Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Vietnam’s Responses to Provincial Economic Disparities through Central-Provincial Government Financial Relations VU Xuan-Binh, Nguyen Duc-Tho, Christine Smith and Nghiem Hong-Son The paper examines key changes in central-provincial government financial arrangements, and their effects on provincial economic disparities, in Vietnam over the period 2000-2008. Our findings suggest that after 2004 transfers from the central government to provincial governments conformed much more closely to objective, pre-determined criteria than before. Econometric estimations confirm that in the post-2004 sub-period, poorer provinces obtained more-than-proportionate assistance from the central government, and the favourable treatment was both statistically significant and increasing over time. Responses from interviews and statistical data suggest that transfers from the central government played an important role in reducing poverty and provincial output disparities after 2004. The difficulties experienced by the central government in securing adequate resources to finance such transfers and the over-reliance of some provinces on the transfers are also analysed in the paper. JEL Codes: F34, G21 and G24 1. Introduction In a recent study of economic disparities across the provinces of Vietnam, Vu Xuan-Binh et al (2011) found that although provincial levels of output per capita diverged over the study period as a whole, namely 1990-2008, there was a clear break in this divergence trend around 2004, when it was actually reversed (see Figure 1). These authors also offered a number of possible explanations for this trend reversal, one of which was the increased role of central-provincial government financial relations in responding to the above disparities. In this paper, we take up this theme by examining more closely the financial arrangements between the central and provincial levels of government in Vietnam before and after 2004 and analysing their effects on provincial economic disparities. More specifically, we shall focus on the following research questions: Q1: How did key features of the central-provincial government financial relations in Vietnam change after 2004? Q2: How important were transfers from the central government in helping to reduce poverty and provincial output disparities? Q3: What are the main issues in funding the above arrangements? In order to answer these questions, we employ both qualitative and quantitative methods including in-depth interviews, analysis of available official documents as well as VU Xuan-Binh,Department of Accounting, Finance and Economics, Griffith University, Australia. NGUYEN Duc-Tho, Department of Accounting, Finance and Economics, Griffith University, Australia. Christine SMITH, Department of Accounting, Finance and Economics, Griffith University, Australia. E-mail: [email protected], [email protected], [email protected] NGHIEM Hong-Son, Mayne Medical School, University of Queensland, Australia E-mail: [email protected], Binh, Duc-Tho, Smith & Hong-Son econometric analyses based on data from a variety of sources. Our expected contributions lie in the use and interpretation of recent data, as well as in the synthesis and analysis of findings from the interviews and other sources. Figure 1: Disparity in GDP per capita across provinces (Coefficient of variation of GDP per capita of provinces at 1994 prices) The coefficient of variation of GDP per capita at 1994 prices of provinces 1.15 1.10 Coefficient of variation 1.05 1.00 0.95 Unweighted CV Weighted CV 0.90 0.85 0.80 0.75 0.70 0.65 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Years Source: Vu Xuan-Binh at al (2011) The remainder of the paper is organised, as follows. Section 2 presents a brief review of the relevant literature on government responses to regional output/income disparities and poverty. Section 3 outlines the research methods and describes the in-depth interviews and sources of data. Section 4 discusses the findings and Section 5 provides a summary of the main points raised. 