Growth and Inequality:

The Role of Public Investment in
VietnamTran Thu Thuy
Visiting scholar, Policy Research Institute
Ministry of Finance, Japan

Main contents▪ Overview of economic growth, income inequality and public investment in Vietnam▪ Empirical assessment on whether public investment is an effective policy to foster
economic growth and reduce inequality in Vietnam▪ Context and challenges in meeting the needs of public investment▪ Discussion on the promotion of PPPs in Vietnam as a solution to overcome thesechallenges and lessons should be learnt from Japan

Motivation
Growth and inequality trade-off: Theoretical perspectives: High inequality may lead to more redistributive policies, which
are supposed to be economically inefficient Empirical evidence: Trade-off between growth and inequality may exist, but it could betackled by public investment (Muinelo and Roca-Sagalés, 2011; Muinelo and Roca-Sagalés,
2014; Ostry, Berg and Tsangarides, 2014; Fournier and Johansson, 2016)

Vietnam’s situation:
 High economic growth tends to go along with an increase in income inequality in some
aspects
 Public spendings have concentrated on the goals of ensuring social security andpromoting economic development
 It is necessary to evaluate the effectiveness of public investment on simultaneously
realizing the goals of growth and equality

Why does public investment matter to economic
growth and inequality?

Productivity
GrowthPublicinvestment

Infrastructure

Capitalaccumulation
Inequality

Access toresources

Overview of Growth,Inequality and Public
Investment in Vietnam

High economic growth has contributed to improvements in income
and people’s living
 Average GDP growth rate in the past decade: 6%

Vietnam’s economic growth and GDP per capita

 Vietnam became a middle-income country in 2011
4500

12.00

 GDP per capital in 2022: 4,068 USD

4000

10.00

Poverty rate in Vietnam

3500

8.00

3000
2500

6.00

2000

4.00

1500
1000

2.00

500

-

GDP per capita (USD) - RHS

2021

2019

2017

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

0

GDP growth rate (%)

Source: General Statistics Office of Vietnam and IMF (WEO, 10/20203)

10

9.2
7.9

8

6.8
5.7

6

4.8

4.4

4.3

2020

2021

2022

4
2
0

2016

2017

2018

2019

Note: Poverty rate is measured according to multi-dimensional poverty
standardInequality is higher in areas with less favorable economic
conditions and has tended to increase
Vietnam’s inequality measured by GINI, average 2012-2022
0.44

0.42

0.42
0.38
0.36
0.34
0.32

12000

0.42

0.39

0.4
0.37

0.37

0.37

Average income per capita per month by quintile

0.38
0.36

10000
8000
6000
4000
2000
0

2010

2012

2014

2016

2018

Q1

Q2

Q3

Q4

Source: General Statistics Office of Vietnam and author’s calculation

2020
Q5

2022

Public investment is an important policy to promote economic
development
Government spendings by component, average 2012-2022
Healthcare, Education,
4.08
13.65

Investment,
25.22

Source: Ministry of Finance, Vietnam

18.0

Socialsecurity,
8.16

Other
current
spendings,
34.62

Government investment: 7.6% of GDP in the past decadeContribution of public sector:≈ 37% of total investment in the economy
2/3 of investment in economic infrastructure
70-80% of investment in education and healthcare

16.0
14.0
GDP growth

Debt
repayment,
14.26

Government investment allocation by locality and
GDP growth, average 2015-2021

12.0
10.0
8.0
6.0
4.0
2.0
0.0

0.0

2.0
4.0
6.0
8.0
Government investment per capita

10.0

Source: General Statistics Office of Vietnam and author’s calculation

Allocation of state budget focuses on ensuring social security• Localities with higher poverty rate often receive
larger government investment allocations
BUT high growth has been accompanied by rising inequality inrecent years

Is public investment effective in promoting growth
and reducing inequality?

