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

In Viet Nam PAR-MP is supposed to be a comprehensive and inter-sector documents guiding the process of simplification administration and modernizing public administration, a further step

UNIVERSITY OF ECONOMICS ERASMUS UNVERSITY ROTTERDAM

HO CHI MINH CITY INSTITUTE OF SOCIAL STUDIES

VIETNAM 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

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

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

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

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

ABBREVIATION

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

CAN PUBLIC ADMINISTRATION REFORM EXPLAIN ECONOMIC GROWTH,

THE CASE OF SIXTY THREE PROVINCES IN VIET NAM

Contents

DECLARATION

ACKNOWLEDGEMENT

ABBREVIATION

Equation Chapter 1 Section 1DECLARATION iii

ACKNOWLEDGEMENT iv

ABBREVIATION v

GDP: Gross Domestic Product v

GRDP: Gross Regional Domestic Product v

PA: Public Administration v

PAR: Public Administration Reform v

PAR-MP: Public Administration Reform - Master Program v

PSR: Public Service Reform v

MI: 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

CHAPTER 1 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 2 LITERATURE REVIEW 20

2 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 3 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

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 4 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 5 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

FIGURES Figure 1: values of Br after taking multiple imputation

Figure 2: values of Lnpar after taking multiple imputation

Figure 3 GDP estimated in conditions of control of corruption

TABLES

Table 1: missing patterns of variables

Table 2 Summary statistics

Table 3 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 7 results analysis under FE and DGMM estimations

Table 8: estimated result using external variables

Table 9: comparison of predictive power of the models

CHAPTER 1 INTRODUCTION

1.1 Problem statement

Since the presence of governance institution, the way of establishing central governments and regional, provincial state bodies has always affect economic activities The role of institutions and governance as controlling, guiding, monitoring, facilitating means for civil activities in general and economic ones for specific is always a much interesting subject for political and economic scientists who have been emphasized this role as deep determinants for growth Differences in quality, way of organizing mechanism, citizen participation and socializing rate of public services can be some good reasons of why some countries grow rapidly, taking advantage of catching up opportunities and get richer

while others falling behind (Olson et al 2002) This is of most trite yet crucial question in

field of economic growth These differences were explained by traditional neoclassical growth model, following Solow (1956), Cass (1965) and Koopmans (1965) using income per capita in terms of different paths of factor accumulation (saving rates, total factor productivity) Differences in national income in these models, however, are not explained

by variation in institutions

Growth theories, in common sense, emphasized that sustained steady-state growth could

be induced by externalities from physical and human capital accumulation Romer (1986) and Lucas (1988) or endogenized steady-state growth and technical progress (Romer (1990), Grossman and Helpman (1991) and Aghion and Howitt (1992)) Those works stayed squarely within the neoclassical tradition of explaining differences of growth rates

in terms of preferences or endowments and for a long time seem unable to provide a fundamental explanation for economic growth As North and Thomas (1973, p2) put it

“the factors we have listed (innovation, economies of scale, education, capital accumulation, etc.) are not causes of growth; they are growth” (italics in original) According to North and Thomas’s view, the fundamental explanation of comparative growth is differences in institutions instead of factor accumulation - proximate causes of growth

The first incarnations of growth theory in correlation with political institution is presented

by Max Weber (1868-1920), a 19th-century German sociologist and one of the founders

of modern sociology, in his monumental essay named Economy and Society reasoned for the fundamental value of bureaucracy as one of the institutional foundations of capitalist growth In the early years of 1900, Max Weber studied the relationship between bureaucracy, public administration and governance whose works led to his well-known model of bureaucracy or Weber’s model for bureaucracy Many aspects of modern public administration date back to him This is epitomized in the fact that a classic, hierarchically-organized civil service is still called a “Weberian civil service” By using Weberian scale or Weberianness, a measurement of effectiveness and efficiency of state apparatus, Evans and Rauch (1999) deciphered the relation between administrative structures and changing levels of economic output and came to derivation about the role

of bureaucratic authority structures in facilitating economic growth

As a styled fact, each regime, institution, social and political unity need a system of procedures, formalities, administrative work papers for controlling, adjusting, operating The problem of whether these papers are cumbersome, bureaucratic, do they follow the principles of transparency, simplification and facilitation result in many lines of studies

on quality of institution, its determinants and the correlation to economic performance Studies are wide ranging from focusing on quality of institution as source of national income to deep determinants of quality of governance for which economic outcome is facilitated The common result of almost all studies is that the robust connectedness between the efficiency and quality of regulation, a specific type of determinant of quality

of institution, which affects the economic performance of an economy is consistent Olson et al (1998), Kauffman et al (2005) came up with the same conclusion that good governance is associated with higher economic growth In most attempts of defining sources of economic growth from institutional perspective quality of government is explained by a straight forward manner and empirical terms which are neither standard endogenous nor exogenous growth models From organization argument political,

economic and social outcomes depend on the large part of state bureaucratic structure Empirical findings prove that a strong and well-organized state bureaucracy contributed

to economic growth in some Asian countries in 1990s (Amsden 1989; Wade 1990; World Bank 1993) In World Bank’s report in 1997 named “the state in a changing world” why some state bureaucracies are more effective than others is analyzed focusing on bureaucratic characteristics, inter-organizational distinctions while others were set secondary instead Evans and Rauch (1999) verified the effect on economic growth of certain structural features and suggested that building a better bureaucracies and a relevant attempt by both policymakers and social scientists to research on variations in how state bureaucracies are organized are in need