2. Background Akai and Hosio (2009) investigated the relationship between fiscal decentralization and inter-county inequality by employing cross-sectional data for the United States and found that the achievement of autonomy by fiscal decentralization in low-income counties contributed to decreased inter-county inequality. Kaufman, Swagel and Dunaway (2003) analysed output/income disparities across provinces in Canada and the role of federal transfers between 1961 and 2000. The research showed that equalization transfers stimulated provincial output convergence and ensured that lower income provinces could access sufficient resources. Similarly, Rodriguez (2006) found that interprovincial transfers played a vital role in accelerating the convergence process for poorer Canadian provinces from 1926 to 1999. Lessmann (2006) analysed impact of fiscal decentralisation on regional disparities in 17 OECD countries from 1980 to 2001 and indicated that countries with a higher degree of fiscal decentralisation showed signs of lower regional disparities. Moreover, social security funds and central government grants played an important role in helping poorer regions to catch up with richer ones. In contrast, Kessler & Lessmann (2008) explored the impact of inter-governmental transfers on interregional disparities for 23 highly developed OECD countries from 1982 to 2000 and found that countries with higher levels of interregional redistribution in the past had a subsequent increase in interregional disparity; whereas, countries with lower levels of grants and transfers showed less divergence or even convergence based on cross-sectional data. Similarly, countries experienced more 2 Binh, Duc-Tho, Smith & Hong-Son divergence due to having increased their sub-governmental transfers and grants based on panel data. This is because those equalisation payments mitigated migration from poor to rich regions; therefore, they hindered the convergence process. Similar studies have also been undertaken for China. Raiser (1998) indicated that the rate of income per capita convergence across Chinese provinces decreased from 1985 to 1992 partly because inter-provincial fiscal transfer mechanism prevented convergence among interior provinces because the transfers tended to be distributed towards the richer among them. In contrast, Jiang and Zhao (2003) showed that the transfer payment system in China played an important role in mitigating regional economic growth divergence and in reducing regional income disparities between 1995 and 2000. Similarly, Zheng and Chen (2007) and Yao (2009) analysed government responses to regional disparities in China and showed that three main programs were implemented to reduce the inequalities including “Go West” in 1999, “Reviving the Northeast” in 2003, and “Central Rising” in 2006. Government responses to poverty in Vietnam have been studied by a number of researchers. Bird, Litvack and Rao (1995) examined the impact of fiscal decentralisation and intergovernmental transfers on poverty alleviation in Vietnam based on the VLSS 1 1992-93. They found that pro-poor services throughout Vietnam were underfunded, especially those in the poorer areas. Similarly, Rao, Bird and Litvack (1998) indicated that one of reasons leading to higher poverty rate in rural areas was the shortage of resources at the provincial level and the allocation of resources favoured richer provinces rather than poorer ones. Bjornestad (2009) found that transfers per capita from the central to provincial governments correlated positively with provincial poverty rates in 2002, 2004, and 2006. Poorer provinces received higher per capita transfers from the central government in 2006 compared with those in 2002. Nevertheless, inflation may impact negatively on the results since nominal transfers were used in this research. More recently, Nguyen-Phi-Lan and Anwar (2011) indicated that expenditure on decentralisation, particularly recurrent expenditures, had a negative impact on provincial economic growth; whereas, investment expenditures and revenue decentralisation contributed positively to provincial economic growth for the two sub-periods: 1997-2001 and 2002-2007. In addition, intergovernmental transfers were argued to have affected negatively provincial economic growth for the sub-period 2002-2007. As we shall see below, however, the data period should be divided into two sub-periods: 1997-2003 and 2004-2007 because the 2002 State Budget Law was not put into effect until 2004. 