(KTSG) – “Public investment is a form of ‘seed capital.’ At certain stages of the economy, public investment must play a leading role,” Prof. Dr. To Trung Thanh of National Economics University (NEU), co-editor of the monograph Annual Vietnam Economic Review 2023: Stimulating Aggregate Demand for Economic Growth in the New Context, told Saigon Economic Times.

The Paradox of Public Investment

KTSG: Investment, including public investment, is one of three important components that can stimulate aggregate demand and generate growth across the economy. The more effective public investment is, the stronger growth becomes. Yet what has happened and continues to happen clearly falls short of expectations. What is your assessment of this issue? How should an economy like Vietnam maximize the benefits of public investment?

Prof. Dr. To Trung Thanh, Head of the Department of Research Management

– Prof. Dr. To Trung Thanh: The Annual Vietnam Economic Review 2023 showed that public investment and its allocation have not been highly effective. Research covering 2011-2022 shows that private investment and foreign direct investment (FDI) are positively correlated with gross regional domestic product per capita.

Specifically, a locality’s growth rate increases by approximately 0.03-0.04 percentage points for a 1% increase in total investment, private investment, or FDI, all other factors remaining unchanged.

By contrast, through empirical research models, we found that public investment appears to have a negative effect on provincial gross regional domestic product per capita. Increasing public investment does not help drive local economic growth.

Looking at individual economic regions, investment affects gross regional domestic product per capita in the central region, with an estimated coefficient of 0.06. This means that, all other factors remaining unchanged, a 1% increase in total investment raises the growth rate of gross regional domestic product per capita in the central provinces by 0.06 percentage points.

In the southern region, private investment also contributes to positive economic growth, with a contribution of 0.03 percentage points. This relationship is similar to the correlation between FDI and gross regional domestic product per capita in the southern region. Notably, the estimation results indicate that public investment has a negative effect on gross regional domestic product per capita in the northern provinces.

In Vietnam, total realized investment across the economy in 2023 at current prices was estimated at VND 3,423,500 billion, up 6.2% from 2022. This increase was primarily driven by realized investment funded by the state budget (21.2%). Also in 2023, private-sector investment rose by only 2.7%, compared with an 8.9% increase in 2022; FDI rose by only 5.4%, compared with a 13.9% increase in 2022.

The share of state-sector investment increased from 25.61% in 2022 to 27.85% in 2023, while the share of non-state-sector investment fell from 58.2% in 2022 to 56.1% in 2023.

These findings have two implications:

First, in the current context, public investment is viewed as an important driver, making up for shortfalls in other growth drivers. However, the quality of public investment remains low, and capital allocation is not highly effective. Greater attention therefore needs to be paid to the quality and efficiency of public investment capital, rather than focusing solely on increasing public investment disbursements.

Second, non-state-sector investment is the important component that stimulates growth, particularly in the central and southern provinces. Yet this sector has experienced a sharp decline in investment in recent years. Private investment needs support and must be central to policy design in the coming period.

Identifying Bottlenecks

KTSG: In your view, what are the main reasons for the inefficiency of public investment? Is this inevitable for a developing economy with a low starting point like Vietnam?

– Prof. Dr. To Trung Thanh: With public investment disbursements exceeding VND 662,000 billion in 2023, concentrating these funds on effective areas with strong spillover effects, such as key interregional infrastructure, science and technology, social housing, and schools, would both stimulate aggregate demand and nurture resources for increasing aggregate supply, while also minimizing the trade-offs associated with demand-side policies. However, Vietnam’s public investment currently remains spread too thinly, lacks focus, has not targeted areas with strong spillover effects, and is not yet effective.

The reason is that legal regulations in this field—considered the main barrier to disbursing state budget funds—have yet to undergo fundamental changes. For example, investment preparation is the most difficult stage of public investment because every issue must be anticipated and incorporated into the plan, including site clearance and the relocation of technical infrastructure; bidding, contractor selection, and contract awards; project implementation; and assessment of the capacity of project management boards. However, the current Law on Public Investment does not clearly distinguish funding for preparatory tasks from funding for project implementation. As a result, site clearance cannot be carried out in advance and independently, but still takes place alongside project implementation procedures. Consequently, in many cases, projects have completed bidding but do not yet have cleared sites for construction.

The second issue is management capacity, beginning with vision and planning. Vietnam has yet to adopt a long-term approach to planning: plans drawn up for decades can be changed immediately after being issued. We have also yet to anticipate investment priorities and focus areas for the short and medium term. Meanwhile, under the Law on Public Investment, projects and investment preparation tasks must be included in the medium-term public investment plan to qualify for funding under annual public investment plans. If they are not included in the plan, only after funding has been allocated for investment preparation can the steps begin to prepare, appraise, and decide on investment policy, and to prepare, appraise, and decide on project investment. These steps take six months to one year, and up to two years for Group A projects.

Furthermore, the capacity of project management boards and officials responsible for investment at various levels, particularly at the district and commune levels, remains limited. Land management is not sufficiently rigorous, and violations have not been addressed decisively and promptly, leading to land encroachment, unauthorized changes in land use, transfers, and construction.

Third is the equal-share, locally focused approach to public investment. At certain times, public investment races have emerged: when one province has an airport, another also requests one; when one province invests in a seaport, another also wants a seaport. Investment capital is spread thinly, making spillover effects difficult to achieve.

As a developing country, Vietnam, like economies at a comparable level of development, must also address issues involving economic mechanisms and institutions, waste, and the exploitation of public investment for corrupt gain.

Public Investment Must Not Replace the Private Sector

KTSG: Does Vietnam need a different approach to public investment? In fact, even the tax incentives or direct incentives that the United States is providing to semiconductor chip projects in the country are a form of public investment…

– Before 2011, the prevailing view was that public investment should substitute for private-sector investment. As a result, public investment accounted for a very high share, approximately 40-50% of total investment across the economy. There was subsequently a shift in thinking. Public investment primarily focused on areas with spillover effects and areas that facilitate private-sector development. Consequently, public investment’s share of total investment fell below 30%, reaching, for example, nearly 28% in 2023. In my view, that is an appropriate approach.

However, in areas where resource constraints make it difficult for the private sector to invest, public investment must provide support without replacing the private sector. Both theory and practice show that private investment is always more efficient than public investment. In addition, economic mechanisms and institutions must be adjusted to enable public investment to be implemented more effectively.

KTSG: Vietnam is on the threshold of a potentially profound economic transformation, most clearly exemplified by the green transition. What are your thoughts on green public investment?

– Prof. Dr. To Trung Thanh: I think of public investment as a form of “seed capital.” At certain stages of economic development, public investment must play a leading role. Green production is a global trend, and a highly open economy like Vietnam cannot remain on the sidelines. To meet the requirements of the green transition, state support is needed if the private sector is small in scale and lacks sufficient capacity. Of course, this support can take a relatively wide range of forms and need not rely entirely on public investment. For example, public-private partnership models can be developed to address bottlenecks and focus on critical areas, thereby creating turning points for production.

Source: The Saigon Times

This is an automated translation. If you notice any errors, please contact the Department of Communications, National Economics University at phongtruyenthong@neu.edu.vn.