Institution and political regime is certain an incontrovertible subject generating considerable interest among scholars, researchers and practitioners in recent years (World Bank, 2004) They attempt to explain differentiation, prosperity from country to country

to find the nexus growth between collective actions or institutions and economic activities organized within a society which help to build a monolithic model for implementing globally Notably Acemoglu and Robinson (2008) in their working paper namely “The role of institutions in growth and development” raised questions of whether institutions are key determinants of economic outcomes or secondary arrangements that respond to others, perhaps geographic or cultural, determinants of human and economic interactions It is worth noting an important proposition: ultimately, the aim of researching on institutions is to pinpoint specific institutional characteristics that are responsible for economic well-being in any nation-context, for example, the effect of legal institutions on the types of business contracts

Clearly, analyzing determinants of growth from social, political and organizational viewpoint rely on answering the question of what institutions are and its determinants Douglass North (1990, p 3) offers the following definition: “Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction.” From this interpretation bureaucracy, state

apparatus and public administration, governance, regulations, rule of laws are well defined as a key element as well as determinants of a good institution and there are many approaches on explaining national growth rates

Complexity and diversity of studying on the nexus between growth and its determinants can be classified according to social and natural nature of determinants itself From this stance two branches of analyzing economic growth are regarded when debating entries of theoretical model: de facto and De jure components

1.2 Research gaps

Although there is a broad set of literature analyzing proximate and fundamental causes of growth that will be discussed in detail in section 1.3 mentioned below, a few theoretical and empirical research taking public administration reform as analytic background are found in mechanism of growth or studying fundamental causes of growth Clearly, growth accounting cannot fully explain how and why GDP at high or low level exist if

De jure political power is not accounted for

In institutions-augmented Solow model of growth institutional variables directly reflect

the quality of institutions they stand for Even in De jure power and economic growth

analysis almost focus on governance indicators and give out recommendations on further reforming institutional quality to raise economic outcomes Analyses specialized in deep determinants of institutional quality from perspective of PA and PAR have yet to be many In Viet Nam PAR-MP is supposed to be a comprehensive and inter-sector documents guiding the process of simplification administration and modernizing public administration, a further step of enhancing government effectiveness and quality of governance is lack of an indicator system to assess the impact of PAR on PA system and

so quality of institution as well on national economic growth or even provincial level This system will make clear backlogs of PA system from administrative burdens itself and organizational perspective so that a profound impact evaluation of bureaucracy on

macroeconomic indicators (fiscal, public expenditure to GDP ratio ) and fining-tune state apparatus toward building new public administration with service oriented is in need

So far, productivity potential have seized qualitatively and quantitatively using composite indexes, or additional insights that can be obtained regarding growth rate Criteria and determinants of an indicator of institution such as hierarchical and bureaucratic or public formalities and its causality are not used for examining systematically

Even with this respect, as the emerging of new public administration (NPA), the role of legitimacy procedures in economic has not been focused enough Mostly used are education, physical capital, and health (Afonso and St Aubyn (2006a, 2006b), governance indicators (Kaufmann, Kray and Mastruzzi ,2006) or ICRG (International Country Risk Guide) (Olson, Sarna and Swamy, 2000)

1.3 Specification of research problem

De facto and De jure components of growth process

Central to studying of this paper on institutions is that whether economic institutions, and institutions more broadly, are endogenously or exogenously impact to growth from De facto and De jure aspect and then enlarge the research to apply for Vietnamese context Institutions as defined by Doglas North (1990) are, at least in part, determined by society,

or a segment of it Consequently, the question of why some societies are much poorer than others is closely related to the question of why some societies have much "worse economic institutions" than others Many scholars including John Locke, Adam Smith, John Stuart Mill, Arthur Lewis, Douglass North and Robert Thomas, and recently many papers in the literature on economic growth and development have emphasized the importance of economic institutions A useful framework for thinking about how economic institutions are determined and why they vary across countries are still in need

of a specific theory In other words, while we have good reason to believe that economic institutions matter for economic growth, we lack the crucial comparative static results which will allow us to explain why equilibrium economic institutions differ (and perhaps

this is part of the reason why much of the economics literature has focused on the proximate causes of economic growth, largely neglecting fundamental institutional causes)

In this perspective, factors to regulate a good institutions and economic institutions specifically will be clarified with focus on endogeneity of institution Broadly, political economy of institution will be clear cut and explaining growth will stay on political factors Two components of political power, which referred to as De jure (institutional) and de facto political power are the core of the argument

- De jure political power: refers to power that originates from the political institutions in society Political institutions determine the constraints on and the incentives of the key actors in the political sphere This implies that:

Political institutionst De jure political powert

- De facto political power: the ability of a social group/classes to impose their wish on the society if they are not allocated political power This results in two sources of political power: first, depend on the ability of the group in question

to solve its collective action problem then de facto political power will be defined in comparison with economic resources which determine both the ability of that group to use (or misuse) existing political institutions and also their capability of having outsources or even force against different groups Since there is a lacuna in theoretical framework of when groups are able to solve their collective action problems and discussing in depth about organizational science is not the purpose of this chapter the second source of

de facto political power, hence:

distribution of resourcest de facto political power

With these pieces, a schematic picture of institutional research on economic performance is as follow:

Political

institutionst

De jure political powert

&

Economic institutionst

Economic performancet

&

distribution of resourcest+1

Distribution

of resourcest

De facto political powert Political

institutions t+1

Two terminologies “de facto” and “De jure”, as discussed, will lead this economic analysis of growth to be focused on “De jure” aspect since political institutions will indirectly affect the economic performance by regulating relevant economic institutions Specifically, De jure element in this case will be governance, institutional quality, bureaucracy dimension Apart from recent analyses which focus on de facto such as human capital, capital accumulation, education, investment and so on, De jure factors in this case will be public administration and state apparatus, a perennial subject of reforming The determinants of growth, however chosen to be variables will be public administration and its formalities reforming and others control variables

1.4 Research objective and research questions

As categorized by Acemoglu and Robinson (2008) Solow model can be augmented to account for De factor and De jure and the research gaps discussed in context of Viet Nam and to the best of writer’s knowledge on public administration science, the following questions are the main focus of this study:

- 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

1.5 Scope of study

In context of Viet Nam, public administration program has been applied since the year of

1996 until now From that time state apparatus and rearrangement of social-economic activities were followed strategies of reform across 63 province and regions Mathematically, variables which are grouped into De facto and De jure can be collected perfectedly with exception for some variables of De jure With implicit viewpoint that even with or without exception of variables discussed, the process of reforming public administration toward good institutional quality is still executed and as Acemoglu and Robinson (2008) discussed, de jure element is an signal to review sectors which contribute to a good institutional quality This view is consistent with Solow model augmented for institutional elements

For this reason, the scope of this study spread on 63 province and regions in the period of 1996 to 2016

1.6 Structure of the study

The study is divided into five chapters Chapter 1 address problem and links to Viet Nam case and analyze aspects of institutional quality so that public administration reform will

be entry of mathematical modelling The next chapter make an overall view on theories related and empirical research, empiric studied as well as methodologies applied Chapter third will present analytical framework and econometric models to make regression analysis in case of Viet Nam In this chapter data collection methods and describing variables will be included Chapter 4 will present results of regressions using suitable econometric models and comparison with interpretations of statistics with respect to theoretical framework and empirical analysis in case of Viet Nam Practically applying the results of analysis and some suitable implications, recommendations for policy research will be written in chapter 5 This chapter also end up the problem studying as conclusion and the last chapter as well

CHAPTER 2 LITERATURE REVIEW

The literatures related to institutional quality and economic growth will be analyzed in advance in relation to previous researches to find empiric results In context of Viet Nam, linking PAR factors with economic performance is verified and the channels of which the quality of institution affect economic turnover are proved to be public administration process With this demonstration, suitable growth model is approached to count for PAR elements as proximate variables

2 Literature review

2.1 Review of theory

2.1.1 Review research on institutional quality and economic growth

Karl Marx (1848) when studying philosophy grouped nomenclatures institution, public administration, governance, bureaucracy dimension into historical materialism as a strand

of social sciences Studying this school of terminologies have no economic characteristics

By using dialectic studying method, the nature of those concepts are classified as De jure elements as analyzed by Acemoglu and Robinson (2008) and modeled as determinants of economic outcome By this way the relationship between pure social scientific nomenclatures and economic ones is established to make quantitatively dissecting According to De jure and De facto theme of study of Acemoglu and Robinson, it is clear that almost all precedent analysis used de factor elements as determinants of economic growth in their growth functions while few studies used De jure elements and its component index to find causal factors of growth in econometric models Academically,

it is supposed to acknowledge that while De facto phrase is mentioned as natural factors relating material and tangible resources, De jure element is quite an abstract phrase since its nature relating to manner of organizing, operating, managing social relations, rule of law and so on It means that specific type of De facto elements such as physical capital, factor endowment, geography, land, colonial history have been used in most empiric

researches as determinations of growth in growth functions Less components of De jure elements are used in empirical works Even in the branch of De jure oriented analyses, deep studying on components of institution such as PAR, PA, bureaucracy and their impact on the total production of the economy is quite a few

The purpose of this chapter is to explore an interrelation between deep determinants of institutional quality, PA system and PAR or De jure political power in this case, and economic growth This result in further making analytical explanation on De jure political power to find channels through which economic performance is adjusted to approach purpose of growth quantitatively and economic institution is not the initial target of this study Analytical method of study of this writing when using De jure element will take institutional quality as major indicator and PAR and its attributions to indicate institutional quality

As noted by K.Marx and as compared in empiric result of Acemoglu and Robinson, it is clearly seen that De jure element is of context specific since this is nature of society and

is categorized as historic materialism All components of De jure such as public governance, institutional quality, public administration would be context specific as well and therefore different from nation to nation and even different inside a nation at different period of time In this paper a specific definition of public governance which makes it particularly clear to explore how different ruling powers or governors can be involved appropriately issuing, improving, upholding, strengthening a public system (Governance International, 2003) is used For further analysis, some abstractive concepts above are displayed as follow:

Public governance is an apparatus with functions of social management With this regime all social classes mutually interact in order to influence the outcomes of public policies and good governance means that social expectation and economic interests of each social classes in an issue or area are reached relying on negotiations and agreed governance principles as researched by Bovaird and Elke Löffler (2003) Specific-context, as mentioned, is a rule of any analysis and by this meaning, public governance is abroad and

common concept and public administration is conveyed Public administration is a term

in detail which mean that rule of law on relation between state, public employment and people in a specific area

The function of government and its efficiency can be accessed using De jure elements such as public wage-bills, public employment rate, public expenditure as component of consumption, participation of society in political process These are indicators of institutional quality Practically, institutional quality affect economic activities through adjusting those indicators as an action of ruling social and improving quality of public governance toward social agreements Specifically, economic growth as a result of social participation in commercial and productive activities given the safety and security of investment and the property or ownership right Empirical tests for this correlation can be listed by Helliwell (1992); Minier (1998), Agenor and Montiel (1999); Obreja Braşoveanu (2007); Alesina and Perotti (1997); McDermott and Wescott (1996); Segura-Ubiergo, Simone and Gupta (2006); Roubini and Sachs (1989); Beldacci et al (2004);

Mulas-Granados (2005) Those works, however, examined for the effect of rate of

investment, land owner, expropriation risk, corruption which are De facto elements as discussed instead of using deep determinant of institutional quality such as bureaucratic indicators, structural reform, modernizing and simplification administration burdens Notably, Ding and Knight (2010) when analyzing China’s mysterious economic growth stressed the role of structural change by using Solow model of growth to analyze factors contribute to growth as an experiment of explaining economic growth from institutional aspects In detailed, these determinants used in growth equation are trade openness, education, human resources, secondary education enrolment, factor endowment such as colonial characteristics and railway density, and other relevant Additionally, in their work factors of endowments were included in model such as geography advantages, resources available These variable were categorized to group of de factor according to theory of Acemoglu and Robinson (2008)

2.1.2 Review research on public administration reform and national income

Evans and Rauch (1999) used public size elements in their analysis to find the effect of how efficiency an institution can foster or impede the process of growth and came to conclude that these elements could help to raise factors in explaining the situation of a nation Even though using public size as entry of modelling variables, analyzing based upon cross nation indicators and using system of unique indicators such as Weberianness scale, ICRG, BRI is not context specific since institutional attributes are different from nation to nation

Another strand of studying De jure element on economic growth as an example In this school of research, the effect of bureaucracy on growth is quantitatively analyzed by Dahlström et al.(2010) In their study, Dahlström et al used Webrian indicators to access

to attributes of bureau structure a state possess: the first is administration directly depend

on current government and management activities as well For this reason the similarity

in administrative operations is found both at public sector and private one More specifically, three groups of researches included CPB Netherlands Bureau for Economic Policy Analysis (2004), Gelauff and Lejour (2006), the Swedish Agency for Growth Policy Analysis (2010) and the Australian Government Productivity Commission (2006); Klapper, Laeven and Rajan (2006), Djankov, La Porta, Lopez-De Silanes and Shleifer (2002) and Ciccone and Papaioannou (2007); Costa and Aubyn (2012) concluded that regulatory burdens negatively affect or diminish the entry of new firms into market when examining the role of administrative burdens, administrative formalities on business and total income of commercial activities In those works broad proposition of reducing administrative burden to foster economic activities is assumed as context specific characteristics By this manner, costs and delays in starting up new business, effects of

“red tape” on entrepreneurship, possible effects of legal-simplification programs will be remarkably affected, more transparent business environment is created

Public size is also an important side that need to be verified in context of Viet Nam In this trend, financial aspect of public size included national savings reducing budget deficits, increasing productive investments in infrastructure and social services to contribute to growth in general was main purpose of examination performend by Albertini and Bertucci (2006) The scope of study, however, is international level with data collected cross-nation and belong to De facto cause of growth as discussed by Acemoglu and Robinson (2008)

2.1.3 Concept of public administration and the nature

The long history of public administration can be divided into six phases in which the first stage of origination was Woodrow Wilson (1856 - 1924) as the primitive period of studying The second stage was from 1900 to 1926 with theoretical model of separation

of politic and administrative, administrative principles was compiled at the third phase (1927 - 1937), from 1950 to 1970 public administration was considered as politic science

at the fourth period then proceeded to management science at the fifth step, from that time until now public administration has been considering as administrative science Whatever scenarios public administration tends to be the way of performing state power

so that it essential associate to national apparatus The way of organizing mechanism of state or institution then need a system of prolix procedures/formalities for operating/managing This dissertation has no throughout concentration on public administration and its relation to politic and institution of a regime, the major purpose is

to analyzing how good public administration contribute to economic performance and growth instead In this respect, a proposition of public administration in political science

is acknowledged so that analysis in depth on causal link between efficiency of good regulation, well organized system of administrative principles and so quality of institution can be further proceeded For any country, especially those developing and transitioning appropriate framework is not an economy on the technological frontier but one well inside it

Public administration (PA) science studies the machinery and its features, characteristics such as policies, systems, structures, personnel) and the management of government, particularly focal attention is the ‘executive’ branch of government including the political leadership and government departments or agencies with staff on the state payroll (Earle and Scott, 2010)