3. Research Methods and Data Sources Firstly, we analyse official documents to gain an understanding of key features of centralprovincial government financial arrangements. Secondly, we employ the results of interviews conducted to analyse the role of the transfers in helping to reduce poverty and provincial output disparities. In addition, issues in implementing the arrangements are investigated. The interviews were conducted with four central officials of Ministry of Finance (MOF) and 15 provincial officials of Departments of Finance (DOF) of 15 provinces. MOF is chosen because it is a key Ministry playing an important role in implementing the arrangements with provinces. Similarly, the provincial DOF agencies are selected because they are not only representatives of eight geographical regions of Vietnam but also representatives of three 3 Binh, Duc-Tho, Smith & Hong-Son groups of rich, average, and poor provinces in terms of GDP per capita and budget subsidy from the central government. Thirdly, econometric models are applied to investigate tendencies of the transfers. In particular, a linear-log regression model is applied to test for correlations between net transfers per capita of provinces and their poverty rates. yit a1 b1 *ln( PVit ) 1t (1) where yit is net transfers per capita at 1994 prices of province i, PVit is poverty rate of province i, year t. We also employ a linear-log regression model to investigate correlations between net transfers per capita of provinces and the logarithm of their GDP per capita. yit a2 b2 *ln(GDPit ) 2t (2) where yit is net transfers per capita at 1994 prices of province i, GDPit is real GDP per capita of province i at 1994 prices, year t. In recognition of the fact that the current State Budget Law came into effect in 2004, we divide the study period into two sub-periods: 2000-2003 and 2004-2008, and test for a possible structural break around 2004. We use both panel data regressions and a series of cross-section regressions for separate years. Further technical details regarding these regressions are available from the authors upon request. The data used include real GDP per capita, real net transfers per capita at 1994 prices, and poverty rates for 64 provinces. Data for GDP and population at the provincial level are available from the General Statistics Office (GSO). Yearly data for the subsidies are obtained from MOF. The annual data for provincial poverty rates are collected from Vietnam Households Living Standards Surveys (VHLLS) and the Ministry of Labour, Invalids, and Social Affairs (MoLISA). 4. Main Findings 4.1. Main features of central-provincial government financial relations Before 2004 Central-provincial government financial arrangements in Vietnam were governed by series of government Decrees and Resolutions including Decree 168/1961/NĐ-CP, Decree 119/1967/NĐ-CP, Resolution 186/1989/NQ-HĐBT, and the Decision 168/1992/QĐ-HĐBT. The first State Budget Law was promulgated in 1996 and then was amended in 1998. Although the law was much improved compared with the previous regulations, for example the introduction of financial norms and physical norms in determining provincial recurrent expenditures and transfers from the central to provincial governments, there were still some following shortcomings. Firstly, sub-national governments tended to overstate their revenue needs; therefore, negotiations between central and local governments in setting up the expenditure budget 4 Binh, Duc-Tho, Smith & Hong-Son still occurred (McLure and Martinez-Vazquez, 1998). In addition, the negotiated approach to budget formulation tended to favour richer provincial governments which had more influence on the central government, and therefore, led to an element of opaqueness, arbitrariness, and subjectivity (Rao, 2000). Secondly, provincial governments tended to understate their revenue potential; therefore, provincial budget arrangements were determined after several rounds of negotiations between provincial authorities and MOF and depended on the negotiating strength of the two parties, including the political power of particular provincial authorities. For that reason, the approach was not a transparent and certain system (McLure and MartinezVazquez, 1998). Thirdly, although the transfer mechanism was determined by a formula-based general transfer for each province, specific-purpose transfers were insufficient and too fragmented (McLure and Martinez-Vazquez, 1998). As a result, the amount of transfers was heavily influenced by negotiations and bargaining between central and local governments. Fourthly, local governments still lacked borrowing powers to get additional resources (Rao, 2000). They also lacked revenue-raising powers because the central government was mainly responsible for determining the tax base and the rate structure of all taxes (Rao, Bird, and Litvack, 1998). Local governments were only given powers to raise revenues from some fees, tolls, and voluntary contributions from their communities; however, the resources were insignificant and accounted for below five % of their total expenditures (Rao, 2000). After 2004 Under the 2002 State Budget Law, budget revenue arrangements