45.0
40.0
35.0
Poverty rate

• Criteria for state budget allocation give priority
to poor areas (such as mountainous areas,
border areas, islands, ethnic minority areas, anddisadvantaged and extremely difficult areas)

Government investment allocation by locality andpoverty rate, average 2015-2021

30.0
25.0
20.0
15.0
10.0
5.0
0.0

0.0

5.0
Government investment per capita

10.0

Source: General Statistics Office of Vietnam and author’s calculation

Empirical assessment

Methodology (1) Impacts of public investment on economic growth and income inequality are empirically investigated byregressing reduced-form equations:
Growth equations:Short run: 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝑡𝑡,𝑖𝑖 = 𝛼𝛼𝑡𝑡,𝑖𝑖 + 𝛽𝛽𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃_𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝑡𝑡−2,𝑖𝑖 + 𝜃𝜃𝑍𝑍𝑡𝑡−2,𝑖𝑖 + 𝑢𝑢𝑡𝑡,𝑖𝑖(1)Medium run: 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝑡𝑡,𝑡𝑡+5 ,𝑖𝑖 = 𝛼𝛼𝑖𝑖 + 𝛽𝛽𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃_𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝑡𝑡,𝑖𝑖 + 𝜃𝜃𝑍𝑍𝑡𝑡,𝑖𝑖 + 𝑢𝑢𝑡𝑡,𝑖𝑖(2)

Short run: 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝑡𝑡,𝑖𝑖 = 𝛾𝛾𝑡𝑡,𝑖𝑖 + 𝜆𝜆𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃_𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝑡𝑡−2,𝑖𝑖 + 𝜔𝜔𝑆𝑆𝑡𝑡−2,𝑖𝑖 + 𝑒𝑒𝑡𝑡,𝑖𝑖(3)Inequality equations:

Medium run: 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑡𝑡,𝑡𝑡+5 ,𝑖𝑖 = 𝛾𝛾𝑖𝑖 + 𝜆𝜆𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃_𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝑡𝑡,𝑖𝑖 + 𝜔𝜔𝑆𝑆𝑡𝑡,𝑖𝑖 + 𝑒𝑒𝑡𝑡,𝑖𝑖(4) Data of Vietnam’s 63 provinces in the period of 2015-2022 is obtained from the source of General Statistics
Office, Vietnam
 Forms of panel data estimators: Fixed effects (Hausman test indicates that fixed effects models are better off
being used)Methodology (2)Extended estimation
Baseline estimation
There are 3 policy variables: Public investment
 Redistributive current spendings
 Non-redistributive current spendings
Public investment is the
only policy variable
Compare the roles ofpublic investment andcurrent expenditures

Redistributive effects ofpublic investment andcurrent expenditures byincome quintile

Main variables

PUBLIC_INVESTMENT GOV_INV: Local government investment as percentage of GDP
 INV_PUB: Investment of State sector as percentage of GDP
INV_PUB = GOV_INV + INV_PUB_OT(INV_PUB_OT: Investment of SOEs and central government in localities)

GROWTH

GDP_G: Annual percentage change in gross regional domestic product atconstant price

INEQUALITY

 GINI: GINI index
 Q5/Q1: Ratio of the richest income quintile divided by the poorest one
 LOW_INC: Share of the 2 lowest income quintiles in income
distribution (Ratio of 40%)

Control variables
Variables

Definition

Growthequations (S)Inequality
equations (Z)


GDP_G

Growth rate of gross regional domestic product at constant price (%)

GINI

GINI index



LGDP_C

Gross regional domestic product at constant price in log form

INV_OT

Investment of private sector and FDI as percentage of GDP



LAB_G

Growth rate of labor force (%)



T_LAB

Ratio of trained labor as percentage of labor force (it is used as a proxyfor education)





URBAN

Ratio of urbanization (measured by the share of urban in total
population)







Extended estimation
GOV_HUM

Government current spendings on social security, education andhealthcare as percentage of GDP (redistributive current spendings)



GOV_OT

Other government current spendings as percentage of GDP(non-redistributive current spendings)

