Local government capacity and total factor productivity growth: evidence from an Asian emerging economy

Abstract

This study provides a vital understanding of how local government capacity affects total factor productivity (TFP) growth in the context of an emerging economy. The sample of the study is a panel dataset of 63 Vietnamese provinces over the period of 2006-2017. We find that provinces that are high in self-financing have a positive effect on TFP growth, while low self-financing provinces have a negative effect on TFP growth. More interestingly, the impact of public governance is negative on TFP growth for high self-financing provinces, but is positive for low self-financing provinces. Our findings imply that the Vietnamese decentralisation regime drives high self-financing and low self-financing provinces to pursue different paths. High self-financing provinces defy governance reforms, leading to a race to the bottom.

Keywords:

• Government capacity
• Fiscal decentralisation
• Governance
• Total factor productivity

JEL:

• B40
• E61
• H72

Disclosure statement

No potential conflict of interest was reported by the author(s).

Availability of data and material

The data is provided upon requests.

Code availability

The code is provided upon requests.

Author contributions

All authors contributed to the study conception and design. Material preparation, data collection and analysis were performed by Prof Su Dinh Thanh. The first draft of the manuscript was written by Prof Su Dinh Thanh and Nguyen Phuc Canh. All authors commented on previous versions of the manuscript. All authors read and approved the final manuscript.

Notes

1 Lai Chau, Yen Bai, Tuyen Quang, Bac Kan, Lang Son and Phu Tho…

2 Da Nang, Dong Thap, Quang Ninh, Lao Cai, Bac Ninh, Long An…

3 The General Statistics Office of Vietnam (GSO) helped us to collect this data.

4 It is worth noting that the estimate of Eq. [10] might face the issue of cross-sectional dependence due to possible linkages in economic development between nearby provinces. To deal with this, we have included the region variables (five main regions in Vietnam; i.e., Northern Mountain region, Red River Delta region, Highlands and Central region, Southeast region, and Mekong River Delta region, see A1, Appendix, for detail) in estimates. The author(s) thank an anonymous reviewer for this point.

5 Following article 5, Law of State Budget 2015, see http://vbpl.vn/TW/Pages/vbpqen-toanvan.aspx?ItemID=11049

6 For example, local government in Ho Chi Minh City wants to increase the sharing ratio from currently 18% (in 2021) to 23% for the period 2022-2025, see https://vnexpress.net/thu-tuong-ung-ho-tang-ty-le-ngan-sach-de-lai-cho-tp-hcm-4277481.html

Additional information

Funding

The authors acknowledge the funding from the University of Economics Ho Chi Minh City, Ho Chi Minh city (700000), Vietnam.

Notes on contributors

Su Thanh Dinh

Dr. Thanh Dinh Su is (full) Professor of Public Finance at School of Public Finance, University of Economics Ho Chi Minh City (UEH), Vietnam. He got his PhD in 2002 at UEH. He teaches several courses in Public Finance and Public Policy. He also works at Policy Consultant for Vietnamese Government and International Institute such as World Bank, UNDP. His research areas include Public Finance, Institutional Economics and Public Policy. He has several publications in these areas. His current interests are in tourism economics and public policy, institutional economics, fiscal decetralization.

Canh Phuc Nguyen

Dr. Canh Phuc Nguyen is Senior Lecturer at School of Public Finance, University of Economics Ho Chi Minh City (UEH), Vietnam. He teaches several courses in Investment, Financial Statement Analysis, Macroeconomics, Institutions and Macroeconomics. His research areas are in Institutional Economics, Banking and Financial Economics, Fiscal Economics, and Macroeconomics. His current interests are Fiscal Policy and Institutional Economics.