indicate explicitly which sources of revenue can be collected 100% by the central or by provincial governments, and which sources of revenue can be shared between them. The central government is still fully responsible for introducing taxes, changing the structure of existing taxes, and fixing their rates. The local governments are only assigned to introduce tolls for roads and certain fees for schools and hospitals that contribute insignificantly to their budgets (Maztinez-Vazquez (2004) and Bjornestad (2009)). Expenditure arrangements between the central and provincial governments are determined based on norms. In particular, provincial recurrent expenditures have been determined by clearer norms since 2004 as indicated in Decision 139/2003/QD-TTg, Decision 151/2006/QD-TTg, and Decision 59/2010/QD-TTg. Since 2007, norms applied for determining capital expenditures of provinces have also been stipulated in Decision 210/2006/QD-TTg and Decision 60/2010/QD-TTg. The transfer mechanism from central to provincial governments is also determined by a clear formula and norms. An interesting note is that a majority of these norms are much favourable to poorer provinces (see Theme 1). The Law further encourages provinces to mobilise domestic investment to get additional resources for their infrastructure development projects. The domestic sources of investment which provinces could mobilise include investment bonds issued by provincial governments and investment advanced from provincial Treasuries. In addition, provinces are allowed to borrow capital from the Vietnam Development Assistance Fund (VDAF) and 5 Binh, Duc-Tho, Smith & Hong-Son then the Vietnam Development Bank (VDB), establish development investment funds as designed in Degree 138/2007/NĐ-CP and land development funds as specified in Decree 69/2009/NĐ-CP and Decision 40/2010/QĐ-TTg. 4.2. Officials’ assessment of effectiveness of transfers from central government Overall, 16 out of 19 officials interviewed indicate that roles of transfers from central government in reducing poverty and provincial output disparities were somewhat effective before 2004. Only one interviewee shows that the transfers were effective; whereas, one interviewee indicates that the transfers had no impact and one interviewee gave no rating about effectiveness of the transfers (see Table 1). Reasons resulting in the lower effectiveness ratings are that the “ask and give” mechanism still covered the whole of central-provincial government financial arrangements before 2004. This means that the more budget provinces could ask for and succeeded in, the more expenditure they were able to make. In contrast, 15 out of 19 interviewees indicate that the transfers played an effective role in reducing poverty and inter-provincial output disparities after 2004. Only four interviewees indicate that the transfers played an inconsiderable role in reducing poverty and output inequality between provinces (see Table 1). Reasons leading to the higher effectiveness ratings are that transfers mechanism from central to provincial governments is implemented based on clear norms. More importantly, the norms have been much more systematic and favourable to poorer provinces. Of particular interest is that, more special attention had been paid to mountainous, remote, and disadvantaged areas as well as ethnic minority areas. For example, each 10% of poverty rate or each 100,000 ethnic minority people provinces had, they received one score. In addition, each mountainous or remote district provinces had, they received 0.2 scores. During the budget stability period 2011-2015, provinces obtain 1.5 scores instead of one score if they have each 100,000 ethnic minorities. Each five % of poor households generate two scores for provinces. Similarly, each mountainous or remote district provinces have, they receive 0.5 scores. Moreover, each district located in border line areas contributes one point for its province. Table 1: Ratings of interviewees about effectiveness of the transfers in reducing poverty and provincial output disparities Effectiveness of the transfers Before 2004 After 2004 Effective 1 15 Somewhat effective 16 4 No impact 1 No idea 1 6 Binh, Duc-Tho, Smith & Hong-Son 4.3. Econometric analysis of trends underlying transfers from central government From the substantial changes in budget distribution mechanism, poorer provinces tended to receive more subsidies from the central government, especially after 2004. For example, poorer provinces got roughly 2.5 times in terms of the transfers compared with those in 2003 if they faced