(KTSG) – “Public investment is a form of ‘seed capital.’ At certain stages of economic development, public investment must play a leading role,” Prof. Dr. To Trung Thanh of National Economics University (NEU), co-editor of the monograph Vietnam Annual Economic Review 2023: Stimulating Aggregate Demand for Economic Growth in a New Context, told The Saigon 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 for the entire economy. The more effective public investment is, the stronger growth becomes. Yet past and present realities clearly fall short of expectations. How do you view this issue? How should an economy like Vietnam’s maximize the benefits of public investment?

– Prof. Dr. To Trung Thanh: Vietnam Annual Economic Review 2023 found that public investment and its allocation are not highly efficient. 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 every 1% increase in total investment, private investment or FDI, all other factors remaining unchanged.

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

By economic region, 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, adding 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 estimates 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 driven primarily by realized investment funded by the state budget (21.2%). Also in 2023, private-sector investment grew by only 2.7%, compared with 8.9% in 2022; FDI grew by only 5.4%, compared with 13.9% in 2022.

In terms of shares, state-sector investment rose from 25.61% in 2022 to 27.85% in 2023, while 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 regarded as an important driver, compensating for other drivers of growth. However, the quality of public investment remains low, and capital allocation is inefficient. Greater attention therefore needs to be paid to the quality and efficiency of public investment capital, rather than focusing solely on increasing disbursements for public investment.

Second, non-state-sector investment is the important component that stimulates growth, particularly in the central and southern provinces. Yet this sector has seen 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 inefficient public investment? Is this inevitable for a developing economy starting from a low base, such as Vietnam?

– With public investment disbursements exceeding VND 662,000 billion in 2023, concentrating this funding on effective areas with strong spillover effects, such as key interregional infrastructure, science and technology, social housing and schools, would stimulate aggregate demand while nurturing resources to increase aggregate supply and minimizing the trade-offs associated with demand-side policies. However, Vietnam’s public investment is currently spread too thinly, lacks focus, has not targeted areas with strong spillover effects and remains inefficient.

One reason is that legal regulations in this field—regarded as 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 all issues must be anticipated and incorporated into plans, including site clearance and relocation of technical infrastructure; bidding, contractor selection and contract awards; project implementation; and assessment of project management boards’ capacity. However, the current Law on Public Investment does not clearly distinguish between funding for preparation tasks and funding for project implementation. As a result, site clearance cannot be carried out in advance and independently, but must proceed alongside project implementation. In many cases, projects have therefore gone through bidding without having sites available for construction.

The second reason concerns management capacity, beginning with vision and planning. Vietnam lacks a long-term planning mindset: plans covering decades may be changed shortly after they are issued. We have also failed to anticipate investment priorities and focus areas for the short and medium term. Meanwhile, the Law on Public Investment also requires projects and investment preparation tasks to 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, the steps of preparing, appraising and approving investment policy, and preparing, appraising and approving project investment, only begin after funding has been allocated for investment preparation tasks. 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 all levels, particularly the district and commune levels, remains limited. Land management is insufficiently rigorous, and violations have not been addressed decisively and promptly, leading to land encroachment, unauthorized changes in land use, transfers and construction.

The third reason is the indiscriminate allocation of public investment and the pursuit of narrow local interests. At certain times, public investment has become a race: if one province has an airport, another also requests one; if 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 similar level of development, must also address issues related to 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 for semiconductor chip projects in the country are a form of public investment…

– Before 2011, the prevailing approach was for public investment to take the place of private investment. As a result, public investment accounted for a very high share, approximately 40-50% of total investment across the economy. The approach subsequently changed. Public investment primarily focused on areas with spillover effects and areas that facilitate private-sector development. Its share of total investment therefore fell below 30%, reaching nearly 28% in 2023, for example. In my view, that is an appropriate approach.

However, in areas where resource constraints make private investment difficult, public investment must provide support without taking the place of the private sector. Both theory and practice show that private investment is consistently more efficient than public investment. In addition, economic mechanisms and institutions must be adjusted to enable more efficient public investment.

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

– I think public investment is 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’s cannot remain on the sidelines. If the private sector is small and lacks sufficient resources to meet the requirements of the green transition, state support is needed. Of course, this support can take a variety of forms and does not necessarily have to rely entirely on public investment. For example, public-private partnership models could be developed to focus on bottlenecks and critical areas, thereby creating turning points for production.

Dr. Nguyen Quoc Viet, Deputy Director of the Institute for Economic and Policy Research
(University of Economics and Business, Vietnam National University, Hanoi):

Public Investment as “Seed Capital” to Promote Green Private Investment

Public investment has been identified as a driver of economic growth, particularly when growth faces difficulties. In 2023, we achieved a better result than in previous years, disbursing 81% of public investment capital. With detailed allocations under the 2024 public investment plan exceeding 94.9% by the end of February 2024 and estimated disbursements reaching 9% of the annual plan, higher than the 7% recorded in the same period last year, there are grounds for confidence that public investment disbursement in 2024 will deliver better results than in 2023 and provide strong support for growth.

However, Vietnam has committed to achieving Net Zero by 2050. For several years now, green growth and sustainable growth have been priorities. Green growth requires enormous resources; beyond public resources, private investment participation is essential. Public investment must therefore become “seed capital” to promote and mobilize private investment in green growth.

Specifically, under the plan to implement the Green Growth Strategy through 2030, Vietnam needs as much as US$30 billion, with funding from the state budget expected to account for approximately 30% and the remainder coming from private or foreign sources. Thus, using this 30% seed capital effectively to genuinely unlock the remaining 70% of funding poses a considerable challenge.

To do so, the first step is to reform public investment regulations and procedures to expand green public investment and procurement. Private enterprises wishing to participate in green public investment and procurement projects must make their own operations greener. In this way, state budget spending will achieve two objectives: first, all such spending will be tied to green and sustainability criteria; second, it will stimulate markets for green products, green consumption, and green services. Public investment and procurement plans and programs are typically very large in scale, covering an entire phase of economic development. The shift toward green procurement and investment must therefore be initiated gradually, proceeding within the limits of available resources.

In addition, medium-term investment projects for the 2025-2030 period must take these green infrastructure investment projects into account, particularly infrastructure projects supporting the transition to renewable energy and the reduction of greenhouse gas emissions, or key projects to combat climate change.

Returning to public investment, given the current stable macroeconomic foundation, we should remain steadfast in pursuing policies that support growth in general and businesses in particular. Public investment should focus on key works and projects with spillover effects, laying the foundation for improving the competitiveness of the entire economy.

Recorded by Khanh Nguyen

Link: https://thesaigontimes.vn/gs-ts-to-trung-thanh-tu-duy-dung-huong-ve-dau-tu-cong/

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