2.1.4 Public administration reform and its nature

Public administration reform (PAR) is broadly about strengthening the way that the public sector is managed The United Nations Development Programme (UNDP) refers

to public administration reform as works to fine-tune “aggregate machinery (policies, rules, procedures, systems, organizational structures, personnel, etc.) funded by the state budget and in charge of the management and direction of the affairs of the executive government, and its interaction with other stakeholders in the state, society and external environment (UNDP, 2004) PAR or PSR from this approach relate to collective actions and the results of applying policies will be time consuming PAR is so one of the most important horizontal reform areas in each country since this is of De jure element from which causal link between institution and the economy will be defined

In Vietnam, the initiation of PAR/PSR was embarked since the Eight plenum of the Central Committee of the Vietnamese Communist Party (VII Congress) in January 1995 when the rubric of the PAR first endorsed From this time onwards PAR framework is regarded as public administration reform-master program (PAR-MP) and for each tenure

or period of time this PAR-MP will be re-evaluated and validated

Four decisive areas of reforming are institutional reform; organizational reform; improvement of the contingent of cadres and civil servants; and public finance reform The PAR when under taken will stick to specific objectives, however, the tough emphasis

is simplification of the administrative apparatus, professionalization, accountability, transparency, coordination, reduction of compartmentalization in the preparation of legal documents in general and in policy implementation in particular, and reduction of

corruption (Resolution 17- NQ/TW, 2007; Resolution 53/2007/NQ-CP, 2007) Although the reforming go through stages of areas pointed out, from deploying and implementing aspects, reforming public formalities will be the first stage and executed from bottom up The result from this will be an important basis for other areas of PAR

For the purpose of this dissertation and to narrow down the entry of variables determining analysis PAR will be implied as public formalities reform and bureaucracy dimension hereafter and are prerequisites of the rest Different connotations such as modernising PA, reducing burdens and compartmentalizations of public procedure/formalities, ameliorating effectiveness and efficiency of state apparatus, raising contingent quality of public cadres are the pure ingredients of PAR Others empirical and technical terms such

as one-stop-shop (OSS), one door (OD) are the concept implying the results of reforming areas In this circumstance, PAR/PSR is also considered as determinant of economic growth through the channel of De jure political power

Economic growth formation so that is conditioned by De jure but at first PAR and quality

of reforming areas, fine-tuning administration system will result in good institutional quality/governance Studying into outcomes of the economy so as to have two stages: the first one is how well institutional quality is as a result of PAR which in turn impact the growth rate directly

Although the relationship between economic growth and institutional quality has absorbed much effort using a wide variety of proxy such as public intervention rate or public size, public quality and economic variables to test for correlation and so does

growth rate (Laura et al 2012) (In the study, the impact of public sector or quality of

governance is considered using economic variables such as GDP growth rate, GDP per capita, total public expenditure on GDP A much abstract connotation, governance indicators, political stability, government effectiveness and so on standing for quality of institution are used in the analysis The results also revealed that in some countries with political distinction, too big size of public sector and/or quality of institution negatively affect growth rate of the economy) The correlation between PAR and economic growth

expressed in concrete terms, for instance one standard deviation on the regression leads to

x percent of additional growth, is not explored Additionally, most analyses have mainly used large cross-country samples over a long period of time Adapting such approaches to

a single country in a medium term context is therefore a complex undertaking

For the case Viet Nam, the measures aimed at enhancing public sector contribution towards improving the quality of Viet Nam’s economic growth are open to question Moreover, despite comprehensive coverage, the initial goals set of PAR are “ build a public administration that is democratic, with integrity, professional, modern, effective, and efficient, based on the principle of the socialist state rule by law ” (Resolution 53/2007/NQ-CP, 2007) There is no linkage with government economic development programs at the goal/impact or the objective/outcome level explicitly and systematically

At the objective and outcome level, only two objectives have outcomes directly related to economic development: (1) to perfect the system of public administration suitable for the era of industrialization and modernization, by for instance emphasizing economic institutions and the organization and activities of the public administration; and (2) to eliminate administrative procedures that are bureaucratic, cumbersome and cause inconvenience for enterprises and citizens; and to perfect administrative procedures following the principles of transparency, simplification and facilitation (Resolution 53/2007/NQ-CP, 2007)

From the empirical research and implementation view of points this is of lacuna facing government and policy makers in reaching a sustainable growth rate For the most part, a sub-programs that link PAR and economic growth more explicitly, indicator system to assess the impact of PAR measures on the public administration and evaluating/measuring the influence of this improvement on economic-related services are lack of empirical and even theoretical studies Besides, contemporaneous researches are

of depth sciences and impact evaluation of PAR using economic model with quantitative, econometric tools are merely without precedent, statistics mostly based on economic related variables and for descriptive, comparison as well Moreover, Viet Nam is on the

way of integrating into world stage as an official member of WTO, TPP agreement and other bilateral/multilateral relations Enforcing quality of institution upon public administration reform is now a slogan of all state authorities from central government to grass root bodies so that reaching a high rate of growth and maintain this growth rate insist elucidating functions of PA and PAR as De jure element to the economy Besides, clearly define determinants of economic growth from aspect of De jure, especially using public administration results and others relevant to find sequence process in support

economic health is not deserving For this reason, the paper choose to the topic of “can

public administration explain economic performance, the case of sixty three provinces

in Viet Nam” as an attempt and the main motivation to answer the question: whether

PAR and public formalities reform can explain economic growth of the nation and if so

whether they facilitate or impede the grow rates?

