Impact of government expenditure decentralization on economic growth

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Growth, inflation and poverty: From a low – income to a middle income country

Before 1975, both North and South of Vietnam focused on production which served the wars. In general, Vietnam’s economy was a very poor and the basic model of economic growth was fixed to Soviet’s model (see Thang, 2001 and Dollar, 1994). Generally speaking, on the one hand, North’s economy implemented the Soviet’s command econ-omy in which private economic activities were forbidden, state allocated all national resources for production from input to output of economy as it had been in China. Distribution was followed the stamp system. On the other hand, the Southern gov-ernment implemented the scheme which is similar to a market economy by American military supported. Industrial development was carried on via import substitution and consumers could buy products and services without stamps as it was been in North. Especially, farmers could sell their agricultural products for their benefits (see McCarty, 2001).

Economic growth

After obtaining national unity, Vietnam fulfilled the policy for whole which continued centrally-planned economy. With the first 5 years economic development plan 1976-1980, Vietnam concentrated on developing heavy industry then agriculture, however it failed. According to the report of Bureau of Communist Party in 1981, they stated that Vietnam’s economy has many huge problems such as very low productivity, lack of input for manufactures, a giant mistake in distribution channel, a weak infrastructure, and so on. The contribution of each sector to economy is limited, hereafter, the graph describes the trend and results:
Within 10 years from 1991 – 2000, Vietnam’s economy had great achievements (see Table 3.1). For instance, average GDP growth rate was 7.56% per year and absolute value of GDP in 2000 was increased 2.07 times in comparison with absolute value of GDP in 1991. Hence, growth rates of agriculture, industry, and services increased impressive. Average growth rates of agriculture, industry, and services were 4.2%, 11.3%, and 7.2% per year.
In comparison with other countries, the growth rate of Vietnam’s economy was one of the most highest growth rate in the world. In the same period, average annual growth rate of Korea was 10.28%, Singapore 7.43%, Malaysia 6.5%, Thai Lan 4.8%, Philipine 2.8%, and China 8.16% (as shown in Figure 3.1).

Poverty reduction

In terms of poverty reduction, Vietnam has a great achievement since started economic reform. Fan and Long (2004) stated that Vietnam make substantial and steady progress in poverty reduction over the two decades. The ratio of the people living below the poverty lines to total population decreased rapidly, from over 70% at the end of 1980s to 58% in 1993, 37% in 1998, and 29% in 2002. The absolute number of poor people living dropped sharply. Table 3.4 shows that number of poor people declined from 39.8 millions people in 1993 to 12.3 millions people in 2008. Based on both poverty lines, number of poor people reduced sharply for the period 1993 – 2008.