Baseline estimation of growth equations (FEM)
Measure of public investment
Time of effects
PUBLIC_INVESTMENT
LGDP_CGINI
INV_OT
LAB_G
T_LAB
URBAN

GOV_INV
Short run
Medium run
0.16220.0726(1.6800)*(1.7800)*-14.6183-4.7725(-3.2100)**(-3.4600)**-0.0477-0.1015(-0.7300)(-1.4800)
0.0352-0.0013(1.9100)*(-0.0900)
0.08940.0127(1.3100)(0.2300)
0.1672-0.1183(1.5700)(-2.0800)**
0.08310.8331(1.0600)(4.4300)**

INV_PUB
Short run
0.1064(2.6700)**-13.3103(-2.9100)**-0.0325(-0.5000)
0.0415(2.5300)**
0.0841(1.3000)
0.1314(1.2100)
0.0706(0.9100)

Note: Values in parentheses are t-statistics; ** and * indicate 5% and 10% significance, respectively

Medium run
0.0740(2.5400)**-3.4472(-2.9300)**-0.1007(-1.4500)-0.0005(-0.0300)
0.0262(0.5300)-0.1077(-1.9700)*
0.8762(4.7900)**

Baseline estimation of inequality equation in
short run (FEM)
Measure of public investment

GOV_INVINV_PUB

Measure of inequality

GINI

Q5/Q1

LOW_INC

GINI

Q5/Q1

LOW_INC

PUBLIC_INVESTMENT

0.18280.0582-0.0743-0.0492-0.01100.0026(1.3200)(1.3200)(-1.1300)(-0.6800)(-0.5900)(0.0700)-0.0389-1.2855

1.6521-1.3706-1.6379

1.9275(-0.0100)(-0.9600)(0.8200)(-0.3200)(-1.1600)(0.9000)-0.1085-0.0335

0.0429-0.0990-0.0304

0.0390(-1.5300)(-1.1400)(1.2500)(-1.4600)(-1.0700)(1.1800)-0.0132-0.0274-0.0009-0.0341-0.03480.0105(-0.0900)(-0.5300)(-0.0100)(-0.2500)(-0.6600)(0.1600)

0.04160.0397-0.0372

0.04280.0397-0.0361(0.5300)(1.3900)(-0.9900)(0.5300)(1.3800)(-0.9500)

LGDP_C
GDP_G
T_LAB
URBAN

Note: Values in parentheses are t-statistics; ** and * indicate 5% and 10% significance, respectively

Baseline estimation of inequality equation in
medium run (FEM)
Measure of public investment

GOV_INVINV_PUB

Measure of inequality

GINI

Q5/Q1

LOW_INC

GINI

Q5/Q1

LOW_INC

PUBLIC_INVESTMENT-0.2506-0.1074

0.1063-0.0335-0.0032

0.0127(-4.7800)**(-3.3300)**(4.0100)**(-0.8300)(-0.2300)(0.6400)-4.6270-0.96111.9129-5.5030-1.1426

2.2581(-2.8000)**(-2.0000)**(2.4900)**(-3.1300)**(-2.1200)**(2.7200)**

0.01840.0077-0.00700.01230.0061-0.0045(1.2500)(1.5000)(-1.0300)(0.8800)(1.2200)(-0.7200)-0.1200-0.0283

0.0729-0.1202-0.0272

0.0728(-1.2500)(-1.0800)(1.7200)*(-1.0800)(-0.8400)(1.5100)-0.5315-0.08480.2241-0.6282-0.1230

0.2646(-1.6500)(-0.6300)(1.5900)(-1.6900)*(-0.7800)(1.6200)

LGDP_C
GDP_G
T_LAB
URBAN

Note: Values in parentheses are t-statistics; ** and * indicate 5% and 10% significance, respectively