one additional point of natural logarithm of poverty rate (Figures 2 and 3). In particular, Figure 3 shows that the transfers were skewed towards poorest provinces in 2007. For example, the net transfers per capita of Lai Chau-Dien Bien - the poorest province were about VND 1.82 million (1994 price) or roughly USD 240 (2007 price), approximately 18.2 times higher than those of Hai Duong – the average province in terms of poverty rate in 2007. This is because the poverty rate of Lai ChauDien Bien was about three times higher than that of Hai Duong in 2007. Comparing Figures 2 and 3, it can be seen clearly that the estimated relationship for 2007 is a much better fit of the data available for that year (R2 = 0.67) than is the case for 2003 (where R2 = 0.55). Similarly, the estimated slope coefficient for 2007 is, at 0.97, much higher than for 2003 (at 0.38). Figure 2: Net transfer per capita and poverty rate across provinces in Vietnam in 2003 2.00 1.50 y = 0.3878Ln(x) - 0.4266 Net transfer per capita 2 R = 0.5529 1.00 0.50 0.00 0 5 10 15 20 25 30 35 -0.50 -1.00 -1.50 Poverty rates Source: Authors’ calculation based on data from MoLISA, GSO, and MOF Figure 3: Net transfer per capita and poverty rate across provinces in Vietnam in 2007 2.50 y = 0.9747Ln(x) - 2.0601 R2 = 0.67 2.00 Lai Chau-Dien Bien net transfer per capita 1.50 1.00 0.50 0.00 0 5 Hai Duong 10 15 20 25 30 35 40 45 -0.50 -1.00 -1.50 -2.00 -2.50 Poverty rates Source: Authors’ calculation based on data from MoLISA, GSO, and MOF 7 Binh, Duc-Tho, Smith & Hong-Son Similarly, correlations between net transfers and real GDP per capita of provinces also show that provinces having lower real GDP per capita got more transfers from the central government, especially after 2004 (Figures 4 and 5). Indeed, net transfers per capita from the central government to poorer provinces increased approximately 2.9 times in 2008 compared with those in 2000. Particularly, as indicated in Figure 5, the transfers were skewed towards the poorest provinces in 2008. For example, net transfers per capita of Ha Giang - the poorest province were about VND 3.2 million (1994 price) or roughly USD 439 (2008 price), roughly 16.8 times higher than those of Hai Duong – the average province in terms of real GDP per capita in 2008. This is because real GDP per capita of Ha Duong was about 2.4 times higher than that of Ha Giang in 2008. Comparing Figures 4 and 5, it can be seen clearly that the estimated relationship for 2008 is a better fit of the data available for that year (R2 = 0.64) than is the case for 2000 (where R2 = 0.53). Similarly, the estimated slope coefficient for 2008 is, at -3.22, much larger in absolute terms than for 2000 (at -1.18). Figure 4: Net transfer per capita and GDP per capita at 1994 prices across provinces in Vietnam in 2000 1.50 1.00 Net transfer per capita y = -1.1808x + 0.7783 R2 = 0.532 0.50 0.00 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 -0.50 -1.00 -1.50 -2.00 log (GDP per capita) Source: Authors’ calculation based on data from GSO and MOF 8 Binh, Duc-Tho, Smith & Hong-Son Figure 5: Net transfer per capita and GDP per capita at 1994 prices across provinces in Vietnam in 2008 3.00 Ha Giang 2.00 Net transfer per capita y = -3.2234x + 2.9872 2 R = 0.6443 1.00 0.00 0.35 0.55 0.75 0.95 1.15 1.35 1.55 1.75 1.95 Hai Duong -1.00 -2.00 -3.00 Log(GDP per capita) Source: Authors’ calculation based on data from GSO and MOF We apply a panel-data model to test for the relationship between logarithm of net transfers per capita and the logarithm of GDP per capita and test for the effect of the 2002 State Budget Law on the tendency of the transfers. We assume that all individual province differences are captured by differences in the intercept parameters; therefore, the fixed effects model is applied. The results indicate that provinces having lower GDP per capita tended to get more transfers from the central government, especially after 2004. In particular, provinces having one % lower in terms of GDP per capita got about 31% higher in terms of net transfers per capita during the period 2000-2003. After that, there was a break in terms of net transfers per capita in 2004 and the intercept increased by 0.068. From 2004 to 2008, each year, provinces having one % lower in terms of GDP per capita got about four % higher in terms of net transfers per capita from the central government (see Table 2). We also conduct the redundant fixed effects - likelihood ratio test and the results show that the null hypothesis of no fixed effects is rejected. Therefore, it can be concluded that the