Taxation system reform programs: An important role on economic development

Martinez-Vazquez and McNab (2000) stated that the centrally planned economies du-plicated the tax system of Soviet Union and Vietnam is not exception. Almost of taxes revenue comes from public enterprises that levied on turnover tax, profit tax, and payroll tax.
The taxation system started a transition from 1986, at that time, Vietnam deter-mined the role of taxation on economic development. First, instead of planning focused bureaucratic mechanism, taxation system has been designed as a guide line, redistri-bution, and macroeconomic management tool. Furthermore, taxes has to ensure the public budget revenue stability and meet international standards (for instance, taxes are fair to all sectors in economy). In order to implement new strategy in taxation system, the first taxation system renovation was started in 1990 (see GDT, 2015) by Resolution of National Assembly of Vietnam intake VIII, dated December 28th, 1989 in which the 9 kinds of tax have been considered to issue, consist of (1) Revenue tax, (2).
Goods tax, (3) Export – Import taxes, (4) Agriculture tax, (5) Nature resources tax, (6) Profit tax, (7) House – Land taxes, (8) Individual income tax, and (9) Capital tax.1 In particular, capital tax applied for the state sector and it was assigned to government to regulate by resolution. Moreover, Vietnam’s government issued some regulations which contribute to the public budget as such lottery charges, fees, and international labour cooperation fees.
In general, for the period of 1986-1996, total public revenue was increased by 30.75 times in comparison with its revenue in the period of 1981-1985. The public sector accounted for 64.2% of total revenue, non-state sector accounted for 19.6%, and the rest of total revenue came from others. On the other hand, Quang and Dung (1997) stated that taxes revenue accounted for around 20% of total revenue in 1986 in which public enterprises contribute up to 70% (similar to Chan and Whalley, 1999). Meanwhile taxes and fees revenue accounted for 85% of total revenue in 1996 and ratio of public enterprises to total revenue decreased to 50%. In other research, Hoang-Anh (2007) indicated that revenue come from taxes and fees accounted for 95.09% of total revenue, average ratio of taxes and fees to total revenue for period of 1990 – 1995 and 1996-2000 accounted for 95.75% and 94.8% respectively.
Despite having important achievements, Vietnam’s taxation system faced to many challenges in 1990s as a member of ASEAN in order to adopt with this group principles, free trade agreements, and agreements with US in terms of normalization in 1994. Vietnam’s integration into AFTA (Area of Free Trade Asia) had to follow a process over the next decade by implementing CEPT (Common Effective Preferential Tariff) which required Vietnam has adopted its tariff, foreign exchange mechanism, customs, and some things relevant to trade procedure, non-tariff barriers, and so on (see Truong and Gates, 1996). The authors also indicated that within 10 years participated to this organization, Vietnam has to reduce about 857 tariff lines for 18 sectors and 1,622 goods for tariff reduction. Adopting AFTA regulations, Vietnam has to reduce the tariff rates to 0 – 5% on the goods came from AFTA’s members. Actually, It did not seem a problem for Vietnam because at that time more than 2,200 tariff lines has been done by Vietnam

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Table of contents :

1 Introduction g´en´erale 
2 General introduction 
2.1 Motivation
2.2 Overview of thesis and contributions
3 From Centrally-planned to Market Economy: Vietnam as a new Tiger 
3.1 Introduction
3.2 Growth, inflation and poverty: From a low – income to a middle – income country
3.2.1 Economic growth
3.2.2 Inflation control
3.2.3 Poverty reduction
3.3 Taxation system reform programs: An important role on economic development

3.4 Expenditure decentralization and debt: Achievement and challenge .
3.4.1 Expenditure decentralization
3.4.2 Public debt
3.5 Conclusion
4 Government Expenditure, Public Debt, and Economic Growth 
4.1 Introduction
4.2 Model
4.2.1 Government
4.2.2 Firms
4.2.3 Consumers
4.3 Equilibrium
4.4 Balanced growth path
4.5 Impact of taxation on economy
4.6 Conclusion
5 Government Expenditure, Productivity, and Growth of Vietnam’s Provinces 
5.1 Introduction
5.2 On overview on public expenditure, productivity and economic growth
5.3 A model for productivity of Vietnam’s provinces
5.3.1 Production function
5.3.2 Dynamics of total factor productivity
5.4 Data
5.5 Results and discussion
5.6 Measurement errors
5.7 Conclusion
6 Expenditure Decentralization and Growth: A Case of Vietnam 
6.1 Introduction
6.2 Overview on government expenditure decentralization and growth
6.3 Economic model
6.3.1 Government
6.3.2 Firms
6.3.3 Consumers
6.3.4 Equilibrium
6.3.5 Balanced growth path
6.4 Impacts of tax rate and government expenditure decentralization on economic growth
6.4.1 Impact of government expenditure decentralization on economic growth
6.4.2 Impact of tax rate on growth rate of economy
6.5 Econometric estimation
6.5.1 Estimated equation
6.5.2 Data
6.5.3 Estimation results and discussion
6.6 Conclusion
7 General Conclusion 

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