Investment Capital to GDP Ratio of Hanoi and the Whole Country

Hanoi's investment capital increased sharply in 2008, which was actually the capital of the expanded Hanoi. Before 2007, the investment capital data (Table 3.3) was from the old Hanoi. In 2009, investment capital increased from 124,426 billion VND to 147,780 billion VND, partly due to the sharp increase in investment from the state budget, but partly due to the improved investment environment after the merger of administrative boundaries, which attracted a large amount of investment capital from enterprises inside and outside the expanded Hanoi area. On average, state budget capital accounts for about 14% of total investment capital during the period 2001 - 2010. However, this ratio is unstable, some years it is very high, up to more than 20% in 2002-2004, some years it is low, only about 10% in 2006-2008. This capital source is important, often invested in infrastructure, basic construction, creating a foundation for local economic development.

Regarding investment capital from enterprises, while the proportion of investment capital from state-owned enterprises decreased sharply from 46% in 2000 to 7.1% in 2010, the proportion of investment capital from non-state-owned enterprises increased very quickly, accounting for 51.58% of the investment capital structure in 2010. However, due to the small scale of enterprises, this source of capital is unlikely to increase in the short term.

Credit capital has increased from 450 billion VND in 2000 to 17,769 billion VND in 2010, an increase of 35 times. Although this source of capital is not stable, it has an increasing trend, accounting for 10.24% of total investment capital in the whole city in 2010. This is a source of capital that still has the potential to increase strongly, if enterprises can find feasible production and business opportunities.

An important but elusive part of capital is capital in households. According to the Hanoi Statistics Office, this capital contributes an average of 7% to total investment capital and has tended to increase sharply in recent times[15].

Foreign investment capital accounts for a relatively large proportion, averaging over 13% of the investment capital implemented in Hanoi. In particular, after expanding its administrative boundaries, Hanoi has attracted 2.1 times more foreign capital than in 2008. This ratio has decreased in recent years due to the financial crisis and global economic downturn, but has generally been quite stable over the past 10 years. Continuing to actively maintain and attract this source of capital is a condition to ensure that Hanoi has enough capital for growth. However, it can be seen that relying heavily on foreign capital also puts Hanoi at risk from

outside. Once the world economy fluctuates, the situation of attracting foreign investment into our country has problems, Hanoi's economy will be greatly affected. Therefore, in the coming time, in addition to continuing to attract foreign investment, Hanoi must gradually increase the proportion of domestic investment capital through improving the capacity and scale of local enterprises, strongly attracting domestic investment. The goal is to both maintain the growth of investment capital and ensure the stability of capital sources, minimizing risks due to foreign impacts.

Regarding the ratio of investment capital to GDP: In the period 2000-2012, the ratio of investment capital to GDP of Hanoi and the whole country tended to increase rapidly, especially in 2012, this ratio of Hanoi was 75.8. That reflects that Hanoi has done quite well in mobilizing capital for investment, but it must be recognized that investment capital is not unlimited. Therefore, to have a growth rate, it is important not only to ensure the maintenance of investment capital, but more difficult is to ensure and improve the efficiency of capital use.

Table 3.4. Investment capital ratio to GDP of Hanoi and the whole country

Year

Investment capital / GDP (%)
Hanoi	Nationwide
2000	49.0	34.2
2001	50.7	35.4
2002	52.9	37.4
2003	50.8	39.0
2004	49.0	40.7
2005	46.6	40.9
2006	62.6	41.5
2007	68.5	46.5
2008	69.7	41.5
2009	70.4	42.7
2010	70.3	41.9
2011	68.2	34.6
2012	75.8	37.2

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Source: Calculated based on data from Hanoi Statistical Yearbook

3.1.2.2. Efficiency of investment capital use

To consider the efficiency of investment capital use, people often use the ICOR coefficient (Incremental Capital-Output Ratio). The ICOR coefficient shows how much investment is needed to increase one dong of GDP. The higher the ICOR coefficient, the lower the investment efficiency and vice versa. In terms of economic significance, the ICOR coefficient calculated for a period will more accurately reflect the

Calculate ICOR annually, because in a short period of time (one year) there is a certain amount of investment that has not yet taken effect and is not reflected if the investment is spread out.