2.2 Theoretical framework

In explaining growth formation, many sources from De facto viewpoint such as colonial distinctions; factor endowment; railway density; distance to equation or from De jure element such as Civil law and common law applied within a country are employed to determinate the wealth of a nation Theoretically, attempts have been tried out to build growth model as an example of success or even to analyze context specific experience Both in economic framework and political environment the same common are to gain social targets such as economic growth, reducing poverty Using Solow model to explain differences in income and national productivity across countries the diversification of economic turnover can be explicated as a results of technical accumulation, physical capital per worker or labour intensive used in production process which are proximate cause of growth The perennial question is that why should technology be improved in advance, further efficient in mechanism of investment in term of physical and human capital The conclusion derived is that the difference in manner of affecting on economic performance which creating economic institution from allocating resources or allowing for negotiation among parties as discussed by Acemoglu and Robinson (2008) under

consideration of De jure and De facto elements In case of Viet Nam, suitable De jure political power for analysis is PA and PAR to count in modeling growth function The mechanism of contributing to economic growth from administration aspect is called political economy of public administration reform which examine channels of influencing

of PAR on the relevant economy and its outcome

2.2.1 Growth model and institutions-augmented growth model

Growth model

Theoretically, condition of context specific should be accounted in growth model since growth accounting is dynamic over time and can be used to modify causes of growth from viewpoint of Acemoglu and Robinson (2008) and to determine its proxies as determinants of economic growth to model mathematical equation By this meaning, the most frequently employed model is Cobb-Douglass production function in general form

From the function (2) the growth rate can be explained as change of input production

factor K and L where Y(t) is the total production, K(t) is capital stock and A(t) is

technology at time t while K and L are clear as its meaning, technology is a more

abstract and has no natural unit Specifically, each production process will use different technology and the efficacy of technical progress depends on manner of organizing production and market efficiency This is in line of studying of branches of de facto

power as discussed and in function (2) A(t) is considered to be shifter of production

function Capital stock and labour force are interaction depend on number of employment

Econometric method of analysis can figure out steady state and potential equilibrium of

an economy from aspect of input factors In dynamic form an in capita term, function (2)

is rewrote as:

In this function y(t) is output per worker conditioned by capital-labor ration For the purpose of this paper, the mathematical proof of Cobb Douglass and the dynamics of factor input are ignored and used the final derived instead In this case propositions of constant return to scale, law of motion for capital and labor are presumable as follow:

Ct + It ≤ Yt for resource constraint

Or c t + i t ≤ y t in per capita terms

Lt = (1 + n) Lt−1 = (1 + n)t L0 for population growth

The law of motion for capital is:

(1 + n)k t+1 = (1 − δ)k t + i t in per-capita terms For these proposition the Solow

model in discrete time is as:

2.2.2 Institutions-augmented growth model

With regarding De jure power, Solow model is called institutions-augmented Solow model to deal with growth accounting process The specific form is as follow:

Y = f(A(T, t), K(T, t), L(T, t)) (5)

where T is an index denoting the quality of institutions With the best institutional

quality T is supposed to equal 1 ( 0 T 1)

In regression form, equation (5) can be rewritten as:

gi,t,t-1 = α Xi,t + β logi, t-1 Ɵ + εi,t (6)

where X’ i,t stand for variables such as human capital, trade openess, rule of law, investment rate and so on This is also basic model to form econometric model which account for institutional change of this study To cope with functional form and avoiding measurement errors, natural logarithm form of Ɵ which stand for De jure elements used The channel through which institution can impact economic performance is that the economic institution created will control resource allocation As Tebaldi and Elmslie (2008) proved that poor institution will impede distribution of resources or even as examine by Mathews (1986) showed limitation of weak institution in provoking innovations for efficiency Therefore, the quality of institutions will help to foster or hinder the efficacy of technology and raise both labor and capital productivity (Mauro,

1995, Brunetti, Kisunko and Weder, 1997; Lambsdorff, 1999; Wei et al., 2000) In other words, a good institutional quality will influence the contribution of capital to output by augmenting capital productivity Mathematically,

k = sk αT – (δ+n+g)k (9)

A(t)L(t) is defined as the effective units of labor, which grows at rate n+g,

In terms of A(t) and L(t), Tebaldi and Elmslie (2002, 2008), Haucap and Wey (2004) made clear that there exist difficulties of being used effectively as a consequence of existing institutions, for instance, labor market imperfections, restrictive labor contracts

or union relationship and government regulations Component sk αT of equation (8) means that allocating of resources in case of resource constraint is based on institutional

conditions and result in optimal total factor productivity form

To account perfectly for these stochastic institutional factors, (6) is then extended

as:

Y= A (T-1) K αT( AL) αT-1 (10)

The term A(T-1) is stand for the external effect of institutions on technology adoption and

on total factor productivity

If ATL is treated as denominator of (9) then the general form of growth is as:

The equation (12) will allow the background of studying external and stochastic effects

of PA system and PAR for specific to be validity and consistence with the title of this working paper So that this equation is the mechanism of affecting from institution to

growth while equation (6) is set as framework for growth regression and further analysis

thereafter

2.3 Empirical studies and methods applied

Even though analyses on nexus and correlation between institution and economic growth

in form of heterogeneous determinants in growth equations have attracted much effort, the subject of which channels and how institutions do influence economic performance and the outcome of economies are open to question From the de facto and De jure perspectives those works can be classified in to six groups according to elements analyzed:

De facto power:

a/ in this school of thoughts the correlations between material and tangible resources such

as geological, ecological, geographical and historical characteristics which mean colonial features, distance to equator as specified by Gallup and Sachs e Mellinger (1999) are elucidated It is clear that these relation are between economic growth and factor endowments which directly accounted in growth model of any research in this line of analyzing Regarding facto endowment, capital deepening in terms of technique accepted

in total factor productivity equation will be decided by rates of possessing natural resources or being exposed to nature Consequently, the growth functions will be formulated as exogenous or endogenous one depending on allocating resources in production process In this sense, data will be collected country by country to make a regression as cross countries analysis

De jure power:

b/ in this group of studies, indicators of institutional characteristics such as political stability, voice and accountability, government effectiveness, rule of law, control of corruption, regulatory quality and so forth are taken into account to find its implication in favor of economic results as explicitly published by Barro (1999), La Porta et al (2004) Persson (2005), Keefer (2994), Rodrik (2001) Besley et al (2005), Bardha (2005), Acemoglu et al (2001), Aron (2000), Williamson (1995), Ali and Crain (2002) The result of modeling growth equation took both indicators measuring quality of institutions

which are proxies of social cohesion, political standards such as political stability, voice

& accountability indexes for democracy and government effectiveness as indicator of quality of public service to form growth model which are De jure elements The final model is assumed to be augmented-Solow model

c) Formal and informal institutions: (De Soto (2004), Rubin (1994), Berglof and Caessens (2004), Hay and Schleifer (1998), Li (2003), Ensminger (1997), Le (2008), in this branch of studying, when quantitatively accessing institutional effects came to a conclusion that whether economic activities refer formal regulations to informal ones and what kind of institution is predominant in business environment The sense behind formal and informal institution is that economic contracts made personally and implicitly between parties involved The approach of this group is far more different from that of the first two group Based on cross-nation level of data, authors used index of remittances, trade volume, institution as determinants of economic growth and also came to conclude that better quality of institutions leads to higher economic growth in the long run as well

as in the short run In their research findings when exploring role of institutions in economic progress, Acemoglue and Robinson (2006) publicly noticed that diversification

of economic performance among countries mostly rely on differences in the quality of economic institutions This imply that formal institutions will take protective regime for economic transactions and accumulation of national income

d/ Institutional reforming: Aslund (1995), Heybey and Murrell (1999), Pritchett (2003), Olson (1982), Williamson (2000), Hsieh (2000), Vijayaraghavan and Ward (2001) used determinants of institutional quality such as property right and size of government, bureaucracy structure, political freedom to examine economic performance and came to conclude that these indicators were significance in enhancing economic well beings This means that institutional reform will help improve production process of a nation

e/ institutions and governance: Olson at al (1998), Perotti (1996), Kaufmann and Kraay (2007), Knack and Keefer (1995), Grogen and Moers (2001) performed a further investigation in institutional reforming and came to a derivation that institution play an

important role of attracting FDI, an indicator of property right The sense behind property right is that it is significant determinant of economic growth

In general, for those groups discussed above, growth accounting introduced by Solow (1957) was employed in forming quantitative model as theoretical framework Their findings are consistent with conclusions of contribution of human and physical capital to economic growth at given technology and potential bias of over or underestimate of former to ladder With possible problems of omitted variables and different approaches in data processing the regression result may be biased since country characteristics taken into account in empirical model will simultaneously affect economic growth and these context specific will correlate with error terms More specifically, these school of studies found that institutional quality largely affect economic outcome of a country in line with conclusion that the weaker the quality of an institution the smaller of national productivity a country gained by analyzing the relationship between human capital, education (the two most preferred indicators), productivity and institution These indicators are fixed effects within a country which sizeably impact accumulating specification, capital formation and output In these authors’ works cross-country analysis were performed using data collected from dataset built uniquely by World Bank as proxies for context specific in their endogenous growth model such as International Country Risk Guide (ICRG), Business Environment Risk Intelligence (BERI), Kaufmann-Kraay-Zoido Lobaton (KKZ), Transparency International (TI) The problem worth mentions is that these index are not set benchmark due to context specific and each society different in its social moral standard, culture and customs

Since the diversification in approaches to growth analyzing and nature of each governance, taking a growth model as an archetype is not feasible when applying the same implications of institutional factors without regarding correlation of these with error terms in growth functions Additionally, precedent studies verified growth formation using proximate causes or proximate causes from aspect of De jure and De facto as discussed by Acemoglu (2007), North and Thomas (1973), some determinants of

economic growth will be ignored in context of Viet Nam For specific, Vietnamese context will regard PA system and its role to the general production in empirical research Would it be a spurious inference regarding causes of growth existing when examining causal relationship between economic institutions and national income Approaches emphasizing the role of institutional regulations in term of Public administration reform (PAR) as conditioned by context specific within a country are worth attracting a new model of analysis named as political economy of public administration By this concept, this paper concentrate on explaining the initial objectives of this paper