Extended estimation of growth equations (FEM)
Short run

Medium run

Public investment

INV_PUB

Redistributive
current spendings

0.0984(2.3900)**

0.0732(2.6300)**

GOV_HUM

0.01210.0726

Non-redistributive
current spendings(0.2000)(1.8500)*

GOV_OT

0.1278-0.0876(0.7900)
0.0401(2.4300)**-12.6631(-2.7100)**-0.0241(-0.3600)
0.0955(1.5300)
0.1441(1.3500)
0.0735(0.9400)(-1.0600)
0.0000(0.0000)**-2.8891(-2.7600)**-0.0868(-1.1400)
0.0500(1.1500)-0.0812(-1.5200)0.9051(4.4100)**

INV_OT
LGDP_C
GINI
LAB_G
T_LAB
URBAN

Note: Values inparentheses are tstatistics; ** and *indicate 5% and
10% significance,
respectively

Extended estimation of inequality equation in
medium run (FEM)
Measure of inequality

GINI

Q5/Q1

LOW_INC

Public investment

GOV_INV

Redistributive current
spendings-0.1548(-2.1600)**-0.0509(-2.4600)**

0.0519(1.7200)*

GOV_HUM-0.1399-0.0750

0.0584(-2.8200)**(-5.7100)**(2.6900)**

0.26170.1282-0.0743(2.5200)**-5.6660(-3.3400)**
0.0115(0.7800)-0.1479(-1.4700)-0.6447(-2.0500)**(2.8700)**-1.5773(-3.5600)**
0.0039(0.9200)-0.0446(-1.6300)-0.1447(-1.2700)(-1.3400)
2.5155(3.0600)**-0.0038(-0.5600)
0.0884(2.0400)**
0.2690(2.0200)**

Non-redistributive current GOV_ OTspendings
LGDP_C
GDP_G
T_LAB
URBAN

Note: Values in parentheses are t-statistics; ** and * indicate 5% and 10% significance, respectively

Redistributive effects of public investment inincome groups
Income quintile

Q1

Q2

Q3

Q4

Q5

Public investment

GOV_INV

Redistributive current
spendings

0.0217(1.0200)

0.0496(1.8900)*

0.0609(2.2400)**

0.0331(1.3700)-0.1652(-2.1900)**

GOV_HUM

0.03640.02580.02720.0134-0.1028

Non-redistributive
current spendings(2.6300)**(1.6100)(1.4600)(0.9800)(-2.0300)**

GOV_OT-0.0537-0.0314-0.0626-0.07340.2211(-1.4400)
0.8316(2.2800)**
0.0056(1.6000)
0.0526(1.9500)*
0.0115(0.1300)(-1.0600)
1.4619(3.0400)**-0.0032(-0.6700)
0.0769(2.4500)**
0.1038(1.2500)(-1.2900)
1.7078(4.1100)**-0.0075(-1.5900)
0.0401(1.0700)
0.1886(1.7000)*(-1.5900)
1.6399(3.3700)**-0.0042(-0.7600)-0.0121(-0.4000)
0.1351(0.7700)(1.8500)*-5.6412(-3.9500)**
0.0093(0.6800)-0.1574(-1.5200)-0.4390(-1.2000)

LGDP_C
GDP_G
T_LAB
URBAN

Note: Values in parentheses are t-statistics; ** and * indicate 5% and 10% significance, respectively

Highlights of main findings and implications
Main findings
Policies

GrowthImplications
Inequality

Public investment▪ The expansion of free infrastructure and public
utilities may benefit the poor more than the richGovernment
investment+(short andmedium runs)(medium run)State investment+(short andmedium runs)0▪ Government investment should be used withredistributive
current
expendituresassupplement
policessincegovernment
investment has effects on Q2 and Q3 while
redistributive current expenditures target betterto the poorest.
▪ The findings emphasize the importance ofspendings on human development in bothenhancing growth and lowering inequality inmedium run.