In Vietnam, the calculation results of the ICOR Index also depend on the 1994 fixed price and the actual price or current price. In this study, the ICOR indexes of Hanoi and the whole country are calculated according to the actual price and without delay. The meaning of this coefficient is to evaluate economic efficiency, accordingly, if the ICOR coefficient increases, the efficiency of using investment capital decreases and vice versa, if the ICOR coefficient decreases, the efficiency of using investment capital increases.

Comparing the two indicators, the investment coefficient and the ICOR coefficient of Hanoi with the whole country in the same period, we see that Hanoi has a high investment/GDP ratio, but the economic growth rate of Hanoi is not commensurate with the increase in investment capital. For example, in 2008, Hanoi's economic growth rate was 6.7%, 1.4% higher than the economic growth rate of the whole country (6.7% compared to 5.3%), while the investment capital ratio of Hanoi/GDP was 55.5%, while that of the whole country was 41.5%. This shows that the efficiency of investment capital use in Hanoi is low. The ICOR coefficient of the whole country and Hanoi is shown in the tables below.

Table 3.5. Investment efficiency ratio (ICOR) of the whole country over some years

Year

GDP (price)	Investment capital (price)	Speed of increase GDP growth (%)	Capital ratio investment/GDP (%)	ICOR
1	2	3	4	(5=3:2)	(6=5:4)
2005	839211	343135	8.44	40.89	4.84
2006	974264	404712	8.23	41.54	5.05
2007	1143715	532093	8.46	46.52	5.50
2008	1485038	616735	6.31	41.53	6.58
2009	1658389	708826	5.32	42.74	8.03
2010	1980914	830278	6.78	41.91	6.18
2011	2535008	877850	5.89	34.63	5.88
2012	2662519	989300	5.03	37.16	7.39

Source: Calculated according to Statistical Yearbook data Based on the ICOR indexes of the whole country and Hanoi, we can make the following comments: The ICOR index of the whole country is in the range of 4.8 - 6.5, except for the special case of the year

2009 was 8.03. This coefficient was relatively stable in the period 2005-2011, but increased sharply again in 2012 from 5.88 to 7.39. Compared to other countries, the ICOR coefficient of

In our country in recent times, this coefficient in countries in the region often fluctuates between 2 and 5 at fixed prices. For example, according to Tran Van Tung (2011, page 122), "Korea (3.0), China (4.0 from 2001-2006), Thailand (4.1 from 1981-1995)... Moreover, the situation is even worse, if we consider the starting point of our country's economy is still low; the proportion of agriculture and small industrial production, small services is still high... When at a low level of development in the years from 1950 to 1975, the ICOR coefficient of Hong Kong, Singapore, Taiwan, Japan and Korea only fluctuated between 1 and 2; much lower than the ICOR of Vietnam today".

From Table 3.6, Hanoi's ICOR coefficient is always higher than the whole country, moreover, this index has tended to increase recently. At the beginning of the period from 2006-2012, Hanoi's ICOR coefficient was lower or approximately the same as the whole country in 2005, 2006, 2008, Hanoi's ICOR index was 3.70; 4.97; 5.23 respectively and the whole country's was 4.84; 5.05; 6.58. However, in 2009, Hanoi's ICOR coefficient peaked at 10.72, which was too high. The reason for this phenomenon is that in 2008 and 2009, Hanoi attracted a very large amount of investment capital, which was attracted at the time of administrative boundary merger, the leadership structure was not yet stable, so it somewhat affected investment efficiency. In the following years, the ICOR coefficient decreased but was still higher than the whole country. That proves that Hanoi's investment efficiency is too low and when the investment capital ratio to GDP is low, the economic efficiency brought by investment capital in Hanoi is higher than the whole country, conversely, when the investment capital ratio is high, the economic efficiency decreases.