2.4 Institutional quality and economic Growth

Linking institution and governance, for specific, with economic growth

Knack and Keefer (1995), Grogen and Moers (2001) when analyzing the connectedness between institutional sides and economic progress using panel dataset of 25 countries in period of 1990 to 1998 had used property and political right, civil liberty as proxies for institutional quality and came to conclude that institutions play the major role in raising FDI level These proxies was also used in experiment of Vijayaraghavan and Ward (2001) as additional variables beside structure of bureaucracy, size of the government and the political freedom as control variables The regression results on additional variables showed its consistence with that of Knack and Keefer in enhancing economic performance Besides, the evidence of positive influence of political freedom on human capital and physical capital was also found by Ulubasoglu and Doucouliagos (2004) when gauging total factor productivity (TFP) using both additional and control variables

in their simultaneous equation model Taking China from the year of 1986 to 2002 as context of growth research, Hasan et al (2009) applied OLS and GMM method for analyzing the relation among quality deepening of financial institution, a further type of institutional reform, and growth approached to similarity in conclusion Zhuang et al (2010) whose research scope was for Asian developing countries In those authors’ implications, predominant role of institutions and governance in accelerating long run economic outcome is statistical significant and revising an institution toward high quality

one is suitable for explaining differences in growth rate across countries On the opposite side, impediment of institution on economic by lowering economic performance was also tested by Weil et al (2002) using threshold regression method to find effect of policy tension on civil servants’ salary level

De jure elements reflecting institutional quality variables such as indicators of protecting citizens (Timothy Besley and Maitreesh Ghatak, 2009), providing public service (Irene Brambilla, Guido Porto, and Alessandro Tarozzi, 2011), reducing expropriation (Paulo Mauro, 1995) were also analyzed The same research questions of those works are that by what way and how growth is contributed It is similar that causal linkage is from institution to economic outcome improvement both in results those above authors and in empiric researches of Aron (2000), Hall and Jones (1999), Acemoglu et al (2002), Rodrik et al (2002) whose used relevant variables Research findings of Rosenberg and Birdzell (1986), Clague et al (1996), Eggertson (1990), Mauro (1995), however, demonstrated the opposite direction of affecting or reverse causal link This means that high rate of economic performance will help increase institutional efficiency So the nexus growth can be suggested that not only will higher institutional efficiency lead in higher rates of economic growth, but higher rates of growth will help to improve the quality of existing institutions as well

Determinants of economic growth in term of De jure elements were also modeled in econometric model of Chong and Calderón (2000) whose contextual framework is panel dataset containing information of developing and developed countries over sixty years The results showed that institutional quality did positively impact economic growth at all statistically significant p-value of variables used However, Chong and Calderón also proved that there exist two challenges facing all empiric researches relating to causality relation among institutional quality and economic growth The first is choosing variables that can reflect good quality of institution This means that whether these indicators are accredited academically from viewpoint of political science so that variables used usually lack of theoretical framework and give rise to endogenous or collinearity The second

difficult is that the definition of GDP and growth themselves Most often economic growth is compared among countries using fundamental or proximate cause of growth The problem is that any indicator is never neutral, increasing GDP by all pure policies of

an institution will failed to meet social and policy objectives This kind of difficult affirm elaboration of institutional quality indicators to measure GDP level

re-CHAPTER 3 RESEARCH METHODOLOGY

In this chapter, data collection methods, model specification, variable definitions and measurements, the econometric strategy will be discussed in details All the elements in this chapter were constructed based upon the purpose of the research The aim of this paper is to identify the role of state in accelerating economic activities by using group of seven fundamental causes of growth and group of other eight variables to find the clue of effectiveness of an apparatus on its economic atmosphere

As mentioned above the institution and governance are of context specific, especially in case of public administration reform performed in Viet Nam a comprehensive assessment

on the effect of all six indicators as KKM (2007) is inessential The key indicators are government effectiveness, the quality of regulatory and graft are the first three institutional factor since they are conceptual relevant for Viet Nam and they reflect the effect of PAR/PSR as well

3.1 Measurements of institutional quality

In relation to institutional quality, public administration and reforming program, an abstractive nomenclature, are very comprehensive and include process changes in a diversity of areas from organizational structures, decentralization, personnel management, public finance, results-based management to institutional reforms as verified in works of Kaufmann, Kraay, and Mastruzzi (KKM) (2007) These authors have aggregated a cross-country governance system of database into six fundamental indicators to capture institutional quality These six indexes are proxies of six dimensions of governance Since these proxies are assembled from cross-nation regardless of political particularity, this set is fit using for Viet Nam as literature framework Specifically,

- 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

Improvements in productivity are for the most part driven by better organization and management and by a public administration system aimed toward overcoming obstacles

in economic activities Therefore, achieving growth targets requires changes in the organizing production, allocating of production factors, infrastructure, and governing It also calls for profound changes in behavior, some of which are beyond the scope of government policy but have comprehensive effect on economic performance Contributions to growth and growth function can be grouped under four broad headings:

• Macroeconomic adjustment

• Openness to trade

• Market regulation

• 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