fixed effects model is the more appropriate model. Table 2: Panel estimations Independent variable Dependent variable Log (net transfer per capita) t-statistic Intercept * 0.571 33.375 DTrend * 0.068 22.191 Log (GDP per capita) * -0.309 -9.095 *Significant at 1% DTrend * log (GDP per capita) * -0.036 -11.884 4.4. Relative importance of transfers from central government There are indications that public expenditure, especially public investment, at the provincial level has played a key role in reducing inter-provincial disparities in recent years. For instance, while the domestic (total) investment-to-GDP ratio for the country as a whole increased from 39% in 2005 to 46% in 2008, in Lai Chau-Dien Bien, one of the poorest provinces, it surged from approximately 8% in 1990 to nearly 89% in 2005 and to 9 Binh, Duc-Tho, Smith & Hong-Son about 94% in 2008. The number of provinces with an investment-to-output ratio at or above 50% increased from 13 in 2001 (eight of which could be considered relatively poor) to 25 in 2005 and 30 in 2007 (17 of which were poor). Such extraordinarily high investment-output ratios implied that much of the goods and services that went into to the relevant capital formation must have come from outside the province in question itself – i.e., imported from other provinces or overseas. Typically the investment would involve the construction of infrastructure for which the central government must pay the lion’s share, either directly or through transfers to the relevant provincial authorities. In interviews, both central and provincial officials confirm that subsidies from the central government make very important contributions to provincial budgets, poverty reduction, and inter-provincial output disparity mitigation (see Table 3). In particular, poor provinces received the subsidies which accounted for more than 70% of their budget expenditures in 2008, indicating that the subsidies played a vital role in generating their sources of budget expenditure. Indeed, the subsidies to Ha Giang accounted for about 81% of its total expenditures in 2008. Table 3: List of provinces in receipt of net transfers from the central budget and ratios of the transfers to provincial budget expenditures in 2008 Ratios of the transfers Number Name of provinces to provincial budget of expenditures were provinces above 70% 8 Lai Chau, Dien Bien, Son La, Hoa Binh, Ha Giang, Cao Bang, Yen Bai, and Quang Tri from 50% to 70% 23 Lao Cai, Bac Kan, Lang Son, Tuyen Quang, Thai Nguyen, Phu Tho, Bac Giang, Ha Nam, Nam Dinh, Thai Binh, Thanh Hoa, Nghe An, Ha Tinh, Quang Binh, Quang Nam, Kon Tum, Dak Nong, Ninh Thuan, Ben Tre, Hau Giang, Tra Vinh, Soc Trang, and Bac Lieu from 30% to 50% 16 Ha Tay, Hung Yen, Ninh Binh, Thua Thien Hue, Quang Ngai, Binh Dinh, Phu Yen, Gia Lai, Dak Lak, Lam Dong, Binh Thuan, Dong Thap, An Giang, Tien Giang, Vinh Long, and Kien Giang below 30% 6 Hai Duong, Bac Ninh, Binh Phuoc, Tay Ninh, Long An, and Ca Mau Source: Authors’ calculation based on data of MOF Although all provinces are encouraged to mobilise other resources to get additional resources to meet their needs, their results from mobilising the resources are different. Therefore, they have different opinions about importance of the resources. Firstly, poor provinces indicate that unused capital advanced from their Treasuries or borrowed from their VDAF or VDB contributed moderately to their development investment because the investment mobilised from the sources was moderate compared with their budget expenditures. For example, Kon Tum borrowed VND 15 billion from VDAF for its 10 Binh, Duc-Tho, Smith & Hong-Son irrigation system improvement, but this accounted for only about 1.1% of its budget expenditures in 2005. In addition, a majority of poor provinces have not issued investment bonds because their investment bonds may not be attractive to domestic organisations and local people. Secondly, poor provinces such as Phu Tho and Thanh Hoa indicate that although their land development funds were established in 2010, the roles of the funds in contributing additional resources to their budget expenditures were still limited. From the above analysis, it is clear that poorer provinces could not get additional resources as readily as wealthier provinces could. In addition, subsidies from the central authorities were still the main sources contributing additional resources to the budget expenditures of poorer provinces. Some poor provinces admit that they over-rely on transfers from the central government due to the following reasons: Firstly, sources of budget revenue of