Table 3.6. Investment efficiency ratio (ICOR) of Hanoi over some years

Year

GDP (price)	Investment capital (price)	Growth rate GDP (%)	Capital ratio investment/GDP (%)	ICOR
1	2	3	4	(5=3:2)	(6=5:4)
2005	92425	42384	12.4	45.86	3.70
2006	110736	67180	12.0	60.67	4.97
2008	178535	99013	10.6	55.46	5.23
2009	205890	147815	6.7	71.79	10.72
2010	246737	175063	10.9	70.95	6.51
2011	283767	193587	10.6	68.22	6.43
2012	306752	232589	8.1	75.82	9.36

Source: Calculated based on Hanoi statistics

Nationwide

Hanoi

2005

2006

2008

2009

2010

2011

2012

Figure 3.1. Investment efficiency coefficient (ICOR) of Hanoi and the whole country

Hanoi's ICOR has far exceeded the recommended level of prestigious financial institutions for developing countries that want to achieve a faster industrialization and modernization process and a sustainable economic development (ICOR at level 3 is effective investment). In 2009 and 2012, Hanoi's ICOR was more than 3 times higher than the recommended level. The high ICOR reveals a number of problems. First of all, Hanoi's economic growth relies heavily on investment capital, without clear technological factors. Compared to other countries in the region, Vietnam's ICOR in general and Hanoi's in particular is nearly double, meaning that our investment efficiency is only half. Some economic experts compare this to a weightlifter having to spend twice as much effort to lift a weight with the same "growth target" scale. The competitiveness of the economy, therefore, is also significantly reduced.

The main cause of ineffective investment is the maintenance of a growth and industrialization model that focuses on quantity and scale for too long. The capacity to manage and operate the capital's economy is still limited, with a bureaucratic administrative appearance, especially in the field of industrial production management.

Another notable reason for the decline in Hanoi's investment efficiency is investment in projects that require a lot of capital but use little labor; investment in the "shell" is more than in the "inner core"; investment is scattered and spread out due to many adjustments and adjustments. Site clearance is often prolonged and costly, and rising land prices increase the amount of investment capital, slow construction progress, and many unfinished projects. Capital is already low and is "stuck", while interest rates continue to pile up on borrowed capital. The waste and loss of capital in investment is quite large, especially from the state budget and even ODA capital.

A huge amount of capital has been invested in the real estate sector, of which a large part is foreign direct investment (FDI). From 2000 to 2011, Hanoi has

attracted 2003 projects with a total registered capital of 13.63 billion USD, disbursed capital in 2011 was 6.09 billion USD, accounting for 44.7%. FDI capital registered for investment in Hanoi was mainly in the period 2006-2010, accounting for more than 74% of the total registered capital of the whole period from 2000-2011. This was also the period when the real estate market in Hanoi as well as the whole country grew the strongest. Notably, in 2008 alone, registered FDI capital in Hanoi reached 5 billion USD, accounting for 50% of the period 2006-2010 (10.1 billion USD). Since 2011, the Vietnamese economy has had many complicated fluctuations, the real estate market has frozen, causing the implementation of real estate projects to be temporarily suspended or slowed down... contributing to reducing investment efficiency in the capital.

Due to the needs of industrialization and modernization, it is necessary to build basic infrastructure. However, due to many subjective and objective reasons, a significant amount of investment capital does not go into construction projects, not only reducing the quality of the project, prolonging the progress but also causing waste. The cost and effort of site clearance are much higher than the investment in construction projects.

Box 3.1. Hanoi has the most expensive roads on the planet!

In 2010, the 547m O Cho Dua - Hoang Cau (Hanoi) road section was started with a total estimated capital of over 642 billion VND (an average of over 1.17 billion VND/m), of which the compensation and site clearance cost was 527 billion VND (accounting for over 82%!), the rest was construction and other costs. Previously, in 2007, the 1,000m Kim Lien - O Cho Dua road section was completed with a total investment of 733 billion VND, of which the compensation and site clearance cost was 600 billion VND! The compensation and site clearance costs were both high and complicated, causing great loss of investment capital, mind, effort and prolonging the time to start construction, execute and put the project into use. Both capital and opportunities were wasted, resulting in us continuing to lag behind in development investment.

