Download Vietnam’s Responses to Provincial Economic Disparities through Central-Provincial Government Financial Relations

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
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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
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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
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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
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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
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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
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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
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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
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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
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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).
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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).
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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
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