Current expenditures
Redistributive
expenditures+(medium run)(medium run)Non-redistributive
expenditures

0(short andmedium runs)+(medium run)

▪ It is necessary to reallocate government
spendings towards investment and humandevelopment in Vietnam’s ongoing restructuringof State budget.

Looking forward

Context
Publicinvestment

Pro-growth
Pro-poor

Allocation of state budget for public investment:
USD 23 billion per year
(Medium-term Public Investment Plan 2021-2025:
VND 2.870.000 billion ⁓ USD 115 billion)
Investment need for sustainable infrastructure:
USD 25-30 billion per year (World Bank, 2020)
Financial gap for infrastructure development:
USD 2-7 billion per year
Increasing public investment to finance the gap is facing challenges

The main sources to finance public investment arehaving difficulties in expanding
State budget revenue

 20% of total state budget revenue is from unsustainable sources (such as
revenues from divestment, SOE’s dividends, land use fees...) ↓ import taxes according to commitments on tariff reduction in FTAs

Domestic borrowings

 54% of government bond value is held by Vietnam’s Social Insurance Fund
(accounting for 85% of its investment portfolio) Asset value of insurance business system: 11.2% of GDP (2022)
 Asset value managed by securities investment funds and fund managementcompanies: 4.7% of GDP (2019)

Foreign borrowings ↓ Access loans eligible for ODA ↓ ODA: 8.8% of GDP (2011-2015) to 4.7% of GDP (2016-2019) ↓ Share of ODA and concessional loan in government investment: 38.8%(2011-2015) to 27.3% (2016-2019)

Are Public Private Partnerships (PPPs) a promisingsolution?
PPPs by sector in Vietnam, number ofprojects in 2019 1997: Decree 77/CP on investment regulationsin the form of BOT contracts for domestic
investors was issued

Transportation

 2021: Law on Investment by Public-Private
Partnership took effect

OthersEnergyWater supply, drainage and environment
23.8%

 As of January 2019, 336 projects with total
investment of 1,600,000 billion VND
However, the number of failures is on the rise,
particularly BOT (Build-Operate-Transfer) projects
in transportation sector.

5.4%
5.4%

65.5%

Source: Ministry of Planning and Investment of Vietnam

Some projects failed to seek out private investors
BOT project of Tuyen Quang - Phu Tho Expressway (to connect
The project under construction
with Noi Bai - Lao Cai Expressway) was approved by the Prime
Minister in December 2019 with a target of about 40.2 km ofroad.
Total planned investment: about 3.271.09 billion VND, including: Central government budget: 500 billion VND (15.3%)
 Local budget: 10.79 billion VND (0.3%)
 Private investor: 2,760.3 billion VND (equity and credit loans)(84.4%)
Investors participating in the bid had to satisfy conditions: Equity of 425.91 billion VND
Source: baotintuc.vn
 Commercial loans are not lower than 2,334.39 billion VND
 The investors had experience in implementing a PPP project in road traffic construction
Local authority (Tuyen Quang Provincial People's Committee), the competent state agency, had to cancel the prequalification bid for investor selection because no investors applied.
The project was then approved by the Prime Minister and converted into a conventional public investment projectwith funding mainly from the central government.

Private partners cannot ensure financial capacity to carryout the contract
BOT Project of Huu Nghi - Chi Lang (it was a sub-section in the BOT Project of Bac Giang - Lang Son Expressway
in 2018)
Initial plan: Total investment of 7.609 billion VND, of which:
The project is still in the process of Private investor: 3.609 billion VND (47%)

adjusting the investment plan

 Local government: 1.000 billion VND (13%)
 Central government: 3.000 VND (39%)
The project was delayed in 2 years because private investors were
not able to arrange financial sources.
The competent state agency (Lang Son Provincial People's
Committee) had to receive approval from the Prime Minister forthe conversion of a BOT without state capital to a BOT with theparticipation of state capital.
However, the project has been suspended since 2019 and is stillin the process of adjusting the investment plan.
Source: baodautu.vn