Source: Dr. Nguyen Anh Dung ;Investment situation and restructuring solutions ; Nhan Dan Electronic Newspaper

September 21, 2012

Thus, in the past, Hanoi's economic growth has been mainly in width, with low investment efficiency (high ICOR coefficient). The growth model and method are no longer suitable for the requirements of improving growth quality. If this continues, it will be difficult to maintain a high and continuous growth rate in the future.

Maintaining a high economic growth rate based on increasing investment capital always creates pressure on capital mobilization. Moreover, it makes the major balances of the economy fragile, the risk of macroeconomic instability is always high. The major imbalances are: the imbalance between savings and investment, the shortage of domestic savings compared to investment at a high level - the fundamental cause leading to large budget deficits and current account balance; Budget balance with a deficit always at a high level; Current account balance with a large deficit... Every time growth declines or we want to have higher growth achievements, we focus on increasing the scale of investment. That way of doing things only works quickly and effectively in the short term, but in the long term it will push the economy in the wrong direction of improving quality or sustainable growth.

3.1.3. Labor and labor productivity

3.1.3.1. Labor

Hanoi's labor force ranks second after Ho Chi Minh City in terms of quantity and accounts for about 7% of the country's total. Hanoi's human resources are abundant but still have shortcomings in structure. Currently, Vietnam as well as Hanoi are forming two types of human resources: general human resources and high-quality human resources. General human resources currently still account for the majority, while the proportion of high-quality human resources accounts for a very low proportion. Currently, Hanoi does not lack general human resources, but lacks high-quality human resources, especially in key industries.

Table 3.7. Labor force aged 15 and over nationwide, Hanoi and some other cities (Unit: 1000 people)

Year

2005	2007	2008	2009	2010	2011	2012
Nationwide (1)	44904.5	47160.3	48209.6	49322.0	50392.9	51398.4	52788.2
Hanoi (2)	1553.1	1653.7	3421.2	3405.8	3556.3	3572.9	3792.9
Ha Tay (3)	1571.7	1575.2
Ratio % (2+3)/1	6.96	6.85	7.10	6.91	7.11	6.95	7.19
Hai Phong	980.6	1009.7	1012.0	1019.4	1062.7	1075.3	11348
Danang	385.6	418.0	439.2	437.2	467.0	496.2	528.3
Ho Chi Minh City	2966.4	3568.1	3856.5	3868.5	3909.1	4000.9	4099.8
Can Tho	627.4	680.6	684.4	656.0	680.7	690.7	711.6

Source: Statistical data of survey results of the Ministry of Labor, War Invalids and Social Affairs

After the merger, the city has about 180,000 - 200,000 unemployed workers each year. Meanwhile, the growth rate of non-agricultural employment is still low, leading to a situation where the majority of workers are still in the agricultural sector. As a result, the growth rate is low, the urban unemployment rate and the rate of labor time utilization in rural areas have not improved.

Changes in the labor structure between industries in an unreasonable direction. With a given total number of workers, changes in labor distribution certainly affect output growth through TFP growth.

Labor growth in the agricultural sector reached 5% and 7% in 2007 and 2008 respectively, but there was a significant decline in 2009 and 2010 (shown in the negative growth rate in Figure 3.2).

Agriculture

Industry - Construction Services

2007 2008 2009 2010 2011

-10

-20

Figure 3.2. Labor growth rate of 3 areas of Hanoi, 2007 – 2011

Source: Calculated from data of General Statistics Office .

The industrial sector's labor force fluctuated the most, with a particularly high growth rate in 2009 and 2010. However, 2011 saw a significant decrease in labor in this sector (18%), while labor in the agricultural sector increased by 14%. This can be explained by the fact that Vietnam is deep in the economic crisis, most industrial and construction establishments are facing difficulties and have laid off a large number of workers. These are agricultural workers before joining industrial and construction establishments, after being laid off they return to the agricultural sector. Labor in the service sector always has the highest growth rate among the three sectors. Hanoi is the place where trained laborers are concentrated, accounting for 35.5% of the total of nearly 9 million trained people in our country (the total number of workers in our country is 52.3 million people aged 15 and over, of which only nearly 9 million people have been trained, accounting for 16.8% of the total labor force, the rest are more than 100 million).

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