poor provinces did not meet their budget expenditures. For example, the budget revenue collected and used 100% by Ha Giang, one of poorest provinces, was only VND 97 billion. This accounted for 2.5% of its total budget expenditure in 2008. Secondly, contributions of organisations and individuals to poor provincial budgets were insignificant. People mainly contributed in kind to infrastructure construction. For instance, contribution of individuals and organisations in Lang Son was roughly VND one billion, accounting for only 0.03% of its budget expenditure in 2008. Thirdly, although provinces are allowed to mobilise additional resources, capital mobilised by poor provinces was insignificant. 4.5 Securing adequate resources to finance transfers from central government Both central and provincial officials indicate that the central government faced difficulty in securing resources for redistributing to poorer provinces because of the following reasons: Firstly, sources of budget revenue of the central government decreased due to the negative impact of economic recessions during the period 1997-1998, 2007-2008, and high inflation during the period 2007-2008. Secondly, few cities and provinces could be able to transfer their budget revenues to the central budget2. Indeed, only five out of 61 provinces transferred their budgets to the central budget in 2003. Similarly, only eleven provinces contributed their budgets to the central budget, and these provinces only accounted for around 25% of the national population of Vietnam in 20083 (see Table 4). Thirdly, a majority of provinces were subsidy recipients from the central government in which some of them were extremely poor and relied mainly on transfers/subsidies from the central government. In particular, seven poor provinces got transfers from the central budget, accounted for more than 70% of their budget expenditures in 2008 (see Table 3). 11 Binh, Duc-Tho, Smith & Hong-Son Fourthly, the central government could not borrow too much money from domestic and international organisations due to the limit on the size of budget deficit. For example, budget over-expenditure approved by the Vietnam National Assembly was below 4.6% and 6.2% of GDP in 2008 and 2010, respectively. Fifthly, provinces, especially poor provinces are frequently and heavily affected by natural disasters. Therefore, the central budget is subject to more pressure when blocks of urgent subsidies are required to help these provinces overcome the disasters. For instance, the “main projects invested through several years as well as the agricultural sector of Kon Tum were almost completely destroyed by a storm N 09, called a historic storm in 2009. Therefore, about VND 250 billion from the central budget, accounted for approximately 14% of Kon Tum’s budget expenditure in 2009, was subsidised for Kon Tum to overcome this severe disaster” (MOF). Finally, an increasing gap in socio-economic development between poor and rich regions as well as between poor and rich provinces also puts more pressure on the central budget during the new budget stabilisation period because the central government must have responsibility for solving uneven development. Table 4: List of provinces/cities transferred their budgets to the central budget in 2003 and 2008 Year 2003 2008 Provinces Number of provinces Names of provinces 5 11 Hanoi, Ho Chi Minh Quang Ninh, Hanoi, Hai Phong, Vinh City, Dong Nai, Binh Phuc, Da Nang, Khanh Hoa, Ho Chi Duong, and Ba Ria Minh City, Binh Duong, Dong Nai, Ba Vung Tau Ria Vung Tau, and Can Tho Source: Author’s calculation based on data MOF In conclusion, the central government faced difficulties in securing resources for reallocating for poor provinces; therefore, solutions improving budget capacity of poorer provinces should be considered. For example, more special policies attracting investors including foreign investors to invest in infrastructure through BOT and BT projects should be issued to promote socio-economic development in the poorer provinces. The reason is that about 73% of FDI in Vietnam in 2008 was still concentrated in 11 rich cities/provinces such as Ho Chi Minh City, Dong Nai, Binh Duong, Hanoi, Ba Ria Vung Tau, Da Nang, Hai Phong, Can Tho, Quang Ninh, Vinh Phuc, and Khanh Hoa 4. In addition, policies aimed at improving public investment efficiency should be strengthened to generate more resources for the central government. The fact is that public investment in Vietnam has recently tended to be unaffordable, inefficient, and unsustainable (Vietnam Development Report, 2012). 