The Impact of Fiscal Decentralization on Economic Growth in Vietnam

Fiscal decentralization experiences in some countries such as Thailand, Indonesia, Philippines, China, can draw some lessons for our country:

First , Vietnam has different characteristics from other countries, it is necessary to clearly distinguish the services provided by local governments from those provided by the central government in order to assign administrative responsibilities. However, this is not simple. In many cases, the formal monitoring system (representative regime) responsible for taking over the transferred powers does not work well. Fiscal decentralization can lead to abuses by local officials. To encourage citizen participation and improve accountability, some informal monitoring systems are needed, supplementing the formal representative regime. One way to solve this is to increase public oversight. Such mechanisms can be to answer questions from the people right from the planning stage, applying competitive bidding processes. In addition, it is necessary to develop new ways to determine the right order of priority among local development plans/projects.

Second , in Vietnam, similar to other developing countries, intermediate levels of government have not yet performed well in coordinating the interests and development plans of autonomous units at the grassroots/local level, so it is necessary to consider measures to avoid disagreements between local governments or between the government and the people and to promote cooperation. Furthermore, in the above countries, when implementing the process of fiscal decentralization rapidly, some of the central government's monitoring and coordination functions are often overlooked, and as a result, many public services are subsequently reduced. It is important that the central government assumes the task of implementing and monitoring the decentralization process, especially in the fields of health and education, which are two areas closely linked to the process of economic development and poverty reduction.

poor. It is therefore important to recognise that decentralisation means that the role of the central government shifts from that of service provider to that of monitoring and coordinating the effective delivery of services by local governments.

Third , it is extremely important to improve the accountability of local governments to the people. Although fiscal decentralization has been promoted, the fiscal system in some countries still follows a centralized model. Local finances are small in scale and account for a low proportion of local independent revenue (local tax and non-tax revenue), and are heavily dependent on budget adjustments from the central government to make up for the difference between revenue and expenditure. The reason is partly because the central government itself is short of revenue and the central government is not willing to transfer larger tax revenue sources, and on the other hand, the tax management capacity of local governments is also weaker than that of the central government. On the other hand, potential tax sources of local governments such as income tax and resource tax are not uniform among localities. Therefore, there must be measures to increase local revenue sources such as allowing localities to collect property-related taxes.

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Fourth , if decentralization proceeds rapidly without adequate attention to income redistribution, the gap between rich and poor will widen. In many Asian countries, as decentralization advances, income inequality tends to increase. This may be exacerbated if the country has many ethnic and cultural problems, and the result may increase political instability, such as Indonesia. Therefore, some mechanism needs to be established to achieve budgetary regulation among local governments to prevent further regional inequality. Less developed regions must have more preferential policies. The budgetary regulation mechanism must be built on an objective, reasonable and consensus basis. It is necessary to eliminate

Eliminate the need for central-local negotiations. The regulatory mechanism should be decided by the central government or a neutral body such as an intergovernmental commission. On the one hand, the regulatory mechanism should ensure annual stability so that local governments can plan their budgets appropriately, but on the other hand, it should be flexible to avoid local financial distress affecting macroeconomic stability. These two contradictory conditions can be resolved by setting the regulatory ratio at a certain level relative to national revenues and this ratio is reassessed regularly through formal negotiations. The simpler and easier the allocation formula, the better.

Fifth , the strong decentralization process in some countries has brought more autonomy to local governments, but it has also led to localism. Especially when a local interest group has a lot of power in its hands, it will dominate the distribution of benefits in favor of its group. Therefore, it is necessary to strengthen the supervision of both the superiors and the local people in the decentralization process.

Sixth , attention should be paid to non-governmental organizations (NGOs). The trend of international donor organizations is often directly related to local governments and NGOs. The legal framework and capacity of these organizations need to be expanded. Moreover, funding sources or programs for localities depend largely on the capacity of local government staff. Therefore, strengthening the capacity of local governments plays an important role in the process of fiscal decentralization.

In summary, Chapter 2 has analyzed the current state of fiscal decentralization in Vietnam, originating from the decentralization of the administrative apparatus leading to fiscal decentralization to localities. This chapter also summarizes the decentralization process in Vietnam before and after the 1996 Budget Law, amended in 1998 and 2002, including comparisons between different stages of the Law.

Next, the actual content of revenue decentralization is described; the autonomy of local governments in decentralizing budget revenue. In the section on budget expenditure decentralization, the thesis has separated budget expenditure into regular expenditure and development investment expenditure, thereby describing the current status of decentralization for these two types of expenditure. Next, chapter 2 analyzes the current status of debt decentralization for local governments and the issues raised. In addition, chapter 2 describes the current mechanism for budget reconciliation between the central and local governments, accountability and transparency of local governments when decentralized. At the end of the chapter, we have made basic observations on the similarities and differences in fiscal decentralization in Vietnam compared to other countries in the world based on the experience of four countries with similar conditions to Vietnam, including Thailand, Indonesia, the Philippines and China, thereby drawing lessons for Vietnam in perfecting fiscal decentralization to promote economic growth.

Based on that factual analysis, the next chapter will use quantitative research methods to test the relationship between the above independent variables and the dependent variable, which is the economic growth rate.

CHAPTER 3:

EMPIRICAL ANALYSIS OF THE IMPACT OF FISCAL DECENTRALIZATION ON ECONOMIC GROWTH IN VIETNAM

3.1. Introduction

After examining the current status of fiscal decentralization in Chapter 2, including the administrative organization structure, the current status of revenue decentralization, expenditure tasks and decentralization in local government borrowing. Preliminary assessment of the budget coordination system and accountability of local governments. Comparison of similarities and differences in fiscal decentralization between Vietnam and other countries, thereby drawing lessons for Vietnam. Chapter 3 presents the research method, assessing the impact of fiscal decentralization on Vietnam's economic growth from 1990 to present, thereby discussing the empirical results found. The purpose of the empirical research is to seek further explanatory evidence to examine the findings of fiscal decentralization having a relationship with growth or not. If so, what is the impact.

In this chapter, we describe the research method with the experimental model and the basic requirements in testing; next, we will describe the collected data, then conduct a preliminary survey of the data on the correlation between the dependent variable and the independent variables, and finally the test results and discuss the research results.

3.2. Research method

3.2.1. Experimental model format

Back to the three models in chapter 1:

Model 1 :

dY / Y

 (  Y

/  K ) dK

/ Y  (  Y

/  L ) dL / L  (  Y

/  TW

) dTW / Y

 (  Y

/  DF ) dDF

Model 2 :

/ Y  (  Y

/  xnk ) dxnk

/ Y  (  Y

/  CPI

) dCPI

/ CPI

dY / Y  (  Y /  K ) dK / Y  (  Y /  L ) dL / L  (  Y /  TW ) dTW / Y  (  Y /  DF I ) dDF I / Y

 (  Y /  DF C ) dDF C / Y  (  Y /  xnk ) dxnk / Y  (  Y /  CPI ) dCPI / CPI

Model 3 :

dY / Y  (  Y /  K ) dK / Y  (  Y /  L ) dL / L  (  Y /  TW ) dTW / Y  (  Y /  TDF ) dTDF / Y

 (  Y /  HT ) dHT / Y  (  Y /  xnk ) dxnk / Y  (  Y /  CPI ) dCPI / CPI

We set:

 dY/Y = gi: annual GDP growth rate (%);

 dK/Y = SI: social investment capital (%/GDP);

 dL/L= PGR: change in labor force (%);

 dTW/Y = CG: central government expenditure compared to GDP (%);

 dDF/Y = LG : local expenditure compared to GDP (%);

 dDF I /Y = L G I : local investment expenditure compared to GDP (%/GDP);

dDF C /Y = LG C : local recurrent expenditure compared to GDP (%/GDP);

 dTDF/Y = LR: local revenue compared to GDP (%/GDP);

 dHT/Y = TR : fiscal transfer portion of the central government to local governments (%/GDP) (reflecting central support to balance local budgets).

 dxnk/Y = TOP: total export and import turnover compared to GDP (%), measuring the trade openness of the economy;

 dCPI/CPI = inf: inflation rate (%).

From there, the above models can be rewritten as follows:

Model 1 :

gi to  1 SI t 2 PGR t  3 CG t 4 LG t

  5 TOP t  6 inches

(9)

In which,  Y /  K  1 ;  Y /  L 2 ;  Y /  TW  3 ;  Y /  DF 4 ;

 Y /  xnk  5 ;  Y /  CPI  6 .

Model 2 :

  o   1 SI t  2 PGR t   3 CG t  4 LG t  LG  TOP  inf

(10)

5 t 6 7 t

In there,

 Y /  K  1 ;  Y /  L  2 ;  Y /  TW  3 ;  Y /  DF ;

5 6 7

 Y /  DF C ;  Y /  xnk ;  Y /  CPI .

Model 3 :

gi t   o   1 SI t   2 PGR t   3 CG t   3 LR t   5 TR t   6 TOP   7 inf t

In which,  Y /  K  1 ;  Y /  L  2 ;  Y /  CG  3 ;  Y /  TDF  4 ;

 Y /  HT  5 ;  Y /  xnk  6 ;  Y /  CPI  7 .

(11)

3.2.2. Research method

The thesis proceeds in the following order:

3.2.2.1. Stationarity test

Stationarity in a data series is understood as the absence of growth or decline in the data, but the data fluctuates almost centrally around a horizontal axis in the increasing direction of time, in other words, the data fluctuates around a constant mean value and the magnitude of the variance representing the fluctuation also remains basically the same over time. Thus, the concept of stationarity of a time series includes two contents: stationarity by mean and stationarity by variance.

Since the variables used in the model are in the form of time series, it is very important to check for stationarity. Regressing non-stationary time series variables will cause incorrect estimation results, which may exaggerate or not reflect the relationship between the independent and dependent variables.

When encountering a non-stationary series, it is necessary to eliminate the non-stationarity before proceeding with the next analysis. It is easy to make a series stationary by the method of differences. The first difference can be defined by the following formula:

Y' t = Y t - Y t-1

In there:

- Y t and Y t-1 are the values of the series at time period t or t-1

- Y' t is the first difference at time t.

The difference series Y' t will stop if the trend of the original series is linear and it has only n-1 observations left because Y' t cannot be calculated and must start from Y' 2 . If

The Impact of Fiscal Decentralization on Economic Growth in Vietnam - 15

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