualitative solutions, yet a comprehensive index for quantitative analysis remains absent, despite its recognized significance.
3.5.3 Group of variables as proximate cause of growth
Enhancing the quality of public services is essential for effective public administration (PA), as it can be evaluated through specific goals and a structured set of criteria encompassing input, processing, output, and final results, as outlined in governmental resolution 30c/ND-CP dated November 8, 2011 The primary objective of improving public service quality is to foster a transparent environment while minimizing unnecessary government expenditures, as highlighted by UNDP in 2003 This concept aligns with various indices that assess administrative burdens and overall institutional quality A notable example is the sub-index of the Public Administration Performance Index (PAPI), developed collaboratively by the Vietnam Fatherland Front, CECODES, and UNDP Vietnam.
PAR acts as agent for provincial public administration index issued yearly by MOHA TSPR expresses transparency and accountability
Transparency and accountability are essential for the effective operation of a modern economy and the enhancement of social well-being By providing access to information regarding government performance, transparency helps to prevent the misuse of power and fosters accountability, allowing authorities to be held responsible for their actions In Vietnam, the government has initiated institutional reform by adopting the Public Administration Reform (PAR) as a foundational step towards addressing inefficiencies within the state apparatus, with an emphasis on improving bureaucracy The ultimate goal of these reforms is to enhance transparency and accountability, which are crucial for combating corruption, preventing the abuse of power, and encouraging citizen participation Consequently, the World Governance Indicator (WGI) data is not suitable for analyzing the cross-sectional time series of Vietnam's sixty-three provinces; therefore, the PAPI transparency indicators are utilized instead.