Bankruptcy after completing construction due to unfeasible
financial plan
BOT Project of Binh Loi Bridge to renovate andupgrade Saigon River channel from Binh Loi
railway bridge (in Ho Chi Minh city) to Ben Suc
port (in Binh Duong province)
New Binh Loi Bridge

The project includes 2 construction items:
 Newly constructing Binh Loi railway bridge: completed in 2019 Dredging and expanding about 71 km of Saigon River channel:
temporarily suspended
The project is facing bankruptcy:
 In the contract: To recover the capital, the investor is allowed
to collect fees for waterway vehicles at three ports along
Saigon River: An Son, Rach Bap and Ben Suc (in Binh Duongprovince).
 In reality: Binh Loi railway bridge was completed in 2019, butthese ports have not been built (An Son and Rach Bap) or
were partially built (Ben Suc). Then, Binh Duong province
adjusted its planning, which removed Ben Suc port.

Source: vnexpress.net

Ministry of Transportation is proposing the Government toterminate the contract before maturity and pay costs to theinvestor.

What could be learnt from Japan?
The number of PFI projects by field in Japan (as of March 2021)
FieldsNumber of projects

Educational and cultural facilities

292

Urban development

220

Health and environment

131

Government buildings and dormitories

76

Industry

27

Security

26

Living and welfare

25

Other fields

78

Total

875

Source: PPP/PFI Promotion Office, Japan 1999: the Act on Promotion of Private
Finance Initiative (PFI Act) was enacted
 As of March 2021, 875 PFI projects
implemented under the PFI Act andcumulative contract value of approximately
USD 61 billion (7 trillion yen).
 The number of failures is not many andmainly occurred during the initial 10 years.

Scope of private sectors
VietnamToo high reliance and risks put on private
sectors in BOT projects.
▪ 2019: 140/336 PPP projects were in theform of BOT contracts.
▪ Financial capacity of the private sector in
Vietnam is generally limited.
▪ Bidding document requirements are often
set too difficult.
▪ Inconsistent and inadequate mechanisms
on risk sharing and dispute resolution
between parties involved in PPPs.

Japan
 Risks taken by the private sector are
limited since the majority of PFI
projects in Japan is in BTO (Build
Transfer and Operate) and service
purchase types.
 When the risks/scopes shared by a
private entity are limited, it may benecessary to have incentives for theinvestor/developer to take the project.

Governance
VietnamJapan▪ The public sector has a lack of skills indesigning, negotiating and monitoring
PPPs.

▪ The private sector is controlled
reasonably through contractual terms
and conditions.

▪ PPPs are implemented with low
discipline, leading to delays and lower
quality projects.

▪ Initial schemes are designed to keep
affordable, reasonable and acceptablestructure. Tariffs should be affordable
for users regardless of who takes
responsibility to deliver.

▪ Many PPPs face financial difficulties due
to poor demand estimates andunfeasible capital recovery plans.

▪ Some projects failed due to poor orchallenging demand estimates, but it
was not common.

Promotion and support from the government
Vietnam▪ Lack of strategies to create a PPP market andpublic sector’s readiness to cooperate withthe private sector.
▪ Lack of guidelines in implementing PPPs,
especially circulars guiding PPP laws ofministries and localities.
▪ Unstable PPP regulations => many investors
have request guarantees, higher profit levels
and longer capital recovery periods.

Japan


The PPP/PFI Promotion Office develops
specific measures for promoting PPP/PFI, suchas the “Action Plan for PPP/PFI promotion”
organizing the “Committee for the promotionof PFI”.

 The PPP/PFI Promotion Office preparesguidelines, manuals, case studies, etc.
 Each ministry, agency, prefecture, andordinance-designated city also prepares its
own guidelines to promote the use of PPP/PFI
methods.

What could be learnt from Japan?
Effective
governance andstrict discipline

Limited risks
bore by private
sectorStrong promotion
and support fromthe government

Thank you for yourattention