12 Binh, Duc-Tho, Smith & Hong-Son 5. Summary and Conclusion The paper examines changes in key features of central-provincial government financial arrangements in Vietnam during the period 2000-2008, and their effects on provincial economic disparities. Our analysis suggests that after 2004 transfers from the central government to provincial governments conformed much more closely to objective, predetermined criteria than before, due to the implementation of the new Law which came into effect in 2004. Econometric estimations confirm that in the post-2004 sub-period, poorer provinces obtained more-than-proportionate assistance from the central government, and the favourable treatment was both statistically significant and increasing over time. Responses from interviews and statistical data indicate that transfers from the central government played an important role in reducing poverty and provincial output disparities after 2004. The paper also highlights the difficulties experienced by the central government in securing adequate resources to continue financing such transfers, and by many poorer provinces in trying to reduce their heavy reliance on transfers from the central government. Endnotes 1 Vietnam Living Standards Surveys Based on the sharable taxes between the central and provincial governments 3 The national population of Vietnam was about 86 million in 2008 (Source: GSO) 4 Authors’ calculation based on data of Ministry of Planning and Investment 2 References Akai, N & Sakata, M 2009, 'Fiscal Decentralisation, Commitment and Regional Inequality: Evidence from State-level Cross-sectional Data for the United States', Journal of Income Distribution: An International Quarterly, vol. 18, no. 1, pp. 1-28. Bird, RM, Litvack, JI & Rao, MG 1995, Intergovernmental Fiscal Relations and Poverty Alleviation in Vietnam, WPS 1430, The World Bank. Bjornestad, L 2009, Fiscal Dencentralisation, Fiscal Incentives, and Pro-poor Outcomes: Evidence from Vietnam, 168, The Asian Development Bank. Jiang, T & Zhao, Z 2003, 'Government Transfer Payments and Regional Development in th China', Proceedings of the 15 Annual Conference of the Associations for Chinese Economics Studies Australia, pp. 1-27. Kaufman, M, Swagel, P & Dunaway, S 2003, Regional Convergence and the Role of Federal Transfer in Canada, WP/03/97, The International Monetary Fund. Kessler, AS & Lessmann, C 2008, Interregional Redistribution and Regional Disparities: How Equalization Does (Not) Work, <http://tudresden.de/die_tu_dresden/fakultaeten/fakultaet_wirtschaftswissenschaften/cepe/da teien/publications/lessmann/Interregional_Redistribution_Kessler_Lessmann.pdf>. 13 Binh, Duc-Tho, Smith & Hong-Son Lessmann, C 2006, Fiscal Decentralisation and Regional Disparity: A Panel Data Approach for OECD Countries, 25, Ifo Institute for Economic Research at the University of Munich. Martinez-Vazquez, J 2004, Making Fiscal Decentralisation Work in Vietnam, 04-04, George State University: Andrew Young School of Policy Studies. McLure, CE & Martinez-Vazquez, JJ 1998, Intergovernmental Fiscal Relations in Vietnam, 98-2, Georgia State University: Andrew Young School of Policy Studies. Nguyen-Phi-Lan & Anwar, S 2011, 'Fiscal Decentralisation and Economic Growth in Vietnam', Journal of the Asia Pacific Economy, vol. 16, no. 1, pp. 3-14. Raiser, M 1998, 'Subsidising Inequality: Economic Reforms, Fiscal Transfers and Convergence Across Chinese Provinces', The Journal of Development Studies, vol. 34, no. 3, pp. 1-26. Rao, MG 2000, 'Fiscal Decentralisation in Vietnam: Emerging Issues', Hitotsubashi Journal of Economics, vol. 41, pp. 163-77. Rao, MG, Bird, RM & Litvack, JI 1998, 'Fiscal Decentralisation and Poverty Alleviation in a Transitional Economy: The Case of Vietnam', Asian Economic Journal, vol. 12, no. 4, pp. 353-78. Rodriguez, G 2006, 'The Role of the Interprovincial Transfers in the β-convergence Process', Journal of Economic Studies, vol. 33, no. 1, pp. 12-29. Vietnam Development Report 2012: Market Economy for a Middle-Income Vietnam, 2012, 65980, The World Bank. Xuan-Binh-Vu, Duc-Tho-Nguyen & Hong-Son-Nghiem 2011, 'Provincial Output Disparities in Vietnam: 1990-2008', Proceedings of the International Conference on Social Science, Economics, and Arts, Malaysia, pp. 32-9. Yao, Y 2009, 'The Political Economy of Government Policies toward Regional Inequality in China', in Y Huang & AM Bocchi (eds), Reshaping Economic Geography in East Asia, The World Bank, vol. 47242, pp. 217-40. Zheng, Y & Chen, M 2007, China's Regional Disparity and Its Policy Responses, 25, The University of Nottingham